The Kashmir Conundrum

Apologies for being away for almost a week. I have missed you, hope you have too.

I had no realization of what significant events my brief interlude from blogging would bring. But while I have been away, Jammu and Kashmir as a state of India don’t exist the way it used to. It’s now a Union Territory with a Legislature. The state was also bifurcated to create an independent UT of Ladakh with no legislature. This also meant article 370 of the Indian Consitution, which conferred special status to the state of J&K, was modified. Before this, this special status allowed J&K to have its own constitution, its own flag and its own laws independent of the same in the union of India. Now, people from all over India can buy land in Kashmir, set up businesses and invest; Indian government’s welfare schemes, rules, and regulations will now be applicable in the state.

Before the bill to this effect was passed in Parliament, Indian Army troops moved into J&K, clamped down on the Internet and detained local politicians and separatists. There have been apprehensions of violence and unrest over the development. As we speak, this continues with an eerie silence from the international community with the exception of Pakistan and China. What’s evident is that most countries in the world seem to be viewing this exercise by the Indian government as an internal matter of India, recognizing its sovereignty in dealing with its internal affairs. Pakistan, however, thinks otherwise and has already reached out to the UN and a host of other countries to offer their support in condemning India.

A Contested Past

Unlike the differing viewpoints on Kashmir, there are thankfully no conflicting opinions on how J&K acceded to India. I particularly liked this academic EPW piece on the history of the troubled state. The main points in the piece can be summarised as below:

  • At the time of independence of India, Hari Singh, the then king of J&K was ambiguous about acceding to India or Pakistan. He brokered a deal with the British govt to stay independent. This state was not to be, as an attack by Pakistani pastuns compelled Hari Singh to reach out to India for help. India, in turn, sought J&K accession to India.
  • At the time of accession, India adopted the policy that in case of dispute over J&K’s status, the matter should be settled in accordance with the wishes of people. However, India also considered the accession a purely temporary and provisional arrangement, as stated in the Government of India’s White Paper on J&K in 1948.
  • J&K was conferred the special status via Article 370; you could read all about the provision in detail here. Briefly, this article limited the Union government’s legislative power over Kashmir to just three subjects- foreign affairs, defense, and communications. This in effect ensured J&K’s autonomy.
  • Further, to strengthen this arrangement, certain riders were put in place: the central government couldn’t make any changes in the article without issuing a presidential order, with approval of the state legislature, and only after the changes were incorporated in the state constitution.

Why The Scrapping of 370 Was Welcomed:

  • Home Minister Amit Shah, in his speech in Lok Sabha, said article 370 had for years separated J&K from India, with the provision misused by separatists and sympathizers of separatists in the state. Shah’s argument was in line with the BJP’s historic stand on article 370, which has also been on their poll manifesto for years.
  • Another argument highlighted the lack of development in the state because of the special status of J&K. Shah said because of the article, many of the central government’s schemes and benefits didn’t reach the people of Kashmir.Manish Sabharwal wrote in The Indian Express:

Historians warn against “presentism” and Kashmir’s history is too long and complex to belong to any party, community, individual or religion. But it would be foolish to deny that Kashmir’s last few maharajas were distracted and disinterested in development. Monarchies or hereditary leadership are ineffective because they think of citizens or voters as a necessary evil that must be tolerated, possibly patronised, but certainly ignored. Naya Kashmir — a memorandum that Sheikh Abdullah submitted to Maharaja Hari Singh in 1944 — outlined a plan to convert J&K from an absolute monarchy to a constitutional democracy, called for universal franchise, freedom of expression and press, ability of women to work in all trades and professions, and a detailed economic plan. Much of what he sought is enshrined in our Constitution but his vision of social justice, economic progress and poverty reduction — which he couldn’t achieve in his lifetime — is highly relevant for Kashmir today….

India and J&K are tremendously and permanently intertwined. When one does well, the other does well. And when we both do well, we are unstoppable.

  • An overwhelming number of Kashmiri pundits rejoiced the scrapping of 370, arguing that with the provision gone, they would return to their homes in J&K from where they had to flee at the peak of separatist violence in the state.
  • Article 370 was acted as a shield for terrorists in J&K, who brainwashed Kashmiri youth against India and took undue advantage of their economic situation arising out of the poor development in the state.

