Aam Aadmi Party`s governance agenda- will it succeed?

The “Aam Aadmi Party (AAP)” revolution led by Arvind Kejriwal has caught the attention of the entire country so much so that the onetime poster boy of the media – Narendra Modi- has been swept off the media pedestal. As per the AAP spokesperson Yogendra Yadav, people have voted for AAP for 3 reasons viz. clean politics, good governance and anti- corruption. Very true! Narendra Modi`s agenda has included these 2 themes along with economic development as a part of his election campaign. Arvind Kejriwal is being touted as the 3<sup>rd</sup> alternative for the Prime Minister`s post so much that a national newspaper has reported today that Modi has pressed the panic button fearing the AAP wave.

What does the country need now? Given the precarious economic scenario that we find ourselves in, economic development is very important for our country. Our GDP growth rate has fallen to sub – 5% levels from the 9% levels we were in a few years back. However, the country has been severely shaken by the numerous corruption scandals in the last few years and historically corruption has been rampant in this country ever since our independence. Hence governance and anti –corruption plank have also become equally extremely important and has caught the imagination of the people especially the middle and upper class that are fed up with the 2 big national parties.

A research paper “Is good governance good for development[1]?” argues that good governance is not a necessary precondition for development. The research paper lists some obstacles mainly the different political characters of various nations. The western nations saw a surge in their economic development in the 18^th and 19^th centuries when the term governance was unheard of. In the last few decades we have seen the rise of China and some other East Asian countries that would rank not very high on the governance matrices.

So what is important now- 

• Governance or economic development? 
• Is governance required for economic development? 

My answer would be yes. Good governance is a good supporting factor for sustainable economic development and possibly to convert economic miracles to sustainable development. The presence of proper institutions like judiciary, legislature and executive machinery is important to deliver the benefit to the people and avoid issues like corruption, inefficient allocation of resources, etc. A well-developed banking and financial system can lead to financial inclusion. Speeding up of judicial activities can ensure protection of ordinary citizens and protection of industrial interests.

For a sustainable and balanced growth of the country it is therefore necessary that economic development goes hand in hand with good governance. Given the size and political status of India, it is imperative that we have do not have a governance less development like the Middle East and some African nations and neither should governance impede development as still a sizeable population is below the poverty level. Singapore can be quoted as a good example of a “proper” balance of governance and development. While many critics can describe Singapore as prison state, the government under the tutelage of the previous premier Lew Kuan Yuew has developed Singapore to be a model of economic prosperity and a toast of the world. People are willing to let go some freedom for economic prosperity.

The Delhi AAP government of Arvind Kejriwal has taken 2 sets of decisions since taking power in late December`13 viz. governance decisions like anti-corruption telephone line and audit of power discoms and on the other hand populist measures like power subsidy and free water. The populist measures smack of “Leftist” thinking which has long been rejected by people. In fact the communist parties are being threatened with the advent of AAP!

Hence Arvind Kejriwal and his AAP team members should probably work on the following paths:

1.The focus on governance is what the country needs and people would love to see the same being institutionalized. Hence the AAP should implement measures and systems to make governance a way of life. Some of them would be institutionalizing the Lokpal bill, ensure proper law and order, regular availability of metered and billed power and water, improve efficiency of government services and last but not the least infrastructure. This in turn would help the economy as well. This will not happen overnight but a proper process can be put in place to do this. One way, which has been initiated, is to form teams with professionals (true aam aadmis!).

2. AAP should not be seen as anti- business and hence should avoid socialist  leanings like the Congress. An anti- business stance will hit the economic  development and can prove counterproductive.

3. Populist measures, especially subsidies need to be avoided as these are  truly anti proper governance.

To conclude, I would sincerely hope that the Aam Aadmi Party truly becomes a mainstream political party and cleans up the entire Indian system and in the process ensure an all-round development of India. All the best AAP !!

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[1] Kwame Sundurama, Jwame and Choudhry.  United Nations Series on Development. 

Human Capital Index: How do China and India fare?

After I wrote my blog on Gross Capital Formation- Trends for India and China (http://ramnarayanan1112.blogspot.com/2013/09/gross-capital-formation-trends-for_27.html), I received various interesting comments. A Harvard economist, who also taught me during my masters at London Business School, commented that” if the same analysis were done for human capital formation (HCF) what would it look like”?

