Two academics evaluate the returns of the art markets in India, Russia and China over the last decade, using a portfolio theory/ CAPM framework.

Investors constantly hunt for alternative assets that might improve the risk-adjusted returns on their financial portfolios. When stock markets experience a downswing, investors search for more profitable alternatives. Financial newspapers fill headlines with record prices paid for certain works of art, giving rise to the idea that investing in art might be a profitable pursuit. Moreover, Artprice recently reported a booming emerging art market for Russia, 780% growth for the Chinese
15 (contemporary) art market since 2001, and 830% for the Indian (contemporary) art market in
the past decade.

To determine if these reported returns are feasible and indicate reasonable investment alternatives, we analyze whether investing in emerging art markets yields a competitive risk-adjusted
return in comparison with other, more traditional asset classes that could be used optimally to
diversify a financial portfolio.

India exhibits the strongest Sharpe ratio of all three emerging art markets and by far the strongest average annual return. Moreover, the Indian art index has a negative market beta and a nearly zero correlation with the S&P 500, which makes it another interesting investment for a well-diversified portfolio. Link

I know very little about art or art markets, since my “right brain” never progressed beyond those sunsets and sunrises in 4th grade, and hence can’t really offer any opinions here. Perhaps some readers are better informed?

HT: Felix Salmon

The entire China vs India debate is so overdone and (mostly) futile. Unfortunately, it seems to elicit the most number of comments on IEB – largely bakwaas, unfortunately – which we have to perforce edit or delete.

Here’s Gurcharan Das, one of my favorite essayists with a rather strange op-ed in the New York Times that begins with the Mumbai terror attacks and the public’s reaction thereof, and then flits from meme to meme — India vs China, the role of Vaishyas in India’s growth, the Argumentative Indian, the 21st century rise of India (and China) and the role (or lack, thereof) of government, and the need for India to get its infrastructure right. Talk about a khichdi of ideas. For all I know, there may be a couple of other memes that I’ve missed. My head was spinning at the end.

Anyone else with similar reactions?

What is interesting in Daniel Yergin’s FT piece is that he deftly sidesteps the question of predicting the future for oil price—near-term or in the long-term. In recent years, he has been proven wrong. His Cambridge Energy Research Associates (CERA) has been bearish on oil since 2004-05.

More important rather than interesting are his comments on the skyrocketing cost of everything from rigs, to ships to technical and skilled personnel. Clearly, for many reasons, the world needs to slow down. Central banks (or more precisely, governments) are unwilling to let that happen. The result is going to be more inflation (for a year or two) and less growth and eventual deflationary bust.

There is no dearth of commentary that predicts an imminent end to oil price. Usually, things happen unexpectedly, just as the rise of oil price itself to present levels. Now that every one and his dog is praying for or predicting a collapse in oil price, I wonder if it would happen now.

In any case, here are two samples of commentaries that call the oil price unsustainable:

In fact, John Hussman finds the contango in crude oil futures as heralding a big slump just as it did in 2006 when the price of oil dropped from around USD 80 to USD 55 per barrel.

He has exited his position in crude oil and has reduced his position in precious metals to 2%. How he proposes to reconcile that with his bearish stance on equities in the U.S.A is something that I have not been able to ask since I do not have his email address. Then, there are the comments by Mr. George Soros. He blamed it on speculators. One Michael Master in his testimony to the US Congress on the oil price spike. He has said that it is caused by index investors.

I do not recall hearing of him before this testimony. Suddenly, his name is everywhere.

It is not clear if these prognostications confuse wishful thinking for forecasts, for buried within its crevices, the Wall Street Journal carried an article on the oil producers shipping less crude than before.

This article refers to the rising consumption in Saudi Arabia and the rapidly declining export from Mexico. It is an interesting read and manages to finish on an optimistic note, somewhat inexplicably (i.e., that is falling oil price). Brad Setser makes an interesting point that this article was buried too deeply in the inside pages of WSJ than it deserved to. See this interesting post by Brad Setser.

Talking of inexplicable conclusions that did not flow from the discussions that preceded it, this paper by researchers by the Federal Reserve Bank of Dallas does the same thing. It argues, explains and convinces us that oil prices are justifably high. Then suddenly it concludes that sustaining triple-digit prices would be difficult.

