The Reforms of Manmohan Singh are Eroding and Threatening India’s Economic Growth with a Return to a Welfare State

Posted by PITHOCRATES - April 22nd, 2012

Week in Review

The BRICS economies are doing pretty well.  Well, better than Europe and the United States at the moment.  Which is saying something.  But it’s not all rosy.  China is struggling to get housing prices under control while at the same time not hindering economic growth.  Not easy to do.  When inflationary policy gives you both that growth and those high home prices.  And now people in India are worrying about sustaining their economic growth.  Which appears to be making a transition from free market capitalism to state capitalism.  Putting the brakes on economic growth much as it has in Europe and in the United States.  Where policies now are turning (or returning) to be more anti-business than pro-growth.  And a rise in public spending that would seem to indicate a return to a welfare state.  For which Manmohan Singh, India’s prime minister, was hammered for at a recent event (see Now finish the job posted 4/15/2012 on The Economist).

The event, in Delhi, was billed as a discussion of India’s economic reforms, hosted by a prominent and respected economics think-tank, ICRIER, along with Oxford University Press. The idea was to celebrate Mr Singh and the launch of an updated version of a book marking his momentous economic reforms of the early 1990s. These, everyone agrees, did more than anything else to usher in sustained and rapid economic growth which has helped to lift millions out of absolute poverty.

As ever, Mr Singh sat twinkly-eyed and almost entirely silent, as a series of speakers took turns to address the room. Yet rather than waste time celebrating his work of two decades ago, everyone pushed on with far more urgent business: trying to get India’s prime minister to understand that, without a second round of economic reforms, and soon, India’s economic prospects will look far grimmer in the next few years than they have recently. In turn, Mr Singh may not be remembered as the man who reformed India’s economy, but the man who only got the job half done…

Then a blunt-speaking economics professor from the University of Chicago, Raghuram G. Rajan, pointed out that things are looking bad when “domestic industry prefers to invest abroad” rather than brave the hassles and uncertainty of India today. Nor did he shy away from identifying who was at fault: “paralysis in growth-enhancing reforms” is a blunt way for an economist to speak; it means Mr Singh and his cabinet have done almost nothing to promote growth, devoting energy instead to ways to dish the proceeds of growth as welfare and other public spending…

He frets, too, that India’s middle class has no clue how high economic growth was first brought about, and instead is deeply, and increasingly, suspicious of capitalism and liberalisation. The result, as another speaker eloquently pointed out, is that there is no political constituency for reform. He saved his most explicit attacks for the budget passed last month, which came with a baffling mix of anti-business measures, especially over retrospective tax, and which is now scaring away the foreign investors that India desperately needs.

Those economic reforms replaced India’s socialism with free market capitalism.  And the subsequent burst in economic activity lifted millions out of “absolute poverty.”  Something their kind and caring socialism never could.  Yet another example of how capitalism helps those least able to help themselves.  But with robust economic activity comes great tax revenue.  And the temptation is to spend that tax revenue instead of cutting taxes further.  Because that excess tax revenue is not needed.  But politicians being politicians are weak.  And they will spend that excess tax revenue.  As Ronald Reagan learned in the Eighties.  His cut in tax rates created so much economic activity and tax revenue (nearly twice what it was before the cut in tax rates) the politicians increased their spending faster than the money came into Washington.  Which is why Ronald Reagan had great budget deficits.  It had nothing to do with the tax cuts.  For they increased tax revenue.  It was the massive increase in spending.  As it always is.

This is the danger of any democracy.  Once the people get a taste of this government largess they want more.  And will vote anyone out of office who doesn’t give them more.  Or, worse, takes some of it away.  Which leads to some problems.  As in chronic deficits.  And sovereign debt crises.  Like they currently have in Europe.  And are getting dangerously close to having in the United States.  All made worse by the fact that during the good times voters become blissfully ignorant about the economic policies that made those good times so good.  All they know is that they like getting a lot of free stuff.  And want to keep getting a lot of free stuff.  So they vote for the politician that promises to give them more free stuff.  Even when they can no longer sustain that level of public spending.

So when the people are blissfully ignorant it us up to the politicians to be responsible.  And not give in to pandering for votes.  They need to do the right thing.  To continue the good times.  By cutting taxes.  Cutting spending.  And cutting regulations.  The proven way to lift people out of poverty.   A particularly difficult task when many in the population have only known the good times.  And have no idea how quickly those good times can turn bad.  But unless the Indians want to slip back to their impoverished socialist past Mr. Singh should take stock of this wise counsel and keep the miracle going in India.  The miracle of free market capitalism.

