Dear list Members,
Please find three articles on economics which will help
you understand Bushler Economic Doctrine(George W.Bush
Economic thinking)!
William Rees-Mogg is a former Editor of the Times Newspaper
before the Asset-Stripping Australian Rupert Murdock
bought the paper to add the Sun Newspaper and the News of
the World to his collection,thus making him one of
the most powerful men in the UK,as his newspapers can
normally influence/determine the outcome of elections
especially the sun(tabloid ).
When William Rees-Mogg writes or talk people in the
establishment listens and act accordingly.He read
PPE(Politics Philosophy and Economics)
at Oxford coming-out with a first many many Moons ago.In
short,He is a seasoned commentator on these things.You can
read his column every monday in the times
Newspaper:www.thetimes.co.uk/
So too is Anatole Kaletsky,He is also a serious
commentator.He read economics at Cambridge.
Happy reading.All done in the name of Sharing!
The best of salaam,
Musa.
Opinion
December 01, 2003
The age of the dollar is ending in a sea of debt
William Rees-Mogg
I have sometimes written about international terrorism and
sometimes about the world’s monetary system. I am sure that
more people actually read what I write about terrorism. Yet
the world monetary system is the more important subject of
the two. The breakdown of monetary order would be a far
greater threat to the wellbeing of readers of The Times.
Daniel Webster, who died in 1852, ranks high among the
American statesmen who were never elected President. He had
a technical lawyer’s grasp of the monetary issues of his
time; he corresponded with Lord Ashburton, the leading
member of the Baring family in the 1830s and 1840s. Even at
that early stage of monetary history Webster declared that:
“We have suffered more from this cause (unregulated paper
money) than from every other cause or calamity. It has
killed more men, pervaded and corrupted the choicest
interests of our country more, and done more injustice than
even the arms and artifices of our enemy.”
Webster, as so often, was right. If we look at the most
bloody events of modern history, from the French Revolution
and the Terror, the great slump, the rise of the Nazis, the
Second World War and the Holocaust, or to the 70-year
Soviet tyranny, we find the mismanagement of currencies
among the main causative factors. Incompetent central
bankers are more lethal even than incompetent generals.
They too have their Gallipolis.
Last week every possible warning flag was flying in the
foreign exchange markets. The dollar is in manifest
decline, and the US Administration is making the classic
responses which make things worse. The euro, the pound and
gold — which look now to be in a long-term bull market —
went to five-year highs. The euro reached its highest level
against the dollar that it has ever reached.
Yet in the same week, the euro itself was sandbagged by its
major sponsors, France and Germany. They had failed to keep
inside the Stability Pact; they refused to pay any fines;
they forced their euro partners to suspend the pact. No
doubt the pact was a badly drafted regulation, but it was
the one thing which imposed a significant budget discipline
on the euro governments. The euro has had its control
system shot away, and by friendly fire.
Why is the dollar falling? It has become an over-indebted
currency, in terms of the external deficit of the US, the
deficit of the federal budget, the off-balance-sheet
deficits of the welfare system, and the deficits which
currently affect 46 of the 50 individual states. In
California, the state deficit had become so large that the
Governor was recalled and Arnold Schwarzenegger was elected
in his place. The Iraq war is an added burden. On top of
this overload of public debt, the United States has an
equally excessive private debt. The baby-boom generation
has not been a thrifty one. The American baby-boomers are
now in their fifties; they thought that Wall Street would
go up for ever; it has not, but they have spent the money
they might have saved. All these debts weaken the dollar.
Even in formal terms, which understate the problem, the
budget deficit is $500 billion and the overseas deficit is
another $500 billion. This double deficit cannot be
supported, but it is still growing, and nothing will be
done to correct it before the presidential election next
November.
It is, however, fanciful to suppose that the euro, which
does not have a European government behind it, but does
have the debt problems of the eurozone governments to
support, is a solid alternative to the dollar. The euro is
only a less-bad currency than the dollar, and it may not
remain less bad in the longer term. At present the euro is
being comprehensively screwed by the decline of the dollar.
The Chinese renminbi is not widely discussed in European
circles, yet the relationship between the renminbi and the
dollar is making it impossible for Europe to manage the
unavoidable decline of the dollar. The Chinese have
profited hugely from fixing the renminbi to the dollar.
During the Asian financial crisis, that gave them a
necessary financial anchor. It has allowed China to become
increasingly competitive and to enjoy two and a half
decades of economic growth of around 8 per cent. It has
allowed the advanced coastal provinces to absorb tens of
millions of workers from China’s interior. But China has
now become too competitive; it exports six times as much to
the US as the US exports to China.
