Category: International

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Crisis in the USA: Is America too big to fail?

Introduction
September has been a disastrous month for the US whose leading presidential candidates like to refer to it jarringly as the greatest country on earth. Natural disasters with hurricanes coming one after the other pale into insignificance compared with the meltdown in that country’s housing and financial sectors. The country that boasts of the triumph of the free market is now adopting some of the most extreme forms of government intervention normally associated with the socialist system – the very antithesis of the free market. In fact, haunted by the ghosts of the Great Depression, the US government is considering bailing out the entire banking system as one by one the banks and other financial houses collapse like a pack of cards.

While it may have originated in the mortgage crisis that has been brewing for the past two years, the wave of nationalisation in the US began on September 8 when the Treasury took over Fannie Mae and Freddie Mac, two companies which hold or guarantee more than half of the US mortgage debt, together owning assets of over $5 trillion or five million million!

In a month when it seemed that Usain Bolt could break just about any record, Lehman Brothers overtook WorldCom as the largest bankruptcy filing in US history. The firm which was founded in 1850 and boasts that its growth in having over $600 billion in assets and 25,000 employees parallels the prosperity of the US, describes itself on its website as “an innovator in global finance,” serving the financial needs of corporations, governments and municipalities, institutional clients, and very wealthy individuals worldwide. To understand the scale of this bankruptcy, consider that WorldCom’s assets prior to bankruptcy were just over $100 billion.

A week is a long time
Then earlier this past week the US central bank, the Federal Reserve, took a 79.9% share in American International Group (AIG) in exchange for a two-year, $85 billion credit facility at the penal rate of LIBOR plus 8.5%. AIG has assets of over $1 trillion and over 100,000 employees worldwide – bigger than either Lehman Brothers or Fannie Mae. And just announced is an ambitious plan for the government to buy seven hundred billion dollars of illiquid debt from ailing American financial institutions to save the sector from further shocks. Those in this region may well recall a similar approach by Jamaica government when in response to the financial sector meltdown of the 1990s that country’s government established FINSAC “to guide the banking sector through the recovery process.”

The one underlying reason with all the failures or near failures in the US was their inability to attract or retain further financing. Fannie Mae and Freddie Mac were set up as the bedrock of the housing market to guarantee mortgages meeting certain conditions. To do this they issued debt effectively backed by the government. But they were poorly regulated and went over the line when they bought securities secured by what has come to be known as subprime mortgages. Clearly the government could not allow them to collapse and ended up taking them over. In Lehman’s case, it was rolling over some $100 billion in short term-debt each month − more than it could bear; its borrowing costs increased and its share price fell to a record level following a massive write-down and credit losses occasioned by the financial crisis.

AIG too was the victim of the subprime crisis writing down some $57 billion of insurance contracts with the real possibility of further losses if the housing market did not improve. AIG’s credit rating was downgraded making it all the more difficult for it to borrow.

Begging the question
Now all of this begs the question what caused the subprime crisis in the first place? Identifying this is the easy part. The explanation is harder and takes us back to the early part of this decade. During that time there was an unrealistic increase in house prices and the belief by prospective and existing homeowners that the prices of their homes would keep rising allowing them to continue borrowing. With their risks creatively reduced, lenders eased their standards and permitted borrowers to buy more expensive homes than they could afford. There was also the phenomenon of adjustable mortgage loans which in simple terms transferred the greater part of a risk from the lender to the borrower. Greed stepped in as brokers found they could charge excessive commissions on such loans. A combination of a flagging economy, deregulation, poor oversight and equally, carelessness by banks and other lending institutions meant that borrowers were unable to carry and could not refinance their debt. This resulted in a mounting number of foreclosures and an extreme decline of house prices.

The subprime loans meanwhile were packaged into “derivatives,” part of creative but unreal wealth which the smart guys in Wall Street conjured up as assets which were sold and resold among the banks and financial institutions. Readers will recall from the series I did on Enron in 2002 that such “derivatives” were equally prominent in the demise of that giant. Sadly such assets are hardly regulated by the central bankers and are far too complex for the simple minds of the accountant to understand, let alone value for purposes of accounting. No wonder the investor guru Warren Buffett describes these as “financial weapons of mass destruction.” Players engaged in this game are as likely to succeed as the optimist in the Casino – yet they still play.

Darwin questioned
That was capitalism at its creative best or destructive worst, depending on whether you are the recipient of millions of the new wealth created by the free market or the victim of just another in the long line of bubbles. But an integral part of such a market is the Darwinian principle – the survival of the fittest, promoted with the usual American arrogance to the entire world since the end of WWII. The question is whether the fundamentalist adherence to such dogma excludes any interventionist action. The US government which has been preaching the mantra of liberalisation, lecturing the Asians and the Europeans to abandon their own economic model and adopt the US’s New Economy in which the ‘D’ word was not the dreaded ‘depression’ but ‘deregulation’  has found itself once again in a dilemma. It ignored the fact that the savings and loan crisis was sparked by the same deregulation and weak accounting standards, as was the Dotcom bubble which took with it not only Enron and WorldCom but the accounting giant Arthur Andersen well.

