Insights from the World Economic Forum

Before you fall off of your seat, let me assure you that I was not at the World Economic Forum myself :). But, I recently had the opportunity to talk to Dr. Laura Tyson who had just returned from Davos. Dr. Tyson was the chairperson of the council of economic advisers to President Bill Clinton during his administration. She has been attending the World Economic Forum (WEF) every year for the last several years.

Dr. Tyson pointed out that the idea of “decoupling”, which basically suggests that emerging economies can continue to grow somewhat independently of the economic situation in the United States, seemed to have made a come-back at the WEF. In a panel discussion, Larry Summers and other western economists were apparently focused on discussing ways to avoid a recession in the United States including suggesting the usual idea that Federal Reserve ought to relax its monetary policy etc. The moderator then turned to the Finance Minister of India Mr. P. Chidambaram and asked him how his country was planning to avoid a slowdown in its own economy to which he replied, much to the surprise of most in the audience, that he did not anticipate a slowdown.

It used to be the case that if the US sneezed, rest of the world would catch a cold. This seems to be less true today than ever before, particularly in the case of emerging markets. Turns out that despite all the talk of globalization, only 20% of the world’s cross border capital flows either originate from or are headed to emerging economies. The remaining 80% of the capital flows are among developed countries, mostly the US, Western Europe and Japan. This statistic might partly explain the decoupling effect. This is in fact a good thing for the emerging markets because when some very creative bankers in the US decide to securitize sub-prime mortgages and sell them off to unsuspecting investors as investment grade securities, the people who suffer from the resulting consequences are those with the 80% cross-border capital flow linkages; not the remaining 20%.

China is less decoupled with the US given that trade accounts for almost 2/3 of its GDP while for India, domestic consumption makes up about 2/3 of its national income. China may actually benefit from this tighter coupling as the US slowdown could help the Chinese moderate their scorching pace of economic growth.

Another interesting topic is about the compression of development time for emerging economies to get to the so-called “productivity frontier”. What used to take a century for today’s developed countries to achieve is being accomplished in one or two decades by emerging countries today.

Overall, some very thought provoking discussions. Hopefully, I will be able to report first-hand at some point in the future. :)

What might slow down the India growth story?

Weak infrastructure, an overburdened judicial system, wage inflation, geopolitical disruptions, slowdown in the global economy etc. are the reasons often cited. While these are all valid concerns, not much attention is paid to a rather touchy-feely social issue that might arguably be as important as the often debated issues mentioned above. And, that is the question of how driven today’s youth are.

Speaking from my own personal experience, I have noticed that my parents’ generation had a raging fire in their bellies to succeed. They had to go the extra mile even to make ends meet. So they put all their ingenuity to use and worked really hard to improve the standard of living and establish themselves firmly in middle and upper-middle class sections of society. They also drove their kids to do well academically and did a great job of imbibing in them an appreciation for the value of good education. Horror stories about how freshly minted engineers could not even get a job that paid 1800 rupees per month had been told and retold several times.

Conditions today for India’s urban youth appear to be vastly different. Economic progress and jobs have brought affluence. At the same time, there are far more distractions as well. Cable and satellite television, online games, social networking sites etc. are just a few examples. And, these are only the “benign” distractions. Clearly, there are far more dangerous ones as well.

Given these conditions, I wonder whether the urban college kids of neuve riche parents are as driven to succeed as older generations. What would be the incentive to toil through a grueling professional degree program followed by higher education when alternatives include relatively well paying BPO jobs that provide enough disposable income enabling lavish spending on discretionary products?

Difficult situations drive people to succeed. Affluence breeds complacency. Ironically, the hurdle to growth might be growth itself. How does a society avoid falling into such a trap?