World
3 Reasons Italy is back in recession
The bureaucracy, trade unions, business and finance and a cozy political class all benefit from the present system and see no reason to change
 
Economists, and perhaps only economists, were surprised by Italy’s preliminary estimates that suggest the economy is back in recession. The forecasts for second quarter GDP were for growth of at least 0.1%. Instead, Italy's GDP fell by 0.2%. Despite some previous optimism the reality is that Italy never emerged from the recession. Its economy is still 9% below its size in 2007. In the past 12 quarters it has experienced only one quarter of growth. At least it is in good company. Germany reported last week that its economy had also contracted by 0.2%.
 
What is a country to do? Italy’s solution is to elect a 39-year-old former mayor of Florence, Matteo Renzi. Mr Renzi promised to reform Italy and get the economy moving, but like his counterpart, Shinzo Abe in Japan, promising reform and actually doing it are two different things.  
 
Like Mr Abe, Mr Renzi started his ‘reform’ in the usual way, with money. He recently gave lower paid workers a tax break. He also wants to start, or restart, infrastructure projects. But he again he has the same problem as Mr Abe, money. Italy has a €2 trillion debt, which is projected to reach 135% of GDP this year. Though not quite up to the 227% of Japan, it is much higher than that of most of its peers.
 
Italy desperately needs reform. It ranks 65th in the World Bank’s Doing Business rankings. This is far below other countries in Europe. To start, Mr Renzi has been concentrating on labour and judicial reforms.
 
Italy desperately needs labour reform.  Its unemployment rate is 13%, the highest in 37 years.  By contrast the unemployment rate in Germany is 5.1% and 10.4% in France. Its problems are typical. There is a duality of the labour market: the haves and the have-nots. There is the vast majority of the work force, who have permanent positions. Their rights are highly protected.  Then there is a growing sector of temporary workers with few rights and benefits.
 
Mr Renzi’s proposed reform does little to change this. Instead it affects only temporary contracts by making it easier to extend them. But even this small change was exceptionally difficult to pass into law.
 
Indians would be sympathetic to another one of Mr Renzi’s proposed reforms. The Italian judicial system is a byword for glacial. It is harder to enforce a contract in Italy than in Haiti. The average civil law suit takes eight years. The European average is two years. The case backlog is 5.2 million cases. As much as Mr Renzi wants to reform the system, he is limited as to what he can do. Judges are answerable only to the self-governing Superior Council of Magistrates and not to the justice ministry. Obviously the Superior Council has had a lot of time to reform, before Mr Renzi took office, but did little.
 
The real obstacle to reform in Italy is the same everywhere. The bureaucracy, trade unions, business and finance and a cozy political class all benefit from the present system and see no reason change.
 
Japan’s economy, like Italy’s, has also fallen. The Japanese economy contracted by 1.7% in the second quarter. It also suffers from a “duality”. Temporary workers make up 36.8% of the work force. Unlike regular employees, they do not enjoy any protection against being fired. This is particularly a problem for Japan. Japan’s population is aging. Despite an unemployment rate of only 3.7%, Japanese wages are not going up. Firms already have too many highly paid unproductive employees to buy more. It is simply cheaper to hire temporary workers, mostly women, who can be laid off any time.
 
Both, Japan and Italy stand in contrast to Spain. Spain has made changes to its labour laws. It has been rewarded with accelerating growth of 0.6%.
 
It is not only the entrenched power groups in these countries that hold back their economies. Their central banks are doing their best to stymie the economies as well. They consistently issue over optimistic economic forecasts. For example, in 2013 they estimated a contraction of only 0.5%. It turned out to be 1.9%.
 
What should be obvious is that the economic models simply do not work well enough to help policy. By consistently over estimating growth and propping up unprofitable companies with free money, they allow governments to avoid making the hard choices required for real reform. So despite the best efforts of Mr Renzi and Mr Abe, their economies will stagnate until they get so bad that reform will be the only option.
 