Too big to fail
Why then are some allowed to fail such as Lehman Brothers but not Bear Sterns, AIG, Freddie Mac and Fannie Mae? There is the principle, ‘too big to fail,’ that if the consequence of failure is too great it must be avoided at any cost. With their stake in the mortgage market so huge, the collapse of these institutions would threaten the whole system of finance for American housing, endangering those American banks that put money into the housing market and precipitating a catastrophic fallout across the world.

Globalisation means that the central banks of China and Japan have indirectly invested billions of dollars in the US housing market through Fannie and Freddie’s bonds, while commercial banks from South Korea to Sweden hold investments linked to American mortgages. Not only would there be huge worldwide losses if the credit crunch in the US escalated, but the very global financial system could be imperilled. In the process of looking at all of this an even more visceral possibility has been raised by Peter Goodman in the International Herald Tribune – is America too big to fail? With the USA being by far the largest economy in the world, the mere thought of that is spine-chilling.

Paradoxically the very decision to save the financial sector can lead to reckless conduct by dealmakers knowing that there will be a safety net sometimes referred to by critics such as Alan Greenspan as “moral hazard.”

Guyana
There is also the irony and the glee of many Guyanese (and Hugo Chavez) that America is being humiliated by it all. For decades the USA and its surrogates like the IMF and the World Bank have used their preeminent position − particularly since the fall of the Berlin Wall and the triumph of the West − to dictate the conditions for accessing assistance, loans and capital. The first item on the prescription was the surgical removal of weak companies as we saw with our own Development Bank and GNCB, among others. The double irony for us is that we were proud to be paraded by those countries and institutions as “success stories,” even as our economy has continued to sub-perform.

According to the Governor of the Bank of Guyana the current crisis in the US is not likely to have any direct impact on Guyana. Our banks are all very liquid and profitable and for the first time Guyanese may have to concede that the ultra conservatism of the local banks has had one good effect. I am only aware of one company that has direct insurance placed with AIG, but it is quite likely that indirectly some of our insurance companies’ reinsurance business is placed with AIG.

Remittances will be one of the immediate casualties as the cost of the bailouts of the American banks and financial businesses are borne by the rest of the economy and taxpayers, among whom would be members of the Guyana diaspora. Investment flows into Guyana are likely to reduce and high value projects like hydroelectricity would find financing hard to come by and therefore very expensive. The international and regional financial institutions will have less soft money to lend and further justification to stall support to Guyana if the government is perceived as having little interest in regulation and accountability.

Our larger exporters may also be impacted because the uncertainty over jobs overseas will ultimately lead to a contraction in spending, so those who export consumer items will feel the squeeze. Any of our major industries which must necessarily tap into overseas markets for large sums of US dollar financing may have to shelve any major expansion plans. What this signifies for the power and agricultural sector is yet to be determined, but it does not look good. We must be thankful that Guyana does not have the kind of creative financing as the US. Tax evasion and money-laundering are the preserve of the privileged and the connected while regulations are seen as things to be ignored and resisted. The Companies Act 1991 is honoured more in the breach while even our more prominent companies feel that they are at liberty to challenge the Securities Council and the insurance regulator at will.

But it would be foolhardy to be complacent or to try to predict the outcome of all of this over the next year or so, when a week seems such a long time. The most we can do is fasten our seatbelts.

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Coping with the EPA

Introduction
Over the strident objections of President Jagdeo the Caribbean countries and the Dominican Republic will sign the Cariforum-EC Economic Partnership Agreement (EPA) some time within the next few weeks. The record will show that Guyana stood alone in its last minute efforts to have the region pause “to scrutinise further the trade services aspects of the deal.” After an unusually strong exchange involving the leaders of Barbados, Jamaica and Guyana, Guyana is in the most isolated state it has ever been for close to forty years. During that period and not least because of the grand vision of Forbes Burnham and the efforts and impact of Sir Shridath Ramphal and a long line of talented foreign ministers, Guyana was among the leaders of not only CARICOM but the Non-Aligned Movement, the commemoration statue of which is proudly displayed at Company Path Gardens in downtown Georgetown. We were respected by the much more powerful ACP group of countries with a generation of outstanding personalities like Mrs Gandhi, Manley and Kaunda, offering hope to the hundreds of millions of their people. And let us not forget at this sombre hour that the very seeds of the Lomé Convention were sown on the lawns of the Prime Minister’s Residence in Guyana in 1972.

The first Lomé Convention (Lomé I) came into force in April 1976 and provided a hard-won framework of cooperation between the then European Community (EC) and developing countries of Africa, the Caribbean and the Pacific regions, in particular former British, Dutch, Belgian and French colonies.

