After the Gold Rush - Nouriel Roubini-----------------------------------------------------------------------------------------------
The run-up in gold prices in recent years – from $800 per ounce in early 2009 to above $1,900 in the fall of 2011 – had all the features of a bubble. And now, like all asset-price surges that are divorced from the fundamentals of supply and demand, the gold bubble is deflating. At the peak, gold bugs – a combination of paranoid investors and others with a fear-based political agenda – were happily predicting gold prices going to $2,000, $3,000, and even to $5,000 in a matter of years. But prices have moved mostly downward since then. In April, gold was selling for close to $1,300 per ounce – and the price is still hovering below $1400, an almost 30% drop from the 2011 high.
There are many reasons why the bubble has burst, and why gold prices are likely to move much lower, toward $1,000 by 2015.
First, gold prices tend to spike when there are serious economic, financial, and geopolitical risks in the global economy. During the global financial crisis, even the safety of bank deposits and government bonds was in doubt for some investors. If you worry about financial Armageddon, it is indeed metaphorically the time to stock your bunker with guns, ammunition, canned food, and gold bars.
But, even in that dire scenario, gold might be a poor investment. Indeed, at the peak of the global financial crisis in 2008 and 2009, gold prices fell sharply a few times. In an extreme credit crunch, leveraged purchases of gold cause forced sales, because any price correction triggers margin calls. As a result, gold can be very volatile – upward and downward – at the peak of a crisis.
Second, gold performs best when there is a risk of high inflation, as its popularity as a store of value increases. But, despite very aggressive monetary policy by many central banks – successive rounds of “quantitative easing” have doubled, or even tripled, the money supply in most advanced economies – global inflation is actually low and falling further.
The reason is simple: while base money is soaring, the velocity of money has collapsed, with banks hoarding the liquidity in the form of excess reserves. Ongoing private and public debt deleveraging has kept global demand growth below that of supply.
Thus, firms have little pricing power, owing to excess capacity, while workers' bargaining power is low, owing to high unemployment. Moreover, trade unions continue to weaken, while globalization has led to cheap production of labor-intensive goods in China and other emerging markets, depressing the wages and job prospects of unskilled workers in advanced economies.
With little wage inflation, high goods inflation is unlikely. If anything, inflation is now falling further globally as commodity prices adjust downward in response to weak global growth. And gold is following the fall in actual and expected inflation.
Third, unlike other assets, gold does not provide any income. Whereas equities have dividends, bonds have coupons, and homes provide rents, gold is solely a play on capital appreciation. Now that the global economy is recovering, other assets – equities or even revived real estate – thus provide higher returns. Indeed, US and global equities have vastly outperformed gold since the sharp rise in gold prices in early 2009.
Fourth, gold prices rose sharply when real (inflation-adjusted) interest rates became increasingly negative after successive rounds of quantitative easing. The time to buy gold is when the real returns on cash and bonds are negative and falling. But the more positive outlook about the US and the global economy implies that over time the Federal Reserve and other central banks will exit from quantitative easing and zero policy rates, which means that real rates will rise, rather than fall.
Fifth, some argued that highly indebted sovereigns would push investors into gold as government bonds became more risky. But the opposite is happening now. Many of these highly indebted governments have large stocks of gold, which they may decide to dump to reduce their debts. Indeed, a report that Cyprus might sell a small fraction – some €400 million ($520 million) – of its gold reserves triggered a 13% fall in gold prices in April. Countries like Italy, which has massive gold reserves (above $130 billion), could be similarly tempted, driving down prices further.
Sixth, some extreme political conservatives, especially in the United States, hyped gold in ways that ended up being counterproductive. For this far-right fringe, gold is the only hedge against the risk posed by the government's conspiracy to expropriate private wealth. These fanatics also believe that a return to the gold standard is inevitable as hyperinflation ensues from central banks' “debasement” of paper money. But, given the absence of any conspiracy, falling inflation, and the inability to use gold as a currency, such arguments cannot be sustained.
A currency serves three functions, providing a means of payment, a unit of account, and a store of value. Gold may be a store of value for wealth, but it is not a means of payment; you cannot pay for your groceries with it. Nor is it a unit of account; prices of goods and services, and of financial assets, are not denominated in gold terms.