Why The Scrapping of 370 Was Condemned:

  • Scrapping of 370 hits at the autonomy of J&K, many argued.
  • With the special status gone, outsiders can buy and in J&K. Many viewed this as a vicious attempt to engineer a demographic transition in the Muslim-dominate d state.
  • The move attacked the “Idea of India” and diluted Kashimiriyat. 

    Economist Haseeb Drabu, in this piece for Mint, argued:

For the people of J&K, the biggest benefit of the state having greater legislative latitude under Article 370 has been the radical restructuring of agrarian relations. It was the first state in India, much before the communist government in Kerala, to carry out non-compensatory land reforms.

… These land reforms along with a massive debt write-off undertaken over 20 years, from 1951 to 1973, transformed the lives of rural masses and underlie J&K’s better-than national average human development indicators.

Samar Halarnkar in this piece for Scroll, argues that the move marks the slow un-democratization of India:

Aided and approved by vast swathes of the media, the Opposition, the administration and the Indian people, the Kashmir deception is the most impressive feat yet achieved in the slow, gradual process of dimming the lights of India’s democracy.

India has been set on course towards the darkness for some time. Successive Congress governments deliberately allowed India’s democracy to be clouded by the continuation and deployment of laws – old and new – meant to be used by a ruler against the ruled.

We did not complain enough when thousands suffered the wrongful use of vaguely worded laws: against terrorism, criminal defamation, information-technology misuse and sedition, the last of which has been freely used over the years against sloganeering students, villagers protesting power plants and cartoonists.

What Now?

I can not help but talk about the continued media clampdown in J&K. It’s been a week and news from the state has been a trickle, not a storm, as one would expect. The manner in which the move was hurried through, raises these legitimate concerns:

1. Future of media freedom in India – because even as we speak, reports suggest that people in and outside of Kashmir can’t still reach their families, and journalists aren’t moving freely in the state to be able to send regular reports.

2. State of democracy in India – because, firstly, the state assembly had no role to play in this move, and the parliament didn’t discuss a sensitive provision such as this enough before the bill was rushed to voting.

3. Position of courts on the government move – National Conference party has already challenged the government move in Supreme Court, but legal experts say this may not be a cakewalk. Here is The Print report that explored instances in the past when Indian courts have ruled on Article 370.

4. Role and future of political parties in J&K 

5. Will this bring about peace or conflict in the region?

6. Implications for India’s federal structure – Louise Tillin wrote in The Hindu:

 This is not the first time that a Central government has used its powers to bifurcate a State in the absence of local consensus. This was also seen with the creation of Telangana in 2014. As in the case of Telangana, the creation of the Union Territory of Ladakh does respond to a long-run demand in this region with a substantial Buddhist population. However, the decision to transform the remainder of J&K State into a Union Territory, at the same time as annulling Article 370, is a departure with profound and as yet unknown consequences in Kashmir, and wider implications for Indian federalism.

There are undeniably worrying aspects to the latest development in J&K. While there are no clear answers to this now, it’s important to say that the manner in which the government went ahead with scrapping of article 370, it should not keep us in any illusion about the state of the democratic process in India. We could only hope that good sense prevails and there is no repeat.

Much Fuss Over GDP But How Do We Measure Happiness?

The debate over India’s GDP numbers (economists are still locking horns over the truth and objectivity in these figures) was back into currency with this Arvind Subramanian piece published in June this year. He said that India may have overstated its GDP figures by 2.5 percentage points every year since 2011. Another insightful piece said the figures may have been overstated by 1-1.5 percentage points. This is significant, and while there may be a difference in figures quoted, inaccurate reporting of GDP is now an elephant in the room, too big to ignore.

GDP is an important economic tool. It measures the production of all goods and services bought and sold in an economy each year, by this very fact, has been of utmost importance to economists trying to measure economic growth. But of late, there have been concerns that GDP my not be a perfect tool to measure growth. Jacinda Ardern, New Zealand PM took it a step further when she said her government is going to look at fresh ways to measure happiness and wellbeing of the people of her country.

