January 25, 2016
I now know what the expression “dirt poor” looks like. It is dawn in Jaipur, India. I am watching crowds of filthy, impoverished men on the side of a dusty road pour buffalo milk from large vats into smaller cups. They are hungry. The masala chai is brewing as emaciated cows graze in rubbish skips, unfazed by the armada of tuck tucks, motorbikes and buses that transports the masses in this extraordinary and extraordinarily beautiful city.
This medieval breakfast scene is only about six hundred yards from the amazing Jaipur Literary Festival, in fascinating Rajasthan. Jaipur is a brilliant festival with excellent talks/panels, wonderful writers and thinkers – at least as interesting, and I’d say definitely more insightful, than Davos. But even here in the middle of India, Davos is in the air.
The collapse in stock markets and the flight of money to the US, as well as comments by Mario Draghi indicating that the EU economy is going backwards, not forwards, dominate this morning’s Hindustan Times.
Even though life on the streets here is about as far away from the trading screens of the financial casino, global financial sentiment matters to this remote city. It matters because India, like all developing countries, needs outside investment. Such is the contagious nature of financial markets, if the climate for global investment changes and the moneymen of Wall Street get nervous, projects that would have been financed in India, don’t get financed.
In addition, as India is a huge exporter, it needs the rest of the world to buy its produce.
Just walking around this city underscores the scale of the challenge the Indian government faces. Quite apart from economics, India faces the resurgence of the ancient Muslim vs Hindu rivalry. The other stories grabbing local headlines this morning is an Islamic fundamentalist terror cell uncovered in Delhi.
These problems apart, the scale of India’s economic and social achievements are staggering. This huge population is undergoing a transition from traditionalism to modernity at breakneck speed and it has managed to do this with practically no violence. And, unlike China, India is a democracy.
The economic stakes in India, like other developing countries, couldn’t be higher. We shouldn’t forget that the vast majority of the world’s population live in the developing world, and most of them live here in Asia. The developing world simply can’t afford a recession. If the material and career expectations of the billions of young people are dashed, the chances of a peaceful transition to modernity could be jeopardised. This is why Davos matters to Jaipur.
Since the start of the year, financial markets are in something like a spasm. This time, the worry is China and the impact of collapsing oil and commodity prices. India – as a massive energy importer – should benefit from this, but it is lumped together with the rest of the developing countries. As these poorer countries are regarded as more risky than Europe and America, international money flees from developing countries at the first sign of worries about the broader global economy.
There are five specific ways in which crises in developing countries can be more amplified than similar crises in, for example, the US or Europe.
The first one is the general trend for emerging countries to issue debts in dollars or Swiss francs or euros – not their own currencies. So when there is a crisis, the first thing that happens is the currency of the developing country falls. This, straight away, makes paying back debt which is denominated in dollars much harder. We saw these problems emerge in Thailand and Mexico in the 1990s. Today, countries like Turkey and Brazil are similarly afflicted.
A second point is that when there is a crisis in a developed country as there was in the US in 2008, interest rates fall to cushion the slump. In developing countries, the opposite happens, amplifying the recession. At the first sign of a crisis in confidence, money leaves the poor country and this drives interest rates up, not down. So the “normal” way in which interest rates fall in a slowdown, doesn’t happen. In fact, interest rates go upwards, making things worse.
The third difference is that when a crisis occurs, the private sector gets nervous and stops spending. Usually, the government of a rich country will react to this by increases in spending to compensate for the fact that people are nervous and are not spending. This, again, helps ameliorate the downturn. However, this crucial option isn’t available to the developing country as it is locked out of the world’s financing markets. Again, you can see how policy doesn’t work in poorer countries as it is supposed to.
A fourth major difference is to do with global priorities. When there is a financial crisis in America, the G7 meets, the rich world’s central banks coordinate activity and old rules are torn up to deal with the emergency.
The aim is always to help the rich country that needs help. But when poor countries get into trouble, they get lectured about their bad behaviour, their dodgy standards or their cronyism. The global economic narrative is totally different if the country is developed or developing – rich countries get help, poor countries get lectures.
A fifth major difference is that developing countries, like India, start any crisis in a worse position. All social and economic indicators such as health, infant mortality, education, literacy, clean water as well as typical financial benchmarks like wages and capital, are much lower in poor countries than the West when the crisis hits. This means that it is harder to rebuild after the crisis because the societies are fundamentally weaker.
Economic growth is the essential background noise for these countries to move forward.
When I look around me at both the chaos and the optimism here on the streets of Jaipur, it is clear that the difference between economic success and failure is wafer-thin; but the human cost of economic failure in this part of the world is almost too dreadful to contemplate.