Dr. Susmit Kumar, Ph.D.

In 2009, I attended a conference on Indian economy at a Business School in a Midwest university which is in top five business schools in the US. During the first session, I raised the question that yes Indian economy was booming, but its trade deficit had been increasing like the US trade deficit and US could pay it by printing its currency but India would face a crisis down the line. I also mentioned that I had just published a book in 2008 which had discussion about Indian and global economy in detail. They did not give any direct answer. After my question, they changed the format of question from audience (after the first session) - in the first session, you just needed to raise your hand to ask question. But now they asked to submit questions on a piece of paper to the moderator and it would be up to the moderator to choose from the submitted questions. They did this change because any talk about debilitating effects of growing trade deficit on Indian economy would have had ruined the conference whose aim was to present the bright side of the economic growth in India. In fact just after two years of the conference, Indian economy was in the midst of a grave crisis. Due to record trade deficits during 2011-13, the exchange rate of the rupee (vis-à-vis the US dollar) tumbled from 44.17 in April 2011 to 62.92 in September 2013. After the sharp devaluation of the Indian rupee and double digit inflation during 2011-13 due to the high crude oil price, some economists even started to write the obituary of the Indian economy (read: "None of the experts saw India's debt bubble coming. Sound familiar?", The Guardian, UK, August 26, 2013; ‘Fragile Five’ Is the Latest Club of Emerging Nations in Turmoil, New York Times, January 28, 2014).

In the US, university students are taught virtues of the so-called US capitalism, painting rosy pictures only of the US economy, and not at all discussing the actual dire economic scenario in the US (please see my articles: The US Dollar – A Ponzi Scheme; Credit Rating Agencies and US Rating; Two Competing Models in the Global Economy). Business schools in US universities produce economists and MBAs for the Wall Street and not for the main street, i.e. for the government which works for the common people. There is a revolving door between the Wall Street and the financial organs, like Treasury Department, of the US administration, i.e. in nearly all US administrations, Wall Street bankers hold the top positions in the financial organs of the government and after end of the term, they again rejoin the Wall Street and hence, their allegiance is with Wall Street and not with the common people of the US. One major criticism of the $700 billion bailout, at the onset of 2008 Great Recession, by the Bush administration was that all the Wall Street financial institutions were paid in full - Societe Generale received $16.5 billion in payments, Goldman Sachs $14 billion, Deutsche Bank $8.5 billion, and Merrill Lynch received $6.2 billion, and another 12 institutions received a total of $16.9 billion for full value for their credit-default swaps with American International Group (AIG) which was certain to go bankrupt without the bailout. On the other hand had the AIG was allowed to go bankrupt, the Wall Street bankers would not have had received even a single cent (“Watchdog: Fed Used Flawed Strategy in AIG Bailout”, abcnews.go.com, November, 16, 2009). Generally in a bankruptcy. the loaners are not paid full amount which they had loaned, i.e. they get haircut.

If a country goes to the IMF in case of a FOREX crisis, the IMF, mainly manned by the US Treasury Department, forces the country to pay the loaners' full amount. After watching IMF at work during the 1997 East Asia Economic Crisis, Joseph E. Stiglitz, the 2001 winner of the Nobel Prize in economics and chief economist at the World Bank from 1996 to 1999, wrote in April 2000:

 

“I was chief economist at the World Bank from 1996 until last November, during the gravest global economic crisis in a half-century. I saw how the IMF, in tandem with the US Treasury Department, responded. And I was appalled” (Joseph Stiglitz, “The Insider: What I Learned at the World Economic Crisis,” New Republic, April 17, 2000).

 

“The IMF may not have become the bill collector of the G-7, but it clearly worked hard (though not always successfully) to make sure that the G-7 lenders got repaid” (Joseph E. Stiglitz, Globalization and Its Discontents, New York, W.W. Norton, 2003, p 208).

