Daily Archives: February 9, 2012

Growing up in India in the 1960s, I knew that America gave us wheat, and Britain gave us literature. One of my most vivid childhood memories is of watching Geoffrey Kendall’s Shakespearana troupe performing in my home town of Dehradun. Visiting my uncle in New Delhi, I saw a stack of elegant hardcovers on a table in his study, borrowed from the library of the British Council. Later, as a student at Delhi University, my own education in literature and history was largely shaped by the books from the same library. My uncle read V.S. Pritchett and A.J.P. Taylor. I preferred Anthony Powell and E.P. Thompson.

Those memories came back when, now temporarily living in London, I read the commentary in the British press about whether the UK should stop giving aid to India. Over the years, while the British Council libraries were allowed to run to seed, the Department for International Development supported rural health and education schemes. Several years ago, when Indian billionaires started buying British companies, calls were first heard for the dismantling of Dfid’s operations in India. Earlier this month when, despite continued aid activity, the Indian government said it might buy French warplanes rather than British ones, these calls were renewed.

The first contention, that its provision entails an exchange of favours, is incorrect: sovereign nations cannot easily be bribed into professions of loyalty to richer or more powerful countries. Lyndon Johnson expected that food aid would stop the Indians complaining about the carpet bombing of North Vietnam – it did not. The Bush administration poured money into Pakistan hoping it would co-operate fully in the war against al-Qaeda – the Pakistanis went along when it suited their interests, but acted otherwise when it did not. Barack Obama now thinks that threats to cut off aid will compel the new Egyptian regime to follow America’s policy on Israel – he, too, is likely to be disappointed.

The other argument is that India is now a rich country, and the Indians ungrateful (the foreign minister’s remark that British aid was “peanuts” provoked much outrage). This too is not entirely accurate. While the Indian economy grows at between 7 and 9 per cent per year, and there is a rising number of billionaires, several hundred million Indians are still desperately poor. And inequalities are growing.

Yet the primary responsibility for providing the poor with a social safety net and equality of opportunity must lie with the Indian state. It should improve its schools and hospitals, and provide safe housing for the large number of citizens without it. It should better use technology to remove leakages in the provision of targeted subsidies for the poor. And it should certainly be more energetic in taxing the super-rich.

There may still be a place for aid, but not, I believe, from any foreign government. The Indian elite, which likes to spend its spare cash on luxury mansions and private aircraft, must be shamed into doing more for their less advantaged compatriots. The example of the software entrepreneurs of Bangalore, who have generously supported initiatives in education and the environment, must be more widely emulated. Western charities and multilateral organisations must also continue their good work. India is now largely polio-free, thanks to a well-run government programme funded and monitored by the World Health Organisation and the Gates Foundation.

It is true that Britain and India have a somewhat special connection. No other relationship between a former imperial power and a former colony is so suffused with affection and so free of animosity. To maintain this spirit, the British would do well to focus on culture rather than economics or military hardware. Close down Dfid’s operations in India. Do not sulk when Indian entrepreneurs buy your companies or the Indian government buys guns or rockets from elsewhere. But, please, do restore and enhance the collections of the British Council libraries, and do send your best writers and (especially) actors on tours to India.

The writer is Philippe Roman Chair in History and International Affairs at the London School of Economics. His books include ‘Makers of Modern India’

After protracted negotiations, Greece’s prime minister announced on Thursday that agreement had been reached on a new adjustment programme. By all indications, it is a courageous and ambitious one that incorporates further painful austerity measures, substantial official financing and debt relief from private creditors. Yet the process that has led to this point is a worrying one, pointing to an uncomfortably high probability that this latest agreement will meet the same fate as previous ones – unravelling within a few months, and for legitimate reasons.

Greece’s seemingly endless negotiations are a function of two realities that complicate the decision making process and could derail the deal well before any of its durable benefits materialise.

First, it is never easy to reach agreement among parties with different perceptions and no common analysis. This is especially true in Greece where all three parties to the negotiations (the government, official creditors and private creditors) feel they have already been asked to do a lot, without seeing any actual or potential payback to their sacrifices.

Successive Greek governments have been forced into several rounds of austerity measures in the last two years. Yet every meaningful indicator of their country’s economic and financial state has worsened, both on a standalone basis and relative to what was anticipated in the series of adjustment programmes.

Official creditors have poured money into the country. In the process, national politicians have faced considerable domestic opposition, including in Germany. They have also risked the integrity and credibility of the European Central Bank and International Monetary Fund.

This official financing has done little to improve Greece’s long-term prospects and, rather than attracting new private financing, it has enabled some existing private creditors to get out at maturity with no principal losses. Meanwhile, those that still have Greek bonds complain that every time they have agreed to a haircut on their holdings, starting with a 21 per cent cut last October, other parties have moved the goal posts.

The second factor complicating the process is that no party sufficiently “owns” the adjustment programme. This is likely to prove a problem yet again.

The history of debt crises suggests that weak ownership translates into a lack of conviction. As a result, principals – be they government leaders, the ECB and IMF, or those negotiating on behalf of private creditors – find it very difficult to sell the agreement to constituents. No wonder macro agreements have often unravelled when presented to the many groups that must implement them in a sustained fashion.