As a result, the US is being flooded with Chinese exports,
with Wal-Mart alone importing $12 billion of goods a year.
China’s trade surplus with the US is expected to reach $130
billion in 2003, and it is still rising rapidly. The US is
responding with new protectionist measures, including last
week’s tariffs on Chinese textiles. Protectionism is always
a self-defeating policy for a mature economy.
The competitive situation is becoming even worse for Europe
and Britain. The dollar closed last week at around 1.20 to
the euro. That is a devaluation of the dollar which hits
some European exporters, but it is also a devaluation of
the renminbi, the world’s most competitive currency. The
world’s monetary system cannot adjust if a necessary
devaluation of the largest currency simultaneously results
in a devaluation of the world’s most competitive currency.
In all of this, the UK is in a middle position. While the
dollar has been falling and the euro rising, the pound has
risen relative to the dollar but has fallen relative to the
euro. We are less dependant than the other big European
economies on manufacturing exports but have a larger
surplus on invisible trade, primarily through the City of
London.
In 1999 Germany had a visible trade balance of $72 billion,
largely offset by an invisible deficit of $64 billion; the
UK had a visible deficit of $42 billion, largely offset by
an invisible surplus of $33 billion. Germany’s visible
exports are exposed to Chinese competition, but London’s
invisible earnings have actually been boosted by the growth
of the Chinese economy. The pattern of our trade has tended
to protect Britain.
The dollar is still being supported by the Asian countries
which produce the largest savings. Both Japan and China
have large trade surpluses with the United States which
they simply reinvest in US securities. They are likely to
continue with the investment because they do not wish to be
forced to revalue their own currencies.
The US is suffering from excessive debts, but so is Europe,
if not quite on the same scale. Europe has very expensive
welfare systems, including pension commitments, which are
largely unfunded; they represent a huge future liability.
Germany and France are running current budget deficits of
more than 3 per cent, which may rise further. The Italians
have large debts — more than 100 per cent of gross domestic
product — and their current budget deficit is rising. The
new European states, Hungary, Poland, the Czech republic
and Slovakia have current deficits well above the Stability
Pact limit.
If the United States does have the worse debt problem taken
overall, Europe has no single government to back or manage
the single currency, and no prospect of getting one in the
near term. There is a risk that the euro might fall apart
under pressure, but no such threat to the dollar.
I have lived through most of the period of the decline of
the pound and the disintegration of the sterling area. It
was a long historic process. Its early stages, which
occurred before I was born, have some resemblance to the
current state of the dollar. After 1918 Britain was heavily
indebted, and had lost competitiveness to new economies.
The United States is now heavily indebted, and the debts
are growing rapidly. The United States in its turn has lost
competitive advantage to the countries of East Asia.
Dominant currencies can be based only on strong economies.
The US still has competitive advantages in some important
technological areas, but the world is returning to a more
normal balance. The present decline of the dollar is likely
to prove a permanent shift in exchange relationships. The
rising sun will not be the euro; it is much more likely to
be the renminbi. High savings and competitive exports were
characteristic of the US 100 years ago. Now they are
characteristic of East Asia.
These historic processes take decades to complete
themselves. Nevertheless, the era of dollar hegemony, which
started in 1945, seems now to be coming to an end, just as
the era of the gold standard came to an end when Britain
went off gold in 1961. The present danger is that the
world’s central banks may lose control of the coming
transition.
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December 02, 2003
'Feel-good' India senses its time is coming . . . soon
By Anatole Kaletsky
ASIA will be the driving force of the world economy in the
next decade, and perhaps for much of the 21st century.
The reason for excitement is not just that Asia is home to
60 per cent of the human race. China and India have always
been by far the world’s most populous countries, but, until
recently, their huge populations were seen as obstacles to
development, causes of perpetual poverty and reasons for
businessmen to give them a wide berth. What, then, has
changed? The answer is that Asia has embraced capitalism
and globalisation. If Asian countries can harness their
enormous populations to the dynamism of free enterprise,
the efficiency of market competition and the technological
opportunities afforded by world trade, they will create
wealth on a scale never seen before.
This promise is already being realised in China, but the
triumph of Chinese communism has raised two troubling
questions for the rest of Asia and the world at large. Does
rapid development require political dictatorship? And is
China now so dominant that other developing countries have
lost their chance of profiting from world trade? The
answers to both these questions can be sought in only one
place: India.
