Thursday, 31 October 2019

Public representatives cannot pursue other economic activities while in office

The office of a public representative is sacrosanct - the time in office is people's time and the money is tax payer's money. So those who are elected to public office cannot conduct other economic activities while holding office. Any incomes or wealth accrued to them from pre-existing businesses during the period of office should be put in an escrow account until they demit the public office.

We find that some public representatives take advantage of the current loopholes of the system. Irrespective of the profession or practice, while in office a public representative cannot conduct other economic activity. This has to be put in place both in spirit and deed. A pubic representative's time and energies must be completely dedicated to her office and people of the constituency.

Second, when the respective legislative body is not in office, a public representative must be physically present in the geographical territory of the respective constituency. Quite often we find that people are based out of some other location and hold office somewhere else. This is not acceptable. You have to be available to your people 24/7.

We do not need public representatives who want to conduct their private businesses while holding office. That is just not acceptable in a democracy. Where is the accountability?  There are other people waiting who are much more dedicated and intelligent.

It is high time that civil society and courts question such practices and enact strict legislations to ensure better accountability among public representatives. 

Wednesday, 30 October 2019

Compulsory Education up to 21 years of age for all

Why can't education be made universal and compulsory until 21 years of age ? At least in major democracies, education infrastructure is already in place with both government and private players. Governments around the world spend millions on child care and education and yet there is a considerable proportion of children suffering from mal-nourishment and illiteracy. Quite often, we find children working in eat outs, commercial establishments and farms. In some extreme situations, we come across children working in even hazardous plants. Agreed that in most cases, these children may be the bread-winners of the family. But that cannot be a reason for children not attending schools and colleges. There are other welfare schemes in place for adults. At least during schooling hours, children should be prohibited from work.

Governments have to make education compulsory until 21 years of age for all children. Any employment schemes that lock-in children into future jobs before 21 should be withdrawn whether government or private. We need to give an opportunity for individual growth and development. That is only possible with education and vocational training under learned teachers. We need to give our children all possible opportunities to make their career choices. The importance of education need not be over emphasized and irrespective of the field that an individual chooses education is critical.

Private educational institutions with a reasonably large revenue size can be asked to provide 10 to 20% of their seats to children from poorer economic backgrounds and disclose these details in tax returns. Plus we already have government schools and programs in place. Many large corporations are proactive and have already taken up the cause of education as part of their social responsibility. This should be sufficient to meet the educational needs of our children to a large extent. Our children are our future and their well-being should be of utmost importance to us.

By leveraging smart phone technology and internet penetration, the entire academic curriculum can be made available online and can be accessed any time. Using unique identification number issued to every child at birth, the progress of every child can be recorded and tracked at every administrative level. Wherever, there are deviations like incidences of increase in school drop-outs, necessary action can be taken.

All democracies must accumulate political will to implement 21 years of compulsory education and it should not be a distant dream!

Tuesday, 29 October 2019

Trends in GDP and Per Capita GDP for Select Countries

GDP on its own may not present a complete picture of growth, therefore, per capita GDP has been included here to better understand trends in growth. When we look at GDP and per capita GDP growth over the past six decades for major economies it shows that Asian tigers are roaring.

But when we look at growth in the past three decades it is really the Chinese miracle that attracts your attention. Since the decade starting from 1991, Japan has been stuck in a quagmire. India has a CAGR of around 8% for the past three decades. So China and India have been leading global growth in the more recent past. 
To be fair to the advanced economies you need to look at the base effect and to get a better picture of growth. For a country like the United States with GDP of $ 20 trillions (2018) even a 2% growth transforms into $400 billions which is 15% of India's 2018 GDP. 

Second, for India and China to grow someone has to buy their exports - whether it is software services or manufacturing goods or any others. For some countries to run surpluses, some have to run deficits. We live in an interconnected world. So if the advanced economies slowdown it is going to impact the emerging markets growth.

Although, consumption led growth is a strong point of countries with large populations, no economy can decouple itself from the rest of the world. Moreover, if imports increase and exports decrease (as is the case with increased consumption) deficits increase and currencies fall under stress. 

Third and a more important aspect, is the standard of living and we need to look at the per capita GDP figures to get a better picture. For India and China, huge populations weigh down the per capita  figures. Per Capita Income of all other countries is higher than India and China which in most cases should translate into better standards of living. 