Lomé had two main aspects. It provided for most ACP agricultural and mineral exports to enter the EC free of duty. Preferential access based on a quota system was agreed for products, such as sugar and beef, in competition with EC agriculture. Secondly, the EC committed ECU 3 billion for aid and investment in the ACP countries.

The fiction of free trade
It was not a perfect agreement – General Gowon of Nigeria had earlier told the Heads of the Commonwealth that “it is a fiction to speak of a free trade area between developed and developing countries,”  but for a quarter of a century Lomé remained the cornerstone of trade and aid between Europe and the developing world. It was, however, affected by major developments in the configuration of states and their economies in the European Community  necessitating changes in the economic relationships between the countries of the Europe and those of the ACP.

Another major shift in the world paradigm was the dramatic enlargement of the World Trade Organsation (WTO) which was the club from which all, rich and poor, market based and state-driven, North and South, would consider exclusion akin to being an international pariah. In theory, the WTO is strongly committed to creating a level free-trade playing field, promoting trade without discrimination and fair competition among the countries of the world through rules to prevent unfair behaviour like dumping. If there was a sign of things to come, however, the WTO provided that sign with several major violations by the rich countries in areas where they mattered most to the poor and undeveloped countries. In agriculture, textiles and clothing protectionism, subsidies and unfair practices persisted in the developed countries while the poorer countries were compelled to open their economies in a liberalisation frenzy and remove subsidies on their products.

In 2000, Lomé was finally replaced by a new trade and aid agreement known as the Cotonou Agreement, transforming the previous convention into a system of trade and cooperation pacts with individual nations. The signs were already surfacing that ACP solidarity was being weakened and with the IMF’s influence and dominance, one by one under-developed countries were picked off and brought into the fold of the capitalist world against which they had railed for decades. Even those countries that had shaped their foreign policy along socialist lines soon spent their time and measured their success by how much development assistance they received and the amount of debt write-off they obtained.

Long gestation
How did we in the region and Guyana fare? No question that we should have been better prepared to avoid the embarrassing contretemps earlier this week in Barbados over the EPA. As long ago as 1997, even before Cotonou, CARICOM had set up its Caribbean Regional Negotiating Machinery (RNM) to handle the post-Lomé trade negotiations not only with Europe but with other countries as well. The RNM was initially headed by Sir Shridath who had presciently noted that “we have to be prepared in our minds for a world in which our markets will be open increasingly to competition and not only at the level of goods but also of investment and services.” I am not sure whether President Jagdeo, then Finance Minister was listening, but it is more than passing strange that these are some of the very issues (as well as government procurement) that are now being objected to by him as President and as a leader of CARICOM.

Arguing that it is unlikely that we would be afraid of banks and insurance companies entering our small markets, one  cynic suggested that President Jagdeo’s main objection to any EPA with a services component was in relation to government procurement which as we have seen over the past several weeks is treated as a closed shop by his government. Would an EU pharmaceutical company with a right to bid to supply drugs to the government have sat back as idly and watched the government break the law to help its friends? I doubt it. At the very least therefore President Jagdeo needs to tell the nation exactly what his concerns are, not in politically charged language but in a way the people and the private sector and civil society in particular can understand. He needs to tell us whether the support we receive from the EU as a body and the United Kingdom will come to an end and what might now be the opportunities in the EPA for our own services sector.

The lone national voice
The EPA has been on the table for several years and although President Jagdeo now claims that he has always been opposed to the deal which he will now have to sign “involuntarily” as he puts it, there is nothing in the communiqué coming out of the December 2007 meeting of CARICOM heads at which the decision to sign was made, indicating that he was opposed to signing. His major public rumbling on the EPA was voiced in an exchange with Carl Greenidge of Guyana and the RNM at the GBTI Business Forum 2008 (see Business Page of June 8, 2008, ‘President, scraps and concessions’) but any further discussion had to wait until the Carifesta party was over.

Professor Clive Thomas had for months in his Sunday Stabroek column laid out a compelling case against several features of the EPA but no one in the government took any notice and it was left to a few letter writers to join whatever little debate there has been on this issue which we are now told would affect our country’s very future. A scheduled two days “consultation” that comprised mainly speeches but little information and lasting less than one day was attended by representatives from the private sector and civil society, who clearly knew little or nothing about the EPA on which they were being consulted. The seriousness of the consultation was surely compromised by the PSC which the day before had met with the President and announced their support for his stand. It was no surprise, therefore, that  they along with civil society felt comfortable enough to give Jagdeo the mandate to tell the regional heads that Guyana would only be prepared to sign a “goods only EPA.” The problem for the President was that his mandate was too narrowly defined and it was success or failure – no win-win.

But more ludicrously he could not sign a goods-only agreement simply because none was on the table and the President must have known that.

