Observations of A Brief Trip to Shanghai: Modernity Trouncing Tradition

Observations of A Brief Trip to Shanghai: Modernity Trouncing Tradition.

Arun Kumar

Mainstream, Republic Day Special, January 23-29, 2009, Vol. XLVII No 6. Pp. 47-51.

I. FIRST IMPRESSIONS
There is little that prepares one for the surprise when one visits Shanghai for the first time. China for all its rapid growth in the last 25 years is still one of the poor countries of the world and a part of the developing world. Yet, the Centre of Shanghai is like the downtown of a modern European or US city. Excellent infrastructure, sky scrapers, no power outages, good roads with proper signages, bicycle tracks and in places even moped tracks. The city boasts of the largest number of hotels and malls of any city in the world. Some years back, Mumbai wanted to be like Shanghai and on seeing it one realized why but it also became clear that the goal is a distant one.
Police is not much in evidence suggesting that the crime rate must be low and people largely law abiding. Unlike Delhi, cars do not have dents and traffic is orderly, driving in lanes and even if one is stuck in traffic jams of which there are plenty, motorists do not jump lanes and create a chaos slowing everyone else down (unlike here). Taxis were plentiful and charged by the meter and apparently there are hardly any complaints of over charging or of taking foreigners for a ride via circuitous routes to make them pay more.
First impressions on landing at the Shanghai airport (Pudong) gave a hint of what was ahead. The airport is massive, very neat and with immigration taking only a few minutes. As more and more disembarking passengers came in, the number of counters open increased from 3 to 15. The trip from the airport to the city was in a comfortable bus on an enviable highway where traffic was fast and smooth. Buses were available with great regularity to pick up passengers to different parts of the town. People were helpful, guiding us (strangers) from the disembarkation point to the hotel.

II. STRONG IMPLEMENTATION
The next day we were efficiently picked up at the appointed time to reach the venue of the conference, the reason for our visit to Shanghai. There was much clicking of cameras as three Indians came to the entrance of the Conference Venue – perhaps to establish that it was an international conference. The Conference organized under the auspices of The Third World Forum on China Studies was titled, `Common Challenges, Common Efforts: Working Together for a Better World’. Organization was excellent throughout the two days with simultaneous translation working well, etc. The picture one got was of a highly organized society where things work. This is the underlying basis of the economic miracle. Decisions once taken (right or wrong) get implemented. There is hierarchy everywhere and orders seem to be carried out systematically so that the institutions achieve their goals.
This can also be disconcerting to someone used to living in a democracy. Is everyone’s voice heard or only those at the top decide what is good for society and then everyone has to follow? As long as the cat catches the mice it does not matter whether it is black or white. This is the basis of the idea of `growth at any cost’. Who is bearing the cost?
At the inaugural session of the conference, it was repeatedly mentioned that there is need for harmony in society - perhaps because there is a growing perception of a lack of it. Are there protest taking place somewhere against this kind of growth? I was asked about Singur. Curiosity suggested that the protests in Singur and the predicament of the Tatas may have some relevance to China also. Massive displacement has occurred in China. Data suggest that there has been a decline in acreage under crops.

III. OLD IS OUT
On a trip to see the cleaned up Suzhou Creek in Shanghai, one was impressed by the changes brought about. What was worse than a stinking nallah (much like the river Yamuna in the lean season) has become clean with fish reappearing and stink gone. All around the beautiful park, created to showcase the clean up to the tourists, are high rise apartments. More are coming up as the old houses are demolished. Obviously, there has been resistance since one can still see surviving pockets of old single and double storied houses. These are hidden behind surrounding high walls. On peeping inside one can see that some houses have been demolished while others are still standing. Conditions inside appeared to be obviously bad and in stark contrast to the modern and bustling city just outside the walls.
One could see this pattern in many other parts of the old city like, around the Yeu (meaning High) Garden. Upon taking a walk through this part, one could see despondency on the faces of those staying in these areas in miserable conditions. They are only being tolerated till the tide turns. It is like they are engulfed by the open jaws of the dragon of modernity and it is a matter of time before the jaws close and they get swallowed up by modernity of which they obviously want no part. Life in the clouds outside their hovels must seem to be like a bad dream which does not vanish when the eyes open. The future is staring them in the face.
In the middle of the Yeu Garden is the old tea house located in the middle of a pretty pond where, as one is proudly told by everyone, the Queen of England and Clinton had come to have tea. Around it are beautiful old buildings seemingly well preserved and teeming with visitors. One felt cheated that these are actually new buildings which have been constructed for tourists to get a feel of what it may have been in days gone by. ASI in India would not have allowed new construction within 100 meters of the historic structure but the Chinese perhaps have no such restrictions to worry about.
What of history? The Europeans try to preserve every old building and their history. We are told that the developers will give those displaced from the older buildings a flat in the new apartment block to be built on that land. They would also get cash. Why are they resisting? One young girl said they are bargaining for more. When one asked if it could be the case that they may value the land of their forefathers and their community more than the money they will get, she sheepishly admitted that it was likely. But she said that the young people want none of that and would happily move. She also added that the young wish to have little to do with the old ideas or things and want to modernize. History matters little to them or perhaps begins with their generation.

IV. VISIT TO A CHINESE VILLAGE
On a drive outside Shanghai, one saw massive projects and highways coming up every few miles. Communities are being swallowed up rapidly. We stopped at a village with ponds full of lotus, a rivulet flowing by, every inch of the land planted with something – maize, cabbage, egg plant, gourds, lemon, etc. Even the few feet between the cemented road and the ditch had cotton growing on it. In the village, some very fancy houses with big cars were surrounded by blocks of houses in rows (perhaps a legacy of the Maoist era) and some very broken down houses. Those living in obviously miserable conditions were few but not lacking in dignity or patriotism. They did not wish to be photographed because they said it would be a loss of face for the community and the country.
Some big construction was coming up within visible range and the construction of a massive highway seemed headed towards the village and it only seemed a matter of time before the village would disappear. These are the limited observations of a limited trip to a village – perhaps not a typical Chinese village since it was in the neighbourhood of Shanghai.
While trying to beat the West at its own game of material development, the Chinese have paid a big price. Their youth wishes to have little to do with its own past. They are highly westernized in approach and envious of us for our ability to converse in fluent English. I often heard it being said that India has excellent higher education by which was meant that many of us knew English. They kept saying that you have services and we have manufacturing. They were incredulous to learn that we have only a handful of good institutions of higher learning and spend about 4% of GDP on Education. They were surprised that it is not government policy but due to the pattern of demand of the elite that we have such a high share of services in our economy.
Seeing the massive investment all around, it occurred to me that could it not have been used to revive and preserve the old? It may have been cheaper also, especially in environmental terms, if the economic model was different from the one being borrowed from the West but then China is in a hurry to catch the mice. So, the real problem is not the colour of the cat but one of what is being caught – mice or something else along with it?