India’s size and economic potential are similar to China’s,
but its politics could not be more different. It,
therefore, offers the only real test-bed for the
proposition that democracy and rapid economic development
can co-exist — a question that I will discuss in my article
on Thursday’s Op-Ed page.
Today I want to focus on the second issue, about
development prospects in the years ahead. India has fallen
so far behind since China launched its market revolution in
1978, that many Indians until recently believed their
country would be permanently shut out of promising global
markets, ranging from cars and electronics to textiles and
toys. Looking at India’s macroeconomic indicators, this
gloom seemed amply justified.
India was ahead of China in terms of average income as
recently as 1973, but today average income is 2.5 times
higher in China than in India. India’s exports last year
were $46 billion, compared with China’s $326 billion.
India’s $4 billion of foreign investment was one-twelfth of
the $50 billion reaching China.
Yet despite this history of underperformance, the pessimism
about India’s economic prospects has now largely
disappeared. That was certainly what I found last week, on
a visit sponsored by the Indian Government, to Delhi and
the southern technology hubs of Hyderabad and Bangalore.
As Yashwant Sinha, India’s Foreign Minister and a former
Finance Minister, says: “In India there is a feel-good
factor. Everyone is feeling happy about something. Where is
the confidence coming from? Is it just a good monsoon? Is
it Indian industry coming out of the woods? Is it the IT
sector finding exciting new prospects? Is it the world
economy on the turn? It is all these things, but also
something bigger. It is a sense of having arrived. India is
an idea whose time has come.”
This may sound like rhetoric, but the phrase “feel-good”
factor really is on everyone’s lips. From corporate
executives and travel managers, who describe booming orders
and chronically overbooked hotels and aircraft, to normally
cynical journalists, people are expressing confidence, not
only in their own personal and business prospects, but in
the future of the nation as a whole. Even in the
countryside, where 30 per cent of the population still live
below the abysmal official poverty line (in contrast to the
urban areas, where poverty is down to 10 or 20 per cent,
depending on the definitions used) the mood seems
surprisingly upbeat, partly because of the good rains, but
also because of the economic growth trickling down from the
towns.
The sense that India’s “time is coming” (even if it has not
quite arrived) is not confined to politicians. A recent
analysis by Goldman Sachs showed that by 2035, on plausible
assumptions, India could become the world’s third largest
economy after America and China. Now that India has grown
rapidly for a decade, while Europe has sunk deeper into
stagnation, this idea can no longer be dismissed.
Chandrababu Naidu, the charismatic Chief Minister of Andhra
Pradesh, who transformed Hyderabad in eight years from an
impoverished backwater into a booming centre of information
technology and pharmaceutical research, said: “Eight years
ago, when I started talking about the fantastic
opportunities for development through reform, nobody
believed me. I employed McKinsey to produce Vision 2020, an
analysis of what we could achieve with the right policies
in 20 years. Now the reforms are irreversible. I am
absolutely sure India will be a developed economy by 2020.”
Is this confidence justified? So far, the Indian economy as
a whole has accelerated only slightly (see second chart) in
the 12 years since market reforms were launched in 1991.
But there now seem to be three reasons to believe that
India could be on the point of taking off on a
Chinese-style trajectory of consistent 7 per cent economic
growth. Yet each of these reasons for optimism must be
qualified.
First and foremost there is market reform. Deregulation has
certainly sparked an upsurge of entrepreneurship, which is
hardly surprising given the business acumen of Indian
communities around the world. But the question is whether
reform has really gone very far. India’s tariffs are still
among the highest in the world, many industries still
operate under government licences and “protective” quotas,
foreign investors are excluded from “sensitive” sectors and
privatisation has stalled — issues that I will discuss on
Thursday.
A second reason for confidence is India’s mastery of
information technology. The industry developed too quickly
for India’s Government to regulate (though only just — the
managing director of Infosys, India’s foremost software
company, told me that his business began to expand only
after the 1991 reforms, because previously it was
impossible to obtain licences for “scarce” foreign exchange
to buy such “non-priority” items as computers.) As a result
of the IT successes, India has discovered comparative
advantage in many service industries — from pharmaceuticals
and hospitals to call centres and data entry. All depend on
intellectual capacity, good education and the use of
English and some of them turn India’s geographical
remoteness, 12 time-zones away from America, to its
advantage by helping global firms to keep working round the
clock. The hope is that specialisation in such service
industries could compensate India for its loss of markets
to China in industries such as textiles.