Is HCF important? I guess so. After all human skills are very important to extract the maximum value from any advantage that a country may possess. The Japanese, with superior skills, have been world beaters despite lack of many natural resources while the oil rich Middle East nations thoroughly lack skill sets and hence have to depend on outside workers to run critical functions in their economies.

The WEF Global Competitiveness Report ranks countries on 12 parameters. Two of them are (a) Health and Primary education and (b) Higher education and training which are listed as a basic index and as an efficiency enhancer index respectively. These two parameters are directly linked to the well being of individuals and hence taken as indicators to look at HCF. To be more specific, the World Bank data lists health expenditure (as a % of GDP) and primary school enrolment % for basic indices and for higher education and training, tertiary education enrolment % has been taken as an indicator.

The World Bank Data shows that for the last decade (2000-11) the average world health expenditure is about 10% of the world GDP. The highly developed countries lead the pack as expected. As shown in table no.1 during the peak development period the developed countries had an average spending of more than 8% as shown in table no. 2

India and China lag behind the world in health expenditure with the 10 yr averages at 4.1% and 4.6% respectively. In fact the Indian figures have shown a declining trend since 2004 (since UPA-1!).

During the peak development years, the developed nations like USA and Germany have recorded health expenditures of above 10% consistently. In fact among the BRIC nations, Brazil is the closest the global average with health expenditure in 2000-11 of close to 8%. Thus the aspiring nations like India and China need to boost their health expenditure to sustain their growths. 

One of the main factor in having better health expenditure is the government`s share in the entire spend pie. Even though private expenditure is advantageous to the health systems, government intervention ensures affordable health care within reach to all the people. The World Health Organization (WHO) is driving the Universal Health Coverage (UHC) which seeks to increase health coverage to all people with the help of the governments. As chart no. 2 shows developed countries like Germany, Japan have a very share of government spending in the health expenditure. Even China which was lagging behind in early 2000`s has overtaken USA in terms of government spending. However with the “Obamacare” health insurance bill, the government spending would go up in the USA. Indian government lags far behind which explains the shoddy state of health care and the rise of private health care facilities in India. Will this help the poor get access to health care in India? Certainly not!

 In terms of education most of the countries do pretty well when it comes to primary education which gives basic sustenance and elementary skills like reading, writing and counting. The World Bank lists Primary Gross enrolment ratio (GER, primary)[1]  as an indicator. The major education parameter which increases the efficiency and effectiveness of humans and has a major role in the economic development is tertiary education. Tertiary education also referred to as third stage, third level, and post-secondary education, is the educational level following the completion of a school providing a secondary education. This is the stage where people learn higher skill sets like engineering, vocational skills, accountancy, etc. which enable them to do higher skilled jobs. The World Bank lists Gross Enrolment Ratio for tertiary education[2] as an indicator.

Most of the countries do well in terms of primary education and have enrolment ratios very close to 100% as shown in chart no.3. The average world Primary GER (P-GER) is 104% for the year 2000-11. Chart No. 4 shows the scatter plot of the T-GER and indicates a wide variation and a decreasing slope. The average global T-GER is 24.7% in 2000-11.

       

Naturally the enrolment ratios keep dropping as the progress is made from primary to secondary to tertiary education. Kids enrol for schools and steadily the dropout ratios increase as they progress from primary to secondary. Depending upon the status of the economy and social structures and the thrust given to higher education, the countries with higher degree of development have consistently had a higher proportion of enrolment in tertiary education.

As table no. 3 shows, there is not much of a difference between the nations in P-GER but there exists a huge difference in T-GER between developed and developing countries. India and China are abysmally low in T-GER.

How do the so called developing tigers (I am disinclined to call then developing economies anymore) fare comparatively? Table no. 4 shows that Brazil is a leader of the pack from a health expenditure perspective. Russia, which has inherited most the remnants of the erstwhile Soviet Union where lots of emphasis was laid on technology, research and vocational skills, is far ahead in the tertiary education sector. China and India lag behind in health as well as in tertiary education matrices.

 

However the silver lining for India and China is that T-GER has been consistently increasing over the last decade as shown in chart no. 5. Thanks to the growing economies there has been an increasing trend among people to upgrade their skills to enter the job market. However both these countries lag well behind the global enrolment numbers.

