Development Bank Research Bulletin

India’s demographics may bring a bumpy ride for the economy

Having a large and young labor force is believed to be good for GDP growth. It has been well-received that current demographic structure of Indian population is working toward India’s favour in the next two decades when young Indian children grow up and enter the labor force. Chinese economy, which benefited and is still benefiting (but for not too long) from the 1970s babyboomers, however, will start to slow down because of the aging population .

However, young labor force can take its toll too. A study by Nir Jaimovich and Henry Siu shows that it is the “restless” workers that makes an economy volatile. Based on historical data from major industrial countries, they find that volatility of an economy is positively correlated with the share of young workers (15-29 years old) in the labor force.

To show you the result also graphically, below several charts from the paper are shown. The charts (please click for enlarged imanges) plot the business cycle volatility (the pink line) alongside with the “restless” worker ratio (the blue line) for the seven major industrial countries. The two statistics seem to track each other very well. History may not be a perfect guide, but the evidence collected by economists seems to suggest that demographics is a good predictor of economic volatility. So, Reserve Bank of India, watch out! Your inflation rate is too high!

The Young, the Old, and the Restless: Demographics and Business Cycle Volatility (PDF file)

We investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the U.S. and other G7 economies. During the postwar period, these countries experienced dramatic demographic change, although details regarding extent and timing differ from place to place. Using paneldata methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in U.S. business cycle volatility. Using both simple accounting exercises and a quantitative general equilibrium model, we find that demographic change accounts for a significant part of this moderation.

Indian households save more than Chinese!

According to a new report by McKinsey “Putting China's capital to work”, Chinese households save 23.8% of their disposable income, not particularly high compared to the saving rates of Asian tigers in their high growth period.

Indian households save 31.9% of their income, a ratio that is much higher than Chinese. The current saving rate of French is 16.6%

Chinese = high saving rate? Myth busted!

The report points out that the high total saving rate of China is mostly the result of higher corporate saving rate, which stands at twice world average. The report however also cautions readers that the higher household saving rate of Indians could be the result of small and micro businesses reporting themselves as households.

Nevertheless, the Chinese saving rate could be overestimated too, as Chinese disposable income, the denominator of the ratio,  is severely under-reported because of the huge underground economy.

Note that saving rate of an average Chinese household could be much lower than the headline number. In 2003, 1.86% of the wealthiest Chinese households control 60% of the total stock of liquid financial assets in China, and they certainly have much higher saving rate than poor people. A McKinsey survey indeed shows that the lowest income quintile of Chinese households save only 20% of their income.

Goldman Sachs: China makes largest progress in energy efficiency than other developing countries

Goldman Sachs publishes a note "Improving energy intensity across the BRICs"  (pdf file). There are several interesting take-away points:

(1) China’s energy use per unit of output in industry fell by 56% between 1994 and 2003, which is the largest energy-efficiency improvement progress in developing world. In the same period, India only achieves reduction of 30%, and Brazil almost makes no progress.

Why is everyone blaming China for using too much energy?! China uses more energy simply the population is larger and the economy is still in the early stage of industrialization, and as such a large economy, China is already making much better progress than others.

(2) Russia remains the most energy-intensive countries in the world, The country’s energy intensity is close to three times that of US.

Not surprising, considering that the government is subsidizing energy (for Russian residents) to such an extend that electricity is almost free. By the way, Venezuela always consumes a lot of gasoline, because the price is heavily subsidized. I always say that letting market to determine the price is the best weapon against energy waste.

(3) In China, non-industrial sector is twice more energy-intensive than industry.

I have no idea why!

(4) Projection results show that BRICs (except Russia) will consume much less energy per capita than the current level in more developed economies (U.S., Japan, etc) when  they reach the same income level of developed economies.

I.e., both now and in the future, Americans will remain the heaviest user of energy, even on per capita term.  Why do Americans still point fingers at developing countries and keep on blaming China for exhausting the energy resources of the planet?

Implication for the relationship between growth and environment : as a country gets richer, it will use less energy (because industry becomes more productive and structural shift to service sector will also save energy). The best weapon against pollution is economic growth, not to turn Africa into a zoo.

Will India collapse in balance sheet crisis? a worse scenario analysis

Special note: this analysis is more a stress-test/worse-scenario type of exercise and "thought experiment". I don’t think a crisis is imminent for India, neither do I think it is a large-probability event. An external debt crisis is in particular impossible. The analysis however, by dissecting the problem, helps you identify the weakest links of the system and hopefully may help inform policy-makers in addressing the problem ealier than later.

Will India collapse in balance sheet crisis?

My evaluation is that: India’s national balance sheet is unsustainable in the long term, but financeable  in the short term. Nouriel Roubini has the same opinion in his article “A balance sheet crisis in India” (PDF file)

First, let me tell you why it is unsustainable in the long term. When evaluating a country’s vulnerability to crisis, we need to examine the overall balance sheet of the country, which include not only the corporate and banking sector, but also the government sector.  This is particularly true in India and China, where the liability can be easily moved between balance sheets of the banking sector and the government as a result of strong state intervention in the economy.

In both India and China, governments are heavily involved in loss-making projects. But the losses are recorded differently.

In China, government forces state-owned banks to extend so-called “soft loans” to industries and enterprises favored by the government’s fiscal goals, and thus the huge losses are recorded in the banking sector as non-performing loans.

In India, the government directly involves in subsidizing these “white elephant” projects,  and then finance the expenditure through issuing government bonds to captive state-owned banks. Indian government thus accumulates huge public debts, which amount to more than 400% of its annual revenue.