So gold remains John Maynard Keynes's “barbarous relic,” with no intrinsic value and used mainly as a hedge against mostly irrational fear and panic. Yes, all investors should have a very modest share of gold in their portfolios as a hedge against extreme tail risks. But other real assets can provide a similar hedge, and those tail risks – while not eliminated – are certainly lower today than at the peak of the global financial crisis.
While gold prices may temporarily move higher in the next few years, they will be very volatile and will trend lower over time as the global economy mends itself. The gold rush is over.
Why did Narayana Murthy come back to Infosys?
On Saturday morning, NRN Murthy joined a long list of founders such as Michael Dell, Steve Jobs and Howard Shultz, in the entrepreneurial hall of fame. All of them like Murthy returned to the companies they had started after either retiring or being ousted from them. Founders coming back to run a company is hardly unusual. Many like Jobs have actually been far more successful in their second stint than they were in the first. So in the global scheme of things, NRN Murthy coming back as Chairman of Infosys is not such a big deal.
Especially when the company is going through a challenging time as Infosys clearly is. At such time investors often feel that there is no one better than a founder to steady the ship.
Murthy has never hidden his or his family's attachment to Infosys. Infosys had seven founders, but it was only the Murthys who referred to Infosys as their child. A founder's wife once told me that none of the other founders could match the intensity of how the Murthys felt for Infosys. Murthy has always maintained that if Infosys needed him, he would not hold himself back.
But Murthy's return to Infosys is a little bit different from the other iconic founders mentioned at the beginning of the article. None of them came back to the company along with their sons or daughters. But more on this later, for now let's look at some other important issues.
The biggest question is what happens now to the succession planning at Infosys? With the founders back in the key executive roles, what does it mean for the rest of the management team? There are at least three leaders (B G Srinivas, Ashok Vemuri and V Balakrishnan) waiting to take over from S D Shibulal when he retires as CEO in 2015. What happens to them now that Murthy is back as executive chairman? The assumption was that one of them would become the CEO and Kris (S K Gopalakrishnan) and Shibulal would be kicked upstairs as Chairman and Vice Chairman respectively.
If Murthy stays on till 2018, then it means that either (Kris) Gopalakrishan, or Shibulal might have to go. After all even Infosys cannot afford to keep three chairmen in the company.
Now let's examine the issue of bringing in Rohan Murty into the company. Again there is nothing unusual about this scenario. After all Rishad Premji works at Wipro and Mukesh Ambani succeeded his father at Reliance. Rohan is well qualified, and by all accounts extremely righteous and intelligent. The world in which Murthy ran Infosys (between 1981-2002) has changed dramatically. He has not held an executive role at Infosys for the last 11 years. When he was the CEO, there was no iPad, Facebook, Twitter or Tumblr. At nearly 68 years of age, it is not wrong to assume that Murthy might have fallen behind on some of the big trends driving IT spending today. Rohan has a PhD in computer science from Harvard University. Imagine the scenario. Murthy is meeting the CIO of Apple and Rohan is by his side. Murthy would feel a lot more confident in that meeting and the client would be a lot more impressed.
Except for one detail.
For as far as anyone can remember, Murthy has held that no family member of a founder can ever come to work at Infosys. It is a rule he set himself and all these years he has taken great pride in living by it.
The whole magic about Infosys was that when it gave its word it knew how to keep it. If it made offers to employees and the market tanked, it honored them no matter what. If it made a promise to shareholders about meeting its revenue and profit guidance, it kept it, quarter after quarter. If it said founders would retire at 65, it made sure they were gone by that time. If it said founder's family members would not join the company, it enforced the rule strictly. Some time back, in an interview with me, Rohan had said that what he most admired about his father was that Murthy never went back on his word. He had said that he would often ask his father jokingly whether he could join Infosys. And Murthy's answer would always be the same. No. Once a promise has been made, it had to be honored no matter what.
For a while now, Infosys hasn't been able to keep up with its promised guidance to shareholders.
Today one more promise was broken.
In the press conference today Murthy labored on that Rohan was only coming into help him. Rohan has not been given any leadership role at Infosys and he is not even going to draw a salary. As his executive assistant, his job is merely to make Murthy work more efficiently and effectively.