Is the public spending the most important driver in education sector? Well, there are mixed signals. The top 5 spenders as a % of GDP in 2007-11 are Lesotho, Cuba and Timor-Leste! The comparison of some indicator countries is a mixed bag as in table no. 5. USA is above the world average but countries like Japan, Russia and Germany are lower. This lends supports to a hypothesis that for an effective education sector, the private sector spending has to go hand in hand with government. A higher proportion of private spending in the tertiary sector helps in aligning the skill sets of the job seekers with the job needs.

In terms of HCF, if we look at some of the major countries in developed world and the developing tigers, it’s very clear why the USA is the world`s leading nation. As table no.6 shows, The USA leads in both the health expenditure as well in tertiary education. The health expenditure figures will further go up once the medical insurance scheme of President Obama, which is his pet scheme, goes into full swing. The US universities are symbols of excellence and attract the best of the brains from across the world. As we discussed earlier, primary education is for sustenance while tertiary education is for the future sustenance of an economy. It’s better if higher proportions of people who undergo primary education enroll themselves for secondary and tertiary education and hence lower the difference between primary and tertiary enrolment rates. As table no.7 shows, not surprisingly, the USA scores way above others in the difference parameters. India and China are just below the global average of close to 80%.

Thus the analysis of HCF throws up the following points:

a) Leading nations like USA, Europe, and
     Japan have spent a    higher figure on
     health as one of the basic drivers to
                                                  sustain growth.

                                               b)Tertiary education is very important to

                                                   drive growth  especially innovation driven

                                                   growth as in USA.

                         
                                               c)  China and India still lag far behind in HCF

                                               indices.

As is my usual habit I leave the following questions to be debated:

1. What should be role of private sector in education especially tertiary education?

2. Should the governments of developing countries like India and China focus only on primary and secondary education?

3. What should the governments, especially the Indian government, do to make health care more accessible and affordable?

 Data & Information Sources:

1) World Bank

2) World Health Organization

3) Wikipedia

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[1] GER, Primary is defined as enrolment in primary education, regardless of age, expressed as a percentage of the population of official primary education age. GER can exceed 100% due to the inclusion of over-aged and under-aged students because of early or late school entrance and grade repetition.

[2] GER for tertiary education defined as including universities as well as institutions that teach specific capacities of higher learning such as colleges, technical training institutes, community colleges, nursing schools, research laboratories, centres of excellence, and distance learning centres.[

Platts Commodity Week Interview

A clip of my intervview at Platts Commodity week at Mumbai in Sep`13.

http://www.youtube.com/watch?v=NPSMkI2vBKY

Limitations of Brain – how critical are human attitudes?

A July 2011 Scientific American article” The limits of intelligence” by Douglas Fox, claims that the human brain has reached its limits of intelligence from both a physical as well as structural point of view. The basic premise of the argument is based on the movements of the neurons which as claimed by the author has reached its practical limits.

If the brain gets bigger in size to accommodate more neurons and hence more processing power, the brain would need higher energy as the neurons would need to would need to travel more distance and hence brains can actually become slower. Secondly, if the connection wiring between the neurons is increased or if the neurons are made thicker to increase processing power, this will also lead to more energy consumption and hence would not add to the processing power of the brain. Coincidentally, a newspaper article (TOI dtd. 7^th Oct`13) reported, that a physician who studied the structure of Albert Einstein`s brain after his death found that the wiring between the various parts of his brain was exceedingly high and proposes this as the reason for the Einstein`s brilliance. Thirdly, if structurally more neurons are packed in the same brain area and hence decreasing the size of the neurons, the author claims in this scenario that the interactions between the neurons would be destructive and would not lead to a better output from the brain.

If the human brain can`t get any better then how do we better the human output in this age of “innovation” driven age. Douglas Fox says that one way is by better social interaction leading to a collective pooling of human brain and the second way is by use of technology (viz. internet). Thus social interaction i.e. culture and technology can actually reduce the need for greater individual smart brains!

To understand the ramifications of the article, I tried to look at the ecosystems for the culture and technology angles as raised in Fox`s research.