We have to understand that, although the losses are recorded differently in India and China, if we examine the balance sheet of the country as a whole, they are not better than each other. If Chinese government increases its public debt to the level of India, she can use the revenue to write off the bad loans of the banking sector for many times. Similarly, if Indian government is to default or restructure on its debts, or there are doubts among depositors about the government’s repayment capacity, Indian banking sector will be broke over night as more than 35% of Indian banking sector’s total assets are in the form of government securities. Currently, government papers are treated as very safe and capital and loss reserve is not allocated to safeguarding against potential future losses, which results in misleading capital adequacy ratios.

In a worse scenario, such structure can cost you dearly. According to Professor Roubini, anything that can go wrong tend to go wrong together:

“Note also that if a bank run were to eventually occur—when and if depositors become concerned about the quality of the bank assets and the sustainability of government  debt—the ability of the Indian government to stem the run via explicit guarantees of deposits may be limited. A solvent government running a low deficit and with little debt may credibly guarantee deposits since it has resources to finance a bailout of the financial system. But an insolvent government cannot credibly backstop the banking system and promise to protect deposits given that the cause of the run is, in the first place, concerns about the solvency of the sovereign. Thus the risks of a bank run and the necessity of a deposit freeze become more severe when the government is effectively insolvent or semi-insolvent.”

Will Indian government default on its debt? India’s public debt to GDP ratio is some 85% and the government is still running large fiscal deficits every year, and even if India can maintain its 7%-8% economic growth rates and the interest rates do not go up, the debt ratio is heading toward 90% by the end of this decade, maybe even faster with the coalition government that will certainly spend more. However, high debt ratio alone will not trigger crisis. India’s public debts have long maturity terms (which however also means that banking sector will experiences large losses when short-term interest rates hike), and are mostly denominated in local currencies (which make India relatively free from crisis in external sector).

Nevertheless, everything that can go wrong will go wrong. When the balance sheet is unsustainable in the long run, it becomes very fragile in the short term too, as participants in the economy are forward-looking. Nothing will happen if India can maintain high growth and low interest rates, and (2) No large scandals happen in state-owned enterprises and banks. But if any one of these factors (growth, interest rate, confidence in public sector) goes wrong, investors will start to reevaluate the situation, and some of them may start to think: hey, the whole system is unsustainable in the long run, someone will eventually have to pay the bill, and I don’t want to be the last one to liquidate my position! 

One may point out that European countries also accumulate huge public debt, and why don’t you worry about them. Well, since when has India become a developed country?

Emerging markets are fragile in nature. Let’s review some famous Murphy’s laws:
(1) Anything that can go wrong will go wrong.
(2) If there is a possibility of several things going wrong, the one that will cause the most damage will be the one to go wrong. Corollary: If there is a worse time for something to go wrong, it will happen then.
(3) If anything simply cannot go wrong, it will anyway.
(4) If you perceive that there are four possible ways in which a procedure can go wrong, and circumvent these, then a fifth way, unprepared for, will promptly develop.
(5) Left to themselves, things tend to go from bad to worse.
(6) If everything seems to be going well, you have obviously overlooked something.
(7)It is impossible to make anything foolproof because fools are so ingenious.
(8) Whenever you set out to do something, something else must be done first.
(9) Every solution breeds new problems
I more and more feel that Mr. Edward A. Murphy is such a damn-good economist! World-class!

Recommended Readings:

Deutsche Bank Research: India’s public finances: do they matter? (PDF file)

Also two of my previous articles on India's banking sector:

Why is India’s financial system less solvent than China’s

Fix Mexico’s banks, not China’s

Time of India: "India 12th wealthiest nation in 2005"???

Times of India: “India 12th wealthiest nation in 2005: World Bank”?  Also in the Hindu

Oh my god! India? Wealthiest nation?  Pankaj Mishra's op-ed "The myth of new India" published in the Hindustan Times makes some very good and sober comments on this type of media euphoria: "Mittal is as much an Indian success story as Sergey Brin, the Russian-born co-founder of Google, is proof of Russian's imminent economic superstardom."

A foreigner, if he never walks out of his Indian hotel and reads only Indian newspaper headlines, will certainly get an impression that Indian is the heaven.

Everyday, you are bombarded by headlines like “Asian Development Bank president: India to become a developed nation soon”,   “Indian banks beat Asian peers” “India to beat China in 10 years: BBC survey” (by the way it was actually a survey of Indians),  “No one has actually made any money in China” , so on and so forth.

Any rankings released by any small organizations, so long as India ranks better than Pakistan or China in one of the numerous components of the ranking system, will be highlighted on the same day on Indian newspapers.

The same is true for China, but never to such an extent. Many Chinese are proud of their country as the 4th largest economies in the world, not realizing that the “wealth” has to be divided by 1.3 billion fellow countrymen, and in an terribly unequal way. But I never see any Chinese newspaper headline that portraits China as one of the “richest” or “wealthiest” nations.

When you read Chinese newspapers, except the state media People’s Daily (which by the way cannot be found in most newspaper stands on the streets. i.e., no one buy it), I will say when it comes to economic news, there is not much difference between Chinese newspapers and Indian newspapers. This is not to say that Chinese media is in any sense free, but that Indian newspapers, at least when it comes to economic news, are as propagandist as Chinese ones. The difference is that: Chinese newspapers are forced to, while Indian newspapers choose to, to please readers.

There is a joke that goes like the following. China and India are the same although one has the strictest media censorship in the world while the other has free media. In Chinese newspapers, you always find a lot of articles about the need for reform and how many hidden dangers are ahead of the economy. In Indian newspapers, you will find the same thing: banking sector problems, pollutions, labor unrest......... in China though!