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and speaks four languages.) 

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COMMENTS

N Kanitkar

2 years ago

The italians, Indians and the Japs and maybe many more people around the world would do well to read "Sacred Economics" by Charles Eisenstein. Especially chap 6 which deals with Usury and the ever increasing debt of nations and the false sense of growth presented to the individual. We have monetized every possible free community resource to align it with the debt economy. Unfortunately, there is no escape and the distribution of wealth just gets more and more unequal.

Inspired by Modi speech? Now implement his appeals in your own life
Several people, who watched Prime Minister Narendra Modi speak on Independence Day, expressed inspiration from the speech. However, the question is, will everybody do their own bit for the improvement of India as a whole?
 
Prime Minister Narendra Modi, while addressing the nation from the historic Lal Quila (Red Fort) made several announcements and launched schemes for betterment of lives of people. Several people, who watched his speech, expressed inspiration from the speech. Especially, the twitterati was quite vocal on social media. However, the main question is, will everybody do their own bit for improvement of India as a whole?
 
Toilets for girls, women, poor households
Stressing on the “dignity of women”, the Prime Minister urged parliamentarians and corporate sector to help build separate toilets for girls in schools across the country by next year. “I want to start work from today. There should be a toilet in all the schools of our country. A separate toilet for girls...it is only then our girls will not have to quit schools," he said.
 
According to the Economist, some 130 million households in India lack toilets. More than 72% of rural people relieve themselves behind bushes, in fields or by roadsides. The share is barely shrinking. Of the one billion people in the world who have no toilet, India accounts for nearly 600 million, the report says.
 
 
The United Nations University’s Canada-based think-tank for water, the Institute for Water, Environment and Health (INWEH) cites a rough cost of $300 (about Rs15,000-Rs18,000) to build a toilet, including labour, materials and advice. Zafar Adeel, Director of UNU-INWEH says, “The world can expect, however, a return of between $3 and $34 for every dollar spent on sanitation, realized through reduced poverty and health costs and higher productivity – an economic and humanitarian opportunity of historic proportions.”
 
However, the question is not only about whether India can afford the cost and build toilets at every household and separate toilets for women. It is the lack of sanitation and hygiene habits that are affecting use of toilets, especially among rural folks. At several places, including villages and towns, the government had built toilets and latrine. However, almost all are in bad and pathetic condition due to lack of maintenance and care. They all emit an unbearable stink. These facilities built by government are treated by everyone as 'public property', which in other words means everybody is free to use it as he/she pleases without caring for it. Will the public start caring for these facilities now? 
 
Modi talked about cleanliness and toilets from the Red Fort. Can we follow it at least from our own locality? Or will we simply clap approvingly the speech and move on to do exactly what we have been doing so far? Even the affluent people are found stopping on expressways to relieve themselves, when there are toilets along the way.
 
One model village in every constituency developed by MPs
Prime Minister Modi announced a scheme under which all members of Parliament (MPs) will develop one model village each in their constituencies. Modi said he would like state legislators also to participate in the development scheme. There are nearly 800 MPs and close to 4,000 members of legislative assembly (MLAs) and legislative councils (MLCs) across different state legislatures.
 
There are two different approaches followed by two of the country's prominent model villages, Punsari in Himmatnagar, Gujarat and Hiware Bazar in Ahmednagar district of Maharashtra. Punsari model, which was studied by union rural development ministry few months ago, relies solely on funds from central and state-sponsored schemes. Hiware Bazar, on the other hand follows twin principles of self governance and self reliance and is the village with highest GDP in India.
 
 
The most important thing for both the model villages is active participation from residents. So, unless resident themselves are not willing to or ready to make changes, mere funding from an MP or MLA will not be able to develop the village as model village.  
 