V. GROWING DISPARITIES.
We enjoyed the Chinese hospitality with meals running into twenty to forty dishes. One learnt after the first meal that one can barely taste what was served if one wished to try everything otherwise half way through one had to give up. The green tea, chopsticks and the food seemed genuinely Chinese and the young enjoy it but in their day to day existence some students said there is a substantial switch to quick food, sandwiches and coffee.
Only big cars are in evidence in Shanghai. There is little between them and the two wheelers and the bicycles. Apparently they are not encouraged. Yet, the driver of the car that took us to the rural areas had his dinner at the same table as the group hosting us. The Secretary to the boss was also with us. Dignity of labour is still intact.
Traffic on the roads was massive but none of the vehicles emitted black smoke and so the pollution levels were tolerable even though when approaching Shanghai from the air at night one got the sense that there was a brown cloud hanging over the city but this could also be due to the light pollution. The streets were very well lighted and high beams blinding the traffic from the other direction were not in evidence.
The city is well provided with a East-West and a North-South corridor along with Ring roads. These are roads built over existing roads. There is an efficient metro system and a bus service. But there are traffic jams through most of the day. Perhaps there is a need to build another layer of highways. Where would this stop?
At night one saw some people rummaging through the garbage to collect plastic bottles, etc. One was also told that there were those who slept under the bridges and flyovers and there were many of them. One did not see any beggar (though there are reports of children begging) but there was an old man playing a one stringed instrument and people dropped coins in his cap kept in front of him. However, the number of poor seemed to be far less than one sees in Indian metros. Also, the situation maybe different in the less prosperous hinterland and rural areas. The malls were full of stores from the high fashion world of US and Europe and they seemed to be doing enough business for there to be so many of them. The young aspired to buy this stuff. Disparities are there but apparently less than what is visible in India.

VI. THE MISSING MACROECONOMICS
India is of marginal interest. It is seen as weak and not able to overcome its problems. But its software is seen as something to envy. Indian youth is now going in a big way to study in China because it is cheaper than the private sector professional colleges. The plane we went in had a significant number of young students going there for studies. They were carting spices and food items to survive but China has attractions for them.
The India related papers at the conference saw little interest but privatization in China and Russia was far more interesting. Macroeconomics held less interest than the nitty gritty of how to go ahead with the markets. There was little concern at the slowdown in the world economy given that the Chinese economy was still growing at 10% and it was expected to continue to grow at double digit rates. No one referred to the collapse of Freddie Mac and Fannie Mae and the decline of the value of their shares by 90%. The Chinese investments in these have been substantial and they would have suffered big losses. The high savings and investment rates and large reserves held by China and the resulting high liquidity did not arouse any serious analysis of the emerging situation. Either there was complacency or there are few macro analysts.
In the hotel, at breakfast, one met a couple of executives from Hong Kong who said that non-resident Chinese are active investors. Buildings of all sizes are coming up. The hundred storey building the Chinese completed has been eclipsed by others and especially now by the Dubai Burj but there would be little surprise if one hears of a taller building planned for the coming years. For the Chinese the Earth is Square and the heaven round, so one saw many buildings which have a round something at the top. We were told that the foreign investor ties up with some political heavy weight who delivers on the land and the approval of the schemes. Capital of any description is welcome; displacement and labour are not a problem. The workforce is disciplined and wages not too high but the managers and professionals seem to be well looked after. They are the consumers in the economy.

VII. CHINESE WORLD VIEW AND CONCERNS
The situation in agriculture and in the Western and Central parts of the country are an obvious cause of concern since they have lagged behind. One senior analyst suggested that the government is a disinterested party in development so it looks after the interest of the country as a whole. Others contested this view by pointing to the growing regional and rural urban divide – mirroring the current Indian discussion. Many of the academics are trained in the West and bring with them the western framework of analysis. Neo-classical framework was much in evidence with analysts swearing by the power of the market and largely interested in suggesting how it can be furthered.
In the inaugural session of the conference, the theme of harmony was firmly placed on the agenda but apart from us from India who wove this theme into our presentations and raised this as a serious concern in India and also in China others in our sessions hardly referred to it explicitly. In the round tables held just prior to the concluding session, one did not hear it being mentioned.
In one of these round table discussions, China was upbraided by a Japanese and some western participants for joining the group of 21 to stall the Doha round. It was suggested that China was expected to be more constructive and not to join India. It was suggested that China’s trade could slow down as could its flow of foreign investments. At another round table one heard that China has to adopt the Western tools of analysis for understanding society since only one kind of analysis is possible in today’s world.
In the opening session of the Conference, Mr. Li Wuwei, Vice Chairman, national Committee of CPPCC and Research Professor, SASS, suggested that China has made great strides but this has aroused concerns in the rest of the world and that some call it the “China Threat”. He projected the current trends to 2025 and said the GDP per capita will reach $8,000. He said, it is essential that there be peaceful development in the world and that there is an interconnection between China’s future and destiny and those of the world. He said. `China will continue to contribute to the regional and world common development’. There were elements of China having a hegemonic position in the world and that requires peace.
Prof. Wang Ronghua, President, SASS and Vice Chair of the Shanghai Committee of the Chinese People’s Political Consultative Committee (CPPCC), in a paper, Harmony and Peace: The Global Implications of Chinese Development. SASS Working Papers, suggests, `Western powers typically rose through overseas expansion, often connected with wars.’ While China is `influencing the world constructively by reforming itself.’ He states, ` … lifting approximately 300 million people out of poverty. … in every sense a substantial contribution to human cause of peace and development.’
He suggests, `Two features shaping Chinese development are easily identified: its massive territory and wide gaps between different regions.’ It is a cause of concern that `levels of development in China are still very imbalanced amongst different regions.’ Regarding the world economy he suggests, China `is expanding the volume of global market on the one hand, and on the other hand, helping to curb rising costs and any consequent worldwide inflation’ and this is because it `has great comparative advantages, especially in labour’ but unfortunately, this is not seen as the cause of great and growing disparities.
If one asks is China still socialist? It is reiterated that China has a unique path of development. But it is not explained whether what exists is distinguishable from state Capitalism and primitive accumulation of Capital.
Professor Li Junru, Vice President, Party School of the Central Committee of the CPC and Vice Chairman of China’s Reform and Opening-up Forum, speaking in the inaugural session talked of `the Adaptation of Marxism to Chinese Conditions’. He said, `adapting Marxism to Chinese conditions is just to make every communist party member act with Chinese characteristics.’ He said that Deng Xiaoping suggested, `taking our own road and building socialism with Chinese characteristics’.
According to him, application of value orientation is important which implies `to save the whole nation from great misery’ and `to liberate the whole Nation’. According to him, Deng Xiaoping used this to argue that `the Chinese development can not be away from the world’ and this led to the opening up. This was the objective of reform. Jiang Jemin used this to suggest `our Party should follow closely the progressive trend of the world’. He used this to join WTO and become a part of economic globalization. Hu Jintao has used this to put forward a global strategy of `following a win-win strategy of opening up’.
Zheng Bijian, Former Executive President, Party School of the Central Committee of the CPC, former Chairman of China’s Reform and Opening up Forum said economic globalization started in the middle of 18th century and identified three great turns in it. He suggested that the US failure in Vietnam and Soviet’s failure in Afghanistan made their globalization strategy meet with serious setbacks. He said, in the 21st century we are facing a new `hundred schools of thought’ and this is the third time it has happened in Chinese history. He doubted that the idea of `civilizational conflict’ and the shifts in characterization from `China Collapse to China Threat to China uncertainty’ have much validity in them.
He said, `socialism with Chinese characteristics is a socialism that advocates peace’. He added, `it is impossible to have no twists and turns, ups and downs and even mistakes; it is impossible to be out of balance, out of control, corruption, underside, and even chaos;’ He identified the massive work force in agriculture as a problem that needs to be solved and suggested that there has to be a ‘new industrialization route’, a `modernization route with Chinese characteristics’ but what this means is not spelt out. He suggested that `we can’t learn from the Western Powers the colonist plundering of the world resources’ or `learn from the military nations like Germany and Japan’ or copy the `hegemonism of the former Soviet Union’. He suggested that there was a need for a `harmonious world’.
Mei Zharong, Former president of the Chinese People’s Institute of Foreign Affairs Former Chinese Ambassador to Germany, suggested that China’s rise has led to `malicious attacks of the Western Powers’. He said that they speak `ill of China’s human rights in spite of the China’s actual conditions’. He said that the West is worried about China aiding Africa and falsely accuses it of locking up or plundering its natural resources. He also raised the issue of western support to Dalai Lama under the garb of supporting cultural autonomy. He suggested that China `must keep modest and prudent’, further, `must avoid all means self praise and publicize everywhere and play tricks of “image engineering” and “achievements in official career”.’
All in all, China is projecting itself as an economically successful nation and telling the world that it is ready to take its place in the comity of nations as a leader. It is not particularly worried about its socialist past or claim to be governed by a communist party. It advocates peace to enable its growth to continue so that it becomes the world leader by 2025.

