Global Economics and Management

India's Complex Foreign Policy

India has a very complex foreign policy, with shifting allegiances and alliances. This is largely a product of India's post-independence history. India was an early member of the group of non-aligned countries, with its first Prime Minister, Jawaharlal Nehru, being one of the founders of that movement. Yet in spite of this neutrality in the Cold War, it was generally acknowledged that India was more closely aligned with the Soviet Union than with the US. Its development model, while not as stringent as Soviet-style centralized planning, nonetheless relied on 5-year plans and a heavy handed government - at least until the reforms of the early 1990s. Strategically, India was aligned with the USSR, while Pakistan (India's main regional antagonist) was aligned with the US. India's other main regional antagonist, China, also had a complex and multifaceted relationship with both the USA and the USSR. These Cold War-era relationships still have a legacy today, despite a sustained rapprochement between India and the US since the end of the Clinton Administration and the Bush Administration's efforts to normalize India's status as a nuclear power. 

The closer links between the US and India make up one of the most consequential changes in the strategic landscape in recent years. India, of course, is also a member of the recently formed Quad. Correspondingly, the relationship between the US and Pakistan has steadily deteriorated. The decoupling between the US and China also raised the potential gains from closer links between India and the US. Despite these fundamental forces, India remains very attached to its independence - and thanks to its vast size and dynamic economic  growth, it increasingly has the means to maintain this independence. India's ambiguous stance regarding the Russia-Ukraine conflict is a testament to this state of affairs. A recent article by Sadanand Dhume, in the WSJ, while centered on Pakistan, is a great opportunity to unpack the complexities of India's foreign policy.

If you want to know more about the recent (and not-so-recent) history of India's foreign policy, you can do no better than to consult the Council on Foreign Relations' India repository.

On India's Stock Market Performance

Recently on this blog I touted India's comparatively strong stock market performance over the last year. It turns out that this is a more long-run phenomenon. Via Marginal Revolution, here is a telling graph:

The full source is here, with bonus (if somewhat speculative) explanations as to why. This is definitely something to investigate more. 

On the FTX Debacle

I interrupt our regular programming on India for a rant on the FTX debacle. I must say this particular collapse has me pretty riled up. We've only begun to learn the extent of SBF's mendacity, but compared to a "normal" corporate collapse, this strikes me as having some specificities worth noting:

1) It occurs in a space (cryptocurrencies) where many reasonable people have said for a long time that a collapse was likely. That's because cryptocurrencies are backed by nothing more than the trust that players place in cryptocurrencies. The value of various crypto coins depends entirely on artificial (and in many cases grossly environmentally damaging) methods to create scarcity on the supply side - while demand side is much more subjective, fleeting and volatile than for any other type of money. I have expressed my strong skepticism of cryptocurrencies many times in the past. I did so as early as 2017, when Bitcoin prices were reaching records and my MBA students were laughing at me for my skepticism. You can see some of my past posts on this subject here, here, and here. This was a fragile sector prone to prices divorced from any fundamentals, since they are entirely lacking in fundamentals (see above). It was only a matter of time until the whole edifice was going to come crumbing down. I think we are only at the beginning of this collapse. I still think there will be a space for blockchain-based methods of payment in the future, but they may be government issued and controlled, or at the very least heavily regulated. To call the cryptocurrency world a house of cards is an insult to houses of cards.

2) Sam Bankman-Fried was a particularly mediocre standard bearer for this flawed model:

• Here's Elon Musk on SBF. I can't quote it here because of my ban on the use of profanity on this blog, but Elon has fewer compunctions.
• Here's FTX's new CEO John J. Ray (who previously handled Enron's bankruptcy) on the state of FTX/Alameda finances. Money quote: "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.(...) From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.” You can read the whole filing here.
• Here's SBF trying to explain what happened to a journalist from Vox. What is striking in this exchange is the utter mediocrity of this individual's discourse. I know that things seem distorted in this age of social media and low attention spans, but there is no indication in any of the exchanges that SBF displays any ability to write in full sentences, to come across as having any deep culture or knowledge, or any command of the state of the world. It's a disjoined, incoherent, surrealist series of meaningless affirmations. There is no sophistication in his understanding of the role of regulation, of the proper role of finance, or even of the nature of his own sector. It's just worthless drivel.
• Oh and one more thing - it is not "cool" to show up on stage with Bill Clinton and Tony Blair wearing shorts and a t-shirt. It's disrespectful. To think that this person could have been revered as a visionary is a sad commentary on what passes as a visionary nowadays.

3) The list of foolish dupes who were foolishly duped by SBF and FTX is astounding. They all deserve the egg they now have on their faces. I'll add to this list as more are revealed, but let me start with Larry David, Tom Brady, Steph Curry, Bill Clinton, Orlando Bloom, Katy Perry, Gisele Bündchen, Naomi Osaka, etc. At least some of them may face legal liability for publicly supporting a fraudulent business. Here's a list of financial backers of FTX who deserve to lose every penny they invested. A piece of advice if one of you ever makes a pitch in front of Sequoia Capital: it may help your chances if you play League of Legends while on the call. Unbelievable! Here's someone who was not fooled - smart guy! Elizabeth Holmes too fooled some pretty famous people, but at least she was pretending to offer a useful product.

