By N Chandra Mohan
NEW DELHI, Nov 24 2015 (IPS)

With Goldman Sachs folding up its haemorrhaging BRIC fund, is it curtains for the acronym that defined the investment bankers’ fancy for emerging markets? It certainly appears so after China’s stock market crash and a fast slowing economy triggered fears that the dragon will set off the next global recession.

N Chandra Mohan

Brazil’s economy is experiencing its deepest recession in 25 years. Russia, too, is contracting due to the crash in oil prices and sanctions. India remains a haven of stability. South Africa’s growth is sluggish with very high unemployment. Against this dismal backdrop, what are the prospects of BRICs playing a vital role in the world economy?

Fourteen years ago, BRICs was very much an idea whose time had come. Goldman Sachs projected them as the future growth engines of the world economy. This acronym soon became a self-fulfilling buzz word with a life of its own. A focus on these leading emerging economies, especially since 2006, provided handsome returns that peaked five years ago. Since 2010, however, BRIC Fund assets plunged from $842 million to $98 million in end-September 2015 according to Bloomberg. With no hope for “significant asset growth” in the near future, Goldman Sachs threw in the towel on October 23, the last trading day for this fund.

These financials clearly reflect the fast-deteriorating growth prospects of the BRIC economies. They were expected to overtake the US in size by 2015. But this isn’t likely to happen. A decelerating Chinese economy, in fact, threatens the first global recession in 50 years without help from the US, says a rival investment bank. Russia and Brazil are doing much worse as they are highly dependent on commodity exports to drive their growth. As China is the biggest importer of oil, iron ore and other raw materials, this is bad news for their commodity-driven prospects. Only India’s track record is creditable as the fastest growing economy in the world.

Such concerns can only make this grouping – which globally accounts for one-fifths of GDP, 42 per cent of population, 17.3 per cent of trade, 41 per cent of forex reserves and 45 per cent of agricultural production – less cohesive to have geo-economic significance in the world economy. Analysts consider the BRICs to represent an alliance of middle -sized economies that could lead to a serious attempt to counter-balance the US, the most powerful economy in the world. This is far from obvious except, perhaps for Russia, that has faced the full brunt of US-led sanctions due to its intervention in Ukraine. This is less true of India that is deepening its relations with the US.

But the BRICs are far from happy with the US-led global financial architecture. A striking feature of all the seven statements issued at BRIC summits from 2009 to 2015 is that this grouping aims to promote peace, security, prosperity and development in a multi-polar, equitable and democratic world order. The grouping seeks a greater voice and participation in institutions of global governance like the IMF, World Bank, WTO and UN. The Durban summit in 2013, for instance, indicated that the WTO required a new leader who demonstrated a commitment to multilateralism and that he or she should be a representative of a developing country.

The formation of a New Development Bank (NDB) is in fact a concrete expression of the desire of BRICs to set up its own alternative to the US-led World Bank and IMF. NDB President KV Kamath has indicated that the bank would blaze a different trail than the Bretton Woods twins who impose an unacceptable conditionality on their loan assistance. In sharp contrast, the NDB is expected to place a greater priority on borrowers’ interests instead of the lender’s interests; that it would better reflect the expectations and aspirations of developing countries. BRICs, however, are not keen to position the NDB as a rival to the World Bank or IMF.

At a BRICs meeting ahead of the recent G-20 summit in Turkey, India’s PM Narendra Modi stated that India will guide the NDB to finance inclusive and responsive needs of emerging economies. India will assume the chairmanship of BRICs in February 2016 and the theme of its chairmanship will be Building Responsive, Inclusive and Collective Solutions – the acronym lives on! PM Modi added for good measure that there was a time when the logic of BRICs and its lasting capacity were being questioned. But group members have provided ample proof of its relevance and value through action at a time of huge global challenges.

The good news is that the BRICs are cooperating and competing with one another for a place under the global sun. The seven summits from St Petersburg to Ufa testify to this. BRICs are the new growth drivers for low-income countries, especially in Africa, considering the growing importance of their trade and foreign direct investments in such economies. The BRICs may be passing through troubled times, but they do constitute a major consumer market. Incomes have grown as more and more people have joined the ranks of the middle class, resulting in greater demand for oil, cars and commodities in leading member countries like China and India.

But the grouping must seriously address the serious challenges of kick-starting its pace of expansion to power global growth as before. The BRICs may not be yielding returns to investment banks but they are in no immediate danger of fading into the sunset. Member countries after all take it seriously enough to set up a potential rival to the World Bank and IMF dominated by the US and Europe. Even if its creator has pulled the plug on the BRIC fund, the acronym will remain relevant in the future as well. Its resilience only exemplifies the profound truth of what the famous economist John Maynard Keynes stated long ago that the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else!

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By Raghav Gaiha
NEW DELHI, Oct 19 2015 (IPS)

After Adam Smith and Amartya Sen, Angus Deaton, this year’s Nobel laureate in economics, has contributed most to broaden and enrich our understanding of human well-being. His brilliant and path-breaking contributions to the theory and measurement of consumption, poverty, inequality, nutrition – and, more recently, aging, morbidity and suicides – have inspired a generation of economists to carry out reformulations, refinements and extensions.

Raghav Gaiha

Multilaterals, donors and national policy makers have not been far behind in rethinking development priorities and policies. Blending micro and macro- economics in remarkably creative ways and expanding frontiers of our knowledge through meticulous and innovative empirical validation, Deaton remains peerless. This endorsement, however, does not imply that he hasn’t had his share of controversies.