So, what are we going to do when we fix our GDP numbers back home? May be, join the global efforts on finding means to measure happiness, because number-driven GDP is already being punched for being an ineffective tool.

Courtney Goldsmith, in this piece, argues why GDP as a measure of economic growth may not be effective:

In an independent review of the UK’s economic statistics published in 2016, Sir Charles Bean wrote that GDP is often viewed as a “summary statistic” for the health of the economy. This means it is frequently conflated with wealth or welfare, though it only measures income. “Importantly, GDP… does not reflect economic inequality or sustainability (environmental, financial or [otherwise]),” Bean wrote. What’s more, GDP is not the precise and flawless figure that many believe it to be – it is merely an estimate. “This uncertainty surrounding official measures of GDP is inadequately recognised in public discourse, with commentators frequently attributing spurious precision to the estimates,” Bean continued.

Sarah Arnold, Senior Economist at the New Economics Foundation (NEF), told World Finance that GDP as a measure of economic activity is simply a means to an end: “It has become so synonymous with national success that the rationale for pursuing economic growth in the first place seems to have been long forgotten.”

Putting the flaws highlighted by Bean and Arnold aside, GDP is still an inaccurate measure of prosperity, as it fails to convey much of the value created in the modern world. GDP was developed during the manufacturing age and, as David Pilling, Africa Editor of the Financial Times, wrote in his book The Growth Delusion: Wealth, Poverty and the Wellbeing of Nations: “[GDP] is not bad at accounting for production of bricks, steel bars and bicycles.” Where it struggles, though, is with the service economy, a segment that accounts for a growing proportion of high-income countries’ economies. “[Try GDP] out on haircuts, psychoanalysis sessions or music downloads and it becomes distinctly fuzzy,” Pilling wrote.

GDP’s preference for tangible goods also means it is insufficient at capturing the value of technology.

Of course, the number-focussed measure of GDP may not be equipped to assess job quality, wellbeing, carbon emissions, inequality, and physical health, key indicators of happiness and wellbeing that development economists have been focussing on.

Goldsmith, in her piece, further argues:

For GDP, which does not distinguish between good and bad production, bigger is always better. …Wars and natural disasters, too, can be a boon to GDP as a result of the associated increase in spending. Comprehensive wealth, on the other hand, accounts for all of a country’s assets, including: produced capital, such as factories and machinery; natural capital, like forests and fossil fuels; human capital, including the value of future earnings for the labour force; and net foreign assets.

GDP’s neglect of natural capital in particular has received more attention in recent years. Natural assets, such as forests, fisheries and the atmosphere, are often regarded as self-sustaining, fixed assets. In actual fact, all of these resources can be – and are being – depleted by humans. Since the 1990s, economists have looked into the possibility of putting a price tag on natural resources to ensure their value is taken seriously. Ecological economist Robert Costanza published a paper entitled ‘The Value of the World’s Ecosystem Services and Natural Capital in Nature’ in 1997 that valued the whole of the natural world at $33trn. While Costanza’s research was highly controversial, the idea of accounting for natural depletion within the landscape of economic growth is becoming more common.

This McKinsey report says:

GDP as a unit of measure has not kept pace with the changing nature of economic activity. Designed to measure the physical production of goods in the market economy, GDP is not well suited to accounting for private- and public-sector services with no output that can be measured easily by counting the number of units produced. Nor does GDP lend itself to assessing improvements in the quality and diversity of goods and services or to estimating the depletion of resources or the degradation of the environment associated with production. Transformative change in technology is not easy to measure using GDP because so much of the benefit accrues to consumers.

World Bank too has touched upon the subject with its own concept of “comprehensive wealth“, covering in its sweep all produced capital such as factories and roads; natural capital like forests and water; human capital, which leads to earnings; and net foreign assets, to project a fuller picture of economic wellbeing and growth. Experts today are also working out ways to measure intangible qualities of happiness and knowledge but we have a long way to go.

There are interesting cues here, in this Econlife piece published today, which questions if money could indeed buy happiness, by comparing GDP, social support, life expectancy et al of the top 10 happiest countries (according to the UN Happiness Report) in the world.

