The Oracle Speaks on Reforms and GDP - Mr Joseph Stiglitz

Mr Joseph Stiglitz was in India to speak in the 4th OECD world forum. It provided an opportunity to the Indian media to seek his views on Indian economy. I was pleasantly surprisingly when I found that ET reporter Ms Shobhana Saxena in an interview with Mr Stiglitz asked him the kind of questions which I would have wanted to be asked from him. When I read this interview I was delighted.

Two questions in particular about our focus on GDP growth and on the September 14th 'reforms' were the best in my opinion and the answer was well what you would expect from Mr Stiglitz. This is what Mr Stiglitz replied in that interview:-

• On GDP growth he said that when counting growth you need to look at environment degradation and resource depletion. We have per capita highest number of billionaires but at the same time many in poverty. essentially he is saying that our GDP growth is adding more wealth to the rich than it is to the poor.
• On Retail FDI and Walmart he was quite critical and does not believe that jobs will be created. He believes that Walmart will use its power to bring in Chinese good and adversely affect Indian production. He also does not believe that Walmart's of the world are good employers in terms of quality of jobs.

If you read the interview which I am sharing here then do spend some time reading the comments and you will realize how some people have seen through the 'reform' bogey.

Why GDP growth alone does not make a nation better

I wouldn't be wrong if I make an assertion that very few of us have at best only a basic education in economics. We leave it to the experts to understand economics and the elite group of economists set the policies which our nation follows. But I would also not be wrong by a very great margin when I say that thanks to the media coverage on economic issues, most of us who are even remotely aware on current affairs know quite well what this thing called Gross Domestic Product(GDP) is. I am not going to go into the detailed definition of GDP, briefly as we all know it is the total value of goods and services produced.

We are all aware that the GDP growth percentage of China is more than India's and we are all witness to the euphoria  that existed in media when we were seen to be growing at 8 to 9%.  Not a day goes by when we don't have policy experts and business Czars(Maharaja's would be more appropriate) and financial analysts telling us how we had lost the plot when the growth rate fell, and how we can still reach that 9% target if we get our policies right. Readers would be aware of another jargon that has been often reported in media which goes as the 'Hindu Rate of Growth' describing the pre-reform period in India's economic growth. Prime Minister Manmohan Singh had mentioned in August this year that GDP growth is a matter of national security.

The argument in support of GDP growth is made that growth has lifted millions out of poverty and has the potential to lift millions more. Lifting people out of poverty is a compelling argument, but the fact is that the current poverty line set by the government itself is disputed by many. There are many criticism of the Below Poverty Line and the poverty figures that I have read and I can make an argument about that. But I don't want to make criticism of governments BPL the main premise of my argument in this article. But I would like the reader to keep in mind that by our own estimate on the basis of our own poverty line, there are still 30% of the population who are poor. Now I would like to draw the reader's attention to the curious case of a nation which has these figures(est. as of 2011) of economic development.

Utopia

• GDP growth rate - 7.1% 
• GDP per-capita  -  $19,600(PPP)
• Industry's contribution to GDP  -  89.7%
• Agriculture's contribution to GDP - 3.6%
• Capital Investment - 49% of GDP
• Budget Surplus - 1.7% of GDP
• Public Debt - 4.6% of GDP

Compare these with the figures of India in the same period:

• GDP growth rate - 7.2% 
• GDP per-capita  -  $3,700(PPP)
• Industry's contribution to GDP  -  26.4%
• Agriculture's contribution to GDP - 17.2%
• Capital Investment - 32.8% of GDP
• Budget Surplus - -6.7% of GDP(deficit)
• Public Debt - 48.5% of GDP

I have deliberately limited myself to the figures related to GDP(per capita), GDP growth, industry and agriculture's contribution to GDP so as to stick to the popular metrics that the policy makers and the media usually use while selling current economic policies to the citizens. A quick comparison with India's numbers should make us almost certain that an average citizen of Utopia must be much more prosperous than the average citizen in India. The most important factor being the per capita GDP figure which is a whopping $19,600(PPP) which is comparable to some of the European nations and more than 5 times that of India.We would be convinced even more if I were to tell you that the GDP growth figures in this nation have been double digit in the 90's. That must surely be the reason for this high per capital GDP number, and that must surely be the way to go in order to achieve prosperity i.e. high GDP growth. If you believe this argument then I agree with you that per capita GDP numbers are more important that absolute GDP numbers, and I agree that this number should surely rise if GDP growth rate is high. But shouldn't that mean prosperity?

Before I come to that and before I reveal which country this mystery Utopia really is, let me tackle some more aspects of our national discourse. So what are the problems that Indian economy faces currently which we are all aware of thanks to the communication from the experts that media delivers us? It is lowering GDP growth rate, high budget deficit, increasing current account deficit and high public debt. Solution we are told as per the current policy makers, experts on the subject and the media is 'Foreign Direct Investment' related 'economic reforms'. Incidentally we are also being told by the media at present, as has often been repeated in past, that the reason why we are not able to implement reforms as well as China is because well, we are a democracy. So chaotic democracy which we have, is an impediment to FDI reforms and FDI reforms is a solution for growth and growth (at all costs?) is the solution to poverty. Those are the broad contours of the national discourse on growth. 