There are actually quite a few academic studies that try to find out the reason why media industry, even with perfect degree of freedom, will still purportedly propagate biased information. One of the reasons, as many researchers point out, is that readers believe only what they want to believe, and when the benefit of finding out the truth is much smaller than the cost, no one bother to find out.

I think it is quite true. If you cannot do anything about the poverty, why bother emphasizing it on a daily basis. The other day, I saw a BBC article, which highlights the number of Indians living under $1/day. A local Indian commented below the article that: “why do you throw out a number every several days about the poverty of India. We don’t need you to tell me that we are poor. We can see it everyday when we goes to work. We don’t need you to repeat it”

It's qutie true. After you spend you real life in a sweatshop, why don't you want to review your real tough life again when you go home to relax.

Deutsche Bank’s take of China, India, Brazil and Mexico: Reports

Below I put together a collection of country research reports produced by Deutsche Bank Research, on several important emerging economies. Let's see what are Deutsche Bank's take of Goldman Sachs's BRICs.

China 2020: challenges ahead (PDF file)
China should be able to achieve high growth for another decade, moving its GDP above that of most industrial countries. Challenges however include a fragile banking sector, rising unemployment, large government debt, and corruption within the one-party political system.

India rising: a medium-term perspective (PDF file)
GDP per capita will double in 2020. Favorable demographics, increasing investment in education and infrastructure and further integration with the world economy are the factors behind DB’s projections. IT-related services, textiles, and the auto-ancillary industry and pharmaceuticals are expected to gain dynamism given India’s comparative advantage.

Brazil: O pais do futuro? (PDF file)
Grow at an average of 3.3% year. Competing against China, Brazil is likely to maintain its position in niche high-tech sectors where it has a competitive advantage. Increased Chinese demand for commodities will provide Brazil with an opportunity to move up the value chain in commodity-related sectors.

Mexico 2020: Tequila sunrise (PDF file)
Geographic closeness to the US gives it an unique advantage. There is fair chance that Mexico’s industrial profile will make a successful transition from low value-added to more sophisticated products.

China or India, who’s got sweatshops?

China is known for its labor-intensive low-wage manufacturing. But according to Mercer Human Resource Consulting: software engineers, sales staff, financial analysts and factory workers all earn more in China than India.

AVERAGE ANNUAL PAY-CHINA (in British Sterling)
Project manager: £12,173
Software engineer: £6,998
Accountant: £4,677
Sales rep: £2,649
Production worker: £1,214

AVERAGE ANNUAL PAY-INDIA (in British Sterling)
Project manager: £5,220
Software engineer: £5,344
Accountant: £2,956
Sales rep: £2,464
Production worker: £964

According to a report in The Australian, in the newly-completed Toyota factory in Guangzhou, China, workers, 3500 of them, are paid about $2.70 an hour. Note that these are assembly-line workers, not IIT-educated genius.

Labor regulations never get you higher pay; Market foreces and your own skills do!

Liberalization of imports harms India?

Ashok Sharma in the Indian newspaper Financial Express argues that unilateral and unconditional lowering of tariff for sugar imports harm India

“... the institution of TRQ for sugar import is unilateral and unconditional. We have not in exchange negotiated for raising our low bound tariff rate of 45% on soyabean oil. The policy of unilateral and unconditional liberalisation of imports will weaken India’s negotiating position at WTO. It will endanger domestic production as had been the case with vegetable oil and oilseeds.”

If this were true, then why don’t India raise tariff to 1000% or close the economy completely from international trade then? This should be able to gain India formidable negotiating position at WTO, according to the theory of Mr. Sharma.

Sometimes, busting a myth requires just a little bit of counterfactual thought experiment.

India loses one-third of income tax to the U.S., because of brain drains

India has been suffering from loss of talents because of migration of highly-educated people to the U.S.  Several economics professors have put out a hard number to quantify part of the loss.

According to a study done by  Mihir A. Desai, Devesh Kapur and John McHale, the foregone income tax revenues associated with the Indian-born residents of the U.S. comprise one-third of current Indian individual income tax receipts.

This however only counts in  the fiscal cost, which is but a trivial component of the total loss India incurs. Had there engineers stayed in India and had they been able to make the best use out of their talents in India, India would have been a much more innovative and technologicaly-advanced country by now.  Certainly here we have to assume that the institutions and business enviroment in India could allow them to make the best use of their talents, which certainly is a very strong and unrealistic assumption.

The Fiscal Impact of High Skilled Emigration: Flows of Indians to the U.S. (PDF file)
Abstract: Easing immigration restrictions for the highly skilled in developed countries portend a future of increased human capital outflows from developing countries. The myriad consequences of these developments for developing countries include the direct loss of the fiscal contributions of these highly skilled individuals. This paper analyzes the fiscal impact of this loss of talent for a developing country by examining human capital flows from India to the U.S. The escalation of the emigration of highly skilled professionals from India to the U.S is examined by surveying evidence on the changing nature of the Indian-born in the U.S. during the 1990s. The loss of talent to India during the 1990s was dramatic and highly concentrated amongst the prime-age work force, the highly educated and high earners. In order to estimate the fiscal losses associated with these emigrants, this paper first estimates what these emigrants would have earned in India, and then integrates the resulting counterfactual distributions with details of the Indian fiscal system to estimate fiscal impacts. Two distinct methods to estimate the counterfactual earnings distributions are implemented: a translation of actual U.S. incomes in purchasing power parity terms and an income simulation based on a jointly estimated model of Indian earnings and participation in the workforce. The PPP methods indicate that the foregone income tax revenues associated with the Indian-born residents of the U.S. comprise one-third of current Indian individual income tax receipts. Depending on the method for estimating expenditures saved by the absence of these emigrants, the net fiscal loss associated with the U.S. Indian-born resident population ranges from 0.24% to 0.58% of Indian GDP in 2001.