Neglect
The years of neglect by the government of the reports coming out of the RNM whose head had ministerial rather than ambassadorial rank, the government’s abandonment of diplomacy as a main tool of regional and international negotiations and its failure to have meaningful consultations both at home and abroad now leave us in perhaps the weakest state we have been in since independence.

Machismo may make good domestic politics but our stance would have caused us some loss of face and respect among colleagues and donors. Whatever may be our views and prejudices, the EU representative did not deserve the discourtesies he received at the consultation, not only because he is a guest of our country but also because the EU is still a big donor to Guyana as successive Budget speeches would testify.

Instead of boasting about standing tall we need to take a serious look – if that is not being too optimistic − at whether our policies and actions are developmental in nature. While abusing the EU our country and economy continue to depend on rice, rum and sugar sales to that region. Our forestry and bauxite resources are exploited by foreigners in uneven investment arrangements and little returns to the country, not even with development assistance from the source countries. We have abandoned the National Development Strategy that embraced increased trade with our South American neighbours and have downgraded our diplomatic efforts to boost trade. Only this week the President announced that he is replacing one of the country’s last career diplomats with another pastured minister of the government in what could and should be our largest trading partner, Brazil. The President pleaded with his regional counterparts to wait until a meeting of the ACP Group of States in Ghana before making a final decision, but undermines the seriousness of that plea by his decision to send a junior minister to that meeting because he has a speaking engagement in China.

Let the consultations begin
If the EPA will be as disastrous for Guyana as President Jagdeo asserts with such passion and certainty, then he needs to tell the nation what steps we can and should take to counter those eventualities. Clearly our relations with CARICOM need to be reviewed and rebuilt and if, as both Jagdeo and Ramphal fear, the CSME is in further jeopardy (there is sufficient and justified uncertainty about the commitment of many of its members), then as a regional country we have to contribute to reducing that danger even as we seek to widen our trade relations with non-EU countries.

A useful framework for ascertaining the views of Guyanese and incorporating such measures would be a new Development Strategy based on the earlier version that is accumulating dust on the shelves. Let the (real) consultations begin.

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Facing the threat of rising oil and food prices

Introduction
Oil seems to have a talismanic role in the world’s psyche. More than gold its price causes predictions of apocalyptic proportions, paralysis in the modern world and fears of wheels grinding to a halt. Those of us of an earlier generation will recall how the four-fold rise in the oil price in the seventies sent shockwaves across the world and caused a tectonic shift in global resources as more money poured into the oil-producing economies than they could handle. The dramatic increases in oil prices in 1973-74, 1978-80 and 1989-90 were all followed by worldwide recession. Yet with unerring regularity and often defying the predictions of doom, the economies would return to the historical pattern of periods of unprecedented growth, low interest and inflation, consumer confidence and spending.

In the decade of the eighties, the economies of Asia grew (real GNP) astronomically ranging from 120% growth in the Republic of Korea, Taiwan 90%, Hong Kong 65% and Singapore 80%. Even the Asian crisis went almost as soon as it had arrived, leading the region and the world’s economic managers to take the credit for having fixed the system – once and for all. The more hubristic were even prepared to say that inflation had been bottled up, the economic cycle of periods of recovery and prosperity characterised by relatively rapid growth followed by contraction and recession or the more extreme form ‘depression,’ had been neutralised and the central bankers and the IMF were in complete control.

Storm clouds
Even Bush could not mismanage the US economy given the magical powers of Alan Greenspan of the Federal Reserve Bank, while Gordon Brown, the ambitious Chancellor of the Exchequer was credited with all the economic achievements of Tony Blair. The only threats that the revered gurus could see was the bin Laden-inspired terrorism, and more mundanely, the impact of washing drug money in the pure financial stream overseen by the ever more confident central bankers. But then suddenly storm clouds began to gather on the horizon and the respected Economist publication, ‘The World in 2006’ cautioned that the global growth rate of close to 5% for two consecutive years was too good to be true and that things could not remain so rosy for ever.

Real oil prices had already begun to climb, a housing boom or rather bubble financed by sub-prime loans, extravagant consumer spending with the gas-guzzling Hummer and SUVs being the vehicles of choice and negative personal and national savings rates were facilitated and masked by cheap money. History is replete with examples that such a party could not last, that the night would come to an end and the hangover would be long and painful. That unfortunately has now happened, and almost quarterly we see leading institutions like the IMF and the European central banks revising their economic outlook, shaving a few decimal points with each revision. The decline started with the sub-prime mortgage crisis in the US, which now affects the global financial system with fears that the system can collapse and that Bear Stearns in the US and Northern Rock in the UK were only the early casualties.

A matter of opinion
How the crisis will play out, however, is a matter of dispute, and there are conflicting projections by influential players in the system. The influential Bank for International Settlements – the central banks’ central bank – considers that the world economy is probably facing a deeper and more prolonged slowdown than many assume, and that even though the worst of the credit crisis may be over that did not indicate an all-clear for the world economy.