Since two economies we are comparing are of different sizes, let me talk in terms of percentage when tacking the issue of FDI.

Utopia

Average FDI as a percentage of GDP in 1990's - 38.34%

Average FDI as a percentage of GDP in 2000's - 14.46%

India

Average FDI as a percentage of GDP in 1990's - 0.39%

Average FDI as a percentage of GDP in 2000's - 1.58%

That is it! The figures speak for themselves, surely the Indian policy makers and the business channels are right. FDI is the answer! More FDI means more growth rate and more growth means more per-capita GDP. Surely this country in question has got its policies right and surely it does not have the same problems of policy paralysis and difficulty in decision making that India faces because of its 'chaotic democracy'. India's democratic decision making was a problem as the Economist article argued "Some reformers pray for a financial crisis that will shake the politicians from their stupor, as happened in 1991, allowing Mr Singh to sneak through his changes". I have managed to write an article in great defense of the current policies sneaked through by Mr Manmohan Singh despite 'chaotic democratic' opposition by 'rabble rousing' opposition parties and I have managed to use all the prevalent cliche'. 

Until of course when I tell you that the mystery country in question is none other than the great African Republic of Equatorial Guinnea, and then suddenly my entire argument begins to fall apart. The figures I shared are not wrong they are estimated figures from the CIA world fact book, other sources may quote sightly different figures, but yes I admit I have selectively lifted the figures. The figure I had not mentioned until now is that the poverty rate in Equatorial Guinnea is a whopping 75%. The per-capita GDP figures mean nothing,  the industry's contribution to GDP means nothing, the lower budget deficit(or surplus) means nothing, the GDP growth rate means nothing, the FDI means nothing to the vast majority of the country's population. Spectacular GDP growth rate alone has not been able to lift a population of 700,000 out of poverty in that country, but we in in India are being fed the notion that a single minded pursuit of GDP growth rate is what will bring millions out of poverty in India.

Question arises what is the problem in Equitorial Guinnea? Why has the magic potion of GDP growth not worked for them? The problem my dear readers is that Equitorial Guinnea is only a nominal democracy, where the current President Obiang has ruled for last 30 years and will continue to do so for a foreseeable future, the problem is of concentration of political power and corruption, the problem is of concentration of  economic wealth in only a few hands, the problem is of unequal distribution of wealth. This is why the High Income per capital GDP figures are worthless when compared to the poverty figures.

Surely I must be out of my mind comparing the next world super power with Equitorial Guinnea. I need to get more of my facts right to come to the conclusion why India will not be the next Equitorial Guinnea. We are a democracy where free and fair elections are held every 5 years, chaotic but free and fair. So the chaotic democracy with 'rabble rousing' opposition which was until now an impediment to our growth will prevent us from going down the path of Utopia. Our democracy and a free and fair(?) media will prevent corruption and crony capitalism to cause concentration of wealth in only a few hands. The top 70% of our  population cares about the bottom 30%. Our rich are better than their rich. Our billionaires are ethical and moral so are our businesses. Our politicians are aware of their obligation towards the poor, they are not hand in glove with the big Indian and foreign businesses. Our policy maker are educated in the elite institutions of the world and know what is good economics. They have the cause of the country at heart. Our large and growing middle class is educated and it will always make the right choice about who should be leading us and who should be making policies and what policies it will support.

Well if these facts are true especially about the middle class then I concede. After all the middle class is quite vocal in support of reforms. I will write more about the middle class some other day. In the meanwhile let us do all we can to invite FDI. Because FDI leads to growth and growth leads to higher per capita GDP and that leads to lifting millions out of poverty. Really? Is that so?

PS: There was no disrespect intended to the people of Equitorial Guinnea. I was sarcastic in my assessment of the democracy and development record there because in an interview to CNN I heard Mr Obiang describe the country as not a dictatorship but a Republic and described himself democratically elected.He even mentioned that he will remain in power as long as the people wanted him to.
           It has been alleged that the oil wealth of the nation was siphoned off to the notorious Riggs Bank by the corrupt politicians and administrators in Equitorial Guinnea. I had to make this comparison because many middle class Indians thanks to the recent boom in our economy appear to have forgotten that the poor in India are in many aspects poorer than sub-saharan Africa despite the recent boom in our economy. The effects of corruption and concentration of wealth on the poor are not lost on us. Equitorial Guinnes to me is a typical case of failure of the 'trickle down' theory. I need not be an expert on the subject to make this assertion.
 

Why the mainstream Indian media supports FDI in retail?

For the last one week or so I have been writing posts about the FDI in multi brand retail policy. If you have been following my posts, then you would notice that I have been quite critical of the way in which this policy was pushed. Well it was not a surprise that it would come, it was expected to come as I have written in my previous post I have argued that the decision seems to have been heavily influenced by the corporate lobbying that has gone on for opening up of this sector, as also I have argued that international pressure has worked. I have tried to put up as many facts as I could to at least make my readers pause and think. Now I must ask my readers whether they have read any such criticism in the newspapers with large circulation and in the mainstream news channels that they are exposed to barring a few.