The question is, could Infosys find no one of Rohan's caliber either inside or from outside the company? Does this mean that other founders can now send their children to work at Infosys?
Murthy's coming back will definitely make shareholders happy. It is highly likely that on Monday morning the Infosys stock price will validate the Board's decision to bring him back.
Company officials tell me that when they would go on investor meets; they would always be greeted with this one question, why don't you bring Nandan and Murthy back? They say that old customers would prefer to talk to Murthy even after he left the company. At the last AGM Murthy chaired in 2011, I witnessed for myself the intense emotions shareholders felt for him.
So did the company bend under shareholder pressure and ask Murthy to come back? Did Murthy fear that if things continued the way they were at Infosys, shareholders would demand for Shibulal to go? In his press conference today he said, more than once, that the other two CEOs (Nandan and Kris) had the advantage of his support and guidance, something that Shibulal did not have. Is he coming back to Infosys to protect Shibulal and Kris from further criticism? Clearly with him back in the saddle, it will be very difficult for anyone to directly take on Shibulal or Kris.
So will things change for Infosys with Murthy back at helm? My colleague Ramnath has an interesting take on that.
Murthy though has refrained from making any predictions for the future. But earlier in the day, Kiran Mazumdar Shaw, Biocon Chairperson and a close family friend provided some interesting insights. Speaking on a news channel she said that Murthy was concerned about how the strategy was being executed at Infosys. One way to interpret this could be that he won't make too many changes to the strategy but focus on putting it to work. Infosys has gone through a very long and painful restructuring in the last two years. It would be dangerous to put the company through too much change again.
It is difficult to predict the future. Looking back at the past is so much easier. The years before Murthy gave up his executive role were some of the best years of Infosys. The pressure will be on Murthy now to deliver the same results. It will be interesting to see if Murthy still has the midas touch.
As they say in Bollywood, picture abhi baaki hai mere dost (the story is still unfolding)
The King is Gonna Make it Big in Cambodia!
The Colonel has dominated the local scene since he came to Phnom Penh in 2007. Though, I anticipate a sea change with a new player in town, the King, who has the potential to dominate the country.
No I'm not talking about the upcoming elections or political strife, but something much more fulfilling…fast food wars. But before I delve into this further, a bit of history is in order.
Ever since the first KFC branch opened near Tiananmen Square, China in 1987, KFC has become synonymous with America. Whether people actually enjoyed the overpriced and low quality food fare I will never know, but they have flocked in droves to taste that famous blend of 11 herbs and spices ever since. Maybe this is all about experiencing “democracy” and being “American” for a meal. Regardless, 26 years on there are more than 4,000 KFC's in China, with a growing number in Asia's frontier markets, including Viet Nam and Mongolia.
While those of us with discretionary income may not think of fast food as a glamorous meal, over a billion others do. For those who can afford fast food, which rarely comes cheap, it is all about eating something exotic. It's a means not only of feeding oneself, but more so exhibiting a certain social status. It is not uncommon to walk into a McDonald's or Pizza Hut (The latter being a sit-down restaurant in Asia) and seeing a group of business men on their laptops, and glamorous ladies lunching.
When first coming to these frontier markets I found this bizarre, but now realise that this is something only those with discretionary income can afford. On the opposite end of the spectrum, when I walk into a fast food joint in America it's just a wee bit different.
In the west fast food is cheap. In frontier markets it is ordinarily priced at multiples the cost of local food, effectively pricing out most of the population. Some meal combos in Cambodian KFC's run more than $9. That's expensive for America, let alone in Cambodia where GDP per capita is under $1,000.
New goods and services are priced in tiers, whereby a first mover targets the upper end of the market. Kith Meng's Royal Group partnered with Malaysia's QSR brands in 2007 to introduce KFC to Cambodia, and he seems to be doing just this. Setting aside the Swenson's and Dairy Queens, which were introduced by RMA Group, KFC has had no real competition for nearly 6 years. That is until last month, when Cambodian businessman Sok Hong partnered with Viet Nam's Imex Pan-Pacific Group Inc. to open the Kingdom's first Burger King, located at Phnom Penh International Airport. They plan to have at least one more location opened by year's end.
I don't like fast food, but that doesn't mean it should be written off. When I visited Burger King last week on my way to Singapore, I was awe struck as to what I saw. The menu is cheap!