It is funny and a different story that different people have different persons in mind for “speculators”. If you add them up, just about every one would be deemed a speculator while, of course, all those who invest in stocks that sustain Wall Street are fundamentally driven, analytical and rational.

I think America does not want to see the price of oil to drop so much that it angers the Sheikhs in the Arabian sands so much that they stop writing cheques for bankrupt Wall Street institutions.

See this article for confirmation on America speaking with forked or multiple tongues on this matter. And see this too.

The first line is a gem: “Hank Paulson, the US Treasury secretary, will invite oil producers to invest their petrodollars in the US while urging them to take steps to curb the price of oil in the medium term on a tour of the Gulf that begins on Friday”.

Once America has finished re-capitalising its financial institutions, it would not be averse to seeing the oil price collapse. In fact, it might even actively conspire to bring that eventuality about for biting the hand that fed them is part of longstanding Western tradition.

Geopolitical gains are not trifle if the price of oil continues to remain high, it would also put paid to any fledgling ambition of China (or even the distant India) to overtake America. At the very least, it would push the time-frame out by a few years and with some luck, few decades:

Credit Suisse’ s Dong Tao wrote in their “Emerging Markets Economics Daily” dated May 30, 2008 that Xu Xianchun, deputy director of the National Bureau of Statistics, has suggested that inflation might not peak until 2009 (p. 15).

The longer the oil stays elevated, the longer the persistence of inflation in China and the greater the policy challenge. In the meantime, more money would keep coming into China in search of appreciation.

Brad Setser estimates the rise in monthly reserves in China at USD 74 billions in April. Given that dollar appreciated in April, the actual sum could be about USD 82 billion, nearly a trillion dollar annual rate! There is no need to analyse this. China’s policy is totally and utterly rudderless. Brad Setser is way too polite on this one.

So, for what it is worth (you might be better off tossing a coin to decide), my forecast is that the price of crude oil would drop to about USD 110-115 or so. That is about it. It would then go back to 150 to drive one final nail into Asian economies, shower riches on West Asia and re-capitalise America. Then, once it has done its damage, the missile would be allowed to extinguish itself or burn itself out (pun intended).

The events had their share of coverage in the mainstream media– Indian, African and western. However, the landmark event deserves much wider appreciation and analysis than provided by the perfunctory news reports covering the events.

On one hand, western analysts tend to see all major Indian initiatives on Africa, including this summit, through the prism of competition between the burgeoning economies of India and China. On the other hand, many African commentators have warned their own leaders about India’s intentions in what they have disparagingly labelled as a “second scramble for Africa”.

The key drivers for this summit and other Indian initiatives on Africa go beyond the traditional factors raised by most analysts. It is not limited to containing or matching Chinese economic interests in Africa or answering India’s impending quest for energy security. Unlike China, India has had a historical relationship with the African continent for centuries, based on trade with the eastern and southern coasts of Africa. The presence of a large Indian diaspora in Africa for over two centuries also provides India with a unique advantage over its Asian neighbour. India’s quest for energy in Africa, unlike China, is not a core component of the Indian government’s energy security policy; rather, it is part of its bid to diversify energy sources.

So what was the rationale for the India-Africa summit, if not mimicking the China-Africa summit last year? It is an obvious indicator of the renewed drive in the India – Africa story. Current global equations and recent Indian policies indicate that India’s engagement with Africa has shifted from the old issues of colonialism, non-alignment and South–South cooperation to issues of trade and economy.

Ever since India’s economic revival in the mid-nineties, India’s foreign policy has been increasingly driven towards finding export markets, attracting foreign capital and know-how. This policy shift is echoed across Africa as most of the economies there are going through economic reforms and liberalisation. The Indian diplomats have been working overtime to garner support for its quest for a seat in the UNSC in the continent. The Indian stand on the western agricultural subsidies at the WTO negotiations has been in consonance with the views of most African nations.

The recent improvement in India’s economic relations with Africa, however, cannot be attributed solely to the new focused approach of the Indian government. Another factor is the ‘outward-looking’ attitude of India’s private sector. Tempted by the easy availability of capital and driven by the search for new markets, Indian companies have been eagerly targeting those regions in Africa, in which they had shown little interest until recently. The economic boom in India and the success of both home-grown and NRI/PIO (Non-Resident Indian/Person of Indian Origin) companies in Europe and parts of South America have given Indian businesses the confidence to venture into Africa.