Prof Joe Stiglitz, in one of his addresses at the Norwegian School of Business, remarked that between 1978 and 2017, China was able to move 740 million people out of poverty to a comfortable middle class living. This kind of sets the standard for other emerging markets in terms of poverty alleviation.

One interesting comparison between India and US - India's GDP in 2018 is close to that of US GDP in 1980 and at around the same time Regan tax cuts were introduced which perhaps (different economists have different views) helped prop up their economy. Only time will tell us whether Modi's tax cuts propel India's industry and what India has in store for herself. (and the world!)

For emerging economies huge populations are both a boon and bane. For example, India has experienced growth thanks to its booming services sector, thanks to its large population. At the same time, when we look at the trends in the per capita GDP, population explosion has dampened the growth of emerging markets including India. 

So the key for emerging economies lies in being able to harness the energies of their people by focusing on job creation and broad based growth. 

Sunday, 27 October 2019

Any measures for freeloading?

Economists develop methods and measures to quantify economic variables. But very few people talk about or measure 'freeloading'. Governments around the world spend millions on providing subsidies and benefits to their citizens in one form or the other. For generations many families and societies have received benefits and prospered. People are so used to these freebies by now and politicians are scared to withdraw them for electoral reasons. In countries where there is a scramble between subsidies and development the impact of freeloading is all the more exacerbated. Surprisingly, there are no measures for freeloading.

Why do people need freebies after surpassing a certain income/wealth level ? After all, there are people standing in the line who do not receive any benefits ? 

With the currently available technology and computing power, it is possible to assign a unique identification number to every citizen of the country. Every child that is born can be assigned a unique number at birth and you can track the progress from nutrition, school, profession, employment, family up until the death bed. It is possible to monitor the income/ wealth levels of every citizen of the economy. It is possible to have a flexible benefits system, where the benefits kick in and kick out with income levels. In fact, you can tweak the entire policy systems (make it more dynamic) based on the feedback that you receive from these economic and demographic data and information systems.

The first step is to assess the quantum of freeloading and express it as a percent of GDP to understand the magnitude of its impact. 

Saturday, 26 October 2019

Per capita billionaires as an indicator of economic opportunity

All other things being equal and setting aside political issues, the per capita billionaires of an economy can be a good indicator of economic opportunity and ease of doing business. One may argue that for countries with huge population, the number gets skewed to the wrong side. If we look at the brighter side, each individual is an agent of growth - each individual is an economic opportunity waiting to be unleashed - each individual is a potential engine of growth.
So I took the top 15 countries by the number of billionaires and divided by the population of the respective country. It results in some small numbers, so I multiplied by 1 million again and this is the result. Higher the number, better it is! Of course, this number does not include the qualitative aspects of life such as living in a democracy and leading a free life. Sometimes, we take living in a free country for granted!
In an ideal situation, countries with higher population should produce higher number of billionaires. If they are not then there is some catching up to do!

Data Source:

Friday, 25 October 2019

Broad based growth - easier said than done!

Protection of private property rights and law enforcement are crucial for a well functioning market economy. When citizens don't have rights to hold property then there is no sense of ownership and no sense of achievement. There is no incentive to produce or innovate or even participate. Having said that, it is important to ensure that economic opportunity and the fruits of growth are available to everyone. Prolonged inequality in income and wealth distribution leads to dissatisfaction among people which may have volatile consequences. Even for advanced economies like the United States income and wealth inequality pose existential challenges. Any form of governance, when not well administered leads to an all powerful crony elite group whose interests may not be aligned with the majority. The extent of income inequality in an economy is given by Gini coefficient and the list of countries by Gini is given here:

Economies that are in the process of transformation from lower/middle income group to the higher income group can take a lead from the problems of inequality that advanced economies face today. Emerging economies can devise their own measures of inequality/equality to assess the impact of their economic policy from time to time. It is important to maintain the animal spirits in the economy and at the same time ensure that growth is broad based. To be fair to governance mechanisms this is not an easy job.