Burger King's prices are in line with those in Singapore (Where fast food is inexpensive), and I interpret this to mean that they are targeting both the middle and upper class with attractive price points for menu items. Unlike KFC, if Burger King can garner a following with its American brand name and attractive pricing it should be able to turn a profit in short order.
I look at it as a leading indicator. If Burger King succeeds it could set the stage for an influx of foreign brands selling goods and services to the masses. With a reasonable savings rate, Cambodians have the firing power when new opportunities arise for them to spend. Whoever said the number of fryolators in a country isn't a sound economic indicator was just plain wrong!
“In the 21st Century obesity rates will be a sound measure of economic progress.” - Scott Baker
India will soon have a fifth of the world's working-age population. It urgently needs to provide them with better jobs-----------------------------------------------------------------------------------------------------------
ONE of India's bigger private-sector employers can be found in Patna, the capital of Bihar, a poor, populous state in the east of the country. Narendra Kumar Singh, the boss, has three gold rings on his right hand and arms big enough to crush rocks. His firm, Frontline, has 86,000 people on its books. They are mostly unskilled men from rural areas in poor states like Bihar; thanks to Mr Singh they have jobs in cities all over India.
There is lots to celebrate about this. Mr Singh's business has sales of $185m and its employee base has grown by 1,600% since 2000. He is looking for a Western partner and wants to expand to Sri Lanka and Bangladesh. He is providing paid work for part of the large cohort of young people now entering the workforce. And by shifting people from farms to cities he is helping urbanisation of the sort that underpinned startling progress elsewhere in Asia.
Yet Frontline is also a symptom of a colossal failure. For it is not supplying labour for a manufacturing boom of the kind that helped so many in China, South Korea and Taiwan out of poverty, or for the IT services at which India has excelled. Instead it offers relatively unproductive service-sector jobs—in particular, security guards. It has become de rigueur for every ATM, office, shop and apartment building to have guards. Across India millions of young men now sit all day on plastic seats in badly fitting uniforms with braids and epaulettes, unshaven and catatonically bored as the economic miracle passes by. This isn't how East Asia got rich.
From a bomb to a boom and back
During the boom of the 1990s and 2000s, it became fashionable to talk of India's forthcoming “demographic dividend”. This was quite a turnaround. In the 1960s and 1970s, the booming populations of states like Bihar were seen as a curse. “The Population Bomb”, a Malthusian bestseller by two American environmentalists, Paul and Anne Ehrlich, began by describing “one stinking hot night
in Delhi”, and its horrifying number of “people, people, people, people”. In the 1970s there was a forced sterilisation programme. Sanjay Gandhi, a thuggish scion of the ruling dynasty, organised vasectomy camps near Delhi—one doctor boasted he could perform 40 sterilisations an hour.
In the 1990s, though, economic liberalisers evoked the experiences of East Asia and the demographic dividend it benefited from when previously high fertility rates began to decline. Working-age populations rose at the same time as the ratio of dependants to workers fell. An associated rise in the rate of saving allowed more investment, helping pay for the vast expansion in manufacturing that employed those workers and lifted hundreds of millions of people out of poverty. In the mid2000s the prospect of a similar dividend in India, where the fertility rate had dropped a lot in the 1980s and 1990s, was a key reason for investors' optimism. The timing was particularly encouraging: India's labour force was due to soar as China's began to decline
Now many are worried that India is squandering this demographic opportunity. This is partly because the economy is in a funk. Growth is at 4.5%, half the rate at the peak in the mid-2000s. Industry is 27% of output, compared with 40-47% in other big developing Asian economies. High inflation has prompted households to store ever more of their savings in physical assets rather than the financial system (see chart 2). The costs are clear. With few manufacturing exports, India has a chronic balance-of-payments problem. And India has created too few formal jobs in the past decade.
India's leaders have long said they are committed to employment, but have shown little stomach for the economic upheaval rapid job creation entails. China's policymakers accepted that the process of adding jobs overall often destroyed jobs in particular industries and places. For years India's politicians have preferred economic palliatives such as NREGA, a giant scheme that guarantees work for the rural poor, and subsidies for the needy.