VIII. CONCLUSION
It is clear that China has not evolved a successful indigenous alternative so when Maoist philosophy gave way what was left was the path of western modernity which was dominant in the world. So, for the upwardly mobile, the notion of success has become `Western’. Young people aspire to go West to study. Those adopting the western ways are seen as successful. The youth seems to have given up China’s history in a big way as redundant.
Did communism and its failure after the mid Sixties deliver China to the West? That has happened in much of the world and in the former colonies that fought on the plank of nationalism and indigenous development. The cultural revolution and the running down of all forms of past practices from before the revolution suggested to the population that all the ancient influences were backward and had to be given up in favour of western modernity.
It was a fascinating trip to a great country which has taken rapid strides in material terms but there were uncomfortable questions related to the need for any great country to have its own path which was not in evidence in China? One was groping to understand how a great civilization with such a long history has suddenly given it up in substantial measure?

arunkumar1000@hotmail.com.

Observations of A Brief Trip to Shanghai: Modernity Trouncing Tradition

Observations of A Brief Trip to Shanghai: Modernity Trouncing Tradition.

Arun Kumar

Mainstream, Republic Day Special, January 23-29, 2009, Vol. XLVII No 6. Pp. 47-51.

I. FIRST IMPRESSIONS
There is little that prepares one for the surprise when one visits Shanghai for the first time. China for all its rapid growth in the last 25 years is still one of the poor countries of the world and a part of the developing world. Yet, the Centre of Shanghai is like the downtown of a modern European or US city. Excellent infrastructure, sky scrapers, no power outages, good roads with proper signages, bicycle tracks and in places even moped tracks. The city boasts of the largest number of hotels and malls of any city in the world. Some years back, Mumbai wanted to be like Shanghai and on seeing it one realized why but it also became clear that the goal is a distant one.
Police is not much in evidence suggesting that the crime rate must be low and people largely law abiding. Unlike Delhi, cars do not have dents and traffic is orderly, driving in lanes and even if one is stuck in traffic jams of which there are plenty, motorists do not jump lanes and create a chaos slowing everyone else down (unlike here). Taxis were plentiful and charged by the meter and apparently there are hardly any complaints of over charging or of taking foreigners for a ride via circuitous routes to make them pay more.
First impressions on landing at the Shanghai airport (Pudong) gave a hint of what was ahead. The airport is massive, very neat and with immigration taking only a few minutes. As more and more disembarking passengers came in, the number of counters open increased from 3 to 15. The trip from the airport to the city was in a comfortable bus on an enviable highway where traffic was fast and smooth. Buses were available with great regularity to pick up passengers to different parts of the town. People were helpful, guiding us (strangers) from the disembarkation point to the hotel.

II. STRONG IMPLEMENTATION
The next day we were efficiently picked up at the appointed time to reach the venue of the conference, the reason for our visit to Shanghai. There was much clicking of cameras as three Indians came to the entrance of the Conference Venue – perhaps to establish that it was an international conference. The Conference organized under the auspices of The Third World Forum on China Studies was titled, `Common Challenges, Common Efforts: Working Together for a Better World’. Organization was excellent throughout the two days with simultaneous translation working well, etc. The picture one got was of a highly organized society where things work. This is the underlying basis of the economic miracle. Decisions once taken (right or wrong) get implemented. There is hierarchy everywhere and orders seem to be carried out systematically so that the institutions achieve their goals.
This can also be disconcerting to someone used to living in a democracy. Is everyone’s voice heard or only those at the top decide what is good for society and then everyone has to follow? As long as the cat catches the mice it does not matter whether it is black or white. This is the basis of the idea of `growth at any cost’. Who is bearing the cost?
At the inaugural session of the conference, it was repeatedly mentioned that there is need for harmony in society - perhaps because there is a growing perception of a lack of it. Are there protest taking place somewhere against this kind of growth? I was asked about Singur. Curiosity suggested that the protests in Singur and the predicament of the Tatas may have some relevance to China also. Massive displacement has occurred in China. Data suggest that there has been a decline in acreage under crops.

III. OLD IS OUT
On a trip to see the cleaned up Suzhou Creek in Shanghai, one was impressed by the changes brought about. What was worse than a stinking nallah (much like the river Yamuna in the lean season) has become clean with fish reappearing and stink gone. All around the beautiful park, created to showcase the clean up to the tourists, are high rise apartments. More are coming up as the old houses are demolished. Obviously, there has been resistance since one can still see surviving pockets of old single and double storied houses. These are hidden behind surrounding high walls. On peeping inside one can see that some houses have been demolished while others are still standing. Conditions inside appeared to be obviously bad and in stark contrast to the modern and bustling city just outside the walls.
One could see this pattern in many other parts of the old city like, around the Yeu (meaning High) Garden. Upon taking a walk through this part, one could see despondency on the faces of those staying in these areas in miserable conditions. They are only being tolerated till the tide turns. It is like they are engulfed by the open jaws of the dragon of modernity and it is a matter of time before the jaws close and they get swallowed up by modernity of which they obviously want no part. Life in the clouds outside their hovels must seem to be like a bad dream which does not vanish when the eyes open. The future is staring them in the face.
In the middle of the Yeu Garden is the old tea house located in the middle of a pretty pond where, as one is proudly told by everyone, the Queen of England and Clinton had come to have tea. Around it are beautiful old buildings seemingly well preserved and teeming with visitors. One felt cheated that these are actually new buildings which have been constructed for tourists to get a feel of what it may have been in days gone by. ASI in India would not have allowed new construction within 100 meters of the historic structure but the Chinese perhaps have no such restrictions to worry about.
What of history? The Europeans try to preserve every old building and their history. We are told that the developers will give those displaced from the older buildings a flat in the new apartment block to be built on that land. They would also get cash. Why are they resisting? One young girl said they are bargaining for more. When one asked if it could be the case that they may value the land of their forefathers and their community more than the money they will get, she sheepishly admitted that it was likely. But she said that the young people want none of that and would happily move. She also added that the young wish to have little to do with the old ideas or things and want to modernize. History matters little to them or perhaps begins with their generation.