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China’s Ministry of Railways’ Inefficiencies and Bloated Bureaucracy represents State Capitalism at its Worse

Posted by PITHOCRATES - February 5th, 2012

Week in Review

Big Government liberals in the U.S. say state capitalism is the way to go.  And high-speed rail.  Just like the Chinese.  In fact, they can’t get enough of what the Chinese are doing.  Because they say the Chinese get capitalism right.  By putting ‘state’ in front of it.  Instead of what we normally see in front of it.  Free market.  But their big state funded rail system is far from perfect.  Far, far from perfect (see China’s push for rail reform could be dead in its tracks by Michael Martina posted 2/2/2012 on Reuters).

The ministry’s touted web-based ticket booking system was supposed to replace the antiquated ordeal of waiting in long queues. It didn’t. The system crashed minutes after its launch before the annual holiday migration of 200 million people by rail, and proved as frustrating as any line-up at a station…

The online fiasco — which spurred a barrage of criticism — was the latest in a litany of troubles for the ministry, which has been plagued by scandals and missteps. Some of those problems have been deadly, including a July crash of a new high-speed train that killed 40 people.

But for decades the Ministry of Railways has proven impervious to reform efforts, fending off attempts by leaders to merge it with other ministries or close a separate court system run by the 2.1 million-employee ministry…

The current reform drive could also stumble, said Zhao Jian, a rail expert at Beijing Jiaotong University who has criticized China’s expensive bullet train expansion. For one, the ministry’s $2.2 billion debt load could deter any splitting of its business and regulatory arms.

“If you separate the government function from the business function, the transportation enterprise must take on the debt. But if the debt is so great that the enterprise will immediately become bankrupt, then who will take it on?” Zhao said.

The problems of state capitalism are plain to see.  You have a 2.1 million public sector bureaucracy.  Who speak with a loud and unified voice and could play havoc with the system if they don’t get their way.  And public spending so great that nothing in the private sector can manage the accompanying debt.  No amount of ticket revenue can fund current operations and service this debt.  It’s just impossible.  Which means it can’t be spun off from the government.  Because only government funding (taxes, borrowing and the printing press) can support this behemoth.  Because large-scale rail like this is just not a viable economic model.  Which means it will never be reformed.  And it will always remain a fiasco.  Until it and the state finally collapse.  Sort of like in Greece.  Only without anyone large enough to bail them out.

And this is exactly what the Big Government liberals in the U.S. want.  Of course, when they start running things everything will be perfect.  So they won’t make the same mistakes the Chinese have made.  Or the Greeks have, for that matter.  Even though they can’t point to a single success story in the history of Big Government liberalism.  For sharing the wealth and growing government has never increased economic activity.  But only led to growing bureaucracies and out of control spending.  Like the Chinese.  Only without their booming manufacturing sector powered by cheap labor to help pay for some of these costs.

No, China’s state capitalism is not the economic model to follow.  If you want robust economic activity you need to get the state out of the economy.  And let free market capitalism do its magic.  Like it did for the British during the Industrial Revolution in the 19th century.  And like it did for the Americans in the late 19th century and early 20th century.  Before the growth of government in both countries grew.  And sucked the life out of their economies.

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Solving Public Spending and Debt Crises with Privatization

Posted by PITHOCRATES - May 23rd, 2011

To Privatize or not to Privatize the NHS

Some want to start privatizing parts of the National Health Service (NHS).  Some don’t.  Some want to improve quality and cut costs.  Some don’t.  But as people live longer into retirement, there is no place for costs to go but up.  Especially when there is no competition (see Where lucre is still filthy posted 5/19/2011 on The Economist).

THE profit motive is alive and well at the Circle hospital outside Bath, in south-west England. The hospital was designed by the architect Norman Foster, and is run by Circle Healthcare, a firm part-owned by its employees and set up by Ali Parsa, a former banker at Goldman Sachs, in 2004. It treats a mixture of National Health Service and private patients. Corridors are wide and gleaming, operating theatres newly equipped. Doctors and nurses have more say in management decisions than in many English hospitals.