Now India's borrowing has soared to queasy levels and welfare spending is being squeezed. There are worries that joblessness could be feeding the spasmodic unrest seen in some cities since 2011. Not all protesters were young. And their motivation varied from support for the anti-corruption guru Anna Hazare to disgust at a series of rapes in Delhi. But the protests added to a sense of youthful volatility.
An official report into the public finances in 2012 warned that a combination of slower growth and the demographic bulge could be “politically destabilising”. Rahul Gandhi, who is poised to lead the ruling Congress party in the general election due by 2014, speaks of the “angry” young and their “urgent demand for jobs”. The government's economic adviser, Raghuram Rajan, says jobs are the biggest priority. Some in the elite seem to be waking up. But is it too late?
Quantity and quality
To see the scale of the challenge, consider that the working-age population, aged between 15 and 64, will rise by 125m over the coming decade, and by a further 103m over the following decade. On current trends a third of the growth will come from poorer and less literate states in the north, notably Uttar Pradesh and Bihar.
Not everyone of working age will be in the job market. More people aged 15-24 will remain in education—26% do today. Some adult women will stay at home; presently only about a third work, a low level by Asian standards. But India probably needs to create about 100m net new jobs in the next decade.
China's boom created 130m net jobs in services and industry between 2002 and 2012. But India is no China. The most recent survey showed no net new jobs were created between 2004-05 and 2009-10, a dramatic slowdown on the previous five years, when 60m jobs were created.
These figures may not be as shocking as they seem. Fewer jobs were created partly because some folk voluntarily withdrew from the workforce. More women in rural areas decided not to look for jobs—perhaps because several fairly good years for farmers meant they did not need the cash. Wages for the unskilled have been rising, and though this is partly because of the NREGA guaranteed-work scheme, it suggests there has not been a collapse in the jobs market. For all these caveats, though, the headline data remain disquieting. Even during a boom few jobs were created. Now that the economy is growing more slowly things have got harder.
The rural poor seem likely to be frustrated, which will add to the number of migrants headed for the cities. The better-educated will suffer, too. By some estimates India produces twice as many new graduates each year as it can absorb. In a half-built private-run campus in Patna most students have modest expectations of their future salaries—typically $500 a month. Even so, their professor worries they won't all get job offers.
The problem lies not just in the quantity of jobs, though; quality matters too. Statistics verify what the naked eye can see in any Indian city. They all have their armies of guards, peons, delivery boys, ear-dewaxers and men who sit on stools in lifts pressing the buttons. About 85% of India's jobs are with “informal” enterprises—those organisations with fewer than ten staff which are not incorporated. Another 11% are casual jobs with formal companies. Only 16% of Indians say they get a regular wage. People with informal jobs are usually very poor. An official study of 2004-05 data concludes that 80% of informal workers got less than the then national minimum wage of $1.46 a day. There are some good jobs. But India's IT firms, for example, account for only a few million jobs out of a total of half a billion.
All this seems to be closely linked to the lack of manufacturing. Although some 23% of Indian workers are categorised as working in “industry”, compared to nearly 30% in China and 22% in Indonesia, half of India's “industrial” workers are in construction whereas the figure is just a quarter in Indonesia. Of the remainder almost all are in the “manufacturing” subcategory. But these are not jobs that involve exposure to modern machinery, techniques and training (crucial for unskilled labour let down by the country's education system). More than half of Indians in the manufacturing sector work in facilities without electricity.
The obvious problem is a “missing middle”. Most of the jobs are in tiny operations. Most of the value added is in a few big, sophisticated firms that prefer using machines to humans. Some, such as Tata Sons and Mahindra, are well-known. Most of those seem keener on expanding globally than on building factories at home. For every dollar of foreign direct investment (FDI) made by outsiders in Indian manufacturing in the five years to March 2012, local firms invested 65 cents in manufacturing abroad. The number of jobs in factories (excluding the very smallest) has increased since 2005; but only by 2.8m.
What manufacturing FDI India does attract tends to be high-end—Volkswagen has a smart €570m plant full of robots. Meanwhile investment is pouring into Vietnam and Indonesia (see chart 3) as costs in China rise. Li & Fung, a big trading firm based in Hong Kong which buys goods in Asia and sells them in the West to retailers including Walmart, gets some 5% of its goods from India, compared with about 20% from South-East Asia.