IV. VISIT TO A CHINESE VILLAGE
On a drive outside Shanghai, one saw massive projects and highways coming up every few miles. Communities are being swallowed up rapidly. We stopped at a village with ponds full of lotus, a rivulet flowing by, every inch of the land planted with something – maize, cabbage, egg plant, gourds, lemon, etc. Even the few feet between the cemented road and the ditch had cotton growing on it. In the village, some very fancy houses with big cars were surrounded by blocks of houses in rows (perhaps a legacy of the Maoist era) and some very broken down houses. Those living in obviously miserable conditions were few but not lacking in dignity or patriotism. They did not wish to be photographed because they said it would be a loss of face for the community and the country.
Some big construction was coming up within visible range and the construction of a massive highway seemed headed towards the village and it only seemed a matter of time before the village would disappear. These are the limited observations of a limited trip to a village – perhaps not a typical Chinese village since it was in the neighbourhood of Shanghai.
While trying to beat the West at its own game of material development, the Chinese have paid a big price. Their youth wishes to have little to do with its own past. They are highly westernized in approach and envious of us for our ability to converse in fluent English. I often heard it being said that India has excellent higher education by which was meant that many of us knew English. They kept saying that you have services and we have manufacturing. They were incredulous to learn that we have only a handful of good institutions of higher learning and spend about 4% of GDP on Education. They were surprised that it is not government policy but due to the pattern of demand of the elite that we have such a high share of services in our economy.
Seeing the massive investment all around, it occurred to me that could it not have been used to revive and preserve the old? It may have been cheaper also, especially in environmental terms, if the economic model was different from the one being borrowed from the West but then China is in a hurry to catch the mice. So, the real problem is not the colour of the cat but one of what is being caught – mice or something else along with it?

V. GROWING DISPARITIES.
We enjoyed the Chinese hospitality with meals running into twenty to forty dishes. One learnt after the first meal that one can barely taste what was served if one wished to try everything otherwise half way through one had to give up. The green tea, chopsticks and the food seemed genuinely Chinese and the young enjoy it but in their day to day existence some students said there is a substantial switch to quick food, sandwiches and coffee.
Only big cars are in evidence in Shanghai. There is little between them and the two wheelers and the bicycles. Apparently they are not encouraged. Yet, the driver of the car that took us to the rural areas had his dinner at the same table as the group hosting us. The Secretary to the boss was also with us. Dignity of labour is still intact.
Traffic on the roads was massive but none of the vehicles emitted black smoke and so the pollution levels were tolerable even though when approaching Shanghai from the air at night one got the sense that there was a brown cloud hanging over the city but this could also be due to the light pollution. The streets were very well lighted and high beams blinding the traffic from the other direction were not in evidence.
The city is well provided with a East-West and a North-South corridor along with Ring roads. These are roads built over existing roads. There is an efficient metro system and a bus service. But there are traffic jams through most of the day. Perhaps there is a need to build another layer of highways. Where would this stop?
At night one saw some people rummaging through the garbage to collect plastic bottles, etc. One was also told that there were those who slept under the bridges and flyovers and there were many of them. One did not see any beggar (though there are reports of children begging) but there was an old man playing a one stringed instrument and people dropped coins in his cap kept in front of him. However, the number of poor seemed to be far less than one sees in Indian metros. Also, the situation maybe different in the less prosperous hinterland and rural areas. The malls were full of stores from the high fashion world of US and Europe and they seemed to be doing enough business for there to be so many of them. The young aspired to buy this stuff. Disparities are there but apparently less than what is visible in India.

VI. THE MISSING MACROECONOMICS
India is of marginal interest. It is seen as weak and not able to overcome its problems. But its software is seen as something to envy. Indian youth is now going in a big way to study in China because it is cheaper than the private sector professional colleges. The plane we went in had a significant number of young students going there for studies. They were carting spices and food items to survive but China has attractions for them.
The India related papers at the conference saw little interest but privatization in China and Russia was far more interesting. Macroeconomics held less interest than the nitty gritty of how to go ahead with the markets. There was little concern at the slowdown in the world economy given that the Chinese economy was still growing at 10% and it was expected to continue to grow at double digit rates. No one referred to the collapse of Freddie Mac and Fannie Mae and the decline of the value of their shares by 90%. The Chinese investments in these have been substantial and they would have suffered big losses. The high savings and investment rates and large reserves held by China and the resulting high liquidity did not arouse any serious analysis of the emerging situation. Either there was complacency or there are few macro analysts.
In the hotel, at breakfast, one met a couple of executives from Hong Kong who said that non-resident Chinese are active investors. Buildings of all sizes are coming up. The hundred storey building the Chinese completed has been eclipsed by others and especially now by the Dubai Burj but there would be little surprise if one hears of a taller building planned for the coming years. For the Chinese the Earth is Square and the heaven round, so one saw many buildings which have a round something at the top. We were told that the foreign investor ties up with some political heavy weight who delivers on the land and the approval of the schemes. Capital of any description is welcome; displacement and labour are not a problem. The workforce is disciplined and wages not too high but the managers and professionals seem to be well looked after. They are the consumers in the economy.

