A letter in response to an Ibbitson column in the Globe and Mail

John Ibbitson wrote an article in the globeandmail about what the French election means for the World. It is the work of a simpleton- an America-loving Canadian simpleton who seems to know little beyond what Americans know about the rest of the world. The article is best found using a Google search string:
http://www.google.ca/search?client=safari&rls=en-ca&q=What+it+will+mean+to+have+France+with+America+in+the+world&ie=UTF-8&oe=UTF-8

This is my response to his column:

Dear Mr. Ibbitson,

I read your latest article "What it will mean to have France with America in the world" which ended in the following manner, "And if nothing else, Mr. Sarkozy's victory should serve as a reminder to skeptics that the American way is increasingly the only way - even for the French." That sentence made me laugh out loud. It sounds like it was been written 40 years ago when America, Britain, France and Russia were the most important countries in the world.

American power in both West Asia and South America have been gradually fading for 35 years. Asia is where all the growth is, and America's impotent fury over North Korea underscores exactly how much its influence in the region has faded. The fact is that, notwithstanding Sarkozy, the American and European agenda has diverged on energy (gas and oil from Russia), defence (European defence products), and international trade (different emphasis in trade accords). Given the political moves of the Bush administration as well as the economic news to come, the American model of state-sponsored (not laissez faire) capitalism, centralised presidential democracy and no welfare state stands increasingly discredited as a model (even as its acceptance is still peaking in the world mind you). Democracy and political accountability are causing that. If, as you say, Europe will never have the population or economic clout to lead the world, it is hard to understand why America will continue to do so.
The last effort to reign in Asia was the South-East Asian economic crisis where the State Department let well known financiers run riot knowing fully well what they were up to- the memories of the South-East Asians won't let that happen again. With Russia playing the energy card with increasing effectiveness (it supplies energy to Europe, China and Japan) and the failed wars in both Iraq and Afghanistan, American efforts at bolstering influence in Central Asia have ground to a halt. The only places in the world that this slide in influence has not been halted are Central America, Canada and large parts of Africa. The increase in influence in Canada has been the most fruitful with America gaining near total control of energy supplies. The influence in Central America is a mere remainder of the heyday of the Monroe doctrine. Even in Japan, that most faithful of America's allies, the legitimacy of American power and influence has been slipping even in the face of North Korean madness.
The latest effort at finding a close ally is in India. The only problem is that India is a lively feisty democracy that has the highest consistent anti-incumbency mood among the large democracies of the world. Its political elite are increasingly reminded that private side deals aren't important if domestic policy isn't taken care of. The pro-American bent in the present government is being rapidly checked as the domestic ramifications of policies are felt. India is looking increasingly eastwards not westwards. Building trading ties with ASEAN is their prime consideration. Even Australia under Sheriff John Howard, arguably the oldest whitest male heading a "western democracy", is having to build bridges with his coloured counterparts in Asia. As Latin America and Europe find their own destiny, Russia bargains to maintain its place, and China and India rise, America's role as leader of the "free world" against communism becomes increasingly obsolete. The efforts at creating one more singular bogeyman, be it Al Qaeda, Iran or Chavez, are not finding fruition. It is fortunate that the never-ending war described in 1984 has been so difficult for the Bush administration to recreate in our world.
American financial institutions have achieved remarkable efficiencies in generating and deploying capital. As these systems were exported, America's influence consistently rose. That quid pro quo is natural. But now America has less to offer many countries- it has some of the highest poverty rates, crime rates, and health care cost problems in the industrialised world. Its political system is almost too dire to be called a representational democracy (two nearly identical parties competing for votes, regional bias in the senate completely perverting the one person one vote principle). I think you have been spending too much time sympathising with the Americans. You might try sympathising with others as well. I suggest reading the Financial Times, The Guardian, Xinhua - anything that will cure you of this American tunnel-vision you seem to possess.

Best regards,

Hari Balaraman

P.S: you might find this article on the future prospects of the American economy enlightening ( http://www.blonnet.com/2007/05/11/stories/2007051100430800.htm )

P.P.S: The French economy has grew uninterrupted for the last ten years (although its prospects are now dimming). The French people have turned to Sarkozy because of the societal tensions integrating a welfare state with multiculturalism. He has tapped into a deep vein of racism that has sustained both the mainstream in decades gone by (in its paternalistic colonial endeavours) and lately candidates such as Le Pen. It is laughable to say they votes for his pro-American and pro-English bias. In fact the most popular that Chirac and de Villepin have been is when they have been seen as standing up for France against the Americans or against other EU interests. His pro-American bias is incidental to his appeal in French society. He won because he was more plausible as a "rupture" candidate than his uncertain and lightweight Socialist opponent. Don't kid yourself.

