Economist Jayati Ghosh: India's Woes Foretell 'Chaos and Violence'

Photo Gallery: India's Sputtering Economy Photos
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Indian economist Jayati Ghosh believes her country's current financial problems are of its own making. She also warns of widespread chaos and an increase in violence if India's economic imbalances are not tackled head on.

Jayati Ghosh, 58, is an economist specializing in globalization and international finance. She teaches at Jawaharlal Nehru University in New Delhi and acts as an advisor to the Indian government. She also recently co-authored a book titled "Economic Reform Now: A Global Manifesto to Rescue Our Sinking Economies."


SPIEGEL: Ms. Ghosh, when the global financial crisis broke out in 2008, the demise of the West seemed to be sealed. Now, however, China is suffering from a banking crisis, and in India the situation is even more dramatic. Economic growth has almost halved, and panicking investors are abandoning the rupee. Is the Asian Era over before it has even begun?

Ghosh: Our two countries have big problems, but the situation is completely different. China is fundamentally strong; it has a huge trade surplus. India, however, suffers from a huge current account deficit, which we are trying to partly fill with hot money, or speculative investment, from abroad. China first and foremost has to control its illegal shadow banks, but that is not at all comparable to the mess that we are now facing in India.

SPIEGEL: Overall, money inflows into emerging markets are beginning to slow, and investors are also reacting to the possibility raised by US Federal Reserve chief Ben Bernanke of an end to quantitative easing.

Ghosh: Certainly, countries like India and Brazil have a problem if suddenly less hot money flows in. But our government in particular cannot simply put the blame for the fall of the rupee on external factors like Bernanke. This can only explain to a small extent why the rupee is now one of the worst performing currencies among developing countries.

SPIEGEL: How threatening do you think the present rupee crisis is? Does the government have the situation under control?

Ghosh: Our government reacts with panic measures. For example, it desperately attempted to attract more capital into the country by easing rules for external commercial borrowing. This, however, only worsens the structural causes of the rupee crisis. Our much vaunted economic boom was essentially a debt-driven consumption spree, financed by short term capital inflows. Those who profited were mostly construction companies and the real estate sector. India's boom was also peculiar in that it did not generate any new jobs, but instead deepened the gap between rich and poor.

SPIEGEL: China also suffers from an inflated real estate sector, when its state-sponsored capitalist sytem artificially pumped up the economy after the Lehmann crisis of 2008. Is that now coming back to haunt China?

Ghosh: I am fundamentally in favor of a bigger role for the state in order to direct investments and control banks. However in China, as in the rest of Asia, a big real estate bubble was created. Instead, China should have strengthened domestic consumption in order to free itself from the dependence on exports.

SPIEGEL: Does this mean that the decoupling of Asia from the West -- which experts have been predicting for a long time -- is moving further into the future?

Ghosh: China won't be able to break away from the West for a long time. And since the rest of Asia depends on China -- it's the biggest trade partner for many -- they also cannot break away. To be sure, China strives for a leading global role. But for the time being, the weight of traditional industrialized nations is still too strong.

SPIEGEL: Indeed, parts of the West look surprisingly strong just now: Innovations like the iPhone are being created above all in the United States.

Ghosh: If I look at the 21st century I see a huge imbalance. The most important economic currents flow from South to North: the trade in ever-cheaper products which the emerging markets produce; the capital investments -- because these countries invest their surpluses in US bonds; the cheap labor which they export, and with which they help solve the problems of those aging societies. But why does the North still dominate? Because it still invests a lot of money into research and development, and it controls intellectual property.

SPIEGEL: India in particular is falling behind in the race to catch up to industrialization. Why is it so much more difficult for your country than for China to escape poverty?

Ghosh: We can't manage the simplest things, because our starting point was completely different. When China began its reform process at the end of the 1970s, almost everybody there already had enough to eat. There were roads in almost every village, and there was medical care. In China, society was by and large equal. In contrast, a third of Indians still don't have electricity. We fight against the legacy of a caste system which condones inequality and discrimination. India's elites put up with conditions which are extremely damaging.

SPIEGEL: So you wouldn't blame democracy for India's problems? In a democracy, you can't simply order progress to happen as you can in communist China.

Ghosh: The problem is the nature of our democracy, which developed on the basis of a strictly hierarchical society. We actually need more democracy. Only democracy can create the necessary social pressure to eliminate crass injustices.

SPIEGEL: Could India's chronic corruption problem then also be overcome?

Ghosh: Corruption is a question of development. The more developed a society is, the less it will tolerate corruption.

SPIEGEL: In contrast to China, India does not owe its economic miracle to industrial mass production. India started from above, as it were, with software companies that employ well-educated, English-speaking programmers. Now, however, many of those experts are becoming redundant because computers can do their work faster and cheaper. Does India need a new development model?