VII. CHINESE WORLD VIEW AND CONCERNS
The situation in agriculture and in the Western and Central parts of the country are an obvious cause of concern since they have lagged behind. One senior analyst suggested that the government is a disinterested party in development so it looks after the interest of the country as a whole. Others contested this view by pointing to the growing regional and rural urban divide – mirroring the current Indian discussion. Many of the academics are trained in the West and bring with them the western framework of analysis. Neo-classical framework was much in evidence with analysts swearing by the power of the market and largely interested in suggesting how it can be furthered.
In the inaugural session of the conference, the theme of harmony was firmly placed on the agenda but apart from us from India who wove this theme into our presentations and raised this as a serious concern in India and also in China others in our sessions hardly referred to it explicitly. In the round tables held just prior to the concluding session, one did not hear it being mentioned.
In one of these round table discussions, China was upbraided by a Japanese and some western participants for joining the group of 21 to stall the Doha round. It was suggested that China was expected to be more constructive and not to join India. It was suggested that China’s trade could slow down as could its flow of foreign investments. At another round table one heard that China has to adopt the Western tools of analysis for understanding society since only one kind of analysis is possible in today’s world.
In the opening session of the Conference, Mr. Li Wuwei, Vice Chairman, national Committee of CPPCC and Research Professor, SASS, suggested that China has made great strides but this has aroused concerns in the rest of the world and that some call it the “China Threat”. He projected the current trends to 2025 and said the GDP per capita will reach $8,000. He said, it is essential that there be peaceful development in the world and that there is an interconnection between China’s future and destiny and those of the world. He said. `China will continue to contribute to the regional and world common development’. There were elements of China having a hegemonic position in the world and that requires peace.
Prof. Wang Ronghua, President, SASS and Vice Chair of the Shanghai Committee of the Chinese People’s Political Consultative Committee (CPPCC), in a paper, Harmony and Peace: The Global Implications of Chinese Development. SASS Working Papers, suggests, `Western powers typically rose through overseas expansion, often connected with wars.’ While China is `influencing the world constructively by reforming itself.’ He states, ` … lifting approximately 300 million people out of poverty. … in every sense a substantial contribution to human cause of peace and development.’
He suggests, `Two features shaping Chinese development are easily identified: its massive territory and wide gaps between different regions.’ It is a cause of concern that `levels of development in China are still very imbalanced amongst different regions.’ Regarding the world economy he suggests, China `is expanding the volume of global market on the one hand, and on the other hand, helping to curb rising costs and any consequent worldwide inflation’ and this is because it `has great comparative advantages, especially in labour’ but unfortunately, this is not seen as the cause of great and growing disparities.
If one asks is China still socialist? It is reiterated that China has a unique path of development. But it is not explained whether what exists is distinguishable from state Capitalism and primitive accumulation of Capital.
Professor Li Junru, Vice President, Party School of the Central Committee of the CPC and Vice Chairman of China’s Reform and Opening-up Forum, speaking in the inaugural session talked of `the Adaptation of Marxism to Chinese Conditions’. He said, `adapting Marxism to Chinese conditions is just to make every communist party member act with Chinese characteristics.’ He said that Deng Xiaoping suggested, `taking our own road and building socialism with Chinese characteristics’.
According to him, application of value orientation is important which implies `to save the whole nation from great misery’ and `to liberate the whole Nation’. According to him, Deng Xiaoping used this to argue that `the Chinese development can not be away from the world’ and this led to the opening up. This was the objective of reform. Jiang Jemin used this to suggest `our Party should follow closely the progressive trend of the world’. He used this to join WTO and become a part of economic globalization. Hu Jintao has used this to put forward a global strategy of `following a win-win strategy of opening up’.
Zheng Bijian, Former Executive President, Party School of the Central Committee of the CPC, former Chairman of China’s Reform and Opening up Forum said economic globalization started in the middle of 18th century and identified three great turns in it. He suggested that the US failure in Vietnam and Soviet’s failure in Afghanistan made their globalization strategy meet with serious setbacks. He said, in the 21st century we are facing a new `hundred schools of thought’ and this is the third time it has happened in Chinese history. He doubted that the idea of `civilizational conflict’ and the shifts in characterization from `China Collapse to China Threat to China uncertainty’ have much validity in them.
He said, `socialism with Chinese characteristics is a socialism that advocates peace’. He added, `it is impossible to have no twists and turns, ups and downs and even mistakes; it is impossible to be out of balance, out of control, corruption, underside, and even chaos;’ He identified the massive work force in agriculture as a problem that needs to be solved and suggested that there has to be a ‘new industrialization route’, a `modernization route with Chinese characteristics’ but what this means is not spelt out. He suggested that `we can’t learn from the Western Powers the colonist plundering of the world resources’ or `learn from the military nations like Germany and Japan’ or copy the `hegemonism of the former Soviet Union’. He suggested that there was a need for a `harmonious world’.
Mei Zharong, Former president of the Chinese People’s Institute of Foreign Affairs Former Chinese Ambassador to Germany, suggested that China’s rise has led to `malicious attacks of the Western Powers’. He said that they speak `ill of China’s human rights in spite of the China’s actual conditions’. He said that the West is worried about China aiding Africa and falsely accuses it of locking up or plundering its natural resources. He also raised the issue of western support to Dalai Lama under the garb of supporting cultural autonomy. He suggested that China `must keep modest and prudent’, further, `must avoid all means self praise and publicize everywhere and play tricks of “image engineering” and “achievements in official career”.’
All in all, China is projecting itself as an economically successful nation and telling the world that it is ready to take its place in the comity of nations as a leader. It is not particularly worried about its socialist past or claim to be governed by a communist party. It advocates peace to enable its growth to continue so that it becomes the world leader by 2025.

VIII. CONCLUSION
It is clear that China has not evolved a successful indigenous alternative so when Maoist philosophy gave way what was left was the path of western modernity which was dominant in the world. So, for the upwardly mobile, the notion of success has become `Western’. Young people aspire to go West to study. Those adopting the western ways are seen as successful. The youth seems to have given up China’s history in a big way as redundant.
Did communism and its failure after the mid Sixties deliver China to the West? That has happened in much of the world and in the former colonies that fought on the plank of nationalism and indigenous development. The cultural revolution and the running down of all forms of past practices from before the revolution suggested to the population that all the ancient influences were backward and had to be given up in favour of western modernity.
It was a fascinating trip to a great country which has taken rapid strides in material terms but there were uncomfortable questions related to the need for any great country to have its own path which was not in evidence in China? One was groping to understand how a great civilization with such a long history has suddenly given it up in substantial measure?

arunkumar1000@hotmail.com.

Analyzing The Satyam Affair: Pointers to Business Fraud in India

Analyzing The Satyam Affair: Pointers to Business Fraud in India
Arun Kumar
CESP,SSS, JNU, N Delhi 110067.
The Tribune January 24, 2009

Business fraud is nothing new in India. Businessmen are known to go to great lengths to make money through legitimate and illegitimate ways. Clever accountants and lawyers are employed to devise ways to generate higher profits for the businessmen.

The Satyam affair stunned everyone when it’s supposedly `honest’ chairperson admitted to committing fraud over the last several years. Apparently, Satyam has been defrauded of Rs. 7,000 crores but the final tally could be larger. The loss to the share holders and employees would be by a multiple of this sum. In comparison, the Harshad Mehta episode in 1991-92 was estimated by the Jankiraman Committee to be of the order of Rs. 3,900/- crores even though others claimed it to be eight times bigger. Ketan Parekh’s manipulations led to massive losses for the entire community of stock investors. Collapse of Global Trust Bank, Telgi scam and other such cases have erupted from time to time.

By one count, by end of the 1990s, 2,500 companies that had raised money in the Indian stock markets had disappeared with the share holder’s money. The government did not act against these fraudsters and this emboldened the owners of businesses to commit more frauds.

Mostly, managements declare lower profits to escape paying taxes and that is how black incomes are generated. What is curious about the Satyam affair is that according to its Chairperson, Mr Raju, it was supposedly doing the opposite, showing higher profits. That means that Satyam was paying more taxes than it needed to have - a double whammy for the shareholders. Not only was their company less profitable than they thought it to be but it lost money because of excess tax payments.