My urge to rant now being satiated, I will stop!

UPDATE: Niall Ferguson, over at Bloomberg, opines along very much the same lines. However I largely disagree with him when he writes: "Yet I am still not convinced that the experiment with blockchain-based finance will end up being a total failure (...) the bursting of the Mississippi and South Sea Bubbles did not mark the end of equity financing and stock trading, any more than the many financial panics of the 19th century marked the end of joint-stock banking." The difference between equity financing / stock trading and cryptocurrencies is that the former are backed by actual cash flows whereas the latter are backed by thin air.

UPDATE 2: Evidence of wrongdoing continues to emerge. I guess it represents a form of altruism, but I doubt it is of the effective kind. Interestingly, Joseph Bankman's Stanford bio states: "He has gained wide attention for his work on how government might control the use of tax shelters". Ironic! And the mother, Barbara Fried, "has written extensively on questions of distributive justice". You don't say!

UPDATE 3: Senator Warren just called for stringent regulation of crypto. I agree with the general sentiments she expresses. In the case of crypto, though, market forces may be sufficient to bring down the industry. In case they do not, then, yes, firms in the industry should be regulated like any other financial firm. The Feds should also have to review and approve the issuance of any crypto token with a nexus in the United States - they are securities.

UPDATE 4: over at Bloomberg, Merryn Somerset Webb authors what I believe to be one of the best recent articles on crypto and the FTX debate that I have read. She gets the economics exactly right.

De-Globalization

Today in class we will discuss in a comparative perspective the integration of India and China into the world economy over the last few decades. Just in time for our discussion, the WSJ published a great article / infographic on de-globalization around the world. It is worth pondering every graph displayed there, as we will do in class.

Recent News on India

1) New Delhi air pollution levels are off the scale. This is the chief reason the Global immersion course to India no longer goes to New Delhi. Relatedly, providing evidence on air quality is one of the most effective policies to curb air pollutants. A recent paper in PNAS uses US Embassy air quality monitor data to show this empirically.

2) ... meanwhile, in the realm of climate change, India calls for more cuts by others. India is both one of the world's largest emitters of greenhouse gases and also one of the principal cost-bearers of climate change.

3) Non-Hindu Language films are successful. The South China Morning News has the details, with an interesting discussion of political debates over languages in India.

Persons of Indian Descent in High Places

The Indian press often remarks that many persons of Indian descent occupy the highest echelons of power in multinational corporations and in politics around the world. Nowhere is this more salient than in the US, where numerous CEOs of major corporations are of Indian origin. See for instance this list, from the Business Standard (an Indian financial news outlet). There are also many politicians of Indian descent on both sides of the aisle - like Vice President Kamala Harris, former South Carolina governor Nikki Haley, Democratic party rising star Rep. Ro Khanna, former Louisiana governor Bobby Jindal, and Rep. Pramila Jayakar, among many others. 

Of course, the most recent example of the ascent of a person of Indian descent to a position of high authority is the nomination of Rishi Sunak as Prime Minister of the United Kingdom. It will interest you to know that Prime Minister Sunak was a former student of mine. He was enrolled in my core MBA class "P230: Business and Its Environment" at the Stanford GSB in the Spring of 2005. His wife Akshata Murthy was also my student, albeit in a different section.

Since I keep detailed records, I actually know what grade they obtained in my class. Unfortunately, FERPA precludes me from revealing these grades. Let me just say that in general, grades in business school and success later in life correlate only imperfectly. I'd like to think, however, that taking my class had a strong causal effect on Rishi Sunak's rise! The class covered business-politics linkages, regulation, lobbying, political decision-making, interest group analysis, etc. - mostly in a US context. That class provided some inspiration for the development of my current Anderson elective "Global Trends", although the latter has a much more global perspective than P230 did.

At any rate, I hope that the readers of this blog too, one day, will rise to such heights, and make me proud!

India News

1) During our first class, I showed a graph of the current composition of India's lower house of Parliament, the Lok Sabha. This showed that the Indian National Congress, the party that was created in 1885 to fight for independence from Britain and had dominated Indian politics since 1947, was down to about 10% of the seats (adding to Congress MPs those of its coalition partners in the UPA, this branch of India's opposition - the one with the best claim at being an alternative to Prime Minister Modi's BJP - only controls about 20% of the seats). The Congress Party just went through a leadership election, and for the first time in 24 years selected a leader who is not a member of the Gandhi family (the descendants of Jawaharlal Nehru, India's first Prime Minister). But the choice fell on an 80-years old party veteran - hardly the kind that will reinvigorate India's opposition. Over at Bloomberg, Mihir Sharma has the details.