Barclays Capital and the Royal Bank of Scotland seem to have a more pessimistic view of the state of the world’s major economies, and in mid-June the latter advised its clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

The UK right of centre newspaper the Daily Telegraph quotes the bank as warning that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with the contagion spreading across Europe and emerging markets.

Global inflation has jumped from 3.2% to 5% over the last year. Tim Bond, chief equity strategist of Barclays Capital, believes that the “emerging world is now on the cusp of a serious crisis; that inflation is out of control in Asia,” and that the need to slam on the brakes will cause “a deep global recession over the next three years as policy-makers try to get inflation back in the box.”

One of the less discussed implications of globalisation is that it spreads both its virtues and its vices, and whether it is a matter of inflation, interest rates or a credit crunch, the dangers will move across borders. Of course it also means that every economy becomes its brothers’ keeper with a real and direct stake, and as is evident with the EU countries complaints of loss of independence is not infrequent. Now with oil and food costs soaring, inflation has returned with a vengeance; economic managers, investment managers are nervous; the genie of inflation has re-appeared; and the dangers of inflation are now so great that those managers would readily sacrifice growth to control inflation. But even that is a major challenge and many are now saying that what has in fact changed is that the long-term growth trend is under threat. And again oil is a major factor, with active wars less so with stability gradually returning to Iraq so that even presidential hopeful Barack Obama is now shifting his position on the drawdown of US troops.

The jury is out
So far it is hard to say which of the two scenarios predicted by BIS and RBS is correct. It is true that the wage-price spiral has been avoided but jobs are disappearing whether in the closure of 600 Starbucks coffee houses or among major car manufacturers, and during this week the stock market actually reacted positively as one of America’s major car manufacturers reported only an 18% decline in sales – it was expected to be higher! Let it not be forgotten that America is still by miles the world’s largest economy and it is the spending habits of the American consumer that have driven the meteoric rise of China and India. The reverse may not be entirely proportional because demand in the numerically significant China and India has increased, but not even America’s worst critic would wish for the collapse of the US economy.

The double edge of the twin
It is one of the ironies that these two economies are partly responsible for the sustained oil and food price increases. While past oil shocks have been caused by supply constraints, the current increases have a significant element of being demand-driven as China’s industries and their growing middle class along with their Indian counterparts find that they can afford cars that are still dependent on oil. The search for alternative energy sources which accompanied pervious oil shocks waned as things returned to relative normalcy with the significant exception of electricity companies which started to move away from oil. The current one will have some similar effect as car manufacturers accelerate their efforts to produce hybrid cars. The airline industry has cut back its flights with immediate effects on the region’s tourism industry that is so pivotal to its survival. And as tourism falls, so too will remittances from the rich countries as migrants struggle to stave off the foreclosure of their homes. Just getting over the next five years without a major catastrophe will be a major achievement.

But while oil has stolen the limelight, food is an equally grave and direct concern, and for the first time in decades countries are suddenly talking of food security. Heads of governments of the region and the world are holding conferences to address the dramatic increases in the price of basic food items, some of which it has to be said are related to the search for alternative energy sources with corn being the most popular cited example. In fact at the World Food Summit (WFS) some NGOs called for a moratorium on ethanol production arguing this would cut wheat prices by 20%.

With oil there may be several alternatives that would be both technically feasible and economically attractive, but food is a different story. The escape of hundreds of millions in the developing world from hunger and poverty means that there are far many more mouths to feed with a growing demand for meat, which itself demands more feed. Like oil, agriculture is not susceptible to dramatic short-term fixes, but that does not mean that more cannot be done, and as we witnessed recently the placing of an export ban on one type of rice by India had an immediate adverse effect on the international price. Countries and their politicians are particularly vulnerable to fears of hunger among their populace and countries are reluctant to co-ordinate national strategies for the global good. For example, while Japan has agreed to release its government-controlled stockpile, Egypt has extended its ban on the rice trade for another year. To compound all of this, the interest of the private operator/producer/exporter and that of the government seldom converge and short of government control regional and international agreements are hard to make and even harder to enforce.

The problem with agriculture is also structural – in both the developed and developing world there is a reducing appetite for participation in the sector with weather and price fluctuations making it like a night at the casino. Added to the challenges of global warming, the reduction of water supplies, declining investment funds, reduced land for agriculture and a long-term trend of falling prices for agricultural produce, we see an industry that can only grow if there is a significant increase in agricultural productivity.

Alas, giving seeds to the populace may appear politically attractive, but it is no more than a very limited short term measure with some impact at the level of the poor household.

Note: I have delayed the column on taxation as I have been promised some additional information.

