Saturday, August 31, 2013

Economist Jayati Ghosh: India's Woes Foretell 'Chaos and Violence'

Excerpts from an article by Jayati Ghosh on Der Spiegel

China is fundamentally strong; it has a huge trade surplus. India, however, suffers from a huge current account deficit, which we are trying to partly fill with hot money, or speculative investment, from abroad. China first and foremost has to control its illegal shadow banks, but that is not at all comparable to the mess that we are now facing in India.

Our government reacts with panic measures. For example, it desperately attempted to attract more capital into the country by easing rules for external commercial borrowing. This, however, only worsens the structural causes of the rupee crisis. Our much vaunted economic boom was essentially a debt-driven consumption spree, financed by short term capital inflows. Those who profited were mostly construction companies and the real estate sector. India's boom was also peculiar in that it did not generate any new jobs, but instead deepened the gap between rich and poor.

I am fundamentally in favor of a bigger role for the state in order to direct investments and control banks. However in China, as in the rest of Asia, a big real estate bubble was created. Instead, China should have strengthened domestic consumption in order to free itself from the dependence on exports.

 If I look at the 21st century I see a huge imbalance. The most important economic currents flow from South to North: the trade in ever-cheaper products which the emerging markets produce; the capital investments -- because these countries invest their surpluses in US bonds; the cheap labor which they export, and with which they help solve the problems of those aging societies. But why does the North still dominate? Because it still invests a lot of money into research and development, and it controls intellectual property.

We can't manage the simplest things, because our starting point was completely different. When China began its reform process at the end of the 1970s, almost everybody there already had enough to eat. There were roads in almost every village, and there was medical care. In China, society was by and large equal. In contrast, a third of Indians still don't have electricity. We fight against the legacy of a caste system which condones inequality and discrimination. India's elites put up with conditions which are extremely damaging

SPIEGEL: Your government promises to open up the country further for big foreign corporations like Wal-Mart and Ikea. Is this really the way to create enough new jobs?
Ghosh: These measures only destroy jobs. Everybody knows that retail multinationals employ much fewer people per product and per turnover than the small shops that dominate in India. Instead, we have to invest in the basics, in infrastructure: A road to every village. Water, electricity and housing for everyone. Access to bank credit for everyone -- not just for rich entrepreneurs. We have to concentrate on things that create jobs. Then India's economy will grow on its own.

SPIEGEL: Ahead of the parliamentary election next year, nobody believes the government has the courage to reform. What happens if your country falls even further behind in the process of catching up?
Ghosh: Then we will face political and social chaos on a mass scale, and an increase in violence against women, as we are already seeing. 

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