“The most useful thing about a principle is that it can always be sacrificed to expediency.” -W Somerset Maugham
Going through life involves making choices. Some may be mundane, for instance whether to go for work or take leave to watch a movie. Other choices are more substantive, for example whether to work for a non-governmental organisation (NGO) and sacrifice monetary benefits in exchange for satisfaction derived from philanthropic work. Human beings are generally guided by certain principles and values, which they hold dear and on the basis of which they make such choices.
Economics, as a discipline, starts with how human beings make economic choices – trade-offs, as economists term them – between guns and butter, consumption and future growth, short term pain and the long term health of the economy, choice of techniques of production etc.
In making these choices, economics offers certain guiding principles. We must save more now so that higher investments can improve our standard of living in future. Inflation must be controlled since it hurts the poor and those with fixed incomes. Borrowing is risky and must be undertaken with due care.
Lately, however, it appears that such ‘hand me down’ wisdom has lost its sanctity, especially in economics. We seem to be discarding an increasing number of principles held dear for a long time. It is not, however, evident to me whether sufficient thought has been given before such principles are discarded or whether it is an outcome of convenience of the moment.
Let us discuss some of these.
A. It has been a long held belief that an economy, which saves more, will increase its investment and productive capacity and achieve a higher growth rate. People have always been exhorted to live well within their means and to save as much as they can. This principle seems to have now been turned upside down, with savings no longer being considered favourably. Higher saving reduces immediate demand and thereby the income of the country. Terms such as ‘savings glut’, ‘spending your way out of recession’ and ‘debt induced recovery’ have become a part of our daily lexicon. Countries that are prudent and save more than they invest are criticised for not doing enough to generate demand. Germany, which is probably the last major economy to continue with conservative policies, struggles to deflect criticism and fights a lone battle for sanity.
B. ‘Inflate your way out of debt’ is the new mantra. Governments are advised to ‘pump prime’ the economy and induce inflation to reduce the real value of debt in their books and increase demand in the economy. Countries as conservative as Japan target to increase inflation and are considered to be failure if inflation is actually below the target rate of 2%. Gone are the days of Paul Volcker, the former Governor of the Federal Reserve Bank of the US, who was revered for consistently fighting inflation and ensuring, what many consider to be, its permanent demise.
C. The world has not learnt the lessons of the 2008 crisis and continues its excessive reliance upon borrowing. The economy is crying out for structural changes but those are politically unpalatable. Easier alternative is to encourage greater borrowing to increase demand. McKinsey & Co has estimated that since the financial crisis in 2008, global debt has gone up by $57 trillion, which roughly equals three fourth of the annual global income. Considering the fact that the crisis was primarily debt driven and the subsequent recovery was predicated on quick deleveraging, there is cause to worry.
D. ‘Global financial imbalance’ is a new term coined to describe the situation over the past two decades wherein some countries have persistent excess savings and current account surplus (China and Germany, being prime examples) whereas many other countries spend merrily, financed by indiscriminate borrowing. The US, for instance, has been experiencing persistently large current account deficits (CAD) for over two decades. According to current wisdom, such an imbalance is inherently destabilizing. The onus is being placed on large savers to correct the imbalance by spending more in order to increase demand and import more.
E. Large, fast growing population has always been considered to be the bane of the developing world, especially India. It has traditionally been believed that without population control, developing countries will not be able to overcome their poor levels of economic development. Such thinking has now been reversed, with demographic dividend being considered to be the most critical narrative underpinning the Indian growth story. Even that bastion of forced population control, China, has now relaxed its ‘one child’ policy.
Demographic dividend is one of those convenient but untested ideas that have a habit of frequently cropping up in economic discourse. The fact that the young working population needs to be properly educated and provided employment opportunities, to be able to contribute to the economy escapes attention. The benefits of a young population are built into our calculations, without worrying about the prerequisites of such an eventuality.
F. We have all grown up with a value system that cherishes working hard for a living. We would expect countries that have come up the hard way would be appreciated more than those, which have become fortunately rich due to bounties of natural resources. Economists, it seems, have a different yardstick.
For a long period, high commodity prices, especially oil, generated huge wealth for Saudi Arabia, Venezuela and Brazil, amongst others. Countries such as India and Japan struggled hard to cope with escalating prices of commodities so integral to their development. No tears were shed for them; in fact, they were told to institute structural reforms to overcome the impact of high prices.
With the inevitable reversal of cycle of commodity prices, the hard time that commodity producing countries are now facing is inviting sympathies and concern. It is feared that their plight leads to lower global growth and reduced investments. Many economists and policy makers are hoping, in fact, gunning for, higher commodity prices. Consequently, these countries escape being berated for their failure to undertake structural reforms, something that was Holy Grail advice during the previous decades
Again, our concern for the immediate future is clouding our judgment. Short term pain is often essential for longer term gain. Japan had long time back demonstrated the virtue of self-belief and hard work in overcoming the lack of natural resources in building a prosperous society. Such virtues do not appear to be very popular in these times of instant gratification.
G. Democracy, rule of law and liberal governance have always been held sacred in Western countries. Promoting representative governance and opposing sectarian, dictatorial regimes has been their stated policy. Lately however, this principle is being increasingly disregarded in favour of promoting their interests. The US’s close relationship with Saudi Arabia is predicated on its geopolitical interests and the oil resources Saudi Arabia possesses, ignoring the family based and sectarian rule in that country. Many multinational companies have happily accepted regulatory demands in China, which they would spurn in other countries.
Obviously, the large market of China is too big an attraction for these companies to forego at the altar of principles they usually espouse in highly moralistic undertones. China, with all its transgressions in personal freedom, faces only restrained and muted criticism by US. Even the great bastion of democratic traditions, the Great Britain, during the visit of the Chinese President Xi to UK last year, chose not to raise inconvenient human rights issues, instead preferring to benefit from mutual trade and the investment China is likely to make. Such instances where economic interests ride roughshod over opposition to sectarianism and dictatorship are too numerous to state here.
(This is first part of a two part series.)
Read second part:
