Eight years ago this month, stock markets across the world were in a deep funk, as the second stage run-off election that would eventually elect Luiz Inácio Lula da Silva to power in Brazil took place. Markets bet that the rise to power of Lula, until then a radical Leftist, spelt doom. Fearing capital controls, emerging market portfolio managers, this author included, raced to convert their Brazilian stock exposure into less dangerous American depository receipts (ADR). Mea maxima culpa.
In many emerging markets around the world, and for the MSCI emerging market index as a whole, that period in 2002 marked the bottom of a multi-year market climb (between then and 30 September 2010, markets rose 390%). A few emerging markets, India included (up 650% over the same period), joined the party starting the following March, just after the military phase of the Iraq war.
Brazil has been the best performing large market since then—rising a cumulative 1,500%. This market performance is reflective of profound changes in the Brazilian economy, an inclusive lift to Brazilian society and impressive improvements in many social indicators. Market-friendly economic policies, coupled with prudent macroeconomic supervision and an explicit focus on “inclusion”, has created a minor miracle in this former bastion of hyperinflation. Several indicators of progress have moved up impressively—real income growth, income equality and average years of schooling, to name but a few. Fourteen million new jobs were created in Lula’s tenure and, this year, Brazil will likely sport an Asian Tiger-like 7.5% gross domestic product (GDP) growth, the best since 1985. Small wonder then, that Lula is one of the most popular heads of state in the world.
Like in any democracy, even this impressive performance comes with its detractors. The naysayers come from two camps. Camp 1 believes that all this is a result of the policies put in place by Lula’s right-of-centre predecessor Fernando Henrique Cardoso. Cardoso laid the foundation for many institutional reforms, including the famous Real plan of 1994 that broke the back of hyperinflation. Camp 2 believes that much still needs to be done in pension reforms, curtailing big spending and defeating corruption.
Does this sound familiar? Like Brazil, India is a large, heterogeneous democracy. In spirit, if not in letter, the constitutions of the two countries are similar. Does the B (Brazil) in the now famous Bric (Brazil, Russia, India, China) group have a lesson for the I (India)?
One lesson is that strong, steady and sound macroeconomic supervision does help over the long term. The temptation in a plural, large, popular/populist democracy is to loosen the purse strings. The central bank has to lean against this innate tendency for largesse. By explicit and implicit action, the central bank has to be the torchbearer in the fight against inflation. While India has not suffered hyperinflation, it is prone to chronic high inflation. Through its actions over the years, the Reserve Bank of India (RBI) has credibly demonstrated its desire to contain inflation. But as India pushes the limits of its growth in years to come, and supply-side constraints, particularly in infrastructure and logistics, still remain, this will continue to be job No. 1. RBI is equipped with a vague mandate (see a 2009 op-ed article by this author, at Changing central bank mandates) and faces occasional threats to its independence (as it does now). These may be sorely tested at certain points in our economic future. It will be prudent to sort some of these things out when the times are good.
While Brazil is not much of a role model for India in terms of income equality, its effective focus on inclusion over the last decade has some lessons for us. Article 7 of the Brazilian constitution speaks forcefully in favour of employee rights, minimum wage, unemployment insurance and a social safety net for those who lose their jobs or are retired. In India, while we have begun to recognize several such “rights”, implementation has been patchy and the safety net not at all systemic. In particular, the access to social protection beyond the formal employment sector is very poor. It is time we began to think about death dates, or at least reincarnation dates, for large programmes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). In the initial phases, handouts highlight “rights” that have been denied. But continued too long, they become entitlements that steadily build like plaque on the arterial valves of the system. Improving the efficacy of implementation of social programmes—for both short- and long-term goals—should be a major thrust. Conversion of generalized subsidies to conditional cash transfers, introduction of condition and time-specific insurance, and deepening pension systems in the country are takeaways from successful ideas in Brazil.
The India/China dance is overdone. It’s time to Samba.
PS: Lula’s handpicked successor, Dilma Rousseff, was last week forced into a similar run-off second election. Will the past be prologue?
Narayan Ramachandran is an investor and entrepreneur based in Bangalore. He writes on the interaction between society, government and markets. Comments are welcome at email@example.com
To read Narayan Ramachandran’s previous columns, go to www.livemint.com/avisiblehand