Death on the shop floor
India's missed opportunity is most evident in textiles and clothing, a labour-intensive industry that has been dominated by China. In 2011 McKinsey, a consultancy, found that purchasing managers at global clothing firms wanted to shift their sourcing from China; their favoured new destinations included Bangladesh, Vietnam, Indonesia and Cambodia—but not India. India's textile exports have grown, but those from Vietnam and Bangladesh, combined, easily outstrip them.
Why don't more people want to make things in India? Indian migrant workers are sought across the world, not least in the Gulf. But at home tricky labour relations are a problem.
In a dusty lawyers' room in the industrial belt near Delhi, five workers explain how they were fired by Maruti Suzuki, a carmaker controlled by Suzuki of Japan, after simmering tensions on the shop floor led to a riot at a nearby plant in July 2012. A manager was burned to death. The men are in their 20s and from rural families. They have a strong sense of injustice. “We have told our families that they should consider us as behind bars and that they should make other plans for their lives. We are ready for a long fight.” The Maruti violence has so far been a one-off. But the episode unnerved businesspeople.
Economists have long identified arcane labour laws as the key to India's manufacturing problem. Scholars have gleefully dissected India's 51 central and 170 state labour statutes, some of which pre-date independence, to demonstrate how they make it hard for firms with more than a handful of staff to fire people and allow disputes to become legal endurance tests. Studies have shown how tighter rules impede growth in labour-intensive industries and prompt firms to remain small.
Yet the industrial belt in which Maruti's factory sits shows times have changed. Big firms can bypass labour law by using “contract” workers, technically employed by third-party agents. In the past decade they have used—or, workers say, abused—this kink in the rules a lot more. At three car and motorbike plants, based on discussions with workers, about 70% of 14,500 staff work on a contract basis. Their average wage is $5-6 per working day, a quarter of what permanent, unionised staff get. The minimum wage in Guangzhou, a Chinese industrial hub, is $10.5 per working day.
That might appear to be good news. If lots of factory workers can be hired at globally competitive rates, on flexible terms, manufacturing firms should pile into India. In practice the situation is unstable. As the Maruti riot showed, the two-tier workforce has caused anger—the five men in the lawyers' room were permanent employees who say they were disgusted by the treatment of their contract colleagues. Maruti is abandoning the distinction. And from a financial perspective the contract system is not as good as it looks for employers. They must still hire unionised permanent staff, and though these may be in a minority they can account for the majority of a plant's wage bill, lifting the average pay across all workers to Chinese levels.
The labour situation is a long way from the strikes and militancy of the 1970s, but it is unpredictable. That puts off potential manufacturers. And there are lots of other deterrents, too, from red tape to erratic electricity (see, for example, the monumental blackout across north and east India in 2012), a lack of land, bad roads and busy ports. One shipping boss thinks logistics add 20% to the cost of making something in India, compared with 6-8% in China. The Middle Kingdom hardly excelled on such metrics 20 years ago, but India does seem to be especially intimidating for industrial firms. Where non-labour problems have been tackled, notably in Gujarat, manufacturing does better. But Gujarat—population 60m—is not a big state by Indian standards.
Since 2000 India has tried carving out special economic zones (SEZs) to create islands with lower taxes and access to infrastructure, where manufacturers can feel at home. But these have been a limited success, with many dominated by IT firms. A new twist is a proposed industrial corridor between Delhi and Mumbai, inspired by the expressway between Seoul and Busan in South Korea. The project has Japanese support, but basic things such as access to land and water have yet to be settled.
In its frustration India is flirting with a more overt industrial policy. A new rule says that government offices must now buy computers with a chunk of components made locally. This is designed to improve the balance of payments and promote an indigenous industry. The government is also now offering subsidies that could be worth billions of dollars to attract a microchip foundry. There is a push to indigenise the defence industry.
The legislation on offer to try to change the situation more generally may not enthuse industry. There are noises about labour-law reform, but rather than liberalise the regime for permanent workers it may merely tighten the one for contract employees. A bill that is supposed to make it easier to buy land could make the process even more expensive and protracted, argue many businesspeople.
