January 2010

Courtesy: The Economist


Barack Obama was inaugurated as America’s 44th president. In a whirlwind first year in office, Mr Obama overturned a prohibition on federal funding for stem-cell research, eased some restrictions on dealing with Cuba, lifted a ban on people with HIV travelling to the United States, pushed Congress to pass health-care reform, promised to close the detention camp at Guantánamo, pledged a cut in America’s emissions and promoted the first Hispanic person to the Supreme Court.

A new sheriff in town

Mr Obama also set about changing the tone of American foreign and security policy, for example by seeking to “reset” relations with a prickly Russia and by stopping the use of torture during intelligence interrogations. Speaking in Cairo, Mr Obama’s call for “a new beginning” with Muslims was applauded by the Arab world. The new president was awarded the Nobel peace prize, though many said this was premature. He defended the use of force in “just wars”.

Iran and North Korea remained belligerent despite Mr Obama’s plea to tyrannies to “unclench your fist”. Iran moved ahead with its nuclear programme, conducting missile tests just before it attended talks in Geneva with six leading powers. A secret Iranian uranium-processing facility was discovered. North Korea launched a rocket that the West believed could target Alaska. Two American female journalists held by North Korea were freed when Bill Clinton went to Pyongyang to meet Kim Jong Il, the Hermit Kingdom’s ailing dictator.

American troops withdrew from Iraq’s big cities in June. Earlier, Mr Obama presented a plan to withdraw most troops from Iraq in 2010. Sporadic bursts of suicide-bombings that killed scores of people continued to plague the country. A general election will be held in March.

Efforts to stabilise Afghanistan were hampered by a disputed presidential election. Amid claims of corruption and poll-rigging, Hamid Karzai was declared the winner, but only after his remaining rival pulled out of a run-off ballot.

It was the worst year by far for coalition casualties in the war in Afghanistan. General Stanley McChrystal, the American commander there, requested more forces to fight the resurgent Taliban, but Mr Obama came in for some flak for dithering over his response. He eventually agreed to send an extra 30,000 troops.

The violence also intensified in Pakistan, with the most savage terrorist assaults carried out in Peshawar, capital of the North-West Frontier Province. In October the Taliban attacked Pakistan’s army headquarters in Rawalpindi. Pakistani troops began a campaign against the Taliban in the tribal areas of South Waziristan.

To the right, quick march

A military coup in Honduras ousted Manuel Zelaya from the presidency. Mr Zelaya found refuge in the Brazilian embassy in the capital. After much fruitless diplomacy, an election was won by Porfirio Lobo, the centre-right candidate, though many governments said they would not recognise the result.

The European Union’s Lisbon treaty finally came into force after the Irish approved it in a second referendum and the Czech president (eventually) signed it. This did not lessen the enthusiasm of Eurosceptics for bashing the document. Herman Van Rompuy, Belgium’s prime minister, was elevated to the lofty position of permanent president of the European Council.

Mexico’s government in December achieved a rare success in its war on drugs when troops killed Arturo Beltrán Leyva, a leading trafficker. In March, the United Nations renewed its commitment to drug prohibition, though there were more waverers. Marijuana is becoming legal in many parts of the Americas.

China’s economy began to roar ahead again; imports and exports grew following a sharp decline and its returning appetite for raw materials was partly responsible for a rise in commodity prices.

Labour Pains

Governments around the world took measures to tackle the worst economic crisis in decades as unemployment shot up. The American Congress passed a massive $787 billion stimulus package in January and the Bank of England implemented a programme of “quantitative easing” that pumped £200 billion ($330 billion) of new money into Britain’s economy.

As a result of such measures Western economies emerged tentatively from recession, allaying fears that the world would enter a Depression-style slump. But worries were soon aired about the sustainability of large budget deficits: America’s hit more than $1.4 trillion. The IMF, European Central Bank and others urged countries to take steps to unwind their stimulus schemes.

With stockmarkets up, and after passing government “stress tests” to see how they would cope in future downturns, many banks, including Bank of America, Citigroup and Wells Fargo, began to repay the bail-out money they had received at the height of the crisis. Many financed this by offering shares through big capital-raising plans.

‘Tis the season to be jolly

Bank bosses were roasted by politicians for continuing to pay out large bonuses. The revelation that bonuses were given to executives at American International Group, a troubled insurer that obtained a $170 billion bail-out, sparked outrage. Britain’s chancellor imposed a supertax on bankers’ bonuses in Britain.

Bernie Madoff received a 150-year jail sentence for defrauding clients of $65 billion in his Ponzi scheme. Sir Allen Stanford, a Texan billionaire and cricket promoter, was arrested for allegedly defrauding investors out of $8 billion through his bank in Antigua.

