Doing Business 2018: Modi celebrates, but what about Georgia?

The much-noted flagship publication of the World Bank Doing Business (DB) was publicly unveiled recently. This became cause for celebration for The Indian Prime Minister Narendra Modi. Why? Well, after languishing for some time, India jumped 30 places to reach a rank of 100 (the lower the rank the better in terms of the ease of doing business). It was given the accolade of the 10 ‘top improvers’ for implementing more than 50 regulatory reforms over the past year which ‘make it easier to do business’ – a distinction that India shares with Brunei Darussalam, Thailand, Malawi, Kosovo, Uzbekistan, Zambia, Nigeria, Djibouti and El Salvador. This is not exactly an inspiring list of countries. Nevertheless, the Indian Prime Minister tweeted that it was a ‘historic jump’. This is quite different from last year when the Indian government was disappointed that the World Bank did not adequately capture the reform measures that were underway. Prime Minister Modi’s ambition is to catapult India to the top 50 nations in the DB ranking scheme.

As is well known, the DB Report 2018 is the 15th in a series of annual reports that seek to measure regulations that enhance ‘business activity and those that constrain it’. The theme of this year’s report is ‘Reforming to create jobs’. Its authors claim that there is a significant association between improvements in DB rankings and growth, employment and poverty reduction. I am not going to quibble over this empirical proposition, but I do worry that the cheerleaders of good news emanating from the DB reports do not read the fine print.

As a thoughtful analyst has pointed out, one should take time to understand what exactly is being measured. He points out that ‘in India’s case, the business environment in only Delhi and Mumbai are used to compile the national ranking’. Furthermore, the emphasis is on tracking business regulations that, while welcome, are often disconnected from the daily experiences of millions of Indians.

The DB report is itself rather frank about the narrow nature of its remit. As it says, ‘the focus is deliberately narrow…’  It concedes, for example, that it does not ‘…address the extent to which inadequate roads, rail, ports, and communications may add to a firm’s costs and undermine competitiveness’.

What struck me about DB Report 2018 is the attention given to tiny Georgia which, far more than India, is a glaring example of what is revealed and what is not. Georgia is the only lower-middle income country to be part of the ‘top 20 group’ which is dominated by OECD economies. Furthermore, ‘among the top 20 economies, Georgia, with a ranking of 9, has implemented the highest number of business reforms since the launch of Doing Business in 2003’.

Does this rare distinction make Georgia the envy of the developing world? Certainly, there has been a commendable reduction in poverty. George is also classified as a ‘high human development’ country by the UNDP (with a rank of 70 out of 188 countries). It is a very attractive tourist destination. Yet, there is a lot that one should be worried about. As the Deputy Managing Director of the IMF pointed out in a recent speech, Georgia faces considerable development challenges. The country’s export base is too narrow; unemployment and underemployment remains at high levels, with a preponderance of those in long-term unemployed; almost half of the country’s labour force is employed in agriculture. If ‘reforming to create jobs’ is what Georgia has been doing since 2003, it still has a long way to go.

Perhaps, the biggest development challenge that Georgia is facing is a rapid shrinking of its population with a concomitant decline in the work-force. The last (2014) census revealed that Georgia’s population was 3.7 million whereas it was 4.3 million in 2002. Such a rapid decline in the size of the population has been driven by a variety of factors, with the most proximate ones being unattractive economic conditions, a declining birth rate and rapid emigration. If current trends persist, Georgia’s population will shrink to a little over 1 million by 2050. Georgia might be a star performer in the DB reports, but it faces a fundamental demographic challenge that it is unable to meet.

Will increasing the tax burden on the rich hurt growth? Unlikely, says the IMF

A standard refrain among those with conservative proclivities is to argue that the rich are ‘wealth and job creators’. Hence, they deserve to be treated generously, including ensuring that they are not taxed at onerous rates. Otherwise, the rich will vote with their feet and relocate to low tax environments. Protect through preferential treatment, seems to be the sentiment, the proverbial goose that lays the golden egg.

Governments across the world have been influenced by such a view. Marginal tax rates on high income groups have fallen substantially across the OECD as has corporate tax rates. During the recent UK elections, the British Labour Party proposed a 50 per cent tax rate on top income earners. Predictably, the Tory government and its enablers protested that the economy would face ruin because of a ‘tax bombshell’.