For robust jobs growth there must be a change of mindset among officials, judges and politicians. Although Mr Gandhi and others are talking about the challenge, not everyone is, partly due to the electoral system's skew towards the countryside. Only 10% of legislators in the lower house have urban constituencies in which 75% or more of the population is urban, reckons the Centre for the Study of Developing Societies (CSDS), a think-tank. Jobs in factories in cities are not a priority for most politicians.
Could the voices of the young change this? There is a rising level of political involvement. A recent survey by CSDS and the Konrad Adenauer Stiftung, a German think-tank, found that nearly twice as many of today's 18- to 33-year-olds say they are interested in politics as did in 1996. Some 20% of young rural men say they participate in protests, as do 22% of college-educated young men. Those with exposure to the media, from talk shows to social media, are most politically active. One of India's big mobile-messaging sites, Nimbuzz, with 25m mostly young users, says traffic doubled in the aftermath of the rape scandal in Delhi in December and during the Anna Hazare anti-graft protests. But the young have little independent political identity; their party allegiance is much like that of their parents. Nor do they have any obvious muscle.
The lack of political resolve and of a clear signal from voters mean India is unlikely to summon up the single-minded dedication with which South Korea, Taiwan and China created industrial jobs. Its demographic dividend will yield only a fraction of what it could, and the problem of low-quality employment will fester. That would be an immense waste. Most policymakers and well-off people would deny that it is a deep threat, though. The country's religions, its distinctive mix of hierarchical culture and populist politics and its durable family structures will ensure social stability, they say.
They are probably right. They might want to pay their security guards a little more, though. Just in case.
The oil and gold booms are over - Commodity bubble is deflating as China's slowdown continues to spread far beyond the country's shores
The wreckage caused by China's great, juddering slowdown continues to spread far beyond the country's shores. Although most commodities enjoyed a bounce on 3 May, after better-than-expected US employment data, the plunge in their prices over the past few months suggests the past decade's rally is truly broken.
For those of us not in the mining industry, this is actually good news—one of the best signs yet that the global economy is returning to normal.
China's voracious demand for every conceivable raw material—oil, steel, soybeans, gold, to name a few—once seemed to spell a future of endlessly rising commodity prices and falling living standards in developed nations. This was a Malthusian vision of scarcity: Rising demand from the growing economies of the emerging world would couple with shrinking supplies to drive up the prices of natural resources. Gas prices would never come back down; gold would cost thousands of dollars an ounce.
The response, for many international investors, was to bet big on China. Because it is hard to buy directly into China, many instead bought into the commodities that were being sucked into the gaping maw of the country's economy: oil from Russia, iron ore from Australia and so on.
The China-commodity connection was born. Financial entrepreneurs started exchange-traded funds, which allowed individual investors to trade commodities, including silver and gold, as if they were stocks.
For the first time, US pension funds started to allocate a share of their holdings to commodities. Even the Federal Reserve got involved, inadvertently, by printing so much money that a good portion of it wound up fuelling speculative bets on China and the big emerging markets, often using commodities as a proxy.
Prices went parabolic. From 2000 to 2011, copper prices rose 450%, oil prices 365%, and gold prices more than 500% to a high of more than $1,900 an ounce. There was talk of oil hitting $200 a barrel, and gold reaching $10,000 an ounce. It was a wild time, all predicated on the idea that the rise of China had set off a commodity supercycle that could keep prices high indefinitely.
Commodity prices, such as that of gold, tend to rise when faith in the financial system is in decline and usually fall when confidence is high. In this they resemble the politician of whom Winston Churchill once said: He has all the virtues I dislike and none of the vices I admire.
High commodity prices enrich a class whose corrupting influence is legend, and whose chief skill is the
ability to secure the right political contacts. Meanwhile, high commodity prices, particularly for oil, squeeze the poor and the middle class, and act as a brake on growth in the industrial world. During the 2000s, the US fretted over the rise of corrupt oil tycoons and unstable dictators in nasty petro-states, and rightly so.
That's why falling commodity prices—both gold and copper are still down more than 10 percent this year despite the latest bounce—are good news. The China-commodity connection is breaking. After three straight decades of ultrafast growth, China's inevitable slowdown has let air out of the bubble: Since the peak in April 2011, the broadest available measure of commodity prices has fallen 16%. In recent months, money has started flowing out of exchange-traded funds for most commodities.
