World Economics, Political Movements, And Emerging Market Concerns

Eagerly awaited by most, last week’s talk by Dr. Raghuram Rajan was a packed house. Having come directly from his farewell at RBI, he was gracious to accept his first award (as the Citizen of Mumbai) post his tenure as the Governor, and spend a few hours with Rotarians before he returned to his much-loved teaching position at the University of Chicago Booth School of Business.

With a view to give his successor space to establish his views, Dr. Rajan had decided not to speak publicly on any matter related to India, thus he decided to speak about the global situation. What has been happening, why are we seeing political movements across countries, and as an emerging market what kind of concerns we should have going forward?

Setting the background for the current economic scenario, Dr. Rajan started by saying that typically recessions are expected to last only for a while, followed by rollicking growth. In fact, deeper the recession, stronger is the expected growth. However, apart from 2010-11, we’ve been stuck in a period of very slow growth since the beginning of the financial crises in 2007. So why is the world not growing faster?

According to some, the slow growth was because of the build up of large debt over the great recession, and households that were consuming the most, could not borrow any more, as they were paying down the debt. This was the proverbial American housewife who went out and shopped until she dropped, and kept the world economy alive.

“Of course, the answer to revival of growth is reduction in debt. But it isn’t just debt. While in the US, it is household debt, in Europe, some of it is government debt. There are some very heavily indebted governments in Europe, including Greece. And some heavily indebted banks as well, like those with moderate capital in Italy today. The debt disease has spread across the world, and certainly in China. So why did we get into so much debt? Was debt the solution to a prior problem?“, he questions.

Some people including him, argue that debt was a solution to the very slow growth. However, in his book Fault Lines, Dr. Rajan talks about how aging, like in the case of Japan and Germany, contribute to slow growth.This is because, households as they age stop buying enough. This reduces the demand for goods and services and thereby weakening economic growth.

Another problem, which is demonstrating itself is low productivity. “So what is productivity growth?” he asks. “It is essentially one’s ability to make goods and services in a more efficient way than before using less labor and less capital. One would like to believe that with all the technological innovation, productivity has increased. However, historically speaking, productive growth is low compared to in the past.”

Author Robert Gordon is one of the biggest proponents of the fact that all this hype about Internet and social media is overblown. How much productivity can one get from 140 characters? Compare the gains from this kind of communication to gains you had from the invention in the early part of the 20th century when the motor car was invented, when railroads went around the entire country, and replaced coaches, or air transport, air conditioning, etc. and compare that to twitter, facebook and the other stuff that we feel so good about, it seems like night and day!

Dr Rajan affirms, “It is not that productivity is low today, it’s just that we are not measuring it well. The doctors amongst us will tell you that an operation today is very different from one performed 20 years ago. It’s much less invasive, with much fewer post operative problems, and the chances of success are much higher. But when we measure productivity, we don’t take into consideration quality, which is much improved.”

“Therefore, while there is a lot of value that is created by the new services, we don’t measure or monetize them. And since they are not monetized, they don’t show up in GDP, and we believe they don’t exist. Likewise, life today is better than life in the past, but we don’t measure the stuff that makes it better. All these are reasons why people say productivity growth may look low, but we are actually better off than in the past.”

Continuing further, he adds, “In US forexample, the manufacturing share in the GDP has remained relatively constant. However, jobs in manufacturing have plummeted, as over time, the manufacturing process has become more efficient. And the way upwards for moderately skilled workers has disappeared.”

“So across the industrial world, in this period of slow growth, there is increased anxiety. And that anxiety comes from two things: 1) The fear of their job being outsourced, 2) Like the case of driver-less cars, the people fear that their jobs will be taken over by robots. And what is particularly insidious is that when both these concerns come together as being replaced by a robot in ‘Bangalore’!”

“Interestingly, even when I talk to some of the very well-to-do business people, whose kids are going to Stanford and Harvard, and they say, I wonder if my kid will have a job. That’s the level of angst which is very worrisome.”

The problem is everybody can seethe old jobs going away, but they can’t see the new ones coming. Today, Google itself, has spawned a whole new set of jobs in advertising based on measuring the impact of online advertising and finding out how that pays off, but no one knew that job would exist 10 years ago. So in addition to anxiety, the state finances too are stretched across the industrial world because they had too much debt, and that makes for a really volatile mix. “Who are the people supporting Trump? Who are the people supporting BREXIT?”, questions Dr. Rajan. “They are the people who are worried about their future and their jobs. They are worried about their social security, because the government finances aren’t good, and they don’t want their social security being taken away by an immigrant. So they’d rather keep the immigrant out.”

“A lot of the debate around BREXIT too, especially from a distance seems to be about immigration. The guys for it say immigration is good, while the guys against it are saying, lets keep the guys who are basically free-riders and not particularly useful to the system, out. The idea is to close everything. And once everything is shut off, society will become wonderful and we’ll make all the stuff internally.”

The truth is an unrealistic possibility. If a country shut off all its borders, cut off the global supply chains and tried to run everything by themselves, they may actually be much worse. In making it all themselves, the prices would increase, and the real value of livelihood would go down. The problem therefore is that it’s very hard to explain the value of free trade to people, because that part where it keeps prices low is easily forgotten, and the part where they lose jobs is what is remembered.

Earlier the global system was led by the US. Because it had one of the strongest and most efficient economies, it was strongly bent on keeping trade open, expanding trade or keeping capital trade open, expanding investment in other countries, etc. Now with the angst inside the United States about its own capacity to compete, there is very little appetite to expand trade.

Adding further, Dr. Rajan says, “For a country like India which is trying to make in roads into global trade at this time, the environment is becoming harsher and harsher. That basically suggests that we have to step up our game, and be much more forceful in pushing for open borders, for freer trade and for freer investment. But it also means that we have to change our stand, which historically was to resist others who wanted to push into the country, instead now we have to move forward and say now we want access to your markets, we want you to keep boarders open and not erect walls.”

“That’s the difference, but it’s something that needs to be done. At the G20 meeting recently, President Xi Jinping of China forcefully said that the biggest problem was that while we want open borders and world is closing down. It is interesting because historically the push towards open borders was more from the industrial countries. Today, they seem to have lost confidence. Politically too, it has become harder for them to push given that their domestic constituencies are opposing, and in times like these,  it is our responsibility, to pick up as a collective emerging market to push towards open borders and towards free trade.”

“This becomes a little problematic because many of the international institutions are dominated by the industrial countries. Dominated not in the sense of vote or power (that too), but primarily in agenda setting. Agendas are set by the industrial countries in these bodies, and I think that one of the things that we need to do as emerging markets is to improve our intellectual contribution so that we can start setting the agenda. If we wait for them to set the agenda, then we are always in the reactive mode, saying we can’t do this, we can’t do that, or stop trying to open up our agriculture and so on.”

“But setting the agenda requires thinking, coordinating with emerging markets, and a much more savvy use of international platforms. However, the mistake that we sometimes make is that we try to transform the institutions in the belief that greater vote or presence will change those organizations, but without intellectually changing the environment in which those organizations operate. So as long as it is believed that what is happening is shaped by the western intellectual mind or by the western universities, we will not get a change in those organizations, no matter how many votes we have or how many people we send there.”

“What we need is our think-tanks, our universities to step up to offer ideas about the way we see the world, and push other countries to come on board. On climate change for example, we all understand that climate change is ultimately going to be a problem for all of us. So to push forward an agenda that makes collective sense, we need intellectual firepower (much more than any other form of power) and for that we need to upgrade our universities, upgrade our think-tanks and get them outward looking rather than looking internally within the ivory tower.”