The success of knowledge-based industries is also
contributing to a focus on education, which in turn could
boost consumption, investment and productivity growth.
However, the potential impact of service exports and
“business process outsourcing” or BPO (the buzzword for
call centres and back-office functions) on the lives of 600
million Indian workers can be questioned.
Knowledge industries will not provide work to the first
generation of landless agricultural labourers moving out of
the countryside. More labour-intensive services such as
call centres and other BPO functions could eventually
provide millions of jobs, though not in the tens of
millions. They are certainly helping to create a large
Indian middle class. But the question is whether the middle
class spending power will trickle down quickly enough to
the rural poor.
The answer partly depends on a third issue that inspires
both confidence and doubt: macroeconomic management.
Indians are proud of the country’s strong foreign exchange
positions, with reserves of almost $100 billion (£60
billion). The fact that India sailed through the Asian
crisis of 1997 and the recent recession in the world
economy without any financial problems has inspired
confidence in the robustness of the country’s post-1991
economic model. But the satisfaction with macroeconomic
management seems overdone.
India’s strong reserves are a product of the highest
interest rates in Asia, which are stifling investment,
housebuilding and consumer spending. Indians may think
their country is enjoying boom conditions, but its
infrastructure and housing remain woeful and investment
levels are pitifully inadequate compared with China. A
market-oriented central bank would be cutting interest
rates to offset the rupee’s appreciation; but India’s
reaction is to tighten regulations on firms wanting to
borrow abroad.
It seems that Indian authorities still instinctively
distrust the markets and behave as if India is on the verge
of a financial crisis. Omkar Goswami, chief economist of
the Confederation of Indian Industry, says: “For 40 years
our civil servants and politicians and entrepreneurs learnt
to be very good at managing scarcity. The question is
whether we can transit from this defensive psychology of
managing scarcity to a dynamic policy of managing plenty.”
On Thursday I will discuss what such a shift could
mean:----.
December 04, 2003 The times of London.
Is reform possible in a vast, chaotic democracy?
Anatole Kaletsky
At the entrance to a surprisingly modern and smart-looking
hospital near Bangalore in India, stands an ornate
rectangular building of curious construction, with a deep
alcove in each wall. It turns out to be a chapel, with each
of its four faces dedicated to a different faith: Hindu,
Muslim, Christian and Sikh.
Inside I was taken to an intensive care unit where dozens
of babies lay on respirators, awaiting operations mostly
for holes in their hearts. There I was introduced to the
hospital’s founder and director, a heart surgeon called Dr
Devi Shetty, who treated Mother Teresa . He is a
combination of doctor, businessman and political visionary.
His vision is that millions of impoverished Indians, who
are genetically three times more likely than Europeans to
suffer heart attacks, should be given access to high-tech
medical procedures that are considered prohibitively
expensive even in Britain and America – and he thinks he
knows how to do it.
His hospital, which will soon be conducting more heart
bypass operations than any other centre in the world, uses
its high profits from affluent patients, including many
from foreign countries, to finance free services to the
poor — a common practice in charitable hospitals around the
world. What is unusual about Narayana Hrudayalaya is the
very low cost — less than £1000 — for a heart operation,
achievable partly because Indian doctors’ salaries start at
£800 a year, but also because Dr Shetty applies to medicine
the techniques of mass production, financial engineering
and globalisation, which have brought previously
unimaginable luxuries such as televisions and mobile phones
to India’s common people.
His hospital uses satellite links to offer specialist
consultations to patients across India and also in the
Middle East. By concentrating only on cardiac procedures,
it ensures continuous use of expensive equipment, instead
of the low utilisation rates typical in general hospitals
around the world. And last year Dr Shetty helped to design
and launch a self-financing health insurance programme
giving 1.7 million poor farmers private hospital coverage
at a cost of only five rupees, roughly 7p per month.
On a brief trip to India I could not guess whether these
ideas would prove workable. Neither could I judge whether
Dr Shetty was a medical genius or merely a skilful
publicist. But what I could see absolutely clearly was a
flowering of initiative, optimism and ambition in a country
of one billion people. To people such as Dr Shetty, nothing
seems impossible: “We are a country which has gone from no
radio to colour TV, from no phone to mobile phone. We will
go from virtually no healthcare to the biggest health
service in the world. People used to believe that a society
has to be rich before it can afford proper healthcare. But
you see in America that this is not true. As a country gets
richer, healthcare gets more expensive and for many people
it remains out of reach. It is like a mirage. We can take
advantage of our low costs, our vast pool of educated
people and our scientific skills to leapfrog many rich
countries. But the money and the initiative cannot come
from government; it must come from the people.”