So a private, for-profit hospital is well run, clean and has new equipment.  Which implies that the run of the mill NHS hospital is bureaucratic, cramped, dirty and outdated.  Hmmm.  Based on this it would appear that the private, for-profit hospital is a better hospital than your run of the mill NHS hospital.  At least, from a patient’s viewpoint.  And who could argue?

Trade unionists and lobby groups are queuing up to denounce any expansion of the private sector’s role in health care.

So trade unionists and lobby groups are against cleanliness and modernity.  They prefer bureaucratic, cramped, dirty and outdated.  One can only presume so because of the money.  For it usually is.  Of course, they will deny this.  And say they are just looking out for what’s best for Britons.

To some foreign observers, this reticence about private involvement looks odd. There is ample international evidence that competition among private providers yields better results. For example, a report last year by America’s National Bureau of Economic Research found that increased competition in health care was correlated with improved financial and clinical outcomes; adding a rival hospital and instigating patient choice substantially increases the quality of management. As Nick Seddon, of the British think-tank Reform, points out, “It’s a fallacy to think you can choke off the profit motive without losing momentum and innovation.”

And the current debate somehow overlooks the fact that for-profit companies are already delivering many support services in health, education, prisons and other public services. Family doctors have been private operators since the foundation of the NHS in 1948. The profit motive has been making further steady advances in the state sector since Margaret Thatcher’s outsourcing campaign in the 1980s. Tony Blair let privately owned treatment centres provide specialist services within the NHS. His wider reforms were restricted by internal battles in the Labour Party; all the same, a recent report from the London School of Economics found that introducing competition among NHS hospitals in 2006 helped to reduce patient deaths.

The history appears to side with privatization.  Both in the UK.  And the USA.  That is if you’re measuring by the quality of patient care.  And by the number of people you prevent from dying.  Which is a rather important statistic in any hospital I would think.

Let’s take a closer look at this ‘not dying’ thing.  Suppose there is only one hospital serving an area.  And suppose that 5 out of every 10 patients that enter dies.  Now suppose a second hospital opens up.  Where only 1 out of every 10 patients that enter dies.  Which hospital would you want to go to?  I’m guessing the 1 out of 10 one.  Because that ‘not dying’ thing is pretty relevant when choosing a hospital.  And when more people do in this example, the ‘5 in 10’ hospital will have no choice but to improve.  To become a better hospital.  This is what competition does.  It makes everything better.  And it’s just not the UK and the USA seeing this.

Britain is unusual among rich democracies not in how much private involvement there is in its public services, but how little. Only 4% of acute-care beds are provided by private companies. In Germany, the proportion of hospitals run for profit (32%) overtook the number of publicly run ones (31%) two years ago (charitable and voluntary organisations account for the rest). The Spanish region of Valencia allows for-profit firms to run over 20% of its health-care services, with the sort of long-term deal British providers hanker for. New European democracies are experimenting with similar public-private mixes. Two-fifths of Slovak hospital provision is delivered by private operators.

It’s rather ironic.  The people who did so much to improve the life of the individual coming out of the Middle Ages is now among the least free nations when it comes to health care.  They’re talking about privatizing more health care to improve quality.  And cut costs.  Because the NHS, as all state monopolies do, is trending in the wrong way in areas of quality and costs.  The fact that there is a debate proves this.  Now, don’t get me wrong, the NHS is full of good people.  It’s not the people in the system.  It’s the system.  And the people managing the system.

But old bureaucracies are hard to reform.  People trust them.  Because they’re used to them.  Like a comfortable pair of filthy, worn slippers.  But people are living longer.  Consuming more health care in their retirement years.  Vastly increasing health care costs.  Which the NHS has to pay.  Either by more taxation (which can reduce economic activity, which will reduce tax receipts across the board).  Rationing services to make what they have cover more people.  Or by more deficit spending.  Borrow and spend for today.  Leaving a debt bomb for future generations to worry about.

Italy and Spain Circling the Drain?

And speaking of debt bombs, a couple more are about to go off in the European Union (see U.S. stocks plunge on European debt worries by the Associated Press posted 5/23/2011 on the Los Angeles Times).

Stocks plunged Monday after warnings about the finances of several European countries stoked fears that the region’s debt crisis is worsening. The euro dipped briefly to its lowest level against the dollar in two months…

Italy is the latest European country to be affected by the region’s widespread debt problems. Standard & Poor’s said Saturday that country was in danger of having its debt rating lowered if it could not reduce its public borrowing and improve economic growth.