Commodities v. People

Virgin announces it is going to save fuel by having its jumbos towed to the runway. I guess in a world where human resources were costly (and getting costlier) time saved is money saved. The costs of having jets come up to terminals on their own thirsty engines rather than wait to be towed or have people come there was measurable in terms of time saved.In a world where human resources are going to get cheaper as the Indian and Chinese labour forces come on the market, perhaps the balance between human service time saved and commodities saved is probably going to tip in favour of commodities. Perhaps the time value of money will grow less important as well. This is because whereas human work is time based, most other inputs (other than say food which is perishable) into the manufacturing process are not. Even just in time manufacturing services markets that are based on human daily cycles. What happens when labour as a component of production gets severely devalued? Commodities and their expenditure will become the deciding factor. The emphasis will shift from saving people's time to saving people's money.
Will all this actually happen? Maybe. The revaluing of commodities continues and human input becomes less valuable.

Commentary on a Financial Times article

Engaging India: Demographic dividend or disaster?

Interesting article about India in the FT by Jo Johnson

http://www.ft.com/cms/s/cd516aa8-749a-11db-bc76-0000779e2340,dwp_uuid=a6dfcf08-9c79-11da-8762-0000779e2340.html


I'm not sure I agree entirely with the analysis- mainly on account of the burgeoning services industry that is building up around the small but highly paid and competent workforce. What this well written piece doesn't acknowledge is that although a great number of people do not fit present job requirements, the types of job requirements are diversifying rapidly. The viability of human capital changes with demand. The figures are startling but they ignore one thing- you don't need a race of super humans to fulfil all the possible job requirements. The price differential between human capital in the west and human capital in India is so large that it more than compensates for the very high salary hikes seen and will very easily account for the lowered capabilities of the present day workforce. The point is that only if Indian were competing against a population of 1 Billion healthy and well educated Germans, would they be shit out of luck.
To put things in context regarding HIV, we are talking about 5 million people, the population of Denmark and ...uh ...less than 0.5 percent of the India. I suspect more people in India die of road accidents. Not everything can be a problem simultaneously- you can't talk about the high birth rate, the high death rate and the high present population all being equally bad problems.


There is another point to be made regarding professionals whose salaries are rising. Professional salaries will be balanced out by currency devaluation as long as India growth is still internal rather than primarily trade driven. This is because professional salaries are spent in India by people whose output in dollars may not match their input. Thus to compensate for that, the rupee will have to devalue accordingly. The value of the rupee matches the output of all Indians, rich and poor. There is very little reason to fear that professionals in India are about to be priced out by their western counterparts.


The example about Bharat Forge misses the fact that each of those highly paid engineers actually maintains about many other jobs, a cook, a nanny, and a chauffeur at the minimum. Highly paid employees often also economically support large familial networks in a manner not seen in western societies. Very badly paid menial employees usually end up sending their children to limited schooling in the hope that they will do better.

I hope (and can see to a certain degree) to see a middle class consumer economy in India providing jobs and social mobility for millions more.

But all this.... all this aside, what people don't realise is that is yes, India is not going to overhaul China soon and yes, there is going to be social upheaval but -there are safety valves for this upheaval. The ineffectiveness of the judiciary in India has resulted in the Executive taking over most low level judicial functions and the Judiciary often overseeing the Executive from above- a curious but working balance. Democracy lives and breathes and rebalances governmental priorities. The Indian democratic system's ability to balance very very very large cultural, linguistic and economic disparity is unprecedented in modern history. Most prosperous western political systems are finding themselves incapable of meaningfully handling multiculturalism. Almost no poor countries are able to sustain the democratic experiment. The Naxal menace is a challenge that will probably be met first with brutal policing and second with a channelling of resources to those areas. I wish elections were held every four years instead of five


The Health system...sucks so bad it is not funny- but it is in private hands and therefore may be able to respond at some distant stage to all the built up demand. On the other hand, we have the Unicef asking what will be the impact of malnutrition on future growth rates. Do they know? Is it possible that the present rate of growth already factors in these systemic problems? What I worry about municipal infrastructure- people need roofs, water pipes, electricity outlets and sewage outlets. How the hell is this going to be tackled effectively? These are questions that need urgent answers but I have hope- I've seen the change in infrastructure in my lifetime. I've seen so much change since 1990 and so much more opportunity for young people open up. The triumphalists are thumping their chests for one very important reason- they, like me, are seeing an India that they have never seen before. They are seeing a future that they never thought they would see.


