When ‘growth’ is not good

For a narrative to work, it should have a dramatic resolution. If that is not possible, an emotional resolution is a must. I thought of this thumb rule of storytelling when I read the news today about Bernard L. Madoff’s admission in a US court that he had run a vast Ponzi scheme (US$65 billion)—a representative story of Wall Street’s ‘breathless search for profits’. His ordering to jail may provide emotional resolution to the thousands who lost their money in the Wall Street meltdown but this is definitely not a satisfying denouement.

And I’m not alone in holding this view. “…There can be no restoration of confidence in the banking system—and therefore no hope for an economic recovery—until Wall Street comes clean,” says William D. Cohan, the author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street” in his 11 March op-ed piece “A Tsunami of Excuses” in the New York Times. “If the executives responsible for what happened won’t step forward on their own, perhaps a subpoena-wielding panel along the lines of the 9/11 commission can be created to administer a little truth serum.”

I doubt if that’ll ever happen but the seriousness and the sincerity of Cohan’s demand cannot be questioned. The current global financial crisis, issuing from the greed of the ‘prodigals and projectors’ of the Wall Street, has attacked and weakened the very foundations of the capitalistic system—the system that underpins the globalised nature of trade and life in the world today. While for dramatic reasons the spotlight might remain on the Madoff saga for a while, the actual debate has moved on, to focus on the nature and future of capitalism itself.

The future of capitalism

“Capitalism—our ability to buy and sell, move money around as we wish, and to turn a profit by doing so—is in deep trouble,” says Professor Paul Kennedy in an article in the Financial Times.

Nobel Laureate Amartya Sen even argues for making changes in the capitalistic system. “The question that arises most forcefully now is not so much about the end of capitalism as about the nature of capitalism and the need for change....the crisis, no matter how unbeatable it looks today, will eventually pass, but questions about future economic systems will remain,” argues Sen in his piece in the Financial Times.

Surely, this is not the end of capitalism but the questions about the economic system are aplenty.

Peak Credit?

One of the most important questions is about credit and its scant availability (in the current scenario of credit crunch) for companies.

“Credit is the oil of the economic engine, and credit ultimately is a creation of confidence” writes management guru Ram Charan in his recent book, Leadership in the Era of Economic Uncertainty (MacGraw Hill, 2009). “Until all players are confident about the intentions and strengths of the others, there can only be stagnation.”

Charan’s advice to CEOs and business leaders, in this environment, is to conserve cash. “Your focus must shift from the income statement to the balance sheet,” he says. Protecting cash flow is the most important challenge almost all companies face today whether they realise it or not.”

Clearly, the importance of cash flow and credit availability cannot be overemphasised. In the unending cycle of inputs and outputs, driven by profit motive, credit plays the god—both for the producer and the consumer. But peer inside this god and you will say, well, the devil is in the detail. Here are some figures to help you gauge the monstrosity of the credit problem.

For some years, credit growth has been surpassing the growth of economic activity. In 1980, for example, debt levels for US banks were running at 21 per cent of gross domestic product (GDP). By 2007, the figure had grown to 116 per cent of GDP.

Isn’t this jump monstrous? If you thought so, what would you call this one? For the US to create its first trillion dollars took its entire history of two hundred years. To create the next trillion took the last 6 months. We are creating a trillion dollars every 6 minutes!

What kind of growth is this? Does it have any relation to the reality on earth? No wonder then that now even ordinary readers are ranting against the global monetary system. “Banks and Central Banks create money out of thin air,” complaints a reader in a blog. “When you get a loan they give you money by a tract of a pen, just like printing new notes. This is just ‘not fair’ even if the government makes it legal. Moreover, it creates profound imbalances into (sic!) the economy, by permitting people that did not produce anything before to buy goods and service. Invest without produce and save. Investments without real savings… The very basic economic law is that you produce then you save and then you consume. The way around is physically impossible. You cannot consume what you have not produced.”

Repeat of past mistakes

And what’s been the government response to the credit crisis the world over? Cut interest rates, print money, slash taxes, get credit flowing. This might work in the short term but this is not a long term response: a recipe for a W-shaped cycle of bust and boom.

“Expansionary monetary policies are the wrong medicine to solve current problems,” said Dr Doom, Dr Marc Faber, at a dialogue in Singapore in February. “They can address the symptoms of excessive credit growth, but not the cause.”

Moreover, as the US government is pumping trillions of dollars in the rescuing the banks, does anyone know who will purchase the $1,750 billion of US Treasuries to be offered to the market this year? And in 2010, then 2011? China is already saying that it is ‘worried’ about the safety of U.S. Treasuries.