From a business perspective, the global business scenario too has been consistently changing over the past few decades. From the post-world war 2 physical infrastructure build-up in western nations, the rise of the competitive and efficient Asian economies in the 80`s, the IT and internet boom in the 90`s and to the rise of India and China, in the last 15 years, as the global back office and manufacturing base respectively, the scenarios have constantly evolved based on the business requirements. The next decade will be dominated by countries and organizations for which “innovation” is at the core of the business models. 

Better output from social interactions can happen in an ecosystem which encourages more interactions between the people. Apple and Microsoft are designing offices in which people bump into each other more and exchange ideas. Yahoo has banned employees from working from home so that employees work more effectively by more face to face interactions rather than the more efficient means like email, phones, etc. Jack Welch, as GE insiders say, would look at the body language and commitment exuded by the manager presenting new ideas rather than look only at the details of the plans.

The society culture also plays an important part in social interactions. Typically family driven social systems like Indian, Chinese and Japanese tend to have more social interactions. However this trend has changed thanks to the advent of electronic gadgets, internet (strangely yes!), increase in nuclear families and increased urbanization. In India we have seen lesser number of kids preferring to come out to play and be confined to home playing with gadgets. In public transport people are stuck to their phones, tablets, kindles, etc. rather than talk with their fellow travellers. Another aspect to consider is the work culture of the society. Team driven cultures like Japanese have achieved more thanks to their collaborative attitude while the Indian culture of individual brilliance but poor team works skills have impeded the output.

The American system and the European systems have able to drive innovation with the help of the educational and legal frameworks.  These systems driven culture have enabled collaboration between various people by encouraging out of the box thinking and risk taking. The education system too plays an important part in this process. The Western education system and some other education system like the Japanese system focuses on building up specific skills and concept learning which fosters a culture of innovation and higher productivity while some rote based systems like in India and some Asian countries only churn out educated coolies. The legal system too, is protective of original pieces of work e.g. protection of patents, trademarks, strict laws against plagiarism. Etc.

One of my senior business acquaintances who hails from Korea told me that 2 things are very important to succeed and drive changes and innovation in an organization – team work and passion. While passion comes from within, people who can work and contribute to a group effort are very important to organizations which in turn have to build up ecosystems to nurture group efforts. He also mentioned that humans who can use their left and right brains equally well are more productive than single brained humans. The left side of the brain is used in structured and analytical work while the right side of the brain is used for instinctive work like arts, sports, etc.

This information based on the research has very important ramifications for organizations, institutions, societies, etc. which are highly influenced by human behaviours.

1.      One man army teams, teams with rock stars and high calibre people who can`t gel in a team will have limitations beyond a particular point. As the saying goes – “the whole is better than sum of the parts”.

 

2.      Well rounded personalities would be preferred as compared to uni- dimensional personalities in managerial positions. In an organization a person with high IQ but average – low EQ would be a disaster. Highly left brained or right brained people would find it difficult to contribute to an overall case beyond a limit.

 

3.      To identify the correct people, organizations would need to have robust recruitment and training processes. People in managerial posts would need to have interests in varied activities like sports, arts, music, etc. to be effective managers.

 

4.      The education system would need to be modified to stress not only on academics but also in extracurricular activities and sports. Rote based systems need certainly to undergo rigorous changes to suit the new challenges in a global system.

 

5.      Women managers would be find more and more chances as generally they are better off in team work and more well-rounded and balanced personalities as compared to men.

As my Korean friend said “Team work” and “Passion” are the one of most important aspects in life. Very true!!

 

 

  

Gross Capital Formation – trends for India and China

25^th Sep 2013

GDP growth is taken as a measure of a country`s prosperity as well as an indication of the economy. However, GDP growth rate alone cannot be an indicator for a country`s future growth potential. We have seen the BRICS nations, which were the toast of the world, a few years back slowing down.  It’s said that for tomorrow`s fruits you need to sow the seeds today. Hence one parameter which can be looked upon one of the seeds is Gross Capital Formation (GCF).

Economists look for capital formation as a necessary recipe to grow the countries’ economies.  Obviously, more assets creation leads to more and better avenues for output creation which if used efficiently and optimally leads to increased output which is reflected in higher GDP growth. Generally speaking, developing countries often devote a higher % of GDP to investment. Countries with rapid rates of economic growth are heavily investing in more fixed assets to enable rapid economic growth.