So many many people throughout the late eighties and all through the nineties refused to believe that China would do well. Now they deign to agree among themselves that China has done well. In India's case, the reasons for hope are a lot more.

In response to the concerns I brought up in my last post:

• Low paid Jobs: The truth of the matter is that we are witnessing a great number of high-value highly paid outsourcing jobs being outsourced to India. In fact I think that the low-value customer facing jobs will actually dry up or stagnate. Call centre jobs are customer facing jobs that notoriously culture specific. No amount of changing "maninder" to "mandy" or jaswinder to "jesse" will make the customer relationship trouble-free. It is much easier to give one highly paid job that doesn't need a yank accent to one highly paid professional than to give low paid jobs to ten professionals who do need to have the accent. The retraining costs are higher and because the number of people being hired is larger, concerns about employee retention and customer retention become more important.

• The great unwashed: Purchase power parity means that one dollar worth of rupees buys more in India than one dollar does in the US. Thus assessing the salaries and poverty levels in India need to be done taking PPP into account. Secondly, 6 % of India is more than the population of France. The percentage of well-trained people in India doesn't have to be high to start competing with most western countries for investments. In fact high-growth industries in India will offer even higher returns for the dollar on account of PPP. About financial markets, don't kid yourself, the BSE and the NSE are relatively well-run. Let's not bring up the Vancouver stock exchange in comparison. Enron anyone?
  
• An externally dependant economy: There are others who see India as essentially dependant on consumer demand in the west and is therefore vulnerable to economic downturns in the west. India's economy has never been driven by international trade. Even now about that international trade accounts for only up to 15% of Indian GDP (but this figure is rising). Most of the red hot growth is being driven by a combination of different factors: improved exports, improved management skills brought in by the Indian diaspora in the West, increased investment often influenced by Indians abroad, internal deregulation, and mass consumerism. Thus although India's growth is dependant on the west for growth, there will have to a multiple coincidence of events such as reduced exports to the west, reduced investments from the west, increased commercial regulation in the country and reduced consumer demand- hard to see why all that could happen (short of there being all out war with a country).
• Byzantine regulations: Internal regulation is reducing as the government grows more confident of future prosperity, Indian corporate ability to handle competition and a better understanding of the downsides of an overly regulated economy.
• The Business Cycle: Still others concede there is real growth but attribute it to the business cycle and castigate the government for not undertaking massive structural reform. Structural reform affects large groups of people and needs to proceeded with carefully. This is very difficult to do in any country and less so in India where voters rightfully feel democratically empowered. The government has been taking small steps (lots of little change is often enduring change) and that is important. Every level of government needs time to catch up especially in a country where population increase complicates problems further. It is important not to set expectations too high or and to give the "losers" in any massive structural change a chance to adapt. It is important to be fair to everyone. That said, things are a lot different in India than they used to be. People who bleat about how little has changed probably feel mean their bank accounts not their country.
• Catching up with China: - is not important. Set your own house in order. forget about the Joneses. In any case, India uses capital in a far more efficient manner than China. It's capital markets are older and more sophisticated. Also India's economy has not been as trade-dependant as China's. Thus although India could use more money and will probably never catch up with China, it doesn't need as much money to kickstart internal propserity and can probably afford to improve to a greater degree through internal people. India is close to have the largest number of young people in the world. The value of human resources in terms of value-addition grows and grows. India's population will remain young long after China starts greying. There is plenty to be achieved in Indian internal deregulation. If Indians are to be the ones to benefit primarily from that then so be it.