The view that the rich should be treated with care and generosity, especially through the tax system, in order to nourish their role as wealth and job creators has now been challenged by the IMF- an institution that its critics believe is a bastion of neoliberalism and fiscal conservatism. In a report that has attracted media attention, the IMF’s Fiscal Monitor (October 2017) draws on optimal tax theory to show that progressive income taxes (PIT) have a major role to play in ‘tackling inequality’ without hurting growth. A marginal tax rate on high income groups of 44 per cent would have no impact on growth while furthering the goal of redistribution. The current norm in the OECD is 35 per cent. So, the British Labour Party was not really being outlandish in what it proposed.

Of course, the IMF is a diverse institution that can speak with many voices. At the global level, though not necessarily at the country and operational level, it is making proclamations that appear to be a lot more nuanced than they have been in the past. Indeed, it even engaged in a robust critique of neoliberalism arguing that as an intellectual brand it seems to have been ‘oversold’ in some respects. The IMF’s messages on dealing with inequality through the tax system are also in line with the views of entrepreneurs and academics who seek to dismantle the myth that the rich are really job creators who deserve special dispensation from governments across the world.

Rohingya refugees – a plea to China

Adil Khan,  a Professor at the University of Queensland, and a former senior UN official, who worked in Myanmar for an extended period of time, wrote this open letter to to the President of the People’s Republic of China. Professor Khan offers a powerful indictment of China’s official position on the terrible plight of the Rohingya refugees.

Worth reading….


India’s growth slowdown: Reflections of the Reserve Bank

India’s recent growth slowdown has elicited a lively national discussion – see here, for example. It was reinforced by a scathing op-ed by Yashwant Sinha, BJP member and a former finance minister. Sinha also engaged in a vituperative and personal attack on the current finance minister Arun Jaitley and held him responsible for the ‘current mess’ that the Indian economy presumably is in. He highlighted what he considered to be a disturbing case of self-censorship and an atmosphere of fear and intimidation that silence the voices of critics within the BJP.

Of course, other members of the government rose to the defence of Jaitley and the government at large. Prime Minister Modi himself broke his silence, blaming his critics for spreading despair when it is not justified. Yes, growth has faltered. It has done so quite often in the past, but it will bounce back because the government is determined to ensure that appropriate policies and long-term reforms are in place to sustain India’s growth momentum. The current World Bank president offered solace and support proclaiming that the growth slowdown in India is an ‘aberration’.

Beyond the political noise and rhetoric, and the suitably diplomatic intervention of the World Bank, what is the analytical and evidence-based reflection from the government on India’s current growth and prospects for the future? I reached for the latest Monetary Policy Report (MPR) of the Reserve Bank of India (RBI) to find out both for what it says and does not say.  This is what the MPR offered:

‘…real GDP growth fell below 6 per cent in Q1:2017-18 for the first time in thirteen quarters’. RBI attributed this to a variety of factors. These include: (a) ‘a distinct slowdown in exports’, (b) ‘ loss of momentum in agriculture and (c) a sharp decline in industrial production that hit a ‘20-quarter low’ in Q1:2017-2018’. The MPR highlights a ‘collapse in GFCF (gross fixed capital formation)’, while private consumption expenditure slumped as well. The only glimmer of hope lies in the services sector which has remained resilient so far.

What also stands out in the MPR is the potency of fiscal action. As the report notes, ‘…excluding the support from the robust growth of government final consumption expenditure (GFCE), real GDP growth would have slumped to a mere 4 per cent in Q4:2016-2017 and 4.3 per cent in Q1: 2017-2018’ (italics added). Yet, it is also wary about further fiscal loosening because of concerns that such an act would be inflationary.

Despite compelling evidence that shows that the current growth slowdown in India is broad-based, the Reserve Bank is optimistic and projects a return to growth in excess of 7 per cent in 2018-2019. There is no clearly specified framework or countervailing policy actions that can satisfactorily explain the reversal of the growth slowdown.

The MPR is also notable for what it leaves unsaid. Apart from a reference to the disruptive roll-out of the GST and its adverse impact on growth, the MPR has little to offer on either the short-run or long-run effects of demonetisation that took place last November (other than suggesting that it is a beneficial development). There is little or no analysis on the impact of the growth slowdown on the labour market. Others are more forthcoming. The Centre for Monitoring Indian Economy (CMIE), for example, claims that demonetisation has led to a noticeable decline in India’s already low labour force participation. This, if it persists, does not augur well for future economic prospects.

The MPR reflects a standard feature of policy discourse in India which might be called ‘growth fetishism’. All it seems to care about is rapid growth in a non-inflationary environment. Growing in excess of 7 per cent seems to be the holy grail of the current Indian government and its key stakeholders. Certainly, 7 per cent plus growth, if sustained over time, would be a commendable achievement, but it is not sufficient to ensure that the fruits of such growth will be widely shared.