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This is the way the world ends. This is the way the world ends. This is the way the world ends. Not with a bang, but with a virus.
OK, it's not that bad — or at least I don't think it is. The coronavirus isn't the Black Death; so far there's no reason to believe that it will be remotely as deadly as the influenza epidemic that swept the world in 1918-19, killing as many as 50 million people.
But that said, we've clearly missed whatever chance we had of containing the disease's spread. And it's going to be seriously disruptive.
For some reason markets, which had been weirdly complacent for weeks, decided to panic yesterday. I don't know why it took so long, but there are three good reasons to be very worried about the economic impact of what isn't yet officially a pandemic, but is obviously headed for that status.
First, we have a deeply interdependent world economy, and China — still the epicenter of the pandemic, although this thing is going global fast — plays a very big role in world manufacturing. The last time we saw a comparable event — the SARS outbreak of 2002-3 — China accounted for around 7 percent of world manufacturing. Now it's more than a quarter, and a lot of production around the world depends on Chinese components.
And I'm not just talking about iPhones and all that. China, it turns out, supplies some of the crucial raw materials used in modern pharmaceuticals. This virus won't just disrupt world trade, it will disrupt the medical response.
Second, the world economy is poorly prepared to handle an adverse shock of any kind. Unemployment may be low — it's especially low in the United States, but even in Europe it's low by historical standards. But we've only been able to get close to full employment thanks to extremely low interest rates, which means that there's very little room to cut rates further if something goes wrong. And the coronavirus looks like something.
True, we could respond with fiscal stimulus — public spending and other measures to prop up demand. In fact, that's what the Chinese are doing. But the West seems paralyzed by ideology. In America, Republicans seem incapable of coming up with any proposal that doesn't involve tax cuts for the rich. In Europe, the Germans still treat economics as a branch of moral philosophy; saving is virtuous, and nobody can convince them that sometimes you need to spend.
Finally, the Trump administration seems both woefully and willfully unprepared to deal with a public health crisis. President Obama created a global disease "czar" to deal with Ebola; Trump eliminated the position, and substantially cut funding for the Centers for Disease Control, because his administration didn't consider pandemics a significant national security threat. So who's going to take charge if things get really scary? Jared Kushner?
Two indicators of the seriousness with which our current leadership is confronting the risks: Rush Limbaugh, recent recipient of the Presidential Medal of Freedom, dismisses the coronavirus as just the common cold, being "weaponized" against Donald Trump. And Larry Kudlow, the administration's top economist, responded to the market's fears by … urging Americans to buy stocks.
We still don't know how big a deal this virus will turn out to be. But there are good reasons to be seriously scared.
India's state performs poorly in basic public services such as providing primary education, public health, water, sanitation, and environmental quality. While it is politically effective in managing one of the world's largest armed forces, it is less effective in managing public service bureaucracies. The research literature on India has many discussions of programs that fail to deliver meaningful outcomes, or that are victims of weak implementation and rent-seeking behavior of politicians and bureaucrats, or that are vitiated by discrimination against certain social groups ...
But on the other side, the Indian state has a strong record in successfully managing complex tasks and on a massive scale. It has repeatedly conducted elections for hundreds of millions of voters—nearly 900 million in the 2019 general elections—without national disputes. In this decade, it has scaled up large programs such as Aadhaar, the world's largest biometric ID program (which crossed one billion people enrolled within seven years of its launch). Most recently, it has implemented the integrated Goods and Services Tax (GST), one of the most ambitious tax reforms anywhere in recent times. India ranks low on its ability to enforce contracts, but its homicide rate has dropped markedly from 5.1 in 1990 to 3.2 (per 100,000) in 2016 ...
[T[he Indian state has delivered better in certain situations and settings: specifically, on macroeconomic rather than microeconomic outcomes; where delivery is episodic with inbuilt exit, rather than where delivery and accountability are quotidian and more reliant on state capacity at local levels; and on those goods and services where societal norms and values concerning hierarchy and status matter less, rather than in settings where these norms and values—such as caste and patriarchy—are resilient.
Caste continues to play an important role in the Indian economy. Networks organized at the level of the caste or jatiprovide insurance, jobs, and credit for their members in an economy where market institutions are inefficient. Affirmative action for large groups of historically disadvantaged castes in higher education and India's representative democracy has, if anything, made caste more salient in society and in the public discourse. Newly available evidence with nationally representative data indicates that there has been convergence in education, income, occupations, and consumption across caste groups over time. ... The available evidence indicates that caste discrimination, at least in urban labor markets, is statistical, that is, based on differences in socioeconomic characteristics between upper and lower castes. ... Given the strong intergenerational persistence in human capital, the key variable driving convergence, it will be many generations before income and consumption are equalized across caste groups.
The caste-based economic networks that currently serve many functions will also disappear once markets begin to function efficiently. These networks continue to be active in the globalizing Indian economy because information and commitment problems are exacerbated during a period of economic change. In the long run, however, the markets will settle into place and the caste networks will lose their purpose. This has certainly been the experience in many developed countries. In the United States, for example, ethnic networks based on a European country (region) of origin supported their members through the nineteenth century into the middle of the twentieth century. Ultimately, however, these networks no longer served a useful role and today, outside of a few pockets, European ethnic identity in the United States is largely symbolic. We might expect caste to similarly lose its salience as India develops into a modern market economy, and there is some evidence that this process may have already begun.Amartya Lahiri takes up yet another issue: "On November 8, 2016, India demonetized 86 percent of its currency in circulation." Specifically, India declared that people needed to turn in their large-denomination bills at banks, and that the existing bills would be worthless moving forward. They would then be replaced with new currency. The policy had several goals, like making it impossible for organized crime to hide its accumulated gains in the form of cash, and bringing people into the banking system and the digital economy. But Lahiri argues that these larger goals were not much affected by the change. Instead, the main effect of the demonetization was causing short-term hardship and higher unemployment in the areas where the demonetization led to temporary cash shortages. I had not known that India had carried out similar demonetizations of large-denomination currency in 1946 and 1978--with, Lahiri argues, much the same minimal-to-negative effects.
The sustainability of growth—which in late 2019 has cratered to a near standstill— will be determined by structural factors salient amongst which is the "twin balance sheet challenge" initiated by the toxic legacy of the credit boom of the 2000s. Recently, the rot of stressed loans has spread from the public sector banks to the nonbank financial sector, and on the real side, from infrastructure companies to most notably the real estate sector with the latter threatening middle class savings. This contagion owes both to overall weak economic growth and slow progress in cleaning up bank and corporate balance sheets. A failure to resolve this challenge could mean a reprisal of the Japanese experience of nearly two decades of lost growth, but at a much lower level of per capita income. India's development experience could end up being a transition from socialism without entry to capitalism without exit because weak regulatory capacity and lack of social buy-in will have impeded the necessary creative destruction.Thus, India's economy finds itself at a pivotal moment, facing both the short-run challenges of the twin balance sheet problem, the longer run economic problems of appropriate reforms to create an environment in which India's businesses can function and grow, the challenges of building transportation, energy, and communications infrastructure., and the social policy challenges of improving education and health care. Challenges never come singly.