Ghosh: Many Indians believed we could become a service economy straight away and leapfrog industrialization. But that's ridiculous, it doesn't work. Even now, the IT sector only employs around 2.5 million people in our country -- compared to a working population of almost 500 million. We can't avoid the hard task of industrializing our country from the bottom up. Almost 60 percent of our population are younger than thirty; these people need jobs. We are sitting on a ticking time bomb.

SPIEGEL: Your government promises to open up the country further for big foreign corporations like Wal-Mart and Ikea. Is this really the way to create enough new jobs?

Ghosh: These measures only destroy jobs. Everybody knows that retail multinationals employ much fewer people per product and per turnover than the small shops that dominate in India. Instead, we have to invest in the basics, in infrastructure: A road to every village. Water, electricity and housing for everyone. Access to bank credit for everyone -- not just for rich entrepreneurs. We have to concentrate on things that create jobs. Then India's economy will grow on its own.

SPIEGEL: Ahead of the parliamentary election next year, nobody believes the government has the courage to reform. What happens if your country falls even further behind in the process of catching up?

Ghosh: Then we will face political and social chaos on a mass scale, and an increase in violence against women, as we are already seeing.

SPIEGEL: So the shockingly high number of rapes in India has economic causes?

Ghosh: Yes, and the degree of viciousness has gone up. Many unemployed young men see no future for themselves. They hang around on the streets, they see how others are enjoying their wealth, and that drives them mad. Then they go out and rape women, or vent their frustration at Muslims or members of lower castes. We will see much more of this kind of violence. It really scares me.

Interview conducted by Wieland Wagner

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1. optional
danm 08/28/2013
I liked what Ms Ghosh said about a "debt driven consumption spree" being the source of India's prosperity for the past few years. But the same thing could be said about the USA. And much of Europe's generous wellfare state of the past 20 years has also been funded by unsustainable borrowing. And China's construction boom the past few years is also the result of artificial levels of support from it's finance sector. I understand that Ms Ghosh is Indian and we all tend to be a little inward looking about these things, but the problems she attributes to India with respect to debt are really more common that she seems to think.
2. optional
danm 08/28/2013
Ghosh points out the logical point that growth built on debt spending is not sustainable and ultimately harmful. But she also speaks favorably about China's using a bigger role for the state to "direct investments and control banks". These two points seem inconsistent. China's government control of banks has led to utterly unsustainable levels of lending. Instead of speculative home purchases and inflation of their stock markets they have too many roads and empty buildings and windmill farms that are not connected to their power grid. Have any of you seen the empty city near Mongolia? In short, they use easy credit provided by their state run banks to fund work projects that do not give economic value to the nation just to keep people busy and to maintain a dictated rate of growth. This is just as unsustainable as the debt spending of India and the USA on real estate and consumer goods and Europe's welfare state. There is little difference. Eventually China will have to deal with the massive bad debt on their bank's balance sheets and when this happens their rate of growth will take a huge hit. I am surprised Ghosh doesn't see something this obvious when she talks about the strength of the Chinese economy. It's as big of a house of cards as anything in the west and they lack the internal consumption needed to cushion their fall when this eventually hits.
3. India's Woes Foretell 'Chaos and Violence'
BIGuru 08/29/2013
Bad business processes to 25% from 1984 to three months ago...(GDP: India $1.873T; China $7.318T). Hence the issues. At least if they can get get the GDP to $4 T, they will be OK. Advanced Industrial Ecosystems...is the way.
4. don t go bric my heart..
george orwell 1984 08/29/2013
Direct and easy thinking...Let s suppose that event China has not occured, cheaper products etc. instead of that all countries that have such products imported fm China had produced them at home, the money wd be at home....But anyway such countries wd be dominated by the North anyway, not equity maybe. So event China es welcome anyway or a World Crisis wd be anyway ahead? And for put out the fire we have Syria to aid closing the coffin....
5. some Data points
parvati2685 08/29/2013
The Paramedic Girl Nirbhaya aka jyoti pandey who was gangraped in delhi last year was from upper caste kurmi brahmin and she came from same lower income group background as of her rapists only difference was that she her father had their priorities right that she studied hard and her father worked two shifts to see her educated.As for her rapists most vicious was th juvenile muslim whom indian pseudo-secular media tried to give hindu name as "raju" untill the western media let the truth out about the lies of indian media and JNU walas like Ms. ghosh and other four were hindus of lower caste. 2.The rapists of recent Mumbai photo Jurno were all muslims and on hindu.The rapists of Norwegian tourists who were raped in MP were lower caste.
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