However, analysts have argued that Satyam could not have been showing higher than actual profits. If Mr. Raju is to be believed, Satyam was operating with margins of 3 to 4%, and this cannot be correct since the margins of comparable software companies are in the range of 25%. So, many believe that Mr. Raju is lying under the garb of telling the truth. The puzzle is that Satyam should have had higher profit margins but its owner, Mr. Raju is claiming that it had lower margins and willingly implicating himself in fraud. Is he trying to cover a bigger fraud?

Why would an owner show higher profits? First, to manipulate the share price since it rises as declared and expected profits rise. This helps in raising the credibility of the company and its management and thereby enables it to raise more funds for further expansion of the company. Secondly, when there are concessions in taxation on profits, it may pay to divert profits from a company not entitled to tax concessions to a company that is entitled to tax concessions and thereby save on tax payments. There was concession under 80 HHC on profits earned in exports and later it was available under section 10A for exports from special zones. Since these provisions were/are for exports, exports have to be over invoiced. Hence more foreign exchange has to be brought into the country than was earned and this way black wealth held outside or profits of other companies siphoned out of the country through havala are brought back – i.e., reverse havala.

Finally, Mr. Raju could be siphoning out funds from Satyam to sister concerns that were dealing in real estate. One can conjecture that given the recent collapse of real estate prices and slowdown of investments in this sector, the sister concerns were in need of funds and possibly in trouble.

Major infrastructure deals had been signed in the last few years involving payment of large sums of money including in black and as cuts to politicians and bureaucrats. This could have been financed through drawing out of funds from the accounts of Satyam. These would have been recouped in the normal process when land was sold for commercial purposes and black funds obtained which would have been put back into the bank accounts and fixed deposits of Satyam. The crisis in real estate and fall in prices and drying up of investments in real estate would have meant that the funds were not coming back.

The purchase of the sister concerns at high and inflated prices would have meant that the fictitious accounts worth Rs. 7,000 crores would have been drawn down and money transferred to the owners of the sister concerns, that is, to themselves and then there would have been no one to ask where is the money. So, by book transfers, the earlier siphoning out of funds would have been covered up and the false entries of the bank balances and fixed deposits reversed/set right.

Mr. Raju thought that his prestige as the pride of Andhra and his political clout would enable him to commit the brazen act. These factors had earlier enabled him to obtain the silence of Chartered Accountants and the independent directors on the board of Satyam. The Satyam story would perhaps have not broken out as yet but for the crisis resulting from the failure of the attempt to buy the two sister companies.

The forced reversal of the decision to buy the sister companies and the investment banker’s approaching SEBI with the story of the non-existent balance in the banks was the trigger to the realization that the game was up. There was little time to bring back other black funds and perhaps due to the global crisis they had got stuck. Since the funds did not exist in the Satyam bank accounts he had to cover up by saying that the actual profitability of Satyam was lower and that he had been inflating profits for years - an attempt to portray honesty while committing a fraud. This line may also help in the cases in the US courts, to reduce the severity of the fraud and penalties.

The involvement of managers of banks where the non-existent funds were supposedly held is likely. Similarly, the auditors may have looked the other way rather than questioning why so much cash was being held in bank accounts. The independent directors should have asked why Rs. 5,000 crores was held in savings accounts when in Fixed Deposits, Rs 400 crores could have been earned.

The board consisting of management gurus, former bureaucrats and businessmen could not have been so naïve as to not realize that something was remiss. How could they approve the purchase of two family companies at such exorbitant prices when it was apparent even to the layman that something was remiss? Why did they keep quite as cash in banks piled up? Perhaps, through cozy relationships, they benefited in political and financial terms.

It is now coming out that even employment was being fudged and profits so generated were siphoned out. Shady land deals and support from the various Chief Ministers are being talked about. How many skeletons will tumble out is not clear?

The Satyam affair points to the sharp practices adopted by crooked Indian businesses - siphoning out of profits, fudging of muster rolls, the cozy relations with politicians and bureaucrats and finally, manipulating bankers, `independent’ auditors and `independent’ directors. All this is well known in the context of the rampant black income generation. Mr. Raju’s admission has brought into question the notion of a `respectable’ or `honest’ businessman. As the global crisis deepens and more frauds surface, more reputations maybe dented. In India we are used to wrongs of the high ups emerging with great regularity and then to having amnesia about them – perhaps a cynical view but not far from reality.
arunkumar1000@hotmail.com