Well of course people have different opinion about this issue. It is expected that for any economic policy there will be divergent views. But have we been exposed to all these divergent views in the mainstream media? Another question is why this reporting only now what about in the run up to these decisions. What was the reporting like then? Was there enough debate about this issue, were all the pros and cons really presented objectively based on research and experiences, was it debated whether FDI investment was the only way to bring about the growth in our rural economy and to increase efficiency in the food supply as is being highlighted as its biggest benefit? Has it been debated whether the FDI investment alone will be enough? Won't we need investment in infrastructure like roads and power that Big Retail is not going to do? Had these investments in infrastructure been done by the country would we not have better efficiency or do we still need FDI in retail? We have heard about food wastage in the current dispensation but have we heard criticism of incumbent organized retail players as to what they have done to improve the situation? Why have they not been able to price their food products and specifically fresh fruits and vegetables cheaper? Do they really pay higher price to farmers?  Have people not been suspicious as to why the private organized players who should have had reservations about foreign competition like in may other sectors, were delighted to have foreign investment? Do they have an interest in FDI because they want to sell some or most of their existing stake? Have we heard enough in the last 10 days that they have been struggling with debt? It has been reported earlier but why have we not heard about this in last 10 days and why has no one tried to draw a linkage?

Why have we not been hearing more about these issues in the main stream media? Why is the media hailing this decision wholeheartedly other than a few exceptions?  When we see the same argument being made in media again and again we do not see the other side, because we have not been exposed to the other point of view, at least not by people we can trust. When politicians make an argument then we are mostly divided based on our ideological leanings and based on party lines. We are not always open to the views of a politician who belongs to a party we are ideological opposed to, even if he or she is making a valid argument. We fear that if we accept this argument from that person then we would end up being on his side on all the other issues, we do not agree with him on. So we are extremely cynical about the political parties. But what about the views of editors and the facts that journalist are supposed to write about? 

There are many question, and well, here is the answer. We will not hear about these things in the media because the media is not exactly independent in these matters. The media  in our country today has deep links with big corporations. They will not carry articles and opinions which are critical to them in a matter which is so important to them. The business men and politicians have long realized the importance of media. News media not only reflects the facts and opinions of the people it also influences the opinions of its readers. If they brow beat an argument enough, if they twist some facts and hide some other facts or if they promote one opinion more often than another divergent view, then they will be influencing their readers who will start believing what is being projected. 

Since the early part of last decade media companies have been carrying paid news, they have also been entering into these agreements called private treaties. What is a private treaty? Well it is an agreement where by a media group makes equity investments into the companies that enter into this treaty with. They buy a substantial share into that company via private equity placement against guaranteed advertisement and though not mentioned explicitly but is well understood 'no negative coverage'. It has been reported that Rahul Joshi the editor or Economic Times had given instructions to his reporter to write about their treaty clients in a way that enhances “the value of these companies and ToI’s (Times of India’s) investment.”.  Here is an example which is very relevant to the present situation. In 2002 Bennet & Coleman and company which  owns The Times Group, entered into a private placement agreement with Kishore Biyani the owner of Big Bazaar a retail player which will benefit immensely from the FDI policy announcement made on 14th September 2012. Can anyone in the right mind expect any criticism of the FDI in retail policy in Times of India and Economic Times? When the beneficiary of this policy is not just your client but actually you yourself. Times Group is by virtue of its ownership of Pantaloon Retail, Future Value Retail Limited and  Future Ventures India Limited a direct beneficiary of the FDI in multi-brand retail policy. No wonder we hear only praise of the government from Times of India and Economic Times for this policy move. 

The Times of India in its editorials encourages the government to 'Stand Up', not to give in to "rabble rousing pressure from opposition". It has made tall claims that "retail reform is estimated to bring in $16 billion worth of FDI in the next 3 years". It has hardly carried any opinion article arguing against the policy nor has it carried crititical reader comments. In fact as I have mentioned in my last post. Government of India almost appears to be following the script handed out by the Economic Times. The ET view as they have mentioned in one of their articles was that the government should "..open up FDI in multibrand retail quickly, and eases the rules that have curtailed FDI in single brand retail. It should explain that the provisions for FDI in multi-brand retail are enablers. It is up to individual state governments to implement them or not". Now the readers would be in no position to suspect that what they have been writing is in good faith unless the reader is aware that owner of the newspaper they are reading is a direct beneficiary of this policy why will it be critical of this policy? They will make profit when Big Bazaar makes profit.

I am going to end this post with a youtube video speech of Mr P Sainath where he explains the current state of our media companies and a state of affair he describes( borrowing from Ben Bagdekian) as "Corporate Incest within, Corporate Incest".

PS: Here's link to another article by P Sainath on how (as per his article) Times of India manipulated news about Bt Cotton at a time when Biotech Regulation Authority Bill was to be tabled in 2011. Now you can choose what you want to believe. But it is again 'for the welfare of farmer' argument similar to the current FDI in multibrand retail policy changes. So I am pretty sceptical. You can draw your own conclusions.