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China and India – Reshaping the world economy (conclusion)

Introduction

Not a day goes by without something being written about the miracle of China and India and the inevitability of these great countries graduating to superpower status. Their praises are sung in hyperbolic rhythms by a body of writers who have created a whole new cottage industry dedicated to them. The only question in the minds of many of these writers is not whether but how soon the two Asian giants – or as they are sometimes called the dragon and the elephant – will return to the glory days of four centuries ago when they were the dominant forces in world trade. One estimate is that by mid-century, India and China’s share of global output is expected to grow from 6% now to around 45%, spurred both by exports and burgeoning domestic purchasing power as more and more of their more than 2 billion people copy and can afford to live western lifestyles. All the measures suggest that China and India will overtake Germany and Japan and dwarf every other economy except America.

China is spending like a runaway train with expenditure on transportation infrastructure in the five years from 2001 to 2005 exceeding all the expenditure in the preceding fifty years. Spurred by the need to impress the world at the Summer Olympics later this year, it has built its new airport terminal which is 17% larger than Heathrow, faster than it would take London to complete an enquiry to consider whether it would add another terminal. Nothing seems impossible anymore so that when China announces that it will complete an expressway from Beijing to Taiwan’s capital Taipei by 2030, no one considers the challenges of crossing the 150 km Taipei Straits. What China does in one year, other countries seem unable to achieve in as many as ten.

More statues of Jesus

Some questions have however been creeping into the writings suggesting that the world needs to consider more than the marvel of these two giants which, even before their resurgence, had given the world so much. Among China’s many gifts going back more than one millennium are the clock, technology in hydraulics, shipbuilding, weaving and spinning machines, paper and ink, and more leisurely comforts like the toothbrush and playing card. Then like now India’s gifts were in know-how including mathematics from the decimal point to the Pi (the numerical ratio of the circumference to the diameter). Complacency overtook them both as power and politics placed a brake on their development.

Once again, in the blink of an eye, both countries have become so big that economies around the world – from its neighbours in Asia, Europe and North America – are now dependent on them for a full range of goods and services. In their separate ways, China’s workforce and work ethic and India’s information technology and back-office services have brought down prices for the family, the office and the factory. It is ironic that more statues of Jesus are made in atheistic China than are made in the entire Christian world! There are few products in the world that do not include some component or know-how from these giants and it would not be surprising if the harshest critics of out-sourcing among television commentators were wearing shoes or garments made from China. Indeed even those thousands in San Francisco protesting China’s Tibet policy during the passage of the Olympics Torch in their city last week might have been similarly attired. There simply is no getting away from the growing dominance of China and India.

Economic and military power

Yet, nothing should be taken for granted and admiration can easily turn to hatred if these countries behave like superpowers usually do, flexing their muscles and showing no regard for domestic and international concerns. China, for example, is accused by its critics as being willing to work with the most extreme regimes, as in Darfur, if only to source raw materials for its huge factories. Its size and economic power are fast translating into military ambitions and it has its sights set firmly on Taiwan which is now treated as a pariah by so many of its former friends, afraid to offend China. China’s patience is legendary but will it lose it and “reclaim” Taiwan and will the world stand idly by?

As world demand for Chinese goods and Indian technology increases, it brings with it increasingly affluent domestic populations aspiring to higher standards of comfort, if not luxury. To meet those growing demands, China and India are displaying an increased appetite for natural resources, contributing to the driving up of prices of commodities including food around the world. But as their factories produce the goods to meet both international and domestic demand, they add to the pollution problem of their people and the rest of the world. It is troubling that neither country, along with the USA and Australia seems willing to enter into binding commitments on pollution controls. They will need to learn a lesson from America when it comes to the use of economic and military might.

The mighty challenges

With the Communist Party still calling the shots in China and national and provincial politicians wielding considerable influence in India, corruption remains high in both nations. China is still to safeguard the intellectual property of manufacturers, the music industry and the arts. The state of the laws generally has not kept pace with development and cases of broken contracts and theft of intellectual-property are often not worth pursuing. India has a Western-style legal system that produces decisions that rank with the best the House of Lords can offer. But as they say, one cow does not make a herd and the country’s court system generally moves at a snail’s pace.

India’s growth can also suffer at the fiscal level. Budget deficits are high and with the considerable infrastructure deficit and the army of poor and hungry Indians wanting a piece of the Puri, it will require sustained growth to generate the taxes to meet the necessary demands on the federal and state budgets. Disease thrives on poverty and even as India promotes health tourism, the potential for a pandemic is ever present as AIDS and TB threaten hundreds of millions.

India has been relatively fortunate that it has been able to graduate from a low growth rate despite failing infrastructure, a bureaucracy controlled by a 10-million babu raj exercising impenetrable red tape, and an inhuman caste system that seems as unmovable as Mount Everest. The politicians in India are finding it difficult to erase the Gandhi/Nehru philosophy of self-reliance and restrictions on bank lending and foreign investment which impose limits to growth and development.