Too much public sector spending has caught up to the Italians.  High taxation to support that spending is hindering economic growth.  And they’ve borrowed so much that people are starting to think that they won’t get their money back.  Making people that much more reluctant to loan (i.e., buy Italian bonds) them money again.

Spain’s public finances are also worrying investors. Spain’s ruling Socialist party was roundly defeated in local elections, raising concerns that political instability would keep that country from enforcing spending cuts. The Ibex 35 index on the Madrid stock market fell nearly 2 percent in midday trading.

The 10-year U.S. Treasury yield fell to 3.10 percent, its lowest level this year. Bond yields fall when prices go up, so the drop is a sign that investors are clamoring for the safety of long-term U.S. debt.

And the Spanish are in the same boat.  Even with their partial privatization of health care, there’s still just too much public spending.  And a political atmosphere that won’t take kindly to spending cuts.  Unemployment among the young and educated is high.  Close to 50%.  Making their prospects for future borrowing not that favorable either.  So they, like the Italians, will not be able to pay their bills one day.  Which will eventually bring about those spending cuts.  The hard way.

Greece too far gone to Save?

The big public sectors in the social democracies of the European Union (EU) are taking their toll.  Their costs are crippling some of their economies.  And it all started in Greece.  Who is still trying to dig themselves out of their debt hole (see Greece mulls deeper spending cuts as borrowing rates hit record by Derek Gatopoulos, Associated Press, posted 5/23/2011 on thestar.com).

Greece’s borrowing costs surged to another record Monday, as the crisis-hit country’s prime minister chaired emergency talks to deepen austerity measures beyond his own government’s term in office.

A Cabinet meeting began as yields rose above 17 per cent for Greek 10-year-bonds, hitting a record margin — or spread — over the benchmark German rate.

Greece suffered another bond downgrade late Friday from the Fitch ratings agency, lowering its investment ranking by three notches deeper into junk status. Prime Minister George Papandreou conceded over the weekend that plans to return to bond markets next year may not be achievable.

Junk status.  Wow.  That’s bad.  That means few people think they’ll get their money back if they loan any to Greece.  And according to Papandreou, no one will next year.

Greece’s economy is being kept afloat by €110 billion ($156.6 billion), in a 2010-2013 package of rescue loans from European countries and the International Monetary Fund.

But that rescue package does not cover all of Greece’s financing needs for 2012, and EU countries are demanding tougher cost-cutting action from Greece before considering offering another financial lifeline.

In return for the bailout, the government imposed a series of austerity measures, including pay cuts in the public sector, tax hikes and social security reforms, and is under strict supervision from the EU and IMF to ensure the country is meeting the conditions for the rescue loans.

And here we see why they have such a debt crisis in Greece.  High salary and benefits for a bloated public sector.  And state benefits that are too generous.  Things that are hard to cut.  As is evident by the requirement of another bailout.  And the demand by those doing the bailing for tougher cost-cutting.  Because what they’ve done so far isn’t enough.

In Vienna, top financial official Olli Rehn said Greece needed to take more steps “in the coming days and weeks” to convince other EU nations and lending institutions that it is serious about overcoming its huge monetary deficit.

He urged the crisis-hit national to urgently step up its ambitious privatization program. General elections are due in Greece in 2013.

And here again we come to that wonderful panacea.  Privatization.  For the EU countries with the greatest debt crisis are the ones with the least privatization.  Whereas the strongest economy in the EU, Germany, has quite a bit.  Even in the one area people fear most.  Health care.  Germany has more private hospitals than public ones.  So profit (i.e., lucre) isn’t a dirty word in Germany.  They have a strong economy.  And fiscal restraint.  Which is why Germany is doing a lot of the bailing in the EU.  Of course, they have experience rehabilitating financially weak nations.  They no doubt learned a lot when they reincorporated the former East Germany into a reunified Germany after the Cold War.

Ticking Debt Bombs

Public spending has grown in countries big and small.  And it is crippling countries big and small.  Privatization is a way to cut public spending.  But it doesn’t help win elections.  So it’s not easy to do.  People get set in their ways.  And once people grow up on generous state benefits, it’s hard to convince them that things will be better if they start paying for what they once got free.  So few try.  It’s easier to just keep promising more of the same.  And close your eyes to that ticking debt bomb.  Hoping that it will blow up later rather than sooner.  And that the people continue to enjoy their comfortable pair of filthy, worn slippers.  No matter how filthy and worn they get.

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