Weak ownership also undermines the many corrections that are needed over the course of an adjustment programme. Only pure genius or enormous luck could produce a perfectly-designed Greek programme. It is almost inevitable, given the fluidity of the situation in Greece and the global economy, that whatever is agreed will need tweaking in the implementation stage. Without conviction, these mid-course corrections will serve as an opportunity to exit an imperfect agreement rather than to adapt and improve it.

I suspect that all three parties to the negotiations know in their hearts that their latest agreement, as brave as it is, will only last a few months at best. Yet no one wants to be seen as responsible for a change in course at this stage, fearing they could be blamed for a disorderly default in an advanced economy and a potential exit from the eurozone.

While welcoming the latest agreement on Greece, we should recognise that regrettably it stands only a small chance of placing the country on the path to high growth, ample jobs and financial stability. Based on available information, it appears to do too little to promote growth, still leaves the country with an excessive medium-term debt burden, and is unlikely to attract the new external inflows needed to fund new investments in productive and employment-creating sectors.

What Greece needs is a fundamental economic, financial and institutional reset.

Such resets are not easy, and they are neither immediate nor without considerable risk. But until they happen, repeated rounds of protracted negotiations are the rule rather than the exception – as are derailed agreements, finger pointing and disruptive blame games.

The writer is the chief executive and co-chief investment officer of Pimco. A longer version of this article is on the Opinion page

Roger Altman, former US deputy Treasury secretary, tells to John McDermott, FT’s executive comment editor, that America has more economic potential than any other country but it’s too soon to tell if the strong growth rate can be maintained.

Amid all the chest thumping and finger pointing about the failures of capitalism, let’s not forget the responsibility of governments across the globe. They relaxed regulatory requirements, turned blind eyes to dangerous – and in some cases, illegal – activities and indulged in their own excesses.

Capitalism is like an energetic small child who needs rules, boundaries and discipline. If a toddler accidentally sets his home on fire, it’s the parents who bear the blame. “Capitalism in crisis” could easily be subtitled “government in crisis”.

I’m not trying to excuse capitalism or its principal actors from a generous portion of the blame for the all too vivid pain of the past four years. Serious alterations are needed, only some of which have been put in place.

But government has also seriously let us down. The current mess in the eurozone is hardly the fault of capitalism or the financial system. Public officials who created the euro went ahead with the hare-brained scheme of their own accord. Indeed, many financiers (myself included) proclaimed loudly that the euro was ill-designed and likely to run aground.

Then, while the peripheral countries such as Greece were gorging themselves on cheap money, even the Germans turned a blind eye. It was no secret that Greece’s debt was exploding as it doubled government wages, expanded public job rolls by tens of thousands and even spent $14bn on the 2004 Olympics, more than twice what was budgeted.

Imprudent public finances were not limited to Greece. Countries throughout Europe burst through central government budget ceilings. Many were recently repaid with ratings downgrades.

Yes, a measure of increased public spending was needed to combat the recession that accompanied the financial meltdown. But in the case of the US, because of poor tax and spending policies in the seven preceding years, the nation went into firefighting mode with its tanks partly depleted, having squandered a fiscal surplus.

Or take the dramatic rise of global income inequality over several decades. That wasn’t a secret either, and yet, the US chose policy measures that exacerbated the problem rather than diminishing it. Tax cuts in 2001 and 2003 famously led to Warren Buffett’s secretary paying a higher tax rate than he did. In 1993, the 400 wealthiest Americans paid 29.4 per cent in tax; in 2008, it was 18.1 per cent.

By now, the failure of regulators to contain dangerous forces should be well accepted. In the US, deregulation gave rise to a series of problems, ranging from radioactive levels of leverage at securities firm to imprudent lending to homeowners.

For years, America has had consumer protections around everything from the safety of children’s sleepwear to interest rates on credit card borrowings. Yet, virtually no such help was provided to homebuyers as ever more tempting but ill-advised loans were dangled in front of them.

Nor were most overseers any better than their corporate counterparts at identifying the coming tsunami. In February 2006, Ben Bernanke, who has generally been an outstanding chairman of the Federal Reserve, said that “house prices will probably continue to rise”. Just five months later, they began their precipitous decline.

Undoubtedly the benefits of capitalism vastly outweigh its deficiencies. For all the recent devastation, no other economic arrangement could possibly have lifted the standard of living of so many so substantially in the postwar period.

More importantly, the global citizenry appear to agree. While past periods of extreme economic dislocation have often yielded demands for radical change, both Greece and Italy have installed technocratic prime ministers who are focused on correcting the past failures of government rather than imprisoning bankers.

So we must press on with fixing capitalism. My vote is that we devote equal attention to the public sector apparatus as to the evilness of business. Most urgently, an increasingly integrated global economy needs to be paired with global governmental structures. For example, while the various Basel accords have brought a measure of uniformity to bank reserve requirements, in other key areas, nations continue to go their own ways. The US has chosen to limit banks’ ability to engage in proprietary trading (the Volcker rule), the UK is separating deposit taking from trading altogether and some other countries have left their systems unchanged.

The rise of multinational corporations and lack of a global taxation regime has given rise to a race to the bottom in corporate tax rates, another contribution to growing income inequality. In the US, corporate taxes have dropped from 5 per cent of gross domestic product in the 1950s to 1.3 per cent last year.

According to a recent Edelman poll, substantial pluralities of citizens around the world believe business is not sufficiently regulated. If capitalists wish to avoid more regulation, they must get behind better governmental oversight.

The writer is former head of the US government taskforce that oversaw the federal bailout of Chrysler and General Motors.

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