The world bank data for 1990-2012 indicates that the countries which have had the highest average annual GCF`s, in absolute numbers, are USA, Japan, China and Germany which put together have accounted for more than 50% of the average GCF`s in this period. The World Bank data also shows that the countries with the highest average GCF (as a % of GDP) in the period 1990-2012 are Equatorial Guinea, Bhutan, Cape Verde and China which account for 0.02%, 0.002%, 0.003% and 11.47% of the global economies.

China`s story is explainable as everybody knows about the massive investment in the physical infrastructure that has occurred, which has turbo charged the economy over the past 2 decades. India`s story is different. It ranks amongst the top growing economies but only in the top 25 in terms of average GCF as a % of GDP. For comparison purposes China`s average GCF in 1990-2012 is 41.1% while India`s figure is 28.9%. However India has improved its position to the top 10 in GCF in 2000-12 with a GCF figure of 33.7%.

Analysing the growth stories of USA, Japan, Germany, China and Singapore with India, with respect to GCF throws some interesting facts. To make the analysis sharper the GCF figures during the peak growth period post 1960 were looked into. Countries like USA and Germany, which had embarked on the path of development well before 1960 and already had a good capital base, averaged 19% and 22.7%. Japan which embarked on a manufacturing led development since the 1960`s averaged 31.7% while the tiny nation Singapore, which also saw a major development post 1960, had close to 34%. This indicates that countries on a development mode need a GCF of at least 30% to develop their economies. 

China of course is way ahead with a GCF of more than 40%.  After the 2008 slowdown China`s capital investment has increased with GCF at around 47%. India too has made strides and increased its GCF to close to 36%. However, the other countries like USA, Germany and Japan have seen a decrease in their GCF`s.

So why are India and China struggling with their economies despite an increase in their GCF`s?In China the highest investment has been in new plant and machinery and realty sectors, as shown in the adjoining graph, which have proved to be white elephants. The cheap money that is available to the corporates, due to the artificially low interest rates have fueled a realty bubble.  Many high rise buildings are unoccupied and office spaces are lying unutilized. Ghost cities and towns are spread across the country. This has been also fueled by the collusion between influential political lobbies and the banks. China’s manufacturing base has been supported by the huge demand for their goods outside. With recession hitting the global markets many of the factories are closed and lying idle. Thus the increase in GCF has not given the desired results to the Chinese economy as yet.

India`s issues are different. The 2 main issues are (a) drop in private sector investment, (b) reduction in investment in machinery and equipment i.e new manufacturing facilities. The major reason for this has been the lack of confidence in the private sector thanks to the stalemate in reforms at the central government. The share of private sector GCF has dropped to 10.65% from 12.5%. This drop also coincides with the drop in GDP growth. Private sector investments, due to efficiency factors, generate better returns and India has been severely hit by the drop in private sector investments.

What should India and China do? There has been a lot of debate and answers are obvious. China needs to reform its banking sector, free up interest rates and focus on domestic consumption. India, needs to speedup reforms and mainly build up confidence in the private sector. Easier said than done but there needs to be a political will. China certainly has but India? The experience of last 3 years says otherwise!

To conclude these figures throw up 3 questions

a) Is China in a better position to grow once the global economy picks up thanks to its huge capital base? 

b) On the other side,is the capital investment in China a bubble which can burst? 

c) What are the governance norms (or rather the lack of it) that controls the capital investment strategies in developing countries? 

Body Mass Index (BMI) - a fallacy

BMI (Body Mass Index) is calculated as = weight in kgs / (ht in metres)^2. I collected some data on some leading athletes in the world and calculated their BMI`s. If BMI above 25 is taken obese then Usain Bolt, Rafael Nadal and Roger Federer are obese and Tendulkar is on the verge of obesity ! Hence don`t worry about the BMI which I`ve felt for long is farcical.

Athlete	Wt (kg)	Ht	Ht (cms)	BMI
Usain Bolt	94	6"5"	1.93	25.37
Rafael Nadal	85	6"1"	1.83	25.52
Roger Federer	85	6"1"	1.83	25.52
Sachin Tendulkar	64	5"5"	1.63	24.24

The area of concern should be the fat content. Leading athletes are between 10 – 15%.