Unemployment

Despite all the economic achievements of China and India, each year tens of millions of youth join the job queue, some in front and others behind the estimated 200 million yet to reap the benefits of the Asian Miracle. The heavy hand of China was inadequate to prevent more than 57,000 labour strikes while social rights activists in India lament the failure of economic achievements or social programmes to reach the poor. In a federal democracy that could be a recipe for political instability which can derail any economic train.

China’s critics complain about the country’s labour practices which permit low wages paid to workers forced to perform under dehumanizing conditions, about large state subsidies, violations of WTO Rules including dumping at below market prices and an undervalued currency, the Chinese yuan. As the benefits of industrialisation stretch into the countryside and bring urban/rural wages in a more tolerable relationship, farms are being destroyed and farmers deprived of their lands creating serious tensions between the party and the people.

For all its greatness and growth, China is considered hugely wasteful. Even as the world marvels at its 9.5% growth rate in 2004, it should not ignore the fact that $850 billion – half of GDP – was mainly plowed into already-glutted sectors like crude steel, vehicles, and office buildings. Its factories burn fuel five times less efficiently than in the West, and more than 20% of bank loans are bad.

China is also confronting its biggest problem and one that can cause it to lose its competitive edge, its one-child policy introduced as a population control measure. By 2015, its working-age population will begin to decline and in 20 years, an estimated 300 million Chinese will be over sixty years old with no guarantee of any state assistance. With a growing middle class and persons less reliant on the State, can China continue its communist ways and treat any future Tiananmen Square-type uprising with the same heavy hand that it used in 1989 and will the world remain spineless as it tramples the rights of the Tibetans as it is doing now?

Conclusion

For all the dazzling performance of China and India, their continued success will take more than cheerleaders. They currently only account for 6% of global gross domestic product, half that of Japan, and while the signs are good, their success is not guaranteed. The expectations of the hundreds of millions of their people will only be satisfied if the economies of these countries continue to grow at rates that guarantee jobs for the tens of millions entering the workforce annually. That is a huge responsibility and for a world that depends on the goods and services from those countries, any setback in the two countries would have a huge and possibly disastrous effect.

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China and India – Reshaping the world economy

Introduction

To be honest, this article was prompted by China’s harsh treatment of the people of Tibet who would just like to live in peace, free from the heavy hand of Beijing and to practice their Buddhist lifestyle. It is taking place in a glory year for China as the Olympics are held in that country whose government will simply not have anyone spoil their party, not even crusaders for human rights or nationalist respect. Even though such consideration and debate do not rightfully belong to this column – the first in a two-part article on the two fastest-growing economies of the world – such consideration is not entirely irrelevant since economics have social and other consequences as economic power sparks other ambitions and attracts fear if not respect. Indeed this perhaps explains why no country is planning to boycott the Beijing Olympics and why human rights abuses in China are discussed in only the most veiled terms.

In Guyana we must never ignore human rights issues anywhere, but an equally important consideration in any discussion on China and India is the importance of the right mix of policies to spur economic growth and development. Indeed the experiences in China and India are not entirely dissimilar to us here where we attempted to practice an extreme form of socialism beginning with the Sophia Declaration in 1973 and ending with Hoyte’s version of Glasnost, his embrace of the IMF and Cheddi Jagan’s continuation of the programme despite his personal and his party’s antagonistic position to the IMF. We too experienced good growth for some years but this fell off amid other conflicts and the economy has survived in great measure because of debt write-offs.

Reclaiming their rightful place

When in 2006 the Prime Minister of India proclaimed that India and China are on the way to reclaiming their rightful places in the world economy, the world did not see that as some idle boast or threat but rather a simple factual statement. America and the West called for globalisation and China and India opened their doors, not completely, but enough to cause huge consternation and fear among segments of the American population at the way these two countries are shifting the tectonic plates of the world economy. What makes the story of China and India is not only their similarities but their differences – ideologically, historically, culturally and economically. One is dictatorial while the other is democratic; the court system of one would be considered too free by the other; China is Communist but pro-business while India is free-market but at times highly suspicious of business; one emphasizes its human infrastructure while the other promotes the low wages of its people; one still operates with a Five-Year Development Plan while the other seems to worship not any omnipotent, all powerful, many handed deity but the invisible hand made famous by Adam Smith.

But it is not the differences that cause leading journalists like Lou Dobbs to worry – rather it is their similarities – up to recently they were considered part of the Third World, too large and too poor to succeed, over-populated and almost unmanageable. Yet before the world could appreciate the release of the latent powers of numbers, India and China have become the fastest-growing economies giving them the claim to superpower status in less, far less than twenty years. It is true that they will never be able to reclaim the position they held in 1600 when their combined economies accounted for more than half of the world’s economic output or even their position in the late nineteenth century as two of the largest economies in the world.