An Air France jet en route from Rio de Janeiro to Paris crashed into the mid-Atlantic in June killing 228 people, the worst plane crash in a decade.

The Iranian presidential election brought about the Islamic Republic’s worst crisis since the 1979 revolution. Polls had suggested that Mir Hosein Mousavi, a reform-minded candidate, might defeat Mahmoud Ahmadinejad. The scale of Mr Ahmadinejad’s victory caused millions to take to the streets to protest against what they said was a rigged election. Hundreds were arrested in Tehran and elsewhere. Dissidents were sentenced in a series of televised trials.

After a quarter of a century of conflict, Sri Lanka’s civil war came to an end when the army overwhelmed the last remnants of the rebel Tamil Tigers. Thousands were killed in the final days of fighting and up to 300,000 were displaced.

Australia suffered its worst-ever outbreak of wildfires in February, in which more than 170 people died across Victoria.

Deck the halls

Revelations about the expenses charged by British members of Parliament crushed many reputations. The juicier claims included those for duck islands, manure, moat-cleaning and adult films.

General Motors went bust with debts of $172 billion, America’s biggest-ever industrial failure. The American government took a majority stake in the carmaker as it emerged from bankruptcy protection. GM and its rivals benefited from “cashforclunkers” subsidies schemes, which encouraged consumers to trade in their old bangers for more fuel-efficient models.

Chrysler also went bankrupt and was eventually rescued by Fiat. Other companies of note that went to the wall included Nortel Networks, a telecoms-equipment maker, Reader’s Digest, Six Flags, an amusement-park operator, Trump Entertainment, a casino-owner in Atlantic City, the publisher of the Chicago Sun-Times, and Waterford Wedgwood, a maker of crystal and china.

A power-sharing government in Zimbabwe saw Robert Mugabe retain the presidency and Morgan Tsvangirai, the opposition leader, become prime minister. A month after being sworn in Mr Tsvangirai was injured in a car crash in which his wife died.

After Hamas stepped up its rocket attacks at the end of 2008, Israel began a major offensive in the Gaza Strip, launching air strikes and a ground invasion. Hundreds of Palestinian civilians were killed and thousands injured before Israel pulled out in mid-January. Following an investigation, the UN’s Goldstone report, published in September, accused both Israeli forces and Hamas of committing war crimes, but reserved its harshest criticism for Israel, which rejected the document as grossly biased.

Binyamin Netanyahu became prime minister of Israel—for the second time—at the head of a coalition government following an election. Diplomacy over prisoner exchanges and settlement freezes continued at a glacial pace, frustrating many, though in June Mr Netanyahu for the first time publicly accepted the idea of Palestinian statehood.

Venezuela’s Hugo Chávez won a referendum that abolished term limits for the presidency. Mr Chávez continued to harass the opposition and threatened military action against Colombia, after its government updated an agreement which allows American troops to use its bases to fight drug-traffickers.

The H1N1 influenza virus, or swine flu, spread from Mexico prompting the World Health Organisation to declare a global pandemic. Countries advised their citizens to restrict travel and avoid public places. At least 9,500 people worldwide are thought to have died from the disease so far.

Global swarming

Hordes of environmental activists mingled with heads of state at the Copenhagen conference on climate change, at which governments tried to thrash out agreements to reduce emissions.

In other elections, Angela Merkel was returned to power in Germany at the head of a new centre-right coalition, the Congress party increased its majority in India, Jacob Zuma was chosen as South Africa’s new president and Susilo Bambang Yudhoyono was re-elected president in Indonesia. Japan’s election was won by the Democratic Party of Japan, ending almost half a century of uninterrupted rule by the Liberal Democratic Party.

Greenland celebrated home rule from Denmark by distributing two tonnes of rare whale meat.

Georgia’s entry  was banned from the Eurovision song contest. Its ditty, “We Don’t Wanna Put In”, was deemed to be a swipe at Vladimir Putin, Russia’s prime minister, whose “negative move” was allegedly “killin’ the groove”.

Courtesy: The Economist

India’s 7.9% economic growth in the third quarter of 2009 vividly illustrates a dramatic transformation in the country’s image, from a land of elephants and snake charmers to that of an IT powerhouse and an emerging economic giant. While both sets of perceptions are valid, they hide far more than they reveal. Indeed, when it comes to the Indian economy, what most people believe to be true contains more fiction than fact. We highlight below five common myths about India and discuss why the reality on the ground is quite different.

Myth No.1: The information technology sector has been the primary driver of India’s economic growth.

