Wednesday, September 29, 2010

India Launches Bid To Become Most Hopeless Of The Emerging Markets Hopefuls

Could it be that the hype surrounding the economic fate of the four famous emerging market "BRICs", Brazil, Russia, India and China could be just that, hype?

Admittedly, I've never been to any one of these countries so I have no personal experience or ability to have confirmed on a first-hand basis whether any of the impressions I get of these places from the media are accurate or not. Then again, I've never been to a gold mine and yet I feel I understand enough about economics in general, and the dynamics driving the gold price in particular, to be able to competently comment on gold's prospects.

That being said, Russia seems mired in post-authoritarian communism, uh, authoritarian mixed-market socialism, with strongman Vlad Putin banning grain exports in the middle of a drought to appease supporters of mystical Fatherland economics. The country is famous for its massive geographic expanses rich with known and unknown natural resource reserves, but the legal and market structures in the country are so corrupt, and the infrastructure so dilapidated and abused since the fall of the USSR, that nobody can tap into this enormous potential wealth to make use of it. Similarly in Brazil, crony agriculturalism and state-ownership of oil reserves by Petrobras will lead to malinvestment and economically inefficient use of resources which are valuable commodities on international markets (Brazil's government is currently led by a former union organizer, need I point out union organizers are always and everywhere all about patronage and graft?). Meanwhile in China, they're building a lot of stuff, but what is it good for? Little of what China produces for internal use or consumption has any connection to real consumer preferences; rather, China engages in political production to satisfy political goals and dictates that are arbitrary in nature and handed down from centralized authorities far removed from final consumer demand. The country's economy is geared toward satisfying the Communist Party of China's own ego, and it seems much of what gets built is of shoddy and hasty craftsmanship and ultimately dangerous.

All that leaves us with is India and, in this case unfortunately, the grass is not greener on the other side (WSJ):
India's vaunted tech savvy is being put to the test this week as the country embarks on a daunting mission: assigning a unique 12-digit number to each of its 1.2 billion people.

The project, which seeks to collect fingerprint and iris scans from all residents and store them in a massive central database of unique IDs, is considered by many specialists the most technologically and logistically complex national identification effort ever attempted. To pull it off, India has recruited tech gurus of Indian origin from around the world, including the co-founder of online photo service Snapfish and employees from Google Inc., Yahoo Inc. and Intel Corp.

The country's leaders are pinning their hopes on the program to solve development problems that have persisted despite fast economic growth. They say unique ID numbers will help ensure that government welfare spending reaches the right people, and will allow hundreds of millions of poor Indians to access services like banking for the first time.
If you're like me, you might have read that and asked yourself, "Why is the government of a country in which hundreds of millions of people lack even simple technology like reliable electricity, clean, running water and efficient distribution networks for inexpensive, quality foodstuffs attempting a high-technology national census effort that will cost billions and take years?"

The answer is that obviously this is an inappropriate priority for India. It's an inappropriate priority because anything a central government might do "for the economy" is necessarily an inappropriate priority because such actions are always political in nature, not economic in nature. The central government in India is not trying, despite its ignorance of economic theory, to raise the average Indian out of poverty and into a productive role within a modernized economy. The central government of India is trying to figure out a more efficient and effective way to expand its network of privilege-granting and dependency-generation and thereby expand and consolidate its own power.

And, like any good crony capitalist system, there are a number of private sector hustlers along for the ride, in this particular case the bankers and financiers of India. Indian bankers and financiers can't extend loans to a large proportion of the population not because they can't properly identify who these people are but because the costs associated with overcoming these identification quandaries are higher than the potential benefits that might accrue to the recipients of the loans.

In other words, the costs of tracking these loans and potentially suffering higher loss rates on them due to unreliable identification data means that the banks would have to offer higher interest rates than they otherwise might be able to offer in the absence of these identification issues. Whereas the bank might normally make a loan for, say, 6% (random number), instead the loan issuance would only be cost-effective if the interest rate was, say, 15% (even more random number, for illustrative purposes). The potential recipient of the loan might be able to afford 6% interest, but not 15%, and so these loans are not made.

Far from being a market failure, this is market pricing telling the banking industry, and the economy in general, "these capital resources are best used elsewhere in the economy." However, instead of heeding these market signals and investing capital efficiently and realistically, the banks are taking a page out of the well-worn book of Western Financial Cronyism For Dummies and getting the Indian central government to step in and effectively subsidize the banks' costs related to poor identification measures. E voila! 6% loans for everybody!

And the best part? When these loans inevitably fail en masse (because they were not economically efficient in the first place), the banks will go to the Indian central bank and piss and moan for a bailout. It's a win-win for banks and anyone else receiving the preferred patronage of the Indian central government.

The trouble with India, and the other BRICs, is they're attempting to apply "First World", modern systems of welfare patronage and public-private partnership schemes on their "Third World" economies. Whereas the "First World" had a long period of time to accumulate capital, wealth and experience with less-hampered markets before discovering these methods of political manipulation and public corruption during its transition from low-tech, low-wealth agricultural societies to high-tech, high-wealth industrial societies, the BRICs are notorious for making the political transformation without waiting for the economic transition.

In the end, this could be the perfect recipe for inhibiting capital formation, hindering creativity and technological ingenuity and ultimately stagnating a lot of economic development that otherwise might have occurred. And if I had to pick a favorite in this "the winner is actually a loser"-race, my bet would be on India, at least for the next few decades.


  1. Hey Taylor, you've rigged the odds so they are 50/50. Russia seems to enjoy its status as the the most corrupt and dysfunctional economic failure and China seems to think that digging holes and filling them back up (ala empty buildings about to be bulldozed) constitutes wealth creating economic activity. So you are left with India and Brazil. I'll take your side of that bet also.

  2. Stanley,

    I've got to get my edge somehow!

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