Minimum wage, China vs India: is cheap labor the real answer for China’s success in manufacturing?

China has been said to be the World’s factory and cheap labor is said to be the reason why China attracts most of the manufacturing activities away from developed countries as well as from other developing countries.

Africa’s wage level is much lower than China, but they are never on the radar screen as threat to China’s position though. Nevertheless, let’s make a more relevant comparison between China and India.

India has a hard time in attracting manufacturing firms to move there. Many Indians attribute the “failure” to “that’s because we don’t have cheap labor; we focus on service industry with higher value-added”

Let’s compared the minimum wage of China and India to get a idea of who really has cheap labor.

Take China’s Guangdong province as an example. This province is where manufacturing activities agglomerate and where most immigrant workers from inland provinces are employed.

The hourly minimum wage in Guangdong province of China (Effectively July 2006- July 2007) :

Shenzhen (Special Economic Zone) and Guangzhou (two core cities, where manufacturing activities are moving out): 
4.66 Yuan/hour ( = 0.58 USD= 26.7 Rs.)

Shenzhen (outside SEZ), Foshan, Dongguan, Zhuhai, Huizhou, where most of the “sweat shops are actually located:
4.02 Yuan/Hour (=0.5 USD = 23.1 Rs.)

For India, I heard that the minimum wage is  between 7.5 -12.5 Rs./Hour.

(Please correct me if I am wrong; and if anyone can provide me with the minimum wage level, the actual enforcement, and the coverage of workforce,    in typical manufacturing-intensive regions in India, it would be most helpful for me to make a more representative  comparison)

So, minimum wage in China's manufacturing sector is between two to three times that of India!

You may argue that laws are never actually enforced in China. Well, indeed, complicated laws usually get circumvented in China. That’s why the most common violations of labor laws in China are, among others, paying normal wage for overtime work, insufficient safety and health work conditions, insufficient compensation for work-related injuries, no compensation for lay-offs...  These laws get circumvented because employers always managed to maneuver the vague language of the laws in favor of themselves. 

Minimum wage requirement however is in general complied by employers particularly in foreign-owned factories, because it is so easy for regulators to monitor and verify, particularly considering that most factories in the area are in the formal sector and not small workshops.

The most power force however is the market: today if you pay lower than the amount required by the minimum wage, I doubt you are able to recruit any skilled workers to work in Guangdong province, and most employers find it not worthwhile to go down the skill ladders. Labor cost after all constitutes only small fraction of the cost in typical factories producing electronic equipments and employers do not want risk having lower quality of disgruntled workers.  For details see my previous post in the Bulletin: “Unlimited labor supply in China? Not anymore! Wages are hiking!”

As a matter of fact, this is exactly why the minimum wage is set to the level where it is now, i.e. almost equal to market-clearing prices. The employers basically control the whole legislative process.

But still, the minimum wage level in Chinese “sweat shops” is much higher than in India where unions have bargaining power in the legislative process of labor laws.

Well, maybe the difference is not that high. First, living expenses in China is higher; second, Chinese workers in “sweat shops” typically have at least 9 years of education.

After all, it is the whole package: infrastructure, administrative efficiency, and education level of workers, flexibility of hiring and firing, etc. that are driving the location decisions of manufacturing firms

Update:

In a report by Deloitte and Touche "India and China: The Reality Beyond the Hype", it is cited that, according to IMF data, typical monthly wage for manufacturing workers in China is almost 4.7 times that in India. But I am not able to verify the number  it from the original source.  (Hat tip: PSD Blog)

How large is the economic benefit of merging Pakistan with India, Mexico with US....

Professor Enrico Spolaore and Romain Wacziarg published an interesting study on the economic effect of merging two countries on economic growth.  They conduct simulations for large number of potential mergers of geographic neighboring countries.  Some results are quite  interesting.

In general, small countries benefit from merging with larger countries, and poorer countries benefit from merging with their richer neighbors.

According to the simulation, were Bangladesh to merge with India, she would grow faster by 1-2 % per year, and in the long run, she may double her income. The merger of Argentina (or Bolivia, or Peru, or Paraguay, or Uruguay) with Brazil, or Mexico (or Canada) with the U.S. would create economic benefits of similar magnitude for these smaller neighbors as they get full access to larger markets.

Pakistan’s economic growth rate will increase by 1.2-1.5 % per year, and long-run income level will be double, if she were to merge with India. India on the other hand will not gain much. Indian growth rate would be raised by 0.1%, and in the long run become 10% richer. (This may explains why Indians in general are less interested in signing free trade arrangement with smaller countries such as Thailand.)

Certainly the merger of these two countries with different culture and religion will create social problems that certainly will outweigh the economic benefit. But on the other hand this also sadly highlights the huge economic costs of two countries hating each other for half a century.

Borders and Growth  (PDF file)
Abstract: This paper presents a framework to understand and measure the effects of political borders on economic growth and per capita income levels. We present a model that provides a theoretical foundation to estimate empirically the effects of political borders on growth. In our model, political integration between two countries results in a positive market size effect and a negative effect through reduced openness vis-à-vis the rest of the world. We estimate the growth effects that would result from the hypothetical removal of national borders between pairs of adjacent countries. We also identify zones of mutually beneficial political integration, and discuss the applicability of our framework to European political integration.

India loses out in free trade agreement with Thailand?

Ravi Krishnan in Indian newspaper Financial Express claims that India loses out in free trade agreement with Thailand.

His evidence is that:

During January-December 2005, Thailand's exports of items under the Early Harvest Scheme (EHS) of the Indo-Thai FTA stood at Rs 664.3 crore — an increase of 71% over calendar year 2004. In contrast, India's exports to Thailand actually declined 33.8% to Rs 195.6 crore.

