Development Bank Research Bulletin

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.