It was perhaps he who described the crisis best:

 

“The IMF first told countries in Asia to open up their markets to hot short-term capital [It is worth noting that European countries avoided full convertibility until the 1970s.]. The countries did it and money flooded in, but just as suddenly flowed out. The IMF then said interest rates should be raised and there should be a fiscal contraction, and a deep recession was induced. As asset prices plummeted, the IMF urged affected countries to sell their assets even at bargain basement prices. It said the companies needed solid foreign management (conveniently ignoring that these companies had a most enviable record of growth over the preceding decades, hard to reconcile with bad management), and that this would happen only if the companies were sold to foreigners—not just managed by them. The sales were handled by the same foreign financial institutions that had pulled out their capital, precipitating the crisis. These banks then got large commissions from their work selling the troubled companies or splitting them up, just as they had got large commissions when they had originally guided the money into the countries in the first place. As the events unfolded, cynicism grew even greater: some of these American and other financial companies didn’t do much restructuring; they just held the assets until the economy recovered, making profits from buying at fire sale prices and selling at more normal prices” (Joseph E. Stiglitz, Globalization and Its Discontents, New York, W.W. Norton, 2003, pp 129-30).

The US economists/MBAs are very good in increasing the share prices by squeezing as much money from the firm (like keeping it lean and thin, i.e. having as few employees as possible) as possible for the shareholders, but they are not good for a nation’s economy. A country is not a firm. For the development of a country, you need to keep entire population in mind rather than few like shareholders in case of a firm.

Since the liberalization in 1991, Indian economy is going into wrong direction because of being exceedingly dependent on US economists. These are the people who created and sold the US to its Frankenstein, China, in the name of lower taxes and unrestricted free-market. Since early 1970s the US has trade deficit year after year; it just prints its currency, which happens to be the global currency, to pay for its trade deficit (and also for its budget deficit) (please see my articles: The US Dollar – A Ponzi Scheme; Credit Rating Agencies and US Rating; Two Competing Models in the Global Economy; Is "Make In India" Theme Helping Indian Economy? – Part II). Hence the US economists would NEVER accept that the trade deficit, the primary reason for the FOREX (FOReign EXchange) problem, has potential to destroy a country’s economy for decades to come.

India wasted last nearly three decades by following the US economic policy. India’s trade deficit is the third highest, after the US and the UK, in the world (please see Chart 1). It is worth noting that due to Margaret Thatcher, the British Prime Minister during 1979-90, the UK has been following the “Reaganomics,” i.e. small government, lower taxes, free trade and privatization. For this very reason like the US jobless recovery since the 2008 Great Recession (“Why the U.S. Has a Monopoly on Jobless Recoveries,” Noah Smith, Bloomberg News, January 23, 2017), India has been experiencing jobless growth (“Where are the jobs?,” Shweta Punj and MG Arun, India Today website, April 20, 2016). According to a recent report, while the economy is growing at just over 7% per year, jobs increased by just 1.1% last year, covering eight key sectors of the nonfarm economy. An earlier report had pegged joblessness at a five year high of 5% in 2015, and underemployment at a staggering 35% of the over 15-years labor force (“Economy growing at 7%, jobs at 1%”, Subodh Varma, Times News Network, May 19, 2017).

Rather than sending bureaucrats to US premier universities like Harvard University for management training, the Indian government needs to send them to countries like Germany because the German manufacturing sector still contributes about 25 percent of its GDP as compared to only 11 percent in the case of the United States. For this very reason Germany is still the world’s second-largest exporter (please see Charts 2 and 3) and has not faced the same severe crisis that countries such as the United States and other Western nations have been facing due to emergence of the global Chinese workshop.

Chart 1 (in USD billions)
(source: http://www.worldsrichestcountries.com/trade-deficits-by-country.html)

 

Chart 2 (in USD billions)
(source: https://www.statista.com/statistics/256642/the-20-countries-with-the-highest-trade-surplus/)

 

Chart 3 US Trade Deficit with Various Countries (in USD billions)

 

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