His point is that: India receives less monetary revenue from trading with Thailand and thus loses out from the deal.

Ravi forgots that trade is exchange of goods for goods, goods for money, or money for goods. In any voluntary exchange/trade, when you give away goods or money, you will receive goods or money of equivalent value as compensation. 

Certainly in this deal Indians send more money to Thailand than Indians receive, but doesn’t it also indicate that Indians receive more goods from Thailand?

No one loses out from trade. As a matter of fact, both sides gain because with the same amount of money, you can get more stuff from Thailand than from inefficient domestic manufacturing sector back in India.

If you are a worker, do you think your boss always loses out when he hands you the paycheck. No, because he gets your labor of equivalent market value as exchange. Then why do you think India loses out from trade simply because Thailand exports more and receive more money from India?

Is Asian Development Bank making poverty worse?

“Thousands of activists rallied in the southern Indian city of Hyderabad this week to protest against the Asian Development Bank, which held its annual meeting in the city. Protesters say policies of the ADB and other multinational lenders are making poverty worse in countries like India. Anjana Pasricha is in Hyderabad for VOA, where she reports the buoyant Information Technology sector there has brought enormous benefits for the middle classes, but left many behind.”–---- VOA

It is certainly debatable whether ADB is making poverty better. But it really amuses me that they are accusing ADB for making poverty worse. Unless they take money away from you, you cannot get worse.

Sometimes when I see homeless people, I may give them several dollars. Theoretically they can accuse me for making their lives worse. I do make their lives worse. Had I given them 50,000 dollars, they would have gotten out of poverty. So indeed it is me (by not giving them 50,000 dollars) that “causes” their poverty. Theoretically those people who I haven’t had a chance to meet and certainly have not given several bucks to can accuse me of making their lives worse, of leaving them behind.

But isn’t it ridiculous? This means that by doing some good deeds, you are actually become constantly more blamable. At first you are helping them out of good will, and over time the people you help take your giving as granted, and will yell at you, reprimand you when you are one day a little bit slower in delivering foods to them. They however never blame those Indian government officials who always tax them (formally and through corruption, extortions...), let alone helping.

No one is your servant. We only help those who can help themselves and who are grateful. Before accusing others, please think first what you yourselves have done for the poor, and learn to be grateful when others are trying to help.

The lasting legacy of colonial land tenure system in India

Why are some parts of India more productive than the rest of the country? Professors Abhijit Banerjee and Lakshmi Iyer have a new explanation.

They trace it back to colonial times. Back then, areas where the land revenue collection was taken over by the British between 1820 and 1856 are much more likely to have a non-landlord system, for reasons that have nothing to do with factors that directly influence agriculture investment and yields. They show that areas in which proprietary rights in land were historically given to landlords have significantly lower agricultural investments and productivity in the post-independence period than areas in which these rights were given to the cultivators.

Map (click to enlarge)

History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India (PDF file)
Abstract: We analyze the colonial land revenue institutions set up by the British in India, and show that differences in historical property rights institutions lead to sustained differences in economic outcomes. Areas in which proprietary rights in land were historically given to landlords have significantly lower agricultural investments and productivity in the post-independence period than areas in which these rights were given to the cultivators. These areas also have significantly lower investments in health and education. These differences are not driven by omitted variables or endogeneity problems; they probably arise because differences in historical institutions lead to very different policy choices.

A tale of two Chinese provinces: “Indians” in China

China is known to have adopted a “Federalism, Chinese style” decentralization approach, by which local governments are given substantial discretion in economic decision making. An interesting consequence of this is that some provinces are adopting polices that are very “Indian”, according to the study “A tale of two provinces” done by professors Yasheng Huang and Wenhua Di (MIT).

Jiangsu and Zhejiang are two neighboring Chinese provinces, one to the north of Shanghai, the other to the south. They started with similar conditions at the beginning of economic reform in 1980s, but ended up with different institutional environment and economic structure.

Jiangsu is very “Chinese”. In Jiangsu, “government plays a heavy sponsorship role in enterprise management and supported collectively-owned town-and-village enterprises (TVEs) rather than, or even to the detriment of, genuinely private firms.”  The Jiangsu economy now is heavily dependent on foreign investment in its numerous industrial parks, very representative of the typical “Chinese model”.

Zhejiang, in contrast, is the “India” in China, where local economy “heavily relies on private initiatives, a non-interventionist style by the government in the management of firms, and as supportive credit policy stance toward private firms.”  Both starting from scratch, in 1995, domestic private firms generated 38.7% of Zhejiang’s industrial output value, compared to 10.5% in Jiangsu. By 2001, the ratio was 69.3% and 44.7%, respectively. The two professors also  find that the more liberal institutional environment for domestic private firms in Zhejiang is associated with less foreign ownership of the joint ventures operating there.

I don’t want to conclude whether the “Chinese model” or the “Indian model” is superior. They both have strength and weakness. But the advantage of the Chinese decentralization approach is that, she never keeps all eggs in one same basket. Some provinces rely more on foreign investment, while the others rely more on private initiative. No matter which approach turns out to work better, the losers can learn from the winners and quickly adjust, which was exactly what happened in mid-1990s in Jiangsu when they realized the importance of private sector development. “Heads, I win. Tails, I still win.”, such is the wonderful “Federalism, Chinese style”

When India will have a “Chinese province” within its border? I am expecting. Indians spend so much time debating whether and how “Indian model” is better than “Chinese model”. The right way forward however is to start experimenting. Talking will take you nowhere.