The decline

Several things intervened between then and now, including the meteoric rise of the United States of America, which with a workforce driven by a lust for things material and powered by enterprising migrants escaping from the famine in Ireland and war in Europe grabbed the lead in agriculture, apparel, and the high technologies of the era, such as steam engines, the telegraph, and electric lights. There were too the Marshall Plan in Europe and the rise of Japan and South Korea in Asia.

Yet, the decline in both absolute and relative terms of China and India had little to do with such external forces but was directly the result of inward-looking yet adventurous policies by these countries often on the brink of war, with daggers drawn and guns pointing at each other. For several decades political considerations dominated and shaped domestic policy as the countries were held spell-bound by their history of invasion and colonialism and the philosophies of great founding leaders – Mao Tse-tung in the case of China and Mahatma Gandhi for India, one a revolutionary who believed that power lay in the barrel of a gun the other a believer in the principle of non-violence. What would these great leaders think about the country they either killed or died for?

Ten years after announcing the formation of the People’s Republic of China in 1949, Chairman Mao’s disastrous Great Leap Forward caused the death of 30 million in four years of famine while his Cultural Revolution in 1966 saw the decimation of the intellectual and bourgeois class, the closure of universities and destruction of books. His policies according to the author Robyn Meredith in the book The Elephant and the Dragon, may have succeeded in the creation of a society in which private property was practically non-existent but also in a generally downward spiral in the well-being of the country and the people.

Signal left and turn right

The transformation began with the rise to power of Deng Xiaoping who beginning the reform in the countryside, broke up the collectives and introduced the rudiments of a market economy. Over 125 million jobs were created by 20 million entrepreneurs who rediscovered the capitalist instinct of the Chinese. While significant the changes were not nearly enough and it was time to look outward. Instead of heading to Europe and North America, however, Deng went into his own backyard, Malaysia and Singapore, whose Prime Minister Lee Kuan Yew he admired deeply and with whom several learning visits were exchanged. His “special economic zones” were characterized by employer-friendly labour laws and low taxes all the while formally remaining loyal to socialism. There is the joke of Deng being asked by his chauffeur which way to turn as they reached a junction. Deng, the quintessential pragmatist instructed the driver: “Signal left and turn right.”

Now fifty years on, the transformation is like the world has never seen. What makes the situation even more mind-boggling is what has taken place within the past decade. In 2000, 30% of the world’s toys came from China. In 2005 that grew to 75%. One out of every three pairs of shoes made today is the product of Chinese labour and between 1996 to 2004 exports of electronic equipment had increased 800%, from $20 billion to $160 billion. When last did we hear that Small Is Beautiful, the title of a series of books by E. F. Schumacher.

India

Pained by the experiences of colonialism and exploitation in which the masses of India lived in abject poverty while as a colony the country was the gem on the Royal Crown, Gandhi was a great believer and practitioner of economic independence while opposing mass industrialisation, preferring traditional means of production, symbolised by the spinning wheel on the Indian Flag. Even after his assassination in 1948, the Congress Party of India, first under Jawaharlal Nehru and later other members of the dynasty continued the policy of self-sufficiency, shutting India from the outside world, equally difficult for Indian producers to export as for foreigners to invest in the vast country. One of India’s best known companies, the Tata Group, formed in 1868 became a key part of the country’s freedom movement and out of its nationalist commitment built its mills to supply the steel for the country’s successive five-year development plans.

The productive capacity of the country was, however, kept in check by a rigid policy of licensing so that even a manufacturer of motor bikes could only produce as many as his licence permitted. With socialist instincts running through its veins, the government found its finances in perpetual deficit as it made efforts to create jobs which were in turn protected by costly guarantees that were a severe strain on companies. Ironically, it took the cataclysmic second oil shock sparked by the 1991 Gulf War to cause India to awake to the reality that having 330 million people, or 40% of the population, in total poverty was neither moral nor compatible with sustaining its position as the world’s largest democracy. Narasimha Rao who became Prime Minister after the assassination of Rajiv Gandhi, appointed the economist Manmohan Singh, current Prime Minister, as Finance Minister. Unlike China, India took the route of the IMF, devaluing the currency, removing import and export restrictions and expensive bureaucracy.

It is the result of the vision of these leaders and the number and energy of their people that is causing such consternation among Westerners and Americans in particular who see their solo superpower role under threat from the rapid growth of these two economies. For China the growth rate has been averaging 10% per annum while India’s at 6% may seem modest except when it is compared with the 3% in the US and other western countries. Indeed the admired has become the admirer and Lee Kuan Yew told a Forbes Conference in 2006 that he has been visiting China “every year and each time he is surprised at the rapid changes”.

These two countries both have young populations, high Asian saving rates and have put in place measures which barring some catastrophe can keep growth in the high single-digit range for decades. Admittedly they have come from a low economic base but with the substantial catching up they still have to do, there is no reason for them to slow down.

To be concluded next week.