The lost horizon of the emperors -- Vaidyanathan

jun 21st, 2009

 

the good professor pulls no punches! not even 'damning with faint praise'! he tells it like it is. take that, yanks!

 

although i would have used (as i have in the past) angus maddison's statistic for 1750, when india accounted for 25% of world GDP, and china for 33%.

---------- Forwarded message ----------
From: Vaidyanathan R

Dealing with declining Empires

 

____________________________________________________________________________

R.VAIDYANATHAN                                                         

PROFESSOR OF FINANCE                                             

INDIAN INSTITUTE OF MANAGEMENT                   

BANNERGHATTA ROAD

BANGALORE

INDIA_560076 

The lost horizon of the emperors 

By R Vaidyanathan 
21 Jun 2009 11:27:00 PM IST

AT every seminar on financial matters these days, there's one question that lingers — even during the coffee breaks: will the economy recover, and when? And, it isn't about the Indian economy but that of the US. I reiterate it will take at least 40 quarters — that's a decade — for America to recover. I tell this, and am shunned — like a swine flu patient.
I still maintain the US is going the banana republic way what with a national debt of more than $10 trillion, which is more than 80 per cent of its national income. Not only that the budget deficit is skyrocketing; it's expected to reach more than 10 per cent soon. Last year, the US financial regulatory agencies came up with plans of financial support worth $6.8 trillion — comprising temporary loans and liability and asset guarantees. And by the third end of the first quarter of 2009, the financial support programmes reached $13.9 trillion.
The federal deficit as percentage of GDP is now expected to reach more than 10 per cent. There will be furious printing of more treasury bills and notes. The expected inflation is going to rip apart the society and the largest selling item in the last quarter was handguns and rifles. Already intriguing reports have come about attempt to smuggle more than $134 billion in treasury bonds by two Japanese citizens through the Italian border into Switzerland. It could be a ploy by CIA or really a daredevil act by some foreign government to destabilise the global financial system. I am waiting for the creditrating agencies like S&P to downgrade the US economy like other developing countries and prove their independence from the sole superpower. High hopes. Angus Maddison in his pioneering work for OECD on the global GDP share for the last 2,000 years has brought out an interesting fact pertaining to India and China. As early as the 1820s, China (33%) along with India (16%) and other Asian countries had a share of more than 55 per cent in the global GDP. By the late 20th century, it has declined to 29 per cent. The China percentage slid to 12, India's to 5.
In the next 20 years, India should plan to have a share of at least 30 per cent of the global GDP. These imply that India should be racing ahead. If India grows at 8 to 9 per cent in the coming decade, then it can become the world's third or fourth superpower.
But it also implies that, parallely, the West should decline in terms of their importance in the share of global GDP and world affairs.
Since the total is 100 per cent, any increased share for India and China would automatically reduce that of the other two.
Unlike the Great Depression of the 1920s, the current crisis for the West is not just an economic crisis. It has a dimension of demography and conflict (ongoing war with radical Islam) to it. Demographic, because Europe is slowly fading away from the global map. It used to have more than 20 per cent of the global population during the First World War, and now has less than 11 per cent. What's more, it's expected to shrink to three per cent in as many decades.
The reproductive rate in many European countries is less than 1.5, whereas the stable one is 2.1. In the case of US, the crisis is more severe due to its declining savings rate and a long-term tendency to nationalise families and privatise government.
Social security and Medicare system in US is classic case of nationalising families.
Such a declining Empire is dangerous to deal with. To start with, it does not want to accept the fact that it is a declining Empire.
Plus, it wants to retain its sole power status when it realises that its writ does not any more hold good. It tries to bully India.
Whenever a US official visits India, the beards in J&K become more active. Remember Robin Raphael of the nineties vintage who propped up the Hurriyat Conference? India recalls with anger the role Robin Raphael played during the Presidency of Bill Clinton in encouraging the formation of Hurriyat Conference, the umbrella organisation of moderate terrorists and terrorised moderates. Her only name to fame was she studied together with Clinton. When Hillary comes to India, the level of violence in J&K will increase. I wish someone in foreign office in India plots the correlation between visits of US officials and mob frenzy in the downtown Srinagar.
The declining empire realises that its elbowroom is becoming lesser and lesser with the Pakistan army that owns and controls a country. Islamabad always has a peculiar way of coming to discussion on any issue.
They keep a gun on their own head and argue with others. That is, they always threaten others with catastrophe if money is not given to them. This is the most sophisticated begging anywhere you can see in international relations. Bribing them won't stop the plotters against the "US Satan".
The next thing the declining empire does is to cringe and appease. The speech by Obama in Cairo is of that variety. He ascribed every human scientific endeavor to Islamic civilisation. Forget the Hindus who invented zero, forget Ptolemy and forget Copernicus. Just rewrite history. The third thing a declining power does is to pressure others to sacrifice on its behalf to buy peace with bullies. It cannot deal with radical Islam and if the ISI (that is what is critical — not the ten per cent Zardari) needs to be appeased with a piece of J&K, then the US will try to arm-twist India.
Herein comes our ability to understand declining powers.
We must internalise that US is a declining power and our bureaucrats must chant it hundred eight times on a daily basis. We should also remember that USA is very uncomfortable in dealing with democracies.
It's natural ally is always a dictatorship since they can be "use and throw" friendships.
Dealing with democracies is messy since they talk about a domestic constituency and behave similar to USA. A mirror image of itself is unacceptable to "sole super power". As India continues to grow at more than 8 per cent — and simply due to the power of compounding emerges as a major power — the desperation of the declining power will be more since our terrorist neighbour who has a the largest begging bowl and highest per-capita AK-47s will blackmail the declining power to appease him to keep peace.
What is in Indian interest is the continuation of civil war in Pakistan for, say, another ten to twenty years — ambient conflict — sort of auto-cannibalism which will be a dynamic disequilibria — situation.
Other option is to have at least three or so states created out of that entity. The concept of stable Pakistan is passé and a mirage and that should be unequivocally communicated to the declining empire.
Remember the last century. The declining British Empire — now it is the sick child of Europe but still with a grand illusion of influencing Indian sub-continent — created havoc by partitioning the land. The current declining empire may be tempted to do something rash to protect itself. And therein lays the challenge for our political leadership and mandarins. Dealing with a declining empire is more difficult than dealing with a stable empire.

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