References (Hat tip: PSD World Bank blog)
What can China learn from India, by Yasheng Huang (a Chinese) (PDF file)
What can India learn from China, by Sridhar Ramasubbu (an Indian) (PDF file)

Also, the research paper by Yasheng Huang:

A Tale of Two Provinces: The Institutional Environment and Foreign Ownership in China    (PDF presentation file in the World Bank)
Abstract:   In this paper, we use a unique dataset covering joint ventures in two provinces of China, Jiangsu and Zhejiang, to test the effect of the institutional environment for domestic private firms on ownership structures of FDI projects. Unlike many studies on this subject, we approach the issue from the perspective of local firms seeking FDI rather than from the perspective of foreign firms seeking to invest in China. Applying the prevailing bargaining framework in studies on ownership structures of FDI projects, we find that a more liberal institutional environment for domestic private firms is associated with less foreign ownership of the joint ventures operating there. Several mechanisms can contribute to this outcome. One is that a more liberal institutional environment may enhance the bargaining power of those domestic firms negotiating with foreign firms to form alliances (the capability effect). The other mechanism is that a more liberal institutional environment may reduce some of the auxiliary benefits associated with FDI - such as greater property rights granted to foreign investors - and thereby attenuate incentive to form alliances with foreign firms (the incentive effect).

Is what’s good for Hindustan Motors good for India? Large Corporate Sector Stability and Economic Growth

I notice a culture difference between India and China that creates some difficulty in understanding each other’s economy.

Indians are very proud of their global corporations such as Tata and Birla, and make a lot of analysis comparing them with China’s Haier, Lenova, etc. I see so many of them in newspapers, blogs, and academic papers.

I am sure these Chinese corporations are in no way comparable to their Indian counterparts. While Indian big corporations are already playing at globla scale and argubly operating at modern international standards, Chinese corporations such as Haier and Lenova are at best toddlers trying the water.

But such comparison is never relevant, because big corporations do not matter that much for Chinese. China is an ultra-competitive market, in the sense that turnover of industry leaders  is very high in product markets, and productivity enhancement is not usually created by small group of industry incumbents.

I don’t see any Chinese who are proud of Haier or Lenova in the way Indians are proud of their big corporations. If today Haier products are good, Chinese use them; and if tomorrow another Chinese company produces electronic appliance in higher quality and lower price, Chinese consumers simply switch to the new winners; there is no emotion attached to the old incumbents, and there is no sad feeling about failure of certain household brands. As a consumer, you don’t need to cheer up for the “milestones” achieved by Hindustan Motors.

You may ask then how can Chinese corporations make long-term investment when the horizon is so short. This is not a problem in China (although I believe that when Chinese move up the value chain, it will some day become an urgent problem). Engineers, technicians, workers, and machinery will move to the new winner’s plant in weeks, there will be no disruption in production. This is (wildcat) capitalism, Chinese style. Or as Bush puts it, “very capitalism”

Such ultra competition is good for China; at least Chinese don’t need to put up with the Ambassador cars produced by Hindustan Motors. The only beneficiary from India’s protectionism policy is the Birla family that owns Hindustan Motors, and other typcoons, not ordinary Indians.

There is empirical evidence that corporate stability is bad for the overall economy. Professors Kathy Fogel, Randall Morck, and Bernard Yeung study corporate stability around the world, and find that what’s good for Hindustan Motors may not be good for India!

They study the turnover in the list of a country's top ten corporations between 1975 and 1996, and find that higher turnover  is associated with faster overall economic growth, faster productivity growth, and (in high income countries) faster capital accumulation.  They interpret this as consistent with Schumpeter's (1912) theory of creative destruction, in which growth entails creative new firms destroying old stagnant ones.

China however still has a long way to go toward the goal of truely ultra-competitive capitalism. China’s largest corporations are mostly state-owned, and are usually granted certain monopoly rights. They hold substantial assets that are not put into the most productive use. They also wield their political power to create barriers for private sector new entrants, and establish barriers against foreign investors too. They are frictions in the economy that slow down China’s productivity growth. In order not to fall into the same trap where Indian economy currently stays, an urgent issue is to reduce government’s control in the economy.

Many Chinese large corporations (mostly state-owned) are talking about expanding their empire for the goal of eligibility in Forbes 500. They argue that it is important that Chinese have big corporations to compete with India in the Forbes’ list. They say this will be good for overall economy of China, good for national security, blah blah blah, and thus request preferential treatment and capital injection from government and taxpayers. I say Chinese don’t need to engage in this kind of resource-wasting contest.

Sooner or later Indians will find it meaningless too. What is important for you is to get higher income and better products for yourself, not useless national  pride. What is good for the incumbents are not good for the overall economy. Ask Hindustan Motors to stay away from your pockets (both as a consumer and as a tax-payer)!

Reference:
Large Corporate Sector Stability and Economic Growth: Is What's Good for General Motors Good for America?   (PDF file)

The more billionaires the merrier? Depends on how you made the money.

“The richest man in India, Azim Premji, is worth $10 billion. The 4 richest people in India (Premji, The Ambanis, Sunil Mittal) are worth more than the top 40 richest Chinese.”  ----- China vs India: Some random numbers, Indian Economy Blog

“Those Who Dare blog” is particularly unhappy about this comparison though. See “An economic dick measuring contest”

Is “more billionaires” a good or bad thing?

It depends on how they made the money. Recently I read a study done by professors Randall Morck, David Stangeland and Bernard Yeung on the economic consequences of Forbes billionaires on their home countries.

They find that:

“Countries in which billionaire heirs' wealth is large relative to G.D.P. grow more slowly, show signs of more political rent-seeking, and spend less on innovation than do other countries at similar levels of development. In contrast, countries in which self-made entrepreneur billionaire wealth is large relative to G.D.P. grow more rapidly and show fewer signs of rent seeking.”