The Vicissitudes of the Year Past: Relief not in Sight Anytime Soon

The Vicissitudes of the Year Past: Relief not in Sight Anytime Soon
Arun Kumar
CESP, SSS, JNU.
The Tribune, January 1, 2009.
The year 2008 started on a high with the economy doing well, stock markets at a historic high, real estate markets booming, industrial growth running at upwards of 10 per cent and inflation at low rates. The finance minister boasted that the macro economic fundamentals are good and the Eleventh plan target of 9 per cent average growth rate viable. There was little inkling that policy making circles understood that a deep economic downturn had set in India and the entire world.
Contrasting this rosy picture, the year is closing with wide spread reports of declining employment, stock markets down by 50% to the levels of 2006, declining real estate markets, industrial growth and exports showing negative growth and many components of the services sector declining rather than growing. This has happened despite the unprecedented interventions by the government and the Reserve Bank – the infusion of massive liquidity, huge supplementary budget and the announcement of the first package of fiscal stimulus soon to be followed by a second one. FRBM has been given a quiet burial.
The year also saw much turmoil due to a rapid acceleration of inflation from its lows in January to the highs in the middle and now to a rapid decline in the closing weeks of the year. It seemed that the government had lost control because at one point the government admitted that it could do little to keep inflation in check by pleading that it was stable and not rising further.
Internationally, the prices of crude oil which had reached a peak of around $150 per barrel have sharply fallen to around $40 in spite of the threatened cut in production by the oil producers. In fact, many, like, Goldman Sachs had predicted that the price of crude would be around $200 by the end of 2008. Similarly, given the blistering pace of the rise in the BSE experts predicted that it would touch 30,000 - three times the level ruling currently. All this calls into question the expertise of the so called experts and policy makers.
The year began with policy makers and experts suggesting a decoupling between the Asian and the US and European economies. They suggested that the rapidly growing economies of Asia will provide the boost to the advanced economies so that there would be a soft landing for the world. This was based more on hope and hype rather than on analysis (As argued in these columns on February 6, 2008). These economies were already at their peak growth rates and could not double them which was required to compensate for a decline in the rates of growth in the OECD economies. Further, since China is heavily dependent on exports to these economies and India is much more open than earlier, if anything, their rates of growth were bound to fall. These two economies could not move in a direction opposite to that of the bigger economies, as events have borne out. Clearly, all along the policy makers and experts have been hoodwinking by denying reality. They also fooled themselves and did not take timely steps so that the situation became worse than it should have and now everyone is paying for it.
The rich have lost a lot of paper wealth on their financial assets where much of their savings were invested. These people also had substantial amount of their black wealth stashed away abroad because this was also invested in financial instruments. These people were also operating real, nuts and bolts companies or offices and due to the slow down, these are also in trouble. The contagion has spread from the financial markets to the real economy.
All this has impacted the middle classes who have linkages in the organized sectors. Many of them are in the process of losing jobs and their children are not getting the good jobs they expected. Further, a large part of their savings in financial assets – stocks, real estate, mutual funds, etc. - have been wiped out. In recent times they were lured by stories of high returns and greed won over caution. Many NRIs will possibly return as they lose jobs abroad and add to the employment pressures. Remittances that supported many families are likely to dry up leaving families in trouble. Public sector employees with safe employment will have a good time as prices fall.
Some argue that the poor will not be hit by the current crisis because they are marginal to the market and especially the financial markets. This is fallacious because the marginal are coercively linked to the markets in a one way relationship. While they derived little benefit from the high but marginalizing growth they will suffer from the decline. Even if they lose a few rupees a day of income, it will be calamitous for them since they are at the edge of survival.
As unemployment builds up the world over, wages will fall and disguised unemployment will rise. Price fall will help but not enough. Employers in the unorganized sectors and the rich farmers who will be squeezed by the crisis will put the squeeze downwards and affect adversely the incomes of the poor. Government programmes like rural employment schemes can help the poor but corruption moderates its effect.
Agriculture in India has been increasingly export oriented and there has been a shift towards commercial crops and high cost agriculture. The markets for these commodities have declined sharply and the slide can continue unless prices are sharply lowered but then the surplus farmers will lose out. The traders will put the squeeze downwards and the farmers will do the same to the landless workers.
In India, big and medium sized firms buy from the smaller units in the unorganized sectors. As these units face decline in demand, they will be forced to shut partially or wholly , reduce shifts and cut prices which is possible only if they squeeze either the wages or the smaller ancillary suppliers (possibly both) who in turn will squeeze their workers. Thus, wages of workers are likely to decline all around and their employment curtailed.
Governments all over the world have put together huge packages of interventions to prevent their financial sectors from collapsing but done relatively for the real economy and the poor. This has certainly slowed the decline but it is still continuing. The problem this time is different than in 1929 and much deeper, linked to the basics of the world economic system. Merely trying to reflate the economies without any basic change will not work.
In India, the NEP launched in 1991 depended on the proper functioning of the global financial system but because this is now collapsing, the success of NEP is in doubt. While the marginalized sections were suffering and continue to suffer, now the beneficiaries of the NEP are being grievously hurt. In the changed global scenario, NEP need a rethink.
Many companies are close to bankruptcy if not bankrupt, public does not trust the present financial system so it has ground to a halt and due to extreme uncertainty, everyone wishes to remain liquid rather than invest. The crisis has been building from 2006 without our recognizing it and we are still groping for solutions because these have to be out of box and this will take time. If the social and political situation deteriorates with rising unemployment and destitution, then even big economic interventions will not succeed and governments will become helpless. While 2008 is closing on a difficult note, 2009 appears to be heading for deeper trouble.

Eventful Year 2008: Descending into the Precipice

Eventful Year 2008: Descending into the Precipice
Arun Kumar
CESP/SSS, JNU, New Delhi 110067.
Published on January 5, 2009 on Taxindiaonline.
http://www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=8395

Year 2008 began with all round predictions of reduced but positive growth for the world economy. The US economy was expected to continue to grow even if anemically. Mr. Paulson, the US Treasury secretary and Prof. Bernanke, the Fed chief prognosticated that the problems faced by the US economy were tractable and certainly not systemic – something they admitted only on September 19, 2008.
2008 is ending with rapidly rising unemployment and houselessness due to foreclosures and a deepening recession in the USA. The trend is no different in the other major world economies. Some have suggested that this is just the start of a major downturn in the world economy. Fears of deflation in the world economy are real with prices softening and this could head the world towards a depression and a recovery many years away.
The US financial system is no more what it was even six months back. Major entities like, the housing mortgage giants, Freddie Mac and Fannie Mae, the insurance giant, AIG, the largest US bank, Citibank, the giant investment banks, Goldman Sachs, Merrill Lynch, Lehman Brothers and Bear Sterns, have faced collapse. They have had to be bailed out by the government or gone bankrupt. Given the inter linkages the effect on the real economy has been sharp. The rest of the world has been hit hard by these events.

GOVERNMENT INTERVENTIONS: TOO LITTLE, TOO LATE.
USA, Euro zone, UK and Japan are all in recession while China and India are slowing down rapidly, in spite of the massive interventions by all governments which according to one estimate exceeds $10 trillion - about one sixth the size of the global GDP. The slide in the world economy is continuing even though under normal circumstances this would have led to hyper inflation – times are clearly abnormal.
Each time the US government felt that it had licked the problem - tax cut in February, bail out of Bear Sterns in March, take over of Freddie and Fannie, bail out of AIG and then of Citibank - fresh problems erupted soon thereafter. Finally, when the unprecedented bail out package of $700 billion was announced on September 19, it was felt that the collapse would halt. But fresh packages have had to be announced and now it is suggested that the U.S. President elect, Mr. Obama, is planning another package of $800 billion. The gravity of the situation maybe gauged from the announcement by the Fed that it will print as many notes as would be required to stem the collapse.
Each time, government intervention has been `too little too late’ so that the crisis has continued to deepen. The stock markets have responded temporarily till the next bad news. Most policy makers and analysts have been in a state of denial so that rather than anticipating events they have been surprised by them. This could partly be because they wished to avoid panic but the effect has only been a worsening of the situation due to lack of timely actions.
One of the key reasons for the spread of the contagion is the interlocked nature of the balance sheets of the various economic entities. Today, almost any seemingly healthy company can soon head towards trouble because it is not able to recover money from some other entity to which it has extended credit and which is failing. Hence trust has evaporated and credit has frozen almost all over the world and made central bank interventions ineffective. The delay in a decisive response from the US since it has a lame duck President is likely to prove expensive since toxicity in the financial system would have spread further by January 20, 2009 so that even more drastic intervention would be required then.

FINANCIAL FRAUD
The recent discovery of the audacious Ponzi scheme run by Mr. Madoff of the USA, resulting in losses of possibly $50 billion to various entities is going to aggravate failures and fresh problems will appear. Losses have been incurred by charities, universities, individuals, asset management funds, etc. Not only will pensioners and university students be affected, the viability of some of the companies involved will be dented and some of the smaller entities may head towards bankruptcy.
The Madoff fiasco shows that those who were supposed to be alert on behalf of the public - auditors, SEC, etc. - were possibly taken in by the swindle (a charitable view) or were a party to it. It highlights the all pervading desire to make a quick buck with little regard for risks. Since others were making money it was a good enough excuse to take unacceptable risks and make money.
While Mr. Madoff committed fraud and more such frauds maybe discovered in the coming months since there were many clever people who were hoodwinking others and making a killing for themselves, the crisis is deeper than fraud. The problem lies in the way the financial system was functioning.

