Sunday, August 21, 2011

A Unified Theory of Everything

I find it more than a coincidence that India's Anna movement is playing out concurrently with American Tea Party resurgence, Israeli Tent City protests, UK underclass rioting, and Arab Spring revolutions.

Sonali Ranade, in her recent Daily Times column, linked middle class protests to the credit crisis. In her thesis, the enormous losses suffered by large financial institutions are being surreptitiously socialized through stealth taxation on middle class savings.

In this essay, I'll attempt to expand on this analysis.

Clearly, the aftermath of the credit crisis is crucial to explaining the global governance crisis. When highly indebted financial institutions tottered in 2008, they threatened to take down the global economic system. Governments, themselves highly indebted but with some residual ability to print and borrow money, found a variety of ways to take the bad debt off bank balance sheets.

In the US, Government partially nationalized leading banks and the Federal Reserve provided them with near-zero cost funding. In Europe, authorities did the above plus allowed banks to not fully recognize their losses. The principle was the same. Postpone the reckoning where possible, socialize private sector losses where necessary, and transfer wealth to banks so they can recapitalize.

All this played out while Governments in India and China went on debt-fueled binges of welfare and infrastructure expansion respectively.

This is how the banks were saved and the Governments imperiled.

How do deeply indebted Governments resolve their debts? They can print money to inflate it away, sell assets to pay for it, impose taxes, seize private wealth, cut back entitlements, or declare bankruptcy. No other way, really. Except war.

In all of these, there is an implicit transfer of wealth from one set of citizens to another. To expect this to happen without political push-back is naive. Each group will inevitably flex its political muscle to lay down a marker for politicians to contemplate.

Where entitlements have been cut back (e.g., UK), the underclass has revolted. Where entitlements have expanded financed by corrupt asset sales & inflation (e.g., India), the middle class has revolted. Where the debate is raging between entitlement cuts and increased taxes (e.g., US), everyone is morose. Where a kleptocratic autocracy has financed its lavish lifestyle through taxation, inflation, and forcible appropriation of national assets (e.g., Maghreb), revolutions have happened. Where utter confusion has reigned (e.g., Europe), everyone has gone on vacation!

The global credit crunch has become a local political crisis - everywhere.

This is how we must understand what's happening. This isn't about dial 101 for integrity or democracy in the desert or even a new social contract between the rulers and the masses, this is fundamentally about money. And the way this is resolved is not the tedious (and violent) battles for redistribution, rather through new wealth creation.

So how is this to be done?

Prosperity has come to the world in waves, riding the euphoria of new ideas. The end of the cold war, the peace dividend, technology, globalization, and easy credit carried us for two decades. We now need new catalysts to carry us forward.

Some of these can be the end/down-gearing of seemingly interminable wars (e.g., India-Pakistan, Israel-Palestine), new agreements for expanded global trade (e.g., the much delayed Doha round), radical economic reforms in BRIC countries (e.g., privatization and professionalization of economies), dramatic increase in technology usage to rationalize the highly inefficient welfare States in OECD countries (e.g., healthcare subsidies), a new surge of investment in education for the information era, etc.

These are big ideas that require big visions and bold leadership. Our challenges are not going away by use of batons on protestors or expressing helplessness about lack of political consensus. And the Jan Lok Pal ain't going to create prosperity by diktat out of thin air. If we don't take bold steps for reforms now, we should be deeply pessimistic about the coming decade. Not only will we see Anna style protests at home, we are likely to see regional and even global wars break out. This is the lesson of our history. Every major turning point of this magnitude, where huge wealth has been taken from some and given to others, has always come with protest, revolutions, and war. We have a small window to head off this fate. This is the bottom line.

The stock market is a great barometer for our collective belief in the future. Presently, it is telling us we don't believe our leaders have it in them to be bold. Were they to start acting as leaders instead of chickens with their heads cut off, we will see this reflected in the markets immediately. Mr Hazare can then go home.

Monday, August 15, 2011

The Grammar of Reform

Something surely is rotten in the state of India.

Why else would Anna Hazare, a virtual unknown to many outside Maharashtra, vault into national consciousness and force our democratic Government on the defensive?

Much ink has been spilt discussing his agenda and his methods. Much mud has been slung on all sides. After all this, we have now reached a stalemate where an increasingly belligerent Government is in a staring match with an increasingly intransigent Anna Hazare.

As Indians debate this grammar of anarchy, we should separate out several threads mixed in this mire.

First, there is a real crisis of governance in India. Our existing political systems have proven incapable of checking rampant corruption at petty and epic levels. The high cost of our sprawling democracy has created a patronage state to pay for it. The vast reach of our patronizing Government has created opportunity for corruption at a continental scale. The subservience and incompetence of our investigative bodies has created near immunity for corruption. Our parliamentary system has failed to provide sufficient checks and balances on the Government of the day. Our overburdened and, sometimes corruptible, judiciary has been unable to dispense speedy justice. Even our clamorous fourth estate has been compromised in its mortal competition for audience.

Second, our people are smart enough to sense that this state of governance anarchy is not self-correcting. This is why the upsurge in support for Anna Hazare, who people may not know but see as being a potential force for change. That Indians have less faith in their Government than a man most of them do not know and whose ideas they do not understand is telling in itself.

Third, the response of Government of India to this frontal assault has been self-defeating. Its initial defensive crouch has evolved into an increasingly menacing posture. Unable to make a case for its agenda or counter the reality of its inherent corruption, the Government is attacking Mr Hazare in personal terms and his movement by use of force. In so doing, it reaffirms the negative view Indians hold of their political system. If the institution of democratic Government is under siege, it is at the hands of the Government herself - not of Mr Hazare. The many commentators who cite Ambedkar's grammar of anarchy notion to attack Mr Hazare also fall into the same trap. Grammar of anarchy is only problematic in a self-correcting political system. India doesn't have that alas and change here takes way too long to be meaningful. To attack Mr Hazare's protest on the grounds that it sows anarchy misses this obvious point and makes Indians regretfully suspect the credibility of these commentators.

Finally, it is self-evident that Mr Hazare's prescriptions are profoundly dangerous. In the best of circumstances, they will create deep levels of risk aversion among even honest Government servants fearful of painfully intrusive investigations. In the worst of circumstances, they will create a super-Government that is above the democratic process - which would be a major retreat from freedom in India.

So, what is to be done?

This is a moment of perilous opportunity for India. Thoughtful Indians should seize upon the nationwide desire for structural reform in our political system. Yes, the country must reject the fascistic ideas that Mr Hazare offers, but at the same time must embrace the change that he demands. Political and civil society leaders must begin leveling with the people and outlining their visions for a self-correcting political system. We cannot be so rigidly wedded to the current system and so harshly averse to Mr Hazare's ideas that we miss the forest for the trees. Our need for political reforms is perhaps even greater than our need for economic reform. The economic superpower that India can become is being thwarted by the political subpower that it unfortunately is. This has to change - and starting immediately.

The current moment is a cry for help from the Indian people. Using police tactics or lofty rhetoric to smother this cry would be a Himalyan blunder.