Well, some of the Indian rich are indeed self-made entrepreneurs, but most of them are not. But at least there are some hopes, as those emerging from IT industry are more likely to be self-made. Please check Forbes' list of the richest 40 Indians, and find out how many of them are inherited and how many are self-made.

Morck et al. further suggest the old money, the inherited billionaires,  always oppose capital market and goods market openness through their entrenched and enhanced lobbying power, because they have vested interest in preserving the value of existing capital.

This is true in India. No one believes that Indian government adopts protectionism polices for the welfare of Indians. Only those incumbent rich benefit from these polices; as consumers they buy luxury goods in London, thus they won’t be hurt as consumers but only benefit overwhelmingly as monopoly producers. Ordinary Indians suffer as a result.

Reference:
Inherited Wealth, Corporate Control and Economic Growth: The Canadian Disease (PDF file)

China and India: Who is hot in 2006? What do investment banks think?

Most investment banks have already released their forecast of GDP growth rates for India and China. Let’s see what they think about these two competitors’ prospects in 2006.
I find only three major investment banks that have released forecasts on both countries. They are Deutsche Bank, Citigroup, and Morgan Stanley.

Deutsche Bank always has no preference!
Deutsche Bank forecasts that China’s GDP will grow at 9% in year 2006, while India will grow at 6.9%. This creates a 2.1% growth gap. Both numbers are almost the same as the consensus in the market. This is not the first time; I have to mention that last year DB did the same thing. DB always agrees with the consensus view!

Citigroup loves Indian foods!
Citigroup however thinks the gap should be smaller. Citi predicts that China will grow at 8.7%, while India at 8.1%, which produces a merely 0.6% gap compared to DB’s 2.1%. I have to mention that Citi’s 8.1% forecast of India's year 2006 GDP growth is the highest among all major IBs. Their forecast of 7.5% for last year also was the highest. Citi does love Indian foods!

Morgan Stanley does not like Asian foods!
Interestingly, Morgan Stanly is very pessimistic about both India and China. Morgan Stanley thinks China will grow at only 7.8% while India at 6.6%. Among all major forecasters who have released numbers for China and India, Morgan Stanley’s forecast is the lowest. Last year MS also was the most pessimistic about the two countries, and missed the target by wide margin. They must have some private information and hard evidence backing their persistent opinion. I will try to find it out and share with readers in the next weeks.

Credit Suisse, Goldman Sachs, and BNP Paribas loves Chinese foods!
Finally, Credit Suisse, Goldman Sachs, and BNP Paribas are quite optimistic about China. They think China will grow at 10.1%, 9.6%, 9.5%, respectively, in year 2006.

Well, it is always to interesting to reexamine at the end of year 2006 how accurate their bets were. Please do remind me to do that.

Some reference readings on investment banks' views on China vs. India:

Morgan Stanley's Report: Indian and China: a special economic analysis
Deutsche Bank's Report:  China and India Chartbook: a visual essay

Why do the world’s richest always have better-looking children? The example of Mittal family

A widely-received explanation is that: the statistical odd of a rich man marrying an equally rich woman is slim; and for a woman from a poorer background to marry into a rich family, she is at least over-average in terms of looks. Thus their children will inevitably become better looking than their farther, thanks to their mother’s genes. Let me illustrate this with the example of Mittal family. The family head Lakshmi Mittal is the world’s third richest man, and the richest Indian.
Here is his picture:
   
And here are pictures of his son Aditya Mittal and daughter Vanisha Mittal. Apparently, they must have a very beautiful mother.

Below are pictures of Aditya Mittal with his wife and Vanisha Mittal with her husband. I am very sure Lakshimi’s future grandchildren will be even more good looking.

And don’t forget that Lakshmi Mittal’s initial wealth was inherited from his farther Mohan Lal Mittal, also a rich man; We can comfortably guess that Mohan Mittal could be much less good-looking than his son Lakshmi (although I am not able to find Mohan's photo through google).

Bottomline: It takes generation to improve the gene of a family!

It is more profitable to lend to “priority sector” in India?

According to a report in Indian Times, Chennai-headquartered Indian Bank is making very good profits in so-called “priority sector”(agriculture, backward areas, women-owned businesses, etc), to which other banks are willing to lend only when forced to by the government.  According to another report in Hindu Business Line,  many banks actually have to buy loans from public sector banks in order to meet the government-set target of priority sector lending.

Thus the news sounds too good for me to believe ( I checked my calendar and today is not April the First). The report doesn’t give details on how they manage to do it, but I think we definitely need to learn from them if it is true.

“At a time when most banks are fighting for market share in corporate/SME business, Chennai-headquartered Indian Bank is betting big on priority sector lending.  Against the mandated 40%, this bank’s priority sector portfolio accounts for 51% of its advances. “Our experience of lending to priority sector has been good. Non-performing assets (NPAs) in agriculture, for instance, account for less than 2% of that portfolio. The average net interest margin (NIM) is around 4% which is much higher than what we would get by lending to corporates,” says KC Chakrabarty, the bank’s CMD.”

How do they do it? If any readers know about articles about the experience of Indian Bank's lending to priority sector, please let me know. I'd like to look into it.

Why is India’s financial system less solvent than China’s?

First, I have to make it clear that, I am NOT saying that (1) India’s financial system is insolvent, or (2) China’s financial system is solvent. I am only arguing that India’s financial system is less solvent than China’s, i.e., you should worry about India too if you think China’s financial system is in big trouble.

There is this popular view that India is blessed by a sound and efficient financial system, while China will be troubled by the huge amount of non-performing loans sooner or later.