The Malthusian specter of rising demand and shrinking supply has been replaced by a new realization that, for most commodities, demand is flat and supply is rising fast. Oil demand in developed nations has been stable since 1995, because high oil prices have inspired conservation efforts in countries such as Japan and the US.
Now, as emerging nations begin to embrace energy efficiency as well—China is working hard on electric cars, for instance, despite continuing to build dozens of coal plants—global demand might flatten out this decade. The debate over peak oil scenarios may shift from the threat of dwindling supply to the threat of peaking demand.
Certainly, the world is no longer terrified of running out of important commodities. High prices have drawn investment to copper mines, aluminum smelters and other basic sources of supply. In the past decade, the amount of capital invested in the energy and materials sector, which includes most nonfarm commodities, has risen 600%, compared with an average increase of 200% in other sectors.
The much-discussed boom in US shale-gas production is only one result of this spending: Since 2001, China has increased output of industrial metals by striking multiples, from about 140% for iron-ore commodities to 775% for nickel.
This is part of the normal cycle of the world economy, not a supercycle. Commodity-price booms restrain demand, while attracting money and innovation to increase supply, which leads to a bust. For the last 200 years, the average price of commodities has followed this predictable cycle: one decade up, often sharply, followed by two decades down, with the result that real prices haven't risen since 1800. There are exceptions to the rule. Some commodities, including oil and copper, have gained somewhat in real terms. But gold has just retained its value. The price today (about $1,500 an ounce) is roughly the same as in 1980, when adjusted for inflation.
If the historical pattern holds, we are now entering a long period of falling commodity prices, which could last two decades. That is good for importers such as the US, as was the case in the 1980s and 1990s when commodity prices were falling. The current fall in retail gasoline prices should increase the purchasing power of the American consumer and offset the fiscal drag from the government sequestration cuts.
Meanwhile, the nations that have reveled in the commodity boom of recent years are likely to face a disheartening return to the mundane ordeals of normal life. Buddhist monks have a phrase for it: After the ecstasy, the laundry.
Asian debt: Beware of bubbles - Southeast Asia's booming bond market has sparked fears of a bubble
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India's labour pangs
A remarkable feature of the current growth slowdown in India is that it has not made getting labourers any easier for employers. Reports of labour shortages keep pouring in from across the country even today.
The scarcity of unskilled labour in an economy classified as “labour surplus” is a great paradox, and especially so, when growth in aggregate demand has slowed. Indeed, the rapid rise of real wages among both farm and non-farm labour over the past few years indicates scarcity rather than surplus.
The easy and lazy explanation for this is the Union government's Mahatma Gandhi National Rural Employment Guarantee Scheme. But with an annual allocation below 1% of the gross domestic product, and job creation amounting to roughly 2% of rural jobs, the impact of this scheme is limited.
A structural transformation holds the key to India's labour market paradox. The transformation is being driven by three key factors.
First, rising educational attainments and aspirations have led many young men and women to schools and colleges rather than to work. This has played a significant role in shrinking the current labour force.
Second, as a recent Ambit Capital report observed, traditional labour supplier states such as Madhya Pradesh and Bihar have registered higher-than-average growth rates in the past few years, incentivizing many young labourers to stay back. The growth has been particularly rapid in labour intensive sectors such as construction. Literacy growth is also faster in these states.
Finally, the growth of “census towns” in the past decade and the improved pace of rural road construction in the past few years has changed the patterns of migration, and the bargaining power of those at the bottom of the pyramid. The work options have multiplied, and are now available within a daily commute.
Even in the farm sector, better productivity growth, a supportive global commodity cycle and higher procurement prices have raised incomes, enabling landowners to share gains with labourers, who are scarcer in number. This has raised the economy-wide reservation wage.
These changes mirror a once-in-a-lifetime transition of an economy, with the labour force moving away from low-productivity jobs, a process first described by the Nobel Prize-winning economist Arthur Lewis.
In general, such a shift is welcome and greatly anticipated but India's case deserves a few words of caution. Although the wheels of change will run for a while, the lack of enough quality jobs for an educated workforce can thwart a complete “Lewisian” transformation, and turn aspirations into frustrations very quickly. Also, in the medium term, rising wages can skew inflation heavily.