DO WE REALLY KNOW WHAT TO DO?
Some have argued that because the world faced the depression of 1929, we know what to do. Namely, go in for massive fiscal intervention through the creation of fiscal deficits to boost demand. However, even this may not work since the nature of the crisis is different from the earlier one. There was lack of demand and the lesson learnt was to intervene counter cyclically to reinflate the economy.
This time while the deficiency of demand initiated the problem in the financial system that was only a trigger for the collapse of the current financial system. The collapse itself is not due to the deficiency of demand but linked to the structure of the unregulated financial system which has a built in instability which is now playing itself out. The financial bubble inflates gradually but deflates suddenly. This leads to loss of trust and collapse of confidence which then pulls the rug from under the feet of the financial system. The financial markets then freeze so that even Central Bank’s and government’s interventions fail to revive the economy.
The world economy can still produce the output it produced in June 2008 – the factories, offices, fields, etc., are still there – but the system of production which is based on finance to lubricate the flows of goods and services has been disrupted and hence the real economy has been dented. The real and the financial sectors are interlinked and the latter is taking the former along with it. Since the government announced interventions are too little too late and unable to prevent the collapse of the financial sector, the real economy is also not responding to the steps announced till now.
The problem stems from the fact that while each financial transaction is separately reversible, the totality of transactions is irreversible due to the complexity involved. Further in a situation of a freeze in credit markets, governments do not have the resources to cover the losses of all the entities or even most of the losses of some of the major entities.

IN FOR A LONG HAUL?
With spare capacity emerging everywhere and as slow down accelerates, many factories are shutting down or working fewer hours. In this situation, investment plans are bound to be frozen, as reports suggest and demand falls further. This suggests that any chance of a turn around any time soon is bleak. Unless demand begins to turn around and unutilized capacity worked out of the system, investment levels will not recover.
Government interventions have largely helped the financial sector because policy makers are mostly financial experts. But this will neither help raise basic demand in the real economy nor shore up trust and confidence in the shattered financial system because what the government can provide is a fraction of the total losses being incurred. Consequently, the recession can only deepen.
As recession deepens, commodity prices will weaken. Petro goods prices are a case in point. In spite of the slow down having just started, crude oil prices have fallen by a massive 70% from their peak. Many other commodity prices would also fall substantially since their prices had also climbed sharply till 2008 middle. There is an underlying worry of a deflation and if that happens a depression would be inevitable.

INDIA AND CHINA AND ABSENCE OF DECOUPLING.
The Chinese economy has slowed down rapidly due to its dependence on exports. Indian economy which is less dependent on exports has also slowed down. Confidence of investors has been dented by the sharp decline in the stock markets triggered by the withdrawal of funds by FIIs and reduction in the flows of FDI. With gaping holes in the balance sheets, companies need funds to shore up their accounts so they are willing to sell assets even at a loss. Further, since these markets had gone on a speculative boom and were overly priced, it pays to leave early rather than late setting up a herd mentality.
The exporters of primary produce - the developing world, petroleum exporters, etc. - will be hit hard by this decline in commodity prices. In India, Bellary iron ore mines have seen activity drop from a reported 15,000 trucks per day to just a few hundred trucks per day – a drop of more than 95%. Many plants have announced planned monthly closures or reduced the number of shifts. The over heated real estate markets and construction industry have taken a severe drubbing and along with that the cement and the steel industry. Tourism, hotels, transport, finance, trade, consumer durables, etc., are declining.
If the rate of growth of the major economies of the world falls by one per cent, then China and India can compensate for that only if their rate of growth goes up by at least 10 per cent. Given that they were already growing at possibly their peak rates, this possibility never existed so a decline was inevitable. Further since the two depend on exports to the advanced countries, their growth was bound to slow down and worsen the situation.

INEFFECTIVENESS OF POLICY INTERVENTIONS
The collapse of the British Pound, the decline in the Euro and the rise in the dollar has been the response of the crisis ridden financial sector. In spite of the weakness of the US economy, the dollar seems safer than other currencies. Investors feel that the other economies will sink more than the US since the big loses the least. Further, the confusion in the Euro zone due to competing national interests has reduced the chances of a coordinated response so that Europe could suffer badly. In contrast, the US does not face this problem.
In times of crisis, theory suggests that economic entities facing uncertainty go liquid and that is what we are witnessing all over the world. Hence interest rate cuts do not stimulate the economy. Release of liquidity by Central Banks is simply being held and not circulated – money multiplier and the velocity of circulation have collapsed leading to a freezing of the financial markets.
Central banks and governments are liberally promising money to companies without any risk assessment. They have become the lender of first resort to the financial sector and are no more the lenders of last resort as required by banking theory. Are they equipped to assess the risks involved, etc.? In any case, it takes a while to decipher the balance sheets made by clever accountants and lawyers who have devised myriad ways of hiding holes in the accounts. AIG has absorbed $150 billion in the months since September, 2008 but hardly anyone understands where the money has gone and how much more may go.

NEED FOR GLOBAL COORDINATION
The stimulus package of one country may fail due to inaction by others so that there is need for global coordination. Action by one may benefit another due to the global nature of the economy and the former may be left with deeper problems. This is likely since different views of what needs to be done prevail. Mr Obama’s non participation in the G 20 summit in November is an indication that he did not see eye to eye with Mr. Bush. Germany has been critical of Britain. China has hinted at moving away from the dollar since it has suffered big losses. Iceland froze British assets and the latter declared the former a terrorist state. The US rapidly losing jobs could go in for protecting jobs by making retention of jobs in the USA a condition for bailing out companies. All this is pointing in the direction of protectionism.
While global coordination is essential it is necessary but not sufficient for recovery. The problem is, policy makers do not quite know how to resolve the crisis. Understanding of the past is useful but inadequate given that the core problem is not what it was. Policy makers have to get out of their state of denial and the hope that somehow the crisis will blow away – we are not in the world of inevitable happy endings.

CONCLUSION
The world cannot do without the financial system that is essential for investments and trade to occur efficiently. This basic function of the financial system was eroded by the various imaginative innovations in the financial system and led to collapse. These were supposed to lower risk but now it is clear they ended up enhancing it.
There is need to restructure the global financial system completely. The present system has completely lost credibility with the citizens and investors. Trust is not likely to return any time soon given the kind of losses that have been suffered all around – running into trillions of dollars. Experts are no more going to be acceptable to the public since they have proved to be too clever by halves and caused enormous losses to their clients.
The complex financial system was treated by the vast majority of the investors as a black box and faith laid on it because the experts said so. This opacity did not matter as long as money was being made but now the public would demand transparency.
In fact, as is now clear, most policy makers themselves did not fully understand what was going on. Alan Greenspan has admitted this. Demand for proper regulation of the complex financial system is likely to grow so that the powers of the Central Banks are likely to be enhanced and more policy intervention maybe acceptable. The fragility of the financial system would no more be acceptable. A long term view would have to be taken since it is now clear that short term profits with eventual collapse is worse than a steady return. All in all, we are in for a long haul and in 2009 we are entering a world substantially different from the one we started with in 2008.