Jan Dhan scheme to take banking services to the poor
PM Modi also launched ‘Pradhan Mantri Jan Dhan Yojana’ to help the poor open bank accounts which will come with the facility of a debit card and insurance cover of Rs1 lakh. The Union Cabinet has already cleared the two-phase financial inclusion scheme under which bank accounts will be opened for 15 crore poor persons with an overdraft facility of Rs5,000 and accident insurance of Rs1 lakh.
 
The scheme, to be pushed by the Government in mission mode, seeks to provide two accounts to 7.5 crore identified households by August 2018. The main features of the scheme include a Rs5,000 overdraft facility for Aadhaar-linked accounts, a RuPay Debit Card with an inbuilt Rs1 lakh accident insurance cover and minimum monthly remuneration of Rs5,000 to business correspondents who provide the last link between the account holders and the bank.
 
 
Now, let’s take a look at this ambitious financial inclusion plan, which the Reserve Bank of India (RBI) has been trying to implement without much success since 2005. In fact, several thousand new bank accounts, opened under pressure from RBI, remained dormant or did not have a single transaction.
 
In addition, there is a cost factor attached with opening a bank account, issuing a debit card as well as paying premium (whatever it may be) for the insurance coverage. So who will bear the cost? For example, the basic minimum cost for issuing a debit card would be over Rs50. Even if we assume it is Rs50, then for 15 crore people, the cost comes out to be about Rs750 crore. Who will bear the cost? The banks, who are already reeling under pressure from maintaining inoperative or dormant accounts and allowing customers from other banks to allow using its ATMs? So will regular bank customers and taxpayers be made to bear the cost of this humongous task?
 
Financial inclusion and empowering the poor is a necessity. There is no doubt at all that the poor are forced to borrow at significantly higher rates, are badly exploited by moneylenders and also forced to pay more for all goods and services. When financial inclusion was attempted though micro-finance, it led to exploitation by rapacious micro financiers, insurers and others.
 
Will Modi sarkar succeed in getting the same government officials to deliver where others have failed? Will moneylenders not exploit the Rs5,000 overdraft facility for repayment of old borrowings? What will the Modi government do to prevent poor, unbanked, rural folk from blowing up the overdraft, as they usually do, on marriages and religious ceremonies and on liquor?
 
Citing RBI, a report from Livemint, says, nearly 50% of the basic saving bank deposit accounts that were opened during the “Swabhimaan” campaign remained dormant. Although RBI has asked banks not to levy any charge or penalty on dormant accounts that cannot maintain a minimum balance, there still is a cost to banks for maintaining these records.
 
Remember, last year while urging the then Prime Minister Manmohan Singh to take a relook at RBI's proposal on Aadhaar authenticated biometric ATMs, independent MP Rajeev Chandrasekhar, who is also a member of the Standing Committee on Finance, had said, "Public policy towards financial inclusion should be devised intelligently with objective of lower banking costs and increased access for consumers and not using ill-conceived, brute force methods involving significant additional spending and increase in costs to consumers and please make no mistake, these costs will be passed on by banks to consumers.”
 
Will it happen this time as well? Will the regular bank customers made to pay for accommodating unbanked population, who may or may not even use their 'free' bank account?
 
‘Make in India’ and ‘Made in India’
In his speech, Narendra Modi called to make India a hub for exports. “I want to appeal to all the people world over, from the ramparts of the Red Fort, 'Come, make in India', 'Come, manufacture in India'. Sell in any country of the world but manufacture here. We have got skill, talent, discipline, and determination to do something. We want to give the world an favourable opportunity that come here, 'Come, Make in India' and we will say to the world, from electrical to electronics, 'Come, Make in India', from automobiles to agro value addition 'Come, Make in India', paper or plastic, 'Come, Make in India', satellite or submarine 'Come, Make in India'. Our country is powerful. Come, I am giving you an invitation,” the Prime Minister said.
 
The economy of India is the tenth-largest in the world by nominal GDP and the third-largest by purchasing power parity (PPP). India was the 19th-largest merchandise and the 6th largest services exporter in the world in 2013; it imported a total of $616.7 billion worth of merchandise and services in 2013, as the 12th-largest merchandise and 7th largest services importer.
 