I think happiness couldn’t ever be measured except in smiles and those trying to chase happiness are the unhappiest lot. Think of this at a national level and tell me: is it possible to make everyone happy? I like it when they say, happiness is a state of mind. Of course, this is because this happiness question weighs heavy on my soul so escapist statements best resolve the moral dilemma. However, honestly, GDP and happiness do not always go together, that’s very much true. 

Does Capitalism make you materialistic?

Capitalism Didn’t Invent “Keeping Up with the Joneses”

https://mises.org/node/47286
— Read on mises.org/node/47286

Absolutely interesting piece. This one breaks the myth about capitalism making people materialistic. It’s all about creating more choices and opportunities. What you pick remains your sole decision. Don’t blame capitalism for it.

Yes! US-China Trade War is slowing down the world economy

The global economy is not doing well, and trade tensions between the United States and China have a role to play. Even as the rift continues, another conflict I wrote about yesterday also needs early resolution before it snowballs into something big.

IMF’s World Economic Output Update released earlier this week underlines the fallout of the trade war between US and China. According to its latest forecast, real global economic growth will drop to 3.2% this year, 0.1 percentage point slower than the forecast made in April. These are worrying figures given that the growth figures stood at 3.6% last year and 3.8% in 2017.

The impact of the deterioration of the US-China trade talks can be seen from the slowing growth rate of global trade during the conflict period, the report underlines. IMF’s forecast for growth in global trade by 2.5% now is 1 percent lower than the forecast made in April. Here is another clear and concise analysis of the trade slowdown on Mishtalk. This is especially worrying because global trade since 2017 has seen robust periods of growth. On tariffs, the IMF has also said that attempts to address trade imbalances by taxing imports are hurting the world economy without fixing the problem.

Trade was also a main concern in the IMF’s annual External Sector Report released last week, with Chief Economist Gita Gopinath warning that such conflicts are shaking the global economy. Another important finding of the report underlined the big shift in global economies: China, which had the world’s biggest current-account surplus a decade ago, is now close to balanced trade with developed countries like Germany and the U.S. dealing with largest surpluses and deficits.

To get back to the ripple effect trade wars have been having on world economies in recent months, Gopinath, in her note on the report, says:

Trade actions and tensions have so far not significantly affected global current account imbalances, as trade has been diverted to other countries with lower or no tariffs. Instead, as highlighted in an earlier blog, these trade tensions and related uncertainties are weighing on global investment and growth, especially in sectors most integrated into global supply chains (where production is carried out across multiple countries).

Slowing growth mostly was found in emerging markets, with India forecast lower by 0.3 percent compared to earlier forecasts, followed by Russia, Brazil, and Mexico. Besides the US-China trade tensions continuing to impact growth across the world, the report also cited policy uncertainty as another impediment to growth. The solutions to mitigate the slowing growth, according to Gopinath, also hinge on policy decisions of governments across the world, policies that are pro-trade and contribute towards strengthening the rules governing international trade:

Many countries are now near full employment and have limited room to maneuver in their public budgets. So, governments need to carefully calibrate their policies to achieve domestic and external objectives. Countries with excess current account deficits, like the United Kingdom and the United States, should adopt or continue with growth-friendly fiscal consolidation, while those with excess current account surpluses, like Germany and Korea, should use fiscal space to boost public infrastructure investment and potential growth.

Moreover, carefully tailored and sequenced structural policies should play a more prominent role in tackling external imbalances, while boosting domestic potential growth. Reforms that encourage investment and discourage excessive saving—for example through the removal of entry barriers or stronger social safety nets—would support external rebalancing in excess current account surplus countries. Reforms that improve productivity and workers’ skill base are appropriate to promote exports in countries with excess current account deficits. Even economies with external positions that we assess to be broadly in line with fundamentals, like China and Japan, need to adopt policies that address domestic imbalances and prevent a resurgence of external imbalances; this requires structural reforms that facilitate competition in sectors like services.

Exchange rate flexibility remains key to facilitating external adjustment. As highlighted in this year’s analytical chapter, varying features of international trade, including the extent of integration into global value chains and trade invoicing in a dominant currency like the US dollar, can weaken some mechanisms of external adjustment and limit the benefits of exchange rate flexibility in the short term. So, exchange rate flexibility may need to be supported with other policies that bolster the export response, including through improved access to credit and transportation infrastructure. Allowing exchange rates to play their role, however, remains key to deliver durable medium-term rebalancing. 