India is indeed a global powerhouse in information technology and IT-enabled services. Yet the IT sector is little more than a tiny, though highly visible, niche in the Indian economy. The total revenue of this sector added up to $72 billion in 2008. Translated into value-added terms, the IT sector contributed only about 4% to India’s gross domestic product last year. Its contribution to employment is even smaller: About 2 million people are directly employed, and an additional 8 million jobs are created indirectly. Those are tiny numbers in a country with a labor pool of 700 million people.

The fact that India’s IT sector is just a niche is actually a blessing rather than a curse. Notwithstanding IT’s annual growth rates of 25% or more, the bulk of the recent growth in India’s economy has come from manufacturing and other services. Only the manufacturing sector has the scale to create jobs for hundreds of millions of people, most with relatively limited education. If India is to realize its potential as an economic superpower, it will have to keep following China’s path by becoming one of the world’s factories. The IT sector gives India a good brand image, but most Indian jobs will have to come from manufacturing.

Myth No.2: India is decades behind China.

Most visitors to India and China form their impressions about these countries by comparing such cities as Mumbai, New Delhi, and Bangalore with Shanghai, Beijing, and Guangzhou. The difference between the two countries’ urban centers is truly stark. China’s top cities now look more modern and sleeker than New York or London. By contrast, India’s premier cities are still vivid examples of the third world. Yet most people overlook the fact that, even though China is clearly ahead of India, the former looks stronger than it is while the latter is stronger than it looks.

In 2008, China’s GDP was just a bit more than three times that of India. If India’s GDP grows at 8% to 9% a year over the next decade—a reasonable prediction based on analyses by Goldman Sachs (GS), the U.S. National Intelligence Council, and other analysts—India’s GDP in 2020 will be almost the same as China’s in 2008. Of course, China would have powered ahead by then, but the fact remains that India’s economy is about 12 to 14 years, not decades, behind China’s. This is exactly the difference from 1978, when Deng Xiaoping launched China’s reforms, to 1991, when India jumped onto a similar train.

Myth No.3: India’s democratic politics will prevent a rapid build-up of the country’s infrastructure.

Given its fiercely democratic political system, any Indian government will find it impossible to relocate quickly a few million people from a city’s center to make way for gleaming office towers and elevated expressways. Note, however, that infrastructure consists of more than beautiful roads and buildings. It also includes ports, airports, power generation and transmission systems, telecommunications, airlines, and railways.

The only aspect of infrastructure that India’s democratic politics hinders in a major way is the beautification of cities. The number of people who need to be relocated to build interstate highways, intrastate expressways, and most other infrastructure components is minimal and thus largely unconstrained by democratic politics.

From 1995 to 2007, China spent about 8.5% of GDP on infrastructure. During this period, India spent only about 4.2%. Today, though, the situation is radically different. India is currently spending about 8% of GDP on infrastructure and has plans to increase the figure to about 9%.

Ugly and crowded cities, while an eyesore, are unlikely to derail the ongoing manufacturing revolution, which needs interstate highways and intrastate expressways far more than easy-to-navigate city centers. In short, given its political system, India is more likely to become a manufacturing power long before its cities begin to look modern.

Myth No.4: Uncontrolled population growth is a major burden for India.

China’s one-child policy has clearly achieved a major reduction in birth rates and population growth. In contrast, when one thinks of India, the enduring picture is one of cities overflowing with poor and teeming masses. Hence the question on many people’s minds: How can India sustain uncontrolled population growth?

Notwithstanding the utter inability of India’s democratic political system to impose any type of birth control policy, it is critical to remember that, as people become richer and better educated, they choose to have fewer children. Fertility rates (i.e., average births per woman) in India are declining rapidly—from 4.65 in 1980 to 3.25 in 2000, to 2.68 in 2007. A similar steep decline has occurred in the population growth rate—from 2.15% a year during the 1980s to 1.5% a year from 2000 to 2005 and 1.35% a year since then. If current trends continue, as is almost certain, fertility rates in India should drop to about 2.0 within the next 10 years, and the population’s annual growth rate should fall to about 0.6% a year, similar to China’s today.

In short, population growth in India is a self-correcting problem that is getting addressed on its own at a rapid rate. In any case, in a democratic country such as India, it is far easier and wiser for the government to focus on how to make the economy grow at, say, a 9% rather than an 8% rate. Over 10 years, that can be as effective a mechanism for population control as any other.

Myth No.5: India’s education system is world class.

In launching the “Race to the Top” fund for educational reform in the U.S., President Barack Obama encouraged schools to develop internationally competitive standards so that American students can take on “folks in Beijing and Bangalore.” President Obama is right on the money in noting that, in today’s era, labor markets are global and that kids in Los Angeles are competing against not just their peers in Chicago but also those in Beijing and Bangalore. It would, however, be incorrect to conclude that India’s education system is anywhere close to world class.

