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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

BRICWatch



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Kenneth Rogoff sheds light on why growth in India has slowed down under its UPA coalition government:

For many years, India benefited from the long-lasting impact of economic liberalization in the early 1990’s. Back then, Singh, as finance minister, played a central role. He could count on the IMF – which had real policy leverage, owing to India’s need for a bailout program in 1991 – to provide external support to counter the huge internal obstacles to reform. Today, however, there is no external counterweight to the domestic political pressure that is stalling further liberalization.

True, India’s government must now consider growing threats to the country’s investment-grade credit rating. The major ratings agencies are increasingly complaining about the country’s lack of a growth strategy and its outsize budget deficits. But the impact has been limited, owing to the authorities’ ability to stuff debt down the throats of captive local banks, insurance companies, and pension funds.

Indeed, this “financial repression” tax on domestic savers remains a huge opaque source of funding for India’s debt-ridden government. It also prevents funds from being channeled to private-sector investment projects with far higher rates of return than the government can offer. [Emphasis added]

Rogoff concludes his column by identifying the “low-hanging fruit” India ought to tackle to accelerate growth. The more challenging question is how this Indian government or the next will build and hold together a durable political constituency for reform. 

Meanwhile, Andrés Velasco, the former Chilean foreign minister, offers advice for how Brazil might achieve sustainable growth. His basic recipe involves public sector surpluses, increased public and private sector infrastructure investment, and growth-friendly monetary policy.  

And Naomi Rovnick has an article for Quartz on the threat subprime debt poses to China’s financial system:

[W]hen the Beijing government unleashed its massive economic stimulus in 2009-10, China may have actually broken its banks for the long term. During the stimulus years, government officials told bankers to lend money to local governments for make-work projects that were probably unnecessary, leading to a pile up of doubtful municipal debts. So while ICBC on Oct. 30 reported a non-performing loan ratio (polite parlance for debts that may never be repaid) of a mere 0.87% of total assets, there is much suspicion that Chinese banks are not acknowledging the true extent of their soured loans. They may be “evergreening” (i.e., rolling over), reclassifying, or simply not recording them.

Yikes.



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