Another report from the World Trade Organization, released this month, underlines a sharp increase in trade protectionism. Approximately $340 billion a year of trade faced tariffs, the report said, marking the second-highest figure on record, surpassed only by the $588 billion in restrictions reported in WTO’s earlier monitoring report.

All these reports, released in quick succession this month, flag trade tensions as detrimental to economic growth. Yet, bilateral conflicts continue, and while there is no alternative to WTO however ineffective and slow it may be at times, not all conflicts can be resolved by the WTO. This year and next are critical to seeing if sparring countries can come together and find effective institutional frameworks for trade negotiations that benefit all.

India and US Trade War Isn’t Unreal

United States–India trade ties have been in news for all the wrong reasons, of late. There may be optimism that it’s just a mini conflict that can be resolved easily, but the road ahead is nothing short of thorny. It’s a crisis that can snowball into a big rift if not managed properly. The institutional arrangements that currently exist between US and India are unable to manage this conflict, as is clear from the continued tone of President Trump’s tweets and statements on India. What makes worse is the protectionist nature of the governments in both countries.

Let’s look at what both sides have built in trade over the years which will be all exposed to risks if the trade ties continue to be volatile:

  • Bilateral trade in goods and services grew at an average annual rate of 7.59 percent between 2008 and 2018. This was double the value from $68.4 billion to $142.1 billion.
  • US was India’s second-largest trading partner in goods in 2018, and the single largest export destination with $54.5 billion worth of goods shipped to the US in 2017.
  • India was the ninth-largest trading partner of the United States in 2018 with US exports to India accounting for 2 percent of overall US exports in 2018, valued at an estimated $33.1 billion, up 87.3 percent from 2008.
  • US service exports to India were an estimated $25.8 billion in 2018, up 157 percent from 2008.
  • US arms exports to India touched $15 billion in the past decade.
  • Exports to India supported an estimated one hundred and ninety-seven thousand US jobs in 2015.
  • Bilateral FDI more than doubled from $24.3 billion in 2009 to $54.3 billion in 2017.

These numbers are enough to understand how important the US-India trade ties are. But as things stand, the disagreements are chronic and deep.  While Indian government’s efforts to engage in trade talks with the US have increased since 2018, the scope for existing Trade Policy Forum and the Indian Ministry for Commerce and Industry for talks between both countries remains limited. It doesn’t help that for bilateral talks, neither of the two countries has figured out an institutional mechanism to engage with each other beyond the Free Trade Agreements (but the recent conflict over FTAs negates even the possibility of any more FTAs in the near future). AT the WTO, they have sparred constantly with no concrete results.

A report released this month by the Atlantic Council’s South Asia Center recommends that both US and Indian governments take steps to manage short-term disagreements and establish a more constructive relationship in the medium and long runs. This would clearly mean reviewing the existing institutional frameworks for reform, brainstorm on creating avenues for market opening agreements and draw a roadmap for the FTAs. It’s indeed a difficult ropewalk but much-needed. Read the detailed report here.

The Big Show About Getting Nothing Done

This blog comes a bit late in the day, but I still wanted to put together some of the important thoughts that have emerged on the G20 summit this year. The big show about getting nothing done – this seems to be the prevailing criticism about the G20 meet in Japan’s Osaka. Of course, Ivanka Trump seems to have made more news than the key issues_sustainable growth, innovation and health_for the summit in 2019. Ahead of the summit, trade analysts keenly watched the highly anticipated talks between US President Donald Trump and Chinese President Xi Jinping, expecting a breakthrough in the ongoing trade war between the two economic superpowers. G20, after all, is a congregation of some of the world’s largest and most powerful economies where world leaders deliberate on the important economic and political issues of the day.

Yet, this year’s event has come under severe criticism from trade experts who mostly are terming the G20 as utterly incapable of advancing solutions to global challenges. It’s true, if you look at it, that G20 actually is a forum of bureaucrats who are good at meetings but not really generating workable outcomes. This year, for instance, what really transpired at the summit are mere mentions of climate change in its communique and US’s repeated justification of its withdrawal from the Paris accord, both quite dull and drab efforts at communicating urgency on the  very serious issue of climate change that has begun its onslaught across the world — from record heat waves in Europe, unprecedented rains and landslides to ecological disasters in Japan. (If you need more convincing on Paris accord and climate change, here is a very useful piece that I absolutely recommend to you.)