Two ways in which you can increase the aggregate output 1) Increase the quality and quantity of workforce and 2) Increase in efficiency made possible by way of technological advancements.
Some of us would have studied production possibility frontier in Econ 101. This figure explains the most difficult economic problems in a simple way and it is very much relevant even today.
Governments have to balance between subsidies and development expenditure - at the same time invest in technology and human resource. Over a period of time,one would expect people's income levels and standard of living to raise and subsidies to minimize. But subsidies are 'sticky' due to distribution issues and freeloading.

An overarching message coming from the west, specially from economists like Prof. Joe Stiglitz is that it is not sufficient if governments limit themselves to infrastructure and provision of basic services. Governments will also have to continue to invest in production of goods/services and technologies. Given the scramble for limited capital and profit motive, it may not be possible for private entities (except for big business houses with huge capital) to invest in technology or manpower that is not in line with their business requirements. The responsibility to invest in research and technology (and make it publicly available - this can foster newer industries) and manpower is again going to fall back on the governments of the day.

Another challenge for economies is to be able to keep pace with fast evolving technologies. Technologies are disruptive and can change the face of the economy over time. Products/services or even industries which provided employment and revenues for decades may not have any relevance in the near future. To move people from industry to industry, to train and re-train, to manage expectations and provide livelihood, specially in countries with huge population is not an easy task.

So the bottom line - we need to manage limited capital availability, huge population (both boon and bane!),fast evolving technologies and yet achieve broad based growth and development!!

As citizens, we can contribute by abiding the 'good citizen clause' - pay taxes, respect and follow the laws of the land, refuse subsidies and other benefits when not needed, provide constructive suggestions by peaceful means and protect environment. And governments have to be stable, dynamic and forward looking.

Hope springs eternal!

Thursday, 24 October 2019

Balance between financial asset prices and real economic activity

All financial assets derive their value from real economic assets and activity. Time and again we have seen that financial asset prices run ahead of economic activity. Hope is built into human nature - tomorrow will be better than today. One fine example of human expectations is in the price to earnings ratios. We find that prices are running ahead of earnings by many multiples and sometimes these prices get wild and beyond reason. The problem here is that whenever there is a big price correction in financial assets, it paralyses the economic system. Credit which is the lifeline of the economy dries up and there is a panic everywhere. People on the 'Main Street' who are in no way connected to or invested in financial assets are impacted. What does a poor farmer or small business man in some corner of an emerging market have to do with the 30-year mortgage backed security devised by someone in Wall Street? Prof. Damodaran in his lectures states that with the advent of media and technology, there is increased volatility in stock prices. Any market correction or bad news spreads like wildfire and there is no escape. The amount of pain inflicted on the economy is proportional to the number of people invested in the asset in question. There are more people invested in real estate than in stocks, so if there is a price correction in real estate more people suffer than if there is a price correction in stocks.

In order to insulate the economic activity from asset price bubbles, regulatory authorities have identified systemically important organisations, introduced counter-cyclical and liquidity buffers for banks and financial institutions. The effectiveness of these measures will only be known when there is next systemic crisis. (last time the regulators fell short!) To be fair to the regulators, no one can ever predict a crisis on a consistent basis. Some people get lucky sometimes but at least in the longer run, it is not materially possible to predict asset price corrections or economic crises.

To alleviate the pain of asset price corrections on the people of the 'Main Street'  we can devise warning mechanisms. For every asset class, we have asset price multiples and these are available across time. So we can compare the loan to value ratios or debt service coverage ratios for real estate across time. Similarly, for stocks and bonds we can compare price earnings multiples across time. We can device such easy to understand measures for other asset classes as well. We need to calculate such numbers on a broad market basis and disseminate them to the market participants. These numbers can also be compared across asset classes.So if five out of ten asset classes are overheating, perhaps market participants can adjust their portfolios to avoid the risk of a correction.

Dr. Rajan in his book 'Fault lines' remarks that 'Self-interest is the purest form of human emotion'. That is so true -  we are true to ourselves when we act in our own interest. Nobody wants their asset prices to drop. So when all market participants are made aware of overheating on a more prominent basis it is possible to cut down the risk to some extent. Portfolio managers can re-balance their asset allocations. Banks and financial institutions can cut down on big-ticket loans to specific sectors which are over heating. Regulators can more closely look at pockets of economy that are heating up. Small businesses, farmers and families can accumulate additional savings.

We need a concerted (global) effort to maintain the balance between financial asset prices and real economic activity.