Much much has been written about his contributions to demand theory, demonstrating how interdependent demands are for different commodities through relative prices, why consumption is more volatile than income if aggregated from individual choices, the pitfalls in measuring poverty and inequality globally and nationally and his emphasis on carefully designed household surveys.

More, however, needs to be said on some of these propositions and on his more recent contributions to understanding human well-being through self-assessed measures of well-being and health status, aging, morbidity and mortality.

His distrust of causal inferences drawn from standard econometric techniques and the current fad of randomised controlled trials (RCTs), and why foreign aid may do more harm than good under certain circumstances cannot be dismissed lightly but remain controversial.

Let me begin with his deep scepticism of global poverty estimates that the World Bank produces periodically. The estimation requires (i) purchasing power parity ratios or PPPs (i.e. how many dollars are needed to buy a dollar’s worth of goods in the country, say India, as compared to the United States); and (ii) determination of a poverty cut-off point. The latter is taken to be the average of the national poverty lines of the poorest 15 countries in the world in PPP. In admirably lucid comments, Deaton draws attention to some flaws in the construction of PPS and their comparability over time, and determination of the poverty line. The revision of the 1993 PPS in 2005, and a higher poverty line of $1.25 (instead of $1.08) resulted in a jump of the global count of the poor for 1993 by half a billion. Likening it to an “earthquake”, Deaton pointed out that this had little to do with the revision of the PPPs and largely a result of a “faulty” poverty line. As India became richer, and its poverty line was much lower, it graduated out of the 15 poorest countries, and the average poverty line of the new 15 poorest countries rose. As a result, India’s prosperity left India and the rest of the world poorer. His eminently sensible suggestion is to estimate global poverty using India’s original poverty line or the average of the same 15 poorest countries. As he elaborates, “ …the world count would simply be the number of people living below the poverty line set in India when a large fraction of its population was destitute”.

Inspired by Sen’s focus on human functionings and capabilities, Deaton is emphatic that income-based measures of poverty risk missing important features of it. As an illustration, a government that raises taxes to pay for better public services, or better public health, may increase income poverty, while poverty or deprivations more broadly decrease. In a similar vein but in striking contrast to Picketty’s blockbuster, Capital in the 21st Century, Deaton takes a much broader view of inequality transcending its narrow economic boundaries. Much of his recent work accordingly focuses on health inequity by country/region, age, gender and over time. Many of the insights are rich and fascinating and some are surprising.

Not a narrow economist, Deaton argues compassionately that health inequalities are a moral concern. But whether these are seen as injustices depends greatly on how these come about. He argues that childhood inequalities arising from parental circumstances are key to understanding many of these injustices. So public interventions designed to mitigate harshness of such circumstances are necessary.

In a succinct and definitive observation, he points out that “The stories about income inequality affecting health are stronger than the evidence.” A case in point is that infant and child mortality in developing countries is “primarily a consequence of poverty so that, conditional on average income, income inequality is important only because it is effectively a measure of poverty. ” But this is only a small part of the explanation as mother’s health and literacy, hygiene and sanitation, low birthweight and discrimination between boys and girls matter immensely. Some of these concerns receive critical attention in other studies.

Taller populations are richer, and taller individuals live longer and earn more. In order to understand the relationship between health and wealth, he investigated the childhood determinants of population adult height, focusing on the roles of income and disease. In a sample of European countries and USA, there is a strong inverse relationship between post-neonatal (one month to one year) mortality, as a proxy for disease and nutritional burden, and the mean height of those children as adults.

In a further scrutiny of the “wealthier is healthier” hypothesis, Deaton and Case report direct comparisons of a number of objective and subjective measures of economic and health status in two sites, one in the district of Udaipur in rural Rajasthan, and one in the shack township of Khayelitsha near Cape Town. This hypothesis is rejected in both cases. To illustrate, the economically better-off South Africans are healthier in some respects, but not in others. They are taller and heavier, but their self-assessed health is no better; they suffer from depression and anxiety to the same degree. The explanation lies in the multidimensionality of health, weak correlations between some components, and with income.

A distillation of his recent research is contained in his book, The Great Escape: Health, Wealth and the Origins of Inequality, 2013. His major conclusion is that not only people are becoming more prosperous but also they are living longer and are taller and stronger. The gap between life expectancy in advanced countries and the developing world has shrunk. However, a stark reality is that a billion poor are stuck in abject poverty and low life expectancy. His assertion that aid is likely to do more harm than good because governments are weak, fragile and corrupt is not without merit but contestable.

In an analysis based on the Gallup World Poll, Deaton investigates the relationship between subjective well-being and age. One of his major findings is that there is a U-shaped relationship between evaluative well-being (or life satisfaction) and age in high income, English speaking countries, with the lowest level of wellbeing in the age-group 45-54 years. But this pattern is not universal. The relation between physical health and well-being is bidirectional. Older people with coronary heart disease and arthritis, for example, exhibit higher levels of depression and impaired hedonic wellbeing (feelings of happiness, sadness and pain). But wellbeing could also have a protective role in health maintenance.

Deaton’s enthusiasm for using subjective wellbeing and self rated health status measures, based on Gallup Poll and other similar surveys, rests on the premise that instead of relying on revealed preference through markets we might as well use actual preferences. But the important point is that revealed preferences are subject to some restrictions consistent with rationality while actual preferences are not. Also, some of the simplistic statistical methods and averages used are far from persuasive and intriguing. My admiration for Deaton’s scholarship, however, remains undiminished by these disagreements.

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