It is however not clear whether India’s or China’s financial system has greater amount of “non-performing assets”, because financial system is consisted of both the banking sector and the government public finance system.  Chinese banks have to assume some public finance roles and fiscal functions, while India parks all bad assets in the government’s public finance balance sheet. We thus need to take into account India’s bankrupt public finance system when we compare China and India’s financial systems.

In the early stage of China’s economic reform, in order to increase the efficiency of distributing resources, part of the government’s fiscal function was transferred to commerical banks that were spinned out from the planning-era mono-bank. Before the reform, there were no commercial banks, and planning commission of the central government was in charge of disbursing all investment funds.

Certainly state-owned banks are less efficient than private-sector banks, I don’t deny. But this move was an improvement of efficiency for public finance, which is also part of the financial system.  Later empirical studies show that state-owned banks distribute resources more efficiently than government agencies, partly because there are four state-owned bank of equal size operating nationally that are competing with each other.  Most of the non-performing loans were accumulated in this transition period. Argubaly, the other option at that time was to park these liabilities direclty in the government’s public finance balance sheet. This option is choosen by India.

In India, banks are not asked to assume these fiscal functions (burdens) as Chinese banks are, and thus the banks are much healthier. But we have to understand that bad "white elephant" projects are still there. They have to be financed by someone. They are financed by the government, directly. These "non-performing" liabilities don’ disappear, they are simply moved from the balance sheet of the banking sector to the balance sheet of the government’s public finance.  When an Indian PSU wants funding, the government borrows money and the liability is in the government’s balance sheet.  I don’t think PSU sector in any time soon will return large amount of money to the government, and I thus can assume that all the investment in PSUs by Indian government can be defined as “non-performing” if we think of the government as a “bank” that pursues profits

When we evaluate the health of India’s financial system, we have to evaluate the system as a whole, not only the banking system, but also the public finance system.  India’s public debt is more than 80% of its GDP. If Chinese government leverages its public debt to this level, she will have more than sufficient funds to write off all non-performing loans in state-owned banks. And it is legitimate for the government to do for she is the lender of last resort.  This is why depositors are still pouring more money into the system.  For India, the risk is in the balance sheet of the government, and IMF is her lender of last resort.

The reasons why India’s financial system is less solvent than China’s are that (1) when public finance and bank finance is combined, India’s balance sheet is more leveraged; (2) Chinese banks, although much less efficient than Indian banks, allocate resources better than Indian government; (3) India has a bigger public sector, more aggressive and less responsible fiscal policy;  (4) It is not clear whether IMF will bail out Indian government in a prompt fashion when she declares bankruptcy, while Chinese government will certainly bail out her banks as their is concensus that the banks have suffered for the government and it is time for paying back now that the government is flooded with tax revenues that are rising +20% yearly.

Note:   I don’t deny that China’s banking system also is in big trouble. How to improve efficiency of Chinese banks is an extremely difficult task.

India vs China: a comparison

The comparison between China and India is  widely discussed in academia, industry, and policy-making community.  Below are several reports that provide useful background data and facts useful for related discussions and handy references. Hope you will find them helpful.

All are PDF files:

Morgan Stanley's Report: Indian and China: a special economic analysis (by Andy Xie and Chetan Ahya)

Deutsche Bank's Report:  China and India Chartbook: a visual essay

Deutsche Banks's Report: Global growth centers 2020 (based on their Formel-G [Foresight Model for Evaluating Long-term Growth] project)

IMF's conference: A tale of two giants: India's and China's experience with reform and growth

Lee Kwan Yew: Confucian model won't work for India

Mr. Lee is a very frank. In an interview with Joshua Cooper Ramo (who named the so called "Beijing Consensus"),  Lee Kwan Yew repeats his “culture will determine your fate” theory. Many Indians may feel offended by his assertion, because Mr. Lee is implying that, maybe, Indians are not hard-working enough?

“It’s more applicable to Vietnam than to India. The Indians haven’t got the Confucian culture. Without being imbued in a culture that enjoins you to endure hardship and have the stamina to struggle on in a cohesive society where the individual subsumes himself for the benefit of the family and his society, it’s difficult to expect that degree of sacrifice.”

Well, overseas Indians certainly are unusually hard-working, but foreign investors generally find it difficult to set up sweatshops in India (although sometimes the conditions are already quite good... Come on! You are in a developing country, what luxury do you expect!) . How can economic growth come without sweat? I always question.

Amartya Sen is very critical of Lee Kwan Yew (see What Lee Kuan Yew and Li Peng don't understand Asia). I have to  say that Lee could be a little too pragmatic and “growth-centric”, but Sen is certainly far too idealistic (in the sense that his theory can be applied only when angles govern)

For those who are interested in Beijing Consensus, you can find the introduction in http://fpc.org.uk/fsblob/244.pdf   . I have to remind you though, that I think it is rubbish.

You may find that my own position in this article is pretty vague. Well, it is a sensitive subject.

"India today" and "MIT engineers"

   I have to share with you this Bangalore picture I found on internet. Obviously they transformed a truck into a double-deck bus. And we have all those "modern" transport vehicles in the scene. There are also people wearing white shirts and ties, but riding on scooters. Sharp contrast, indeed. We also find a sloan on the bus, which is better than the World Bank one. "You be the millionare" is certainly a better promise that "a world free of poverty" The words in front of the bus tell us the theme of this picture: "India Today" !

In the next picture, we think we see the next generation of MIT engineers. Great scientists always have great curiosity when they are kids.

I also noticed some interesting data today: Indian Planning Commission estimates that there were 45 million households in 2000-01 with annual income of less then ten USD/houshold. It is not a typo, it is TEN dollar per houshold per YEAR!