Studies in Contrast

Last week left us with no clear trends. The Dow took a 300-point drubbingon Monday. And the S&P 500 saw its second worst start to February since 1928. But by the end of the week they seemed to have recovered their footing. We spent the week in India. 

"I wouldn't invest a penny in India," said our old friend Jim Rogers. He may know something we don't. Then again, we know so little that anyone could know more.  India was rich 500 years ago, with a GDP per capita among the highest in the world (according to estimates that are, admittedly, probably unreliable.) Now, it's poor. Could it be rich again? Or at least richer than it is now? 

We don't know. But we traveled to Bombay via Zurich. A greater contrast would be hard to find. Zurich is spotless. Organized. Efficient. Dependable. Bombay is dirty. Disorganized. Chaotic. Zurich is one of the richest cities in the world. Bombay is one of the poorest. 

What accounts for the difference? Culture? Climate? Geography? 


Hot Work

Many are the theories. Race was a popular explanation for the difference before World War II. Afterward, climate was a handy explanation. But neither can explain India's poverty. Look at Indians in the US, South Africa and Britain. Out of their homeland they are among the most successful of any ethnic group. In every line of work — art, engineering, business, academia — they are standouts. The new CEO of Microsoft is from India.

As to climate, the theory changes with the times. When Egypt, Greece and Rome were the world's leading powers, intellectuals presumed that cold weather was ill suited to civilization. Then, when the locus of progress moved north, so did the theory. Today, the idea that heat makes people lazy is common among people from cold climates. 

Heat may have influenced output before the days of air conditioning. The US Congress used to take the entire summer off to escape the heat of the Potomac.  But we grew up without air-conditioning 40 miles from Capitol Hill; we don't recall it slowing us down too much. We worked through the hot summer months doing hard, heavy work in the tobacco fields. 

And today, Miami and Singapore — both hot cities — flourish while Detroit goes bust and Vladivostok is wretched. Generally, Russia is a cold place. But it is hardly a rich place. By contrast, Australia is quite warm — and relatively wealthy. 


More Government = Less Output

One obvious cause of economic retardation is government. The more ambitious and aggressive it is, the more output will be depressed. After World War II, the Chinese were one of the world's poorest people. You could have blamed it on their culture. But millions of Chinese fled to Hong Kong (which was little more than a barren rock) seeking the protection of the British government from the Maoist regime. And they brought their culture with them. 

John Cowperthwaite was the British administrator assigned to watch over Hong Kong from 1961 to 1971. He made it a point not to interfere. He didn't even allow the collection of statistics on unemployment or income. He didn't want to provide the meddlers with any fodder for "improving" things. 

In Mainland China, no sparrow could fall without being registered by the Communist bureaucracy. And there was a program to solve every problem. There were Great Leaps Forward, Cultural Revolutions and Five Year Plans aplenty.  Mainland Chinese became poorer and poorer; the Chinese in Hong Kong got richer and richer. By 1996, Hong Kong had a GDP per capita that was 137% of their British protectors. 

Government quickly reaches the point of declining marginal utility. A little — protecting property rights, enforcing contracts, and keeping people safe from violence — seems to pay off well. A lot is usually disastrous. 

Indians have a lot of government — a relic of the Stalinization of the country under Indira Gandhi. After World War II, Indians sent their elite youth — including Ms. Gandhi — to study in Britain. There they learned the ideas and policies that retarded British growth for almost a generation. Returning to India, they carried Keynes and Marx in their luggage. 

Gandhi took over the top job from Lal Bahadur Shastri, who followed the socialist policies of her father, Jawaharlal Nehru (India's first prime minister). She then came up with six Five Year Plans. One Five Year Plan is usually enough to kill an economy. The Indian economy took all six treatments and somehow survived. 

Traces of the quack medicine remain today. You will experience a bit of it even before you get to India. You must apply for a visa. Doing so requires paperwork. Paperwork takes time. And Indian bureaucrats are very serious about their paperwork. 

Our application for a visa was rejected when our signature strayed out of the box. We had to reapply! 



The above article is from Diary of a Rogue Economist originally written for Bonner & Partners.

Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.





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