All said and done, what is true is also that globally, a broad-based organization taking care of world trade issues at the scale of G20 hasn’t emerged yet. All the best ideas that world leaders may have on pressing global issues in trade and development may stay as ideas if not for a forum like G20 where they, in the least, get discussed.

G20 this year, for instance, didn’t move forward on the utterly critical Dispute Settlement issues, a longstanding pain point in international trade, even as American president Donald Trump keeps violating all trade rules with impunity.

Folks at the NRDC, Han Chen and Claire Wang specifically, have termed this year’s G20 summit as symbolic of Japan’s failure to commit to issues of climate change and coal phaseout. Japan is the world’s 6th largest contributor to cumulative carbon emissions.

They say:

Despite the climate costs Japan has already suffered, its own climate policies are woefully out of date. Prior to the G20 summit, Japan released an uninspiring long term climate strategy that is severely out of line with climate needs, along with watered down language on climate in the draft G20 communique. Japan’s plans for domestic coal expansion and international coal finance continue to draw international criticism, since OECD countries should be phasing out of coal by 2030. The G20 as a whole has also dramatically expanded coal finance, spending at least $63.9 billion on coal per year,  despite committing a decade ago to phase out fossil fuel subsidies.

….Two weeks before the G20 summit, Japan’s cabinet adopted its Long Term Strategy on climate change as part of its commitments under the Paris Agreement. The Strategy seeks to achieve net zero emissions in the second half of the century, but does not set a specific date by which to meet this target. It also maintains Japan’s existing goal to cut emissions 80% by 2050, without specifying a baseline from which to measure emissions reductions. By delaying its net-zero target until after the middle of the century, Japan remains inconsistent with a 1.5C warming limit, which requires reaching net zero emissions by 2050.

So much for the drama in world trade and continued inefficacy of global institutions who continue to be hijacked by the hegemony of the US. Over to next year’s summit now, but if this no-show continues, the voices that doubt its very existence will only grow louder and rightly so.

Democracy versus Growth?

CapturevIs democracy dying?

This question seems to be back on the mind of economists this week. I live in the world’s largest democracy but it often confounds me. It confounds me when I see people voting for leaders who don’t do justice to their roles. It distresses me when politicians make policies that are in conflict with basic economic reasoning, but they do because they want votes from certain sections of voters. I get worried when, in the name of democracy, parties appease certain sections of people with regressive, anti-development policies. I have said enough but economists have been arguing for long if democracy is good for development, development being a difficult word here and much debated as well on its intent and purpose. Anyway, let us focus on democracy and growth for today, which seems to be the focus on this February 2019 publication by  Acemoglu, Naidu, Restrepo, and Robinson in which they argue that there is substantial evidence that democracy impacts GDP per capita positively with as much as 20% increase in GDP per capita of democratizing nations.  They add that the positive effects are driven by greater investments in capital, schooling, and health.

Yet, in his critique Alex Tabarrok argues that the academic literature has at best weakly established the causal effects of democracy on growth. Examples beyond academics to question Acemoglu et al’s research exist and the biggest one is non-democratic China’s rise as an economic superpower. Tabarrok argues the recent research’s contention of 20% growth may not be attractive enough for non-democracies to want to switch to demoracies and that there must be something more to democracy than the GDP per capita link. Read more of his thoughts here.

However, for the first time in three years, the decline of democracy stopped in 2018 according to The Economist’s Democracy Index. According to this index, Norway, Iceland, Sweden, New Zealand, and Denmark are the top five democratic countries in the world, whereas Chad, Central African Republic, Dem. Republic of Congo, Syria and North Korea are the bottom five. India is on number 45. Hmm!

Here is another interesting piece which talks about the queer contradiction that even as freedom the world over is in decline, the appeal of democracy endures! Yet, a conflicting report from Freedom House suggests otherwise primarily because of the rise of autocratic leaders such as Donald Trump.