The Course of Nations

I was browsing through the Times of India yesterday and my eyes fell upon the column Swaminomics. I do not follow the column normally, I used to read the centre page of ToI for Jug Suraiya once, but never anything else. However, what made me read the article was the headline: "It's Goodbye Chindia and Hello Chimerica". The article revisits the relevance of the term "Chindia" - China and India hyphenated during the years 2003-2008. Swaminathan points out that the recently concluded G-20 meeting could have been a G-2 meeting for US and China seemed to be the only countries that mattered.

I think the article is on the dot and timely. Perhaps this idea is a well known idea among geopolitical experts, but the point is China has really left us behind as an emerging star. To put it in clearer terms, pre-2008, if someone had asked me to bet on the emerging super powers in say 30 years time, I would have put my money on China, India and Russia. Post the crisis I would put all my money on China. It is not a matter of China growing at 11-12% and we growing at 9% (at the peak) What matters is the thinking in the political establishment. To quote from the article:

"India scarcely matters. It is still a country that instinctively seeks aid and foreign concessions. On the international scene it is a taker, not a giver. China, however, is now a giver. In the proposed expansion of the IMF's lending,China has offered to supply $40 billion, against $100 billion from Japan and possibly the US. India does not figure in this giver's list, it would rather be a receiver."

There are many critics of the US. There are pages and pages written about US and its hegemony. There is some justification to that. But where was the action when the US became vulnerable during this crisis. Chavez can rail all that he wants, but when this crisis hit, did Venezuala emerge as a beacon for the world? Did Chavez or Castro demonstrate the power of an alternative model? The EU also did not emerge as a clear counter. We are still left looking at the Dow Jones and S&P for cues. And the world is rallying on the news that there are signs of economic recovery in China.

The rise and fall of nations is to me, the most exciting aspect of history. If you want to go back and study history, I say, start with post-15th century history. Pre-15th century is important,yes, but the history of various nation states is more interesting and instructive.

Between 15th-16th centuries, Spain, with its "conquesting" sailors and access to riches in South America was the most powerful nation in the world. From the 17th century to World War II, Britain was the most powerful nation in the world. In between, Britain faced a challenge to its supremacy first from the French and later in the 19th and first half of 20th centuries from Germany. Post World War II, with a weakened Europe, US became the most powerful nation in the world. A great part of the credit goes to the visionary Marshall Plan, where the US came up with a huge package for European Reconstruction. In other words, when the older powers were reeling, the US emerged as the financial big brother.

What is important to understand is the following: unlike a corporation where there is a hierarchy which an employee negotiates to get to the top, there is no such hierarchy in world politics. All the global organizations are more or less influenced. The struggle to be the most powerful nation is a simple, Darwinian struggle and the nation that has the resources and is willing to commit them for the fight will win. You can say it crudely like a two-bit gangster would say, "No one hands anything to you. Ya gotta take it" (Jack Nicholson in "The Departed") Or you could say politely that China has a strategic vision in world politics. Either way, the motivation is the same.

The nature of the resources has changed with time, pre WW II it was guns and tanks. Now, it is economic might. During this crisis the most powerful nations in the world were on their knees begging for money. If you had the money and were ready to twist some arms, the prospect of jumping to another league was there.

At this stage, a qualification is necessary. I am not saying that just because China aspires to be a superpower, we must too. There is no need. Especially, if China had been somewhere far away, near Australia or something, we could have said, "Good for them" and gone about our lives. And just because they are neighbours does not mean we too must strive to equal them every way. Swaminathan's point of Chindia being dead is right on. If there were delusions in that direction, they must be disabused of. My point is: while crises are tough, and unfair to many, they create cracks in the power structure which the underdog or upstart can exploit.

Analysis Of The Disparities Between Nations - Part I

Well, the video did set me thinking on one angle. Scandinavia (Sweden, Finland, Norway and Denmark) pays a lot of attention to inequality. Throughout Europe there is a strong thread of socialism in society. This can be witnessed in the high tax rates and excellent social security systems.

For example, primary and secondary education is free in Finland and in some cases even undergraduate education can be free. Tuition fees at undergraduate levels are quite nominal throughout Europe in government funded schools. And if you can prove your financial difficulties, then state aid is assured. Compared to our own socialist experiment, we would expect that government funded schooling = poor quality education. However, the bulk of the population in Finland goes to the government funded schools. If the quality of education were poor, then a market for private schools would have emerged. But from what I know, it is not the case.