Tectonic movements in the World Economy

I read in the papers this morning that the Tata Steel bid for Corus, an Anglo-Dutch steelmaker. It is the largest take-over of a foreign company by an Indian company. After the Corus accepted the offer, the company's share price dropped close to the bid price, indicating that investors don't anticipate a higher bid. It is still above the bid price indicating there is still the possibility that a Brazilian or Russian steelmaker will enter into a bidding war. If the merger goes through, Tata will be become the world's fifth or sixth largest steelmaker.
This event is important- but only as a signal of India's new found heft on the world stage. It also demonstrates that even in the absence of large amounts of onrushing foreign investment, domestic Indian companies have built up both the financial expertise and confidence to raise money to make both domestic and international investments.
Naysayers about the Indian economy come in various stripes:

• There are those that say that only the low value jobs go there and they are always destined to be servants of companies in the West.
• There are others that look at the millions of poor and think that this reflects accurately on all aspects of India, i.e. its companies, its financial systems, its labour pools etc.
• There are others who see India as essentially dependant on consumer demand in the west and is therefore vulnerable to economic downturns in the west.
• Others see the byzantine regulations as too onerous and will forever hobble Indian growth.
• Still others concede there is real growth but attribute it to the business cycle and castigate the government for not undertaking massive structural reform.
• Finally there are those that feel India has missed the boat which China was on and that India can never hope to catch up especially since it can never hope to attract the kind of capital China can hope to.

I hope to respond to all these concerns in the next post.

The Value and location of Innovation in the Pharmaceutical Industry

I read in the papers today how margins are being squeezed in the European Pharmaceutical industry. There are a a few things happening as a result of this. First, plenty of mergers and second, movement away from costly innovation towards development, manufacturing and marketing of generics, and finally the origin of these changes, the increased pressure on innovators from either copy-cat drug patentors (patented drugs that are almost the same as your drug) or generic drug makers that are challenging the validity of patents.
One would normally think all this is bad- if one favours innovations that is. After all, companies that innovate are now facing a substantial disincentive to innovate. Perhaps this is not the case. Perhaps the cost of innovation is not being driven by the incentives or disincentives of the Intellectual Property system. Perhaps it is driven by the economics of the process or rather the relative economic value of the various components of the drug production process.
I wonder if innovation as preliminary component of the drug production process has been milked for all it is worth. Perhaps in the relatively efficient distribution systems of the North Atlantic countries, the "jump" in value was only available in creativity in researching and developing the product. Thus monetising that part of the process by wrapping in Intellectual Property protection was economically efficient for European and North American producers. "Innovation" in drug research provided the most tangible benefit and thus rewarding companies that innovated bolstered an economic need that already existed and prevented other market forces from stunting an important move. Thus, there was no twisting of market forces in propping up innovation through IP laws.
But now the game has changed, the EU and globalisation in general has brought up many asymmetric jurisdictional (legal and political) challenges to the logistics of marketing and distribution. This brings many inefficiencies to the market apparatus (relative to the overall size of the global market, or rather the overall expectation of distribution)
Therefore perhaps the money to be made is now by generic distribution which focusses on logistics and doesn't have the complex cost of both innovation and protecting innovation. IP rules may balance it somewhat in some jurisdictions but let's face it- IP laws are tenuous and still being formed through continuous challenge by people. IP cannot compensate for the growing costs of R& D in Europe as well as the uncertain and growing costs of protecting a patent portfolio.
Thus generic manufacturers who focus on distribution efficiency will win in the short term because they are efficient and numerous and have no "jewels" to lose.
Think of this like the barbarians at the gates of Rome. Rome has become too costly to maintain and defend. There will be a new order not controlled by Rome. But. I don't fear this new order- whatever we resist, we will become. Rome may have fallen, but Roman law continues to cast a long shadow.

I am foxed

by the dip the cdn dollar is taking. It doesn't make sense. Canada is after all an oil and gas exporting country. Every spike in the price of oil should be bolstering the currency. Looking into it further I realise that Eastern Canada imports oil while Western Canada exports it. Seems to be an of an ass-backward solution if you ask me. This needs some more investigation. I think this might be due to a lot of cheap pipeline capacity in the US. This might explain the lack of a unified Canadian energy "system". There is of course the traditionally cdn weak nationalism.

The more I read, the more I realise that the Canadian nation-building experiment is still very young and hampered, especially in the post-war years, by living next to a large culturally influential neighbour. Nowadays, Canadian nationalism is increasingly dependant on the existence of the American bogeyman.

The Federal Government in Canada may have partially failed as an institution but the judicial system, the initiator of so much change in Canada, grows not only more unified but also extends a strong cultural influence.

The judiciary as an element of a nation-building exercise is interesting because it does not confront political and cultural challenges from the south directly. Perhaps this is a natural result of a young political system that has has not been able to sufficiently confront influences from America and Europe. To a certain degree, both the civil and common law systems in Canada are forging an independant and perhaps more unified system. It remains to be seen to what degree the judiciary carries the can, as it were, before continentalists like Manley and Harper get the better of all of us.