2) Over the past 12 months, the Dow Jones index has declined by about 13%, going from 36,600 to 31,100. The Hang Seng (Hong Kong's index) has declined by almost 40%. The SSEC, Shanghai's stock market index, declined almost 16%. In contrast, the BSE Sensex, India's most prominent stock market index, lost only 2.7%. What is going on? I have a rough theory. Stock markets have been doing poorly because major central banks, not least the US Fed and the European Central Banks, have been raising policy rates to fight inflation. Doing so depresses the stock market because it is expected to slow demand, might generate a recession, and represents an increase in the cost of capital (as shown, for instance, by the recent steep rise in mortgage rates). Raising rates (a price change) is achieved on the quantity side by mopping up liquidity - indeed the balance sheet of the Fed has started to shrink as it withdraws liquidity from the banking system. A lot of Western money, previously in search of yield abroad, can now find higher yields at home. So in times of rising rates in the West, investors tend to withdraw money from emerging markets. The dollar tends to appreciate, and emerging market currencies tend to depreciate. We have seen this happen this time around. But India, in relative terms, seems to be spared. Why? Perhaps because the growing decoupling of the West from China means that there is China-India substitution. India looks like a less unattractive market for Western investors and is therefore relatively spared from the generalized withdrawal from emerging market stock markets. There are domestic forces at play also, as this column by Andy Mukherjee illustrates.

3) India has been ambiguous about the Russia-Ukraine conflict. Has this been a good idea? Mihir Sharma opines, with an Indian perspective that is nonetheless skeptical of India's entanglements with Russia.

Some Things Mentioned This Evening

This evening in class I mentioned several of my papers on cultural diversity around the world and on the links between democracy and economic performance:

1). My 2017 paper in the American Economic Review entitled "Culture, Ethnicity, and Diversity". It is a rather dry piece, and the map I was referring to is on page 52 of its Appendix. There, India stands out in terms of diversity of cultural values ("CF") and linguistic diversity ("ELF"), and on how strongly culture and linguistic identity are linked to each other ("Chi-Square"). The paper contains more details.

2). My 2005 paper with Dani Rodrik, also in the American Economic Review. This is a very short, easy-to-read piece. We show that a) democracies do not grow more slowly than autocracies. b) democracies have less volatile growth rates than autocracies. We wrote: "Another noteworthy characteristic of these experiences with democratization is the sharp fall in the standard deviation of growth after democratization: in a typical country in this subsample, the standard deviation of growth falls from 5.29 to 3.37 percentage points"

3). While the effect of democracy on growth is still subject to many debates, what seems more clear cut is that countries with high levels of income and education tend to be democracies: modernity leads to political rights. In a paper written with Fabrice Murtin in the Journal of Economic Growth, I found strong evidence that this was the case when looking at a long panel of countries. I continue to expect that India's democracy will strengthen with development over the long run, even if there are setbacks in the short and medium run. And I expect that China will ultimately feel more and more pressure (from civil society and from abroad) to liberalize politically. Of course, the long run could take a long time to materialize...

4) I also mentioned the Hindi Belt, pointing to the area of high population density in North India. You can learn more about the Hindi Belt here. The area is a bit broader than the dense part I pointed to in class, but I think the term was suitable to capture the area I wanted to highlight.

Some India Links

Ahead of my first class for the Global Immersion to India, on Friday, here are a few notable links on all things India (I will update these during the course of this weeks as more articles come my way).

1) Over at the WSJ comes the fascinating story of three feuding brothers in the restaurant business in Mahabalipuram, Tamil Nadu. This is a place I know well, with wonderful carved Hindu temples, between Chennai and Pondicherry. If you have a chance to visit, you should, though I won't dare recommend a seafood restaurant! This article contains many lessons about India, which we will have an opportunity to learn more about on our trip. The first is that India is unique in the extent to businesses are family-owned. When things go sour, the resulting breakups can be very messy. The second is that these disputes often involve court battles, but since the Indian court system tends to be very slow, solutions are usually not found there. Instead, parties to a dispute advance their interests by pushing the envelope as much as they can "on the battlefield". A modus vivendi always emerges, as it did in this case, but the process can be painful.

2) Over at Bloomberg, Andy Mukherjee reports on India's outsourcing firms. We will have a chance to meet some of them on our trip (in past global immersion courses, we met with Tata Consultancy Services, as well as Infosys). These firms are highly sensitive to the health of the European and US economies - where most of their clients reside. As these economies start to slow in response to the energy crisis (in Europe) and to the Fed's efforts to tame inflation (in the US), Indian outsourcing firms are heavily exposed. There are longer term challenges related to automation and the emergence of new players, which the article also describes. Incidentally, Andy Mukherjee is one of the very best journalists covering the Indian economy (and India in general). His writings at Bloomberg are self-recommending.

3) Here is a past list of my recommended books on India (from 2017). This list is still very much current, but I will add the following more recent publications:

a. Christophe Jaffrelot's excellent book on Modi's India. The content is not uncontroversial, but nonetheless worth pondering carefully.

b. Amartya Sen's memoir of his early years growing up in Bengal, and then moving to Cambridge (UK) for his studies. This is a wonderful book, by India's best ever economist. I was privileged to be able to take two classes with Professor Sen while in graduate school, and cherish the lessons learned and the lasting memories these classes created. 

c. Kshitimohan Sen's book on Hinduism, published in 1961, is still one of the very best books ever written on this great religion. K.M. Sen was Amartya Sen's grandfather (on his mother's side).