Many Happy Returns …
Tuesday would’ve been Nobel Prize-winning economist Milton Friedman’s 100th birthday—an occasion that was marked quite eloquently in many economists’ circles. Friedman’s vast contributions to 20th century economics are acknowledged not just by those who happen to agree with him, but by detractors as well—an occurrence far too rare in today’s increasingly polarized discussions of which economic policies to best employ.
But partisan assessments of his policy prescriptions aside, Friedman had something valuable to teach everyone, and he had a remarkable way of distilling rather complex thoughts into entirely digestible concepts—as evidenced by his still-relevant, thought-provoking and insightful book, Free to Choose:
“Our society is what we make it. We can shape our institutions. Physical and human characteristics limit the alternatives available to us. But none prevents us, if we will, from building a society that relies primarily on voluntary cooperation to organize both economic and other activity, a society that preserves and expands human freedom, that keeps government in its place, keeping it our servant and not letting it become our master.”
Yet in many cases, it seems the world is still far from realizing such an understanding.
A Case in Point for Privatizing Power
It’s no secret, but at least half of India’s billion-plus people are likely unaware their nation bagged a bronze in 10-meter air rifle at the London Olympics Tuesday.
Why the radio silence? Because radios were, in fact, silenced in much of the nation by a second consecutive day of massive blackouts. Monday’s affected a mere 300 million people. Tuesday’s even larger outage left 21 states and some 680 million people without power.
All blame rests on the country’s rickety power grid, run by the central government as a state-owned enterprise. As India’s burgeoning middle class has acclimated to electricity-hungry devices—air conditioners, refrigerators and TVs—the power grid simply hasn’t kept pace.
India has a long history of heavy direct government involvement in the economy. From its independence in 1947 until 1991, the country mostly followed socialist policies with the central government controlling or tightly regulating most means of production. Following a 1991 IMF bailout, the country enacted various economic liberalization measures, including opening international trade and investment, deregulation, privatization of various industries, tax reforms and inflation-controlling measures.
However, the central government still maintains control over various aspects of its economy through state-owned enterprises—like its power grid. What’s more, the country occasionally takes some onerous backward steps that have hindered its economic growth—like last year’s U-turn on allowing foreign investment in retail. Ultimately, it seems to us maybe India would benefit from taking a page from the aforementioned Milton Friedman and allowing private enterprise to run the grid in search of profits.
The Great Wall of Chinese Stimulus
China added some more bricks to its great wall of stimulus this week, when official data revealed China’s increased this year’s railway investment target by 16% and officials announced fresh measures to increase private investment in predominantly state-run industries. Coupled with the State Council’s renewed pledges to support growth, it seems China’s reacceleration push is heating up.
This latest push came as two more economic data points softened in the year’s first half, suggesting officials are bent on shifting popular attention away from slowing growth (as we’d expect with the planned handover of power looming this autumn). In addition to slower growth in power consumption in 2012’s first half, China experienced a rare capital outflow in Q2. The State Administration of Foreign Exchange was quick to say this “does not suggest a massive retreat of foreign investment,” and perhaps that’s the case—it could be more attributable to increased Chinese investment overseas, which the government has been promoting recently. Nevertheless, officials took pre-emptive steps to boost foreign investment last week, reducing foreign investors’ minimum size requirement from $5 billion in assets under management to $500 million, increasing how much of a single company foreign investors can own and permitting foreigners to invest more broadly in China’s nascent corporate bond market.
All of these measures, in our view, provide more evidence China’s not headed for an economic hard landing. Perhaps more fascinating, though, is China’s longer-term trend toward economic liberalization—by adopting so many measures to boost private and foreign investment in the near term, China’s made noteworthy reforms to its highly restricted financial sector. Yet there’s a long, long road of reform between China today and a fully free economy—and many of these reforms seem designed to reduce the likelihood of freedom-seeking social unrest. In that way, despite incremental reforms, as the one-party regime remains intact—restricting property rights and personal liberties—it seems government very much remains the master and its populace, the servant.