Indian companies’ increased activities in Africa have spurred the government to link its diplomacy in the continent more explicitly to its economic requirements. The Indian engagement reflects private-enterprise led bottom-up approach of its economy. In tandem with this policy change, India’s commercial ties with Africa have grown as the India-Africa trade volume has increased by 285 percent to 25 billion U.S. dollars in the last four years.

African countries hold India in high esteem – in particular, on account of its democratic institutions and the manner of its economic growth. India, as a democratic developing country, serves as a role model for these countries and is a source of support in various sectors, especially agriculture, services and small- and medium-scale manufacturing. Above all, it is the new image of India -– that of a leader in the information technology industry, biotechnology and telecommunications -– that has attracted Africa to India.

For their part, African political leaders would like their constituencies to believe that India and Africa are making a joint effort to improve the well-being of their peoples and societies. It is here that India’s real influence in Africa will emanate– from its success in achieving sustained economic growth and lifting many out of poverty in a democratic, post-colonial setting. It is for the Indian political and bureaucratic masters to remember that the right message to an external constituency in such an environment will be only delivered by a continued focus on domestic reforms. The Indian leadership will be judged by its African partners on how India progressively tackles various impediments to its economic growth in fields of infrastructure, education, labour and other roadblocks. It is imperative that India is perceived to be addressing its own developmental challenges successfully; only then will others, including Africa, consider it as an attractive and rightful partner for the future.

India is often compared with China. But China is country with a highly repressive State apparatus. If you wanted to find historical precursors or parallels to China you’d probably would have to look at the Statist Corporatism of the fascist States that flourished in Europe between the first and second World Wars as well as in the case of Portugal and Spain after the war. Well, not really the case of Portugal and Spain, because they were rather backward, agrarian and clerical, but probably something more like German fascism where you have extremely strong State control of the economy and State control of labour.

Why are Chinese consumer goods flooding the world? For two reasons: one is that even though it’s ostensibly a workers State they can’t form unions; the exploitation is very systematic indeed and, of course, the currency markets are structured in such way as to make Chinese goods cheaper globally. India, by contrast, is a democracy. It’s a very imperfect democracy, but all democracies are. So, the State form is wildly, vastly different. The opportunities for getting wealthy in China through connections to the political elites are very, very deep. To the extent that there is a degree of functioning democracy in India, clearly, it’s oligarchy dominated; we can see this in the familiar dominance of some of the parties.

I think this is an interesting point of contrast with China. If you were to ask sophisticated observers of the business scene, people in business schools generally in Europe or Australasia to name at least one Chinese home-developed brand that was going global, they probably couldn’t do it. But you could do that for India. Corus and Tata are very well known, they are projecting modern India, globally. But I think the important difference is that when the Chinese try to develop own brand manufacturing or marketing they tend to buy up companies which have already got some brand recognition elsewhere. There isn’t a sense that the Chinese firms are going from their domestic place to a global positioning on the back of that domestic base, in India that is different. [Tehelka]

Note: I can’t help but point out the lack of editorial rigour at Tehelka. The gentleman referred to in the story is Stewart Clegg(not Klegg), Research Professor at the University of Technology Sydney, prolific author and public and private sector consultant with expertise in management and organisational learning. [Link]

One of the main arguments of those propogating economic growth has been that it reduces poverty. China is a frequently cited example. Yet, as Bardhan shows, economic growth may have less to do with poverty reduction in China than previously imagined, and conversely, that poverty declined less rapidly in India during the period of economic growth:

Estimates made at the World Bank suggest that two-thirds of the total decline in the numbers of poor people – below the admittedly crude poverty line of $1 a day per capita – in China between 1981 and 2004 already happened by the mid-1980s, before the big strides in foreign trade and investment in China during the 1990s and later. Much of the extreme poverty was concentrated in rural areas, and its large decline in the first half of the 1980s is perhaps mainly a result of the spurt in agricultural growth following de-collectivization, egalitarian land reform and readjustment of farm procurement prices – mostly internal factors that had little to do with global integration.

In India the latest survey data suggest that the rate of decline in poverty somewhat slowed for 1993-2005, the period of intensive opening of the economy, compared to the 1970s and 1980s, and that some child-health indicators, already dismal, have hardly improved in recent years. For example, the percentage of underweight children in India is much larger than in sub-Saharan Africa and has not changed much in the last decade or so. The growth in the agricultural sector, where much of the poverty is concentrated, has declined somewhat in the last decade, largely on account of the decline of public investment in areas like irrigation, which has little to do with globalization.