Starting in 2012, India entered a period of more anaemic growth, with growth slowing down to 4.4%. Other economic problems also became apparent: a plunging Indian rupee, a persistent high current account deficit (CAD) and slow industrial growth. Hit by the US Federal Reserve's decision to taper quantitative easing, foreign investors had been rapidly pulling out money from India though this has now reversed with the stock market at near all time high and the CAD narrowing substantially.
 
India is ranked at 134 out of 189, overall, in World Bank's 2013 ease of doing business index. However, this score masks the underlying data: in terms of starting a business, dealing with bureaucratic permits and enforcing contracts, it is ranked among the 10 worst in the world; while in terms of protecting investors, general operations and other measures, India ranks very favourably among 189 countries. Will the PM be able to ease issues being faced by the entrepreneurs? Will the lakhs of local babus who extort from businesses day in and day out have a change in conscience. Will Modi make the laws less onerous so that the babus don't have too many sticks to beat the businessmen with?  

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COMMENTS

Rakesh Goyal

2 years ago

1. Mr. Modi must lead by example.

2. It is time to create "well thought out" (not half baked) DPRs along with processes; procedure; design standards; quality standards; norms for costing/expenses; measurable outcome; public audit and competition amongst participants for each scheme. These DPRs must be open for public audits before being used.

3. Participants achieving targets within defined parameters must be rewarded and others must be penalized.

Bankimchandra Desai

2 years ago

NaMo's speech is inspiring. It is a challenge first to himself and his own BJP's MPs, MLAs & MLCs who are not used to do real public service. Sizeable number of them have cases against them for cheating! These schemes will provide a chance to revamp their image!
As far as fulfillment of duties is concerned it is meant for "you" and when it is a matter of 'rights" it is meant for 'I" & "me". Latrine in every home in every village is a dire necessity. Banking & Insurance policy if implemented will fleece present regular customers & in a long run will disturb the system to lead it to total breakdown. NaMo seems to be the ignorant about the quality of every Indian's blood. it has "CORRUPTION" in DNAs & RNAs in company of plasma, RBCs, WBCs etc. NaMo has to start dialysis first in PMO !

Amit Shah's new team has Yeddyurappa & Ram Madhav but no Varun Gandhi
Shah announced his new team of BJP office bearers that includes 11 vice presidents, eight general secretaries and 14 secretaries. The new team also includes 10 party spokespersons, five of them are new
 
Bharatiya Janata Party (BJP) chief Amit Shah on Saturday announced his new team, which includes Karnataka's former chief minister BS Yeddyurappa as vice president and Ram Madhav, the pointsman of Rashtriya Swamsevak Sangh (RSS) as general secretary. Shah, however, has dropped Varun Gandhi as general secretary.
 
A week after his formal anointment as party president, Shah announced his new team of party office bearers that includes 11 vice presidents, eight general secretaries and 14 secretaries. The new team also includes 10 party Spokespersons, five of them are new.
 
While dropping Varun, the MP from Sultanpur, whose mother Maneka Gandhi is a minister in Modi government, Shah has retained general secretaries JP Nadda, Rajiv Pratap Rudy, Murlidhar Rao and Ramlal, who will continue to take care of the organisation affairs.
 
Party sources said that Varun has not been included because his mother has been included in the Modi Cabinet as Minister of State with independent charge.
 
The four new general secretaries are Ram Madhav, the RSS face who was sent to the party recently, outgoing BJP Mahila Morcha chief Saroj Pandey, Rajya Sabha MP from Rajasthan Bhupendra Yadav and Ram Shankar Katheriya.
 
Yeddyurappa, who had formed his own outfit after being forced to quit as chief minister following corruption charges but had rejoined on poll eve, is among the 11 vice presidents in Shah's new team. Former union minister Mukhtar Abbas Naqvi has been retained as vice president.

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