During the crisis, governments have to choose between a rock and a hard place, said Nobel Laureate Joseph Stiglitz, in an interview in the Financial Times. But a long term solution has to be found, he emphasised.

Is there a long-term solution then? Yes, there is.

Go for smart growth

“For the first time since World War II, global growth is forecast to turn negative—and that's an optimistic forecast, relative to the possibility of a global lost decade,” says Umair Haque, director of Havas Media Lab, an innovation advisory company. “Today's leaders are plugging dikes, bailing out industries and banks as they fail. Yet, what negative global growth suggests is that the problem is of a different order: that we have reached the boundaries of a kind of growth.” Umair’s manifesto for smart growth is worth reading.

Obviously, with the changing circumstances, and in the face of the gawking absurdities of our growth model, we ought to respond to the crisis with a paradigmatic shift. Call it smart growth (Haque) or humane capitalism (Sen) or less selfish capitalism (Richard Layard), its time has come. The sooner we set about figuring it out and implementing it the better, for we are running against time.

(First published in MIA Asia blog)

Hindi Chini Bhai Bhai

The meteoric rise of India and China—two great, geographically and historically connected nations—in the last two decades or so has rekindled the interest of other nations in these two countries. All nations (or their bottom-line minding corporations) want to do business with India and China.

Well and good.

But what about India and China themselves? Are they interested in each other? And how much?

In terms of doing business with each other, they are definitely talking to each other. Coming back from a recent trip to China, Indian journalist Saeed Naqvi noted that India’s bilateral trade with China, only $5 billion in ’03, will have touched $34 billion next year.

Interestingly, contrary to what China’s giant size and manufacturing scale would suggest, China’s trade balance against India is only $4 billion. It means that between the two neighbours, the game, at least in trade terms, is not that much skewed.

But is that enough?

Can’t there be more than mere trade between India and China, the two giant nations who are fulfilling the prophecy that the 21st century will be the century of Asia?

Looking back, centuries ago, India and China were the world’s leading civilizations. This was much before the flourishing of the Christian and the Islamic worlds. In those centuries, there were great exchanges taking place between India and China. Descriptions of China’s famous silk are found in classical Sanskrit literature. Buddhism traveled to China and became a widely followed religion. Chinese scholars traveled to India (especially to the University in Nalanda, present day Bihar in India) in search of knowledge and enlightenment. Indian scholars and mathematicians were invited to china by the Chinese emperors. Some of them occupied the highest positions in China’s scientific institutions.

Nobel Laureate Professor Amartya Sen has written extensively on this subject. In his seminal book, The Argumentative Indian, he has thrown great light on this shared past of India and China, and how time has come full circle to enable these nations to once again live up to their past cultural and scientific glory.

Professor Sen was in Singapore last week (July 13) to chair the inaugural meeting of the Nalanda Mentor Group. This group, established by India and Singapore governments, wants to revive the famed Nalanda University as a centre for learning and inter-faith dialogue.

Speaking to a group of Indians in a talk organized by Singapore’s India Club (July 13), Professor Sen said that India and China should learn a few things from each other. “I want India to learn from China’s health and hygiene policies and I want China to learn democracy and public reasoning from India,” he said. (I’m quoting from memory as I did not take notes during the talk)

If the two nations were so close together, in culture and business, for centuries, why haven’t they tried in the last half a century to revive their relationship in a way that would befit these two civilizations?

Even I don’t have an answer to that question, said Professor Sen. Tracing back the relationship between India and China after India’s independence, he said that the problems started during the time of Nehru itself. He also mentioned that foreign powers might also have been involved in “poisoning” the relationship between the two countries. Professor Sen mentioned that case of the Indian airplane (Indian Princess) that was hired to transport the Chinese delegation to the Bandung Summit which had crashed killing all the Chinese members of the delegation and the only survivors were the pilots and crew members who were Indians.

I did not know about this incident as it was before my time. So, I googled about it and found out. The Time magazine reported on April 25, 1955 (Crash Report) that the Chinese side blamed the American secret service and Chiang Kai-shek (Taiwan?) for this disaster.

Commenting on the Indian government, while Professor Sen appreciated its policies, he also expressed his disappointment with regard to India’s foreign policy. He cited the case of Burma. India had a moral stand on Burma but due to trade with China, he said, India had sacrificed its moral stand and succumbed to the Chinese pressure.

I hope, on the whole, a revived Nalanda University will emerge as the symbol of India and China’s renewed and reinvigorated relationship. I am sure that under Professor Sen’s enlightened guidance, it will not be reduced to just a token of the past memories.