This contradicts what is now taken as an article of faith within the economic liberalization community. However, the article does not give much to the anti-globalization camp either, for it points out that the inequality cannot be directly ascribed to liberalization or globalization.

But it is not always clear that globalization is the main force responsible for increased inequality. In fact, expansion of labor-intensive industrialization, as has happened in China as the economy opened up, may have helped large numbers of workers. Also, the usual process of economic development involves a major restructuring of the economy, with people moving from agriculture, a sector with low inequality, to other sectors. It is also the case that inequality increased more rapidly in the interior provinces in China than in the more globally exposed coastal provinces. In any case it is often statistically difficult to disentangle the effects of globalization from those of the ongoing forces of skill-biased technical progress, as with computers; structural and demographic changes; and macroeconomic policies.

What this seems to suggest may seem obvious, but is often lost. What causes inequality is not globalization. And what will reduce it or save people from poverty is not economic growth. Rather, it is what policies are used to manage either – or both.

Not so long ago, there were only two countries that collected client states around the world: the United States and the Soviet Union. These days, it seems like anyone with some economic clout can join in the fun. China has Sudan, Venezuela has Bolivia, and now Japan has India.

It is a preposterous claim to make, especially since his contention is based on an IHT article previewing Japanese PM Abe’s visit to India. The article, incidentally, focuses on India and Japan coming together to thwart the threat from China’s economic growth. I searched the piece with a fine toothcomb but could find nothing to justify Daniel’s assertion that

But for now, the Japanese government is happy to underwrite India’s growth, in return for a share of spoils.

Which sharing of spoils is he talking about? The $100 billion DMIC infrastructure project or the Toyota – Kirloskar and Maruti-Suzuki partnerships. It is about two free nations engaging economically in a globalised world. India is a vibrant democratic country with a burgeoning economy, not Sudan or Bolivia, to be patronised by Japan when

Japan’s trade with India was about $6.5 billion in 2006, the Indian government said this week, about four percent of Japan’s trade with China….In 2006, Japan invested just $515 million in India.

The anger has subsided now but I am terribly disappointed to read such uncouth and half-baked opinions pullulated under the IHT logo.

Update – The Acorn has a more nuanced and less concupiscent take on the subject.

Lyman and Dorff argue that notwithstanding traditional humanitarian concerns for Africa, there are more pressing reasons for US to take greater interest in Africa and implement a concerted policy for the impecunious continent. These include

• Fierce competition for resources in Africa led aggressively by China, along with India, Korea, Brazil, Malaysia and the ilk.
• Importance of African energy to US, in light of the problems with existing sources in the Middle East and Latin America.
• The strength of African numbers in trade negotiations at WTO, and their collective bargaining power in concert with India and Brazil at the Doha Round.
• Africa’s importance in the global ‘War on terror’, to counter the influence of Al Qaeda in the region.
• Concerns over current state of health in Africa – HIV, AIDS, Avian flu, malaria etc.

Lyman and Dorff have rightly identified that

At the center of all Africa’s issues and challenges lies the persistence of poverty. Africa is by far the poorest continent and marginal in the global trading system. Poverty adds to the potential for conflict, the vulnerability to terrorist influence, the pressures of illegal migration and the spread of disease; it constitutes a drain on worldwide aid resources. Thus, the humanitarian problems return to center stage…

But they also conclude that

Only when Africa is recognized for the growing importance it has for America will these shortcomings be overcome.

Many interpret the above hypothesis as nothing but a grim reminder that the US is losing out to other contenders in the race for resources in Africa. The purpose of providing humanitarian aid is not altruistic philanthropy but a brazen attempt to stay ahead and satiate the growing US need for mineral resources, raw materials, natural gas and crude oil from Africa. The Chinese are at the forefront of this race for resources with no concern for any despotic or tyrannical regime, humanitarian disasters or international opinions. China being a P-5 member of the UN Security Council has a huge advantage over India, Brazil, Korea etc. in its dealings with the region.

In turn, Alex and Gareth believe that the Indian approach to Africa is more nuanced and fundamentally better suited for Africa. [See my earlier post on India and West Africa