India is not just a large country but also one of the world’s most diverse, with extremely high levels of income and educational disparities. The elite engineering and business schools (the Indian Institutes of Technology and the Indian Institutes of Management) are tougher to get into than Harvard or MIT and have produced a disproportionately large number of CEOs and senior executives for some of the world’s biggest corporations.

Yet one cannot overlook the fact that adult literacy in India runs at only about 61%, far below the 91% figure for China, the 90% figure for Indonesia, and the 89% figure for Brazil. During the past five decades, China has placed far greater emphasis on primary and secondary education. In contrast, India has placed far greater emphasis on tertiary education. The manufacturing revolution, which is now in full swing and must continue, will need high school graduates and vocationally trained people far more than highly trained engineers and scientists. As in the U.S., transformation of the educational system and rapid upgrading of the infrastructure will be two of the most desperate needs for India’s economy over the coming decade.

Courtesy: Businessweek

India’s $1.2 trillion economy may be among the world’s first to come roaring out of the global recession, as government data showed it grew by 7.9% in the quarter ended on Sept. 30, the largest growth since the Indian government started releasing the figures in 1996. Industry grew 9.2%, compared with 5.1% in the year-earlier quarter. “These recent figures may well signal that the worst effects of the global financial crisis have passed for the economy,” says Anuj Chande, head of the South Asia Group at Grant Thornton, which advises companies doing business in Asia.

The numbers, released on Nov. 30, have economists considering raising their estimates for full-year gross domestic product growth in India; the average estimate is currently about 6.5%. The government, meanwhile, has said it expects the Indian economy to grow by 7% to 8% by the end of the fiscal year in March 2010, and hit 9% the year after. “Our own 6.2% number for the current fiscal year is certainly looking on the low side,” says Robert Prior-Wandesforde, Singapore-based Asia economist for HSBC (HBC).

It’s an interesting turnaround by the Indian economy, which spent the period from October 2008 to March 2009 on government-sponsored life support—some $80 billion in tax cuts and other benefits in the form of a stimulus. Without the stimulus, growth in those two quarters would have been less than 1%; the stimulus pushed it to 5.8%.

Broad-Based Growth

Since then the Indian stock exchange has more than found its footing—it is up 72% for the year—and Indian companies have taken advantage of the rising market to mop up billions of dollars in share sales, using that money to pay down debt, prop up production, and even consider overseas acquisitions, including a $12 billion bid by Reliance Industries, India’s largest private company, for LyondellBasell, a Dutch chemicals manufacturer. “As upside surprises go, this was a big one,”says Prior-Wandesforde. “This was an extraordinary result.”

More reassuringly, growth was driven by a wide spectrum of increased economic activity. Trade, hotels, transport, and communication, which make up one-third of the economy, grew by 7.7%. Private consumption grew 5.6%, vs. 1.6% a year earlier, signaling that the famously parsimonious Indian consumer feels more comfortable about his job and is spending more freely. “The broad-based nature of the third quarter’s domestically driven improvement is encouraging,” says Nikhilesh Bhattacharya, a Sydney-based economist with Moody’s Economy.com (MCO). “India may experience a quicker return toward its trend growth rate of around 9% than had earlier been anticipated.”

In India, where GDP growth figures are closely watched as part of a race with neighboring China, TV news reports took on a celebratory tone. The stock market, widely expected to plunge because of the news from Dubai on Friday, added 1.71% to the benchmark 30-stock Sensex.

Signs of Weakness

As always, though, there are some signs of weakness. It isn’t clear how much of the quarter’s growth can be attributed to the stimulus package, which continues unabated. One indicator is that the “community, personal, and social services” sector grew by 12.7%, compared with 6.8% the year before. Both Indian Prime Minister Manmohan Singh and Commerce Minister Anand Sharma have said the stimulus will continue well into next year.

Dubai remains a source of concern, albeit small. The 4.5 million Indians living in the Gulf region sent nearly $30 billion back to their relatives in India—that number could drop significantly if many of them lose their jobs. That’s a likely scenario; most of them work in construction projects. Indian exports to the United Arab Emirates could be affected, too—with $17.5 billion of merchandise exports in 2008-09, it is India’s second-biggest trade destination after the U.S. Luckily, though, of those exports, much is food, which is unlikely to slow. “Overall, there is likely to be some direct impact of the Dubai debacle on remittances into India, as well as on exports, but in our judgment a fairly small one,” says Prior-Wandesforde.

Courtesy: Businessweek