All over India, from the Edwardian government offices in
Delhi and the modern technology parks of Hyderabad and
Bangalore to the grimy villages of Andhra Pradesh, where I
watched an assistant district collector supplying
illiterate peasants with “caste certificates” over the
internet, I kept hearing these two themes — that India
could use education and technology to leapfrog out of
poverty and that private initiative, not government, was
the key to success.
These may seem obvious propositions but they beg three
questions. Is India, a nation inspired for 50 years by
Ghandi’s philosophy of rural simplicity and economic
self-reliance, really serious about integrating its economy
with the modern world? Will a vast government bureaucracy,
created by Nehru on the Soviet model of top-down central
planning, really let the private sector take control? And
even if Indians really do want to transform their country
can they achieve this quickly in a chaotic, scarcely
governable democracy — the polar opposite of the
disciplined Chinese dictatorship, where enlightened despots
could simply impose a new economic system from above? The
only honest answer to such huge questions is that weasel
phrase, “time will tell”. So let me just offer some
observations to illustrate the reasons for both hope and
doubt.
Will India embrace globalisation and forget Ghandian
self-reliance? The good news is that India is fired with
enthusiasm about the vast opportunities for selling
knowledge-based services, including healthcare, software,
and customer support and other “business processes” on the
world market. Yet Delhi proudly led the backlash against
trade liberalisation at the recent World Trade Organisation
negotiations in Cancun. Inward investment in many
industries is still severely restricted and India has some
of the world’s highest tariffs on essential imports,
ranging from industrial machinery to PCs.
Will India abandon Nehru and unleash private enterprise?
Since 1991, all Indian governments have in theory been
committed to market reforms and these have produced
results, with income per head growing by 4 per cent a year,
doubling the so-called “Hindu rate of growth” of 2 per cent
that politicians considered the best achievable during the
decades of central planning. But the state continues to
dominate many sectors, including power supply, transport
and finance, and privatisation has stalled in the past two
years.
Because of the tentative nature of India’s economic
reforms, growth has accelerated much more slowly than it
did in China after its reform programme started in 1978. As
a result, the average Indian now has only half the income
of the average Chinese, having been richer as recently as
1973. The continuing protectionism has also left India with
one of the world’s least open economies. Imports account
for just 10 per cent of GDP, compared to 28 per cent in
China and $4 bn of capital inflows against China’s $50 bn.
The resistance to foreign goods and capital explains many
of India’s economic handicaps: industry is crippled by
power failures and impassable roads; computer prices are
much higher than in developed countries; overbooked
aircraft keep businessmen and tourists away while foreign
airlines are prevented from adding new flights; agriculture
policies raise food prices for landless labourers and do
nothing for subsistence farmers, while favouring landowners
who are relatively well off.
Why have India’s reform efforts proved so half-hearted? One
possible explanation is democracy — and a deeply depressing
thought, since it implies that rapid economic development
can only be achieved by Chinese-style authoritarian
regimes. However, the truth may not be so bleak. While the
politicians in Delhi still find it difficult to agree on
anything ( hardly surprising when the country is ruled by a
coalition of two dozen parties), coherent reform measures
have won strong democratic mandates among the country’s 28
states. In recent state elections, voters have mostly
supported politicians on the basis of economic performance,
rather than on traditional caste and ethnic lines — and
this message seems to percolating up to the politicians in
the centre. Almost everyone in India seems to agree,
therefore, that the direction of economic reform is now
irreversible and that the process is steadily gaining
democratic support.
So let me end by quoting the man I met in India with the
clearest vision of how the country could advance. This was
Chandrababu Naidu, the Chief Minister of Andhra Pradesh,
who transformed Hyderabad from an impoverished backwater
into a booming centre of IT and pharmaceutical research:
“I am absolutely sure that India will become a developed
country because our reforms can never be reversed. Even the
Opposition, who will always criticise us, plan to do the
same things if they are elected. Everyone understands now
that there is only one model for development and that is
economic reform with a human face. If you let business do
its work government can collect revenues and help to spread
prosperity, education and health to the poor. But business
will only work if you give it freedom to respond to
incentives. No other model will work — because human
beings, rich or poor, Chinese or Indians, Hindus or
Muslims, are the same all over the world.”
________________________________________________________________________
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