However, this does not mean everything is hunky dory. There is one section of people that really finds it hard to make ends meet. My observation is that this section is dismissed as "bums" or "drug addicts". The argument is that, if they are in their plight inspite of all that the government does for them, well, it cannot be helped. In that sense it can be pretty tough for a few. It is not a perfect world but broadly, the western European nations appear to have done a good job.

But how do we test this or quantify this? The most commonly used metric for inequality is the Gini index. The Gini index is based on the Gini Coefficient which is calculated as follows. Let us play around with some statistics.

The data was taken from Human Development Reports. I had to make one assumption to smooth over data issues. The Population and GDP Per Capita figures in the excel sheets are for 2005. When I try to access the Gini Index data for 2005 it links to the 2007-08 data. I have assumed that the situation has not changed too much in the past 3 years in terms of inequalities.

Here is a list of top 15 nations in the Gini Index. I have also included the US and the BRIC countries. The analysis is based on a sample of 126 countries.

The Scandinavian countries are all in the top 10. But other than Japan, the rest of the company is not exactly enviable. Slovakia, Bosnia and Herzegovina(!), Hungary, Ukraine... Purely from casual reading we know these nations are not exactly the kind of nations that the world wants to emulate. Therefore, it appears that most of the equitable nations in the world are equitable because they appear to make everyone poor! The Hindu rate of growth!

Let us look at the BRIC countries. Amongst the BRIC countries we seem to be doing the best. We are at 54 while China is at 93 (yay!?) and Brazil at a really low 116. However, doing good on the Gini scale may not be such a great thing as the previous table suggested. That great model for the world (not anymore?) US is at 71. So only do nations that have low prosperity end up with a high Gini score? How do we measure prosperity?

One measure applied for prosperity is GDP per capita. GDP per capita has some flaws since it is an aggregate measure. But since we are taking that and Gini index into account, it should be an interesting exercise.

This makes more sense doesn't it? The ones whom we thought as not worthy of emulation have low GDP per capitas. Bosnia and Herzegovina has $2500, Slovakia at $8616, Ukraine at $1761. The Scandinavian countries stand out here too. Sweden has $39,637, Denmark at $47,769, Finland at $36,820 and Norway at a whopping $63,918.

Looking at the BRIC countries, there does seem to be an inverse relationship between Gini Coefficients and GDP Per Capita. Can we not grow without increasing inequality? (Afterthought, the same analysis will be better done with PPP adjusted GDP Per Capitas)

Let us do one thing. Let us take the nations with the highest GDP Per Capitas and check out their Gini Indices. Remeber when it comes to Gini Index, lower is better.

Interestingly, among the top 25 GDP per capitas we have countries like Qatar, Kuwait, Bahrain. These countries are there on the strength of their natural resources and comparing them is really not going to help us. Let us drop them and build a new table. And the BRIC countries were left out in this one.

(I could have skipped it, but really just wanted to illustrate a point. I also wanted to show how thinking processes really are iterative. When we read from textbooks, we read the end result of a thought process. Unfortunately, the thinker rarely gets to that stage without many a slip betwixt the cup and the lip.)

Okay, last one, I promise. This one shows the GDP Per Capita rank and Gini Index rank for nations.

A cursory glance seems to satisfy the hypothesis that the most prosperous are quite unequal. Let us look at those that have done really well. I define "successful" nations as those whose difference between Gini ranks and GDP Per Capita ranks is not greater than 10. (It is an arbitrary cutoff)

Those are: (Drumrolls please)

Norway, Denmark, Sweden, Netherland, Austria, Finland, France, Canada and Germany.

And what do you know. Barring Canada, the rest are in Europe. I know that they have a strong socialist philosophy. But how come socialism works for these people while it does not work for Czech Republic, Bulgaria, India, China?

Or wait, are these metrics developed in Europe? (!) Is it the result of a built-in bias in the metrics?

For a moment let us discard the "skewed metrics" theory. The question that remains is:

What went wrong with the socialism of India, China, Czech Republic, Bulgaria, Slovakia, Russia yet works for these countries?

PS: I had a fun 2 hours playing around with data. Another delectable tool for data handling is GapMinder. Check it out! Playing around with data could lead to interesting observations and voila you have a theory of your own!

PPS: What was the purpose of all this? In addition to raising some questions, I also wanted to demonstrate how to go about thinking about national development. I also observed that in the western world, there is a lot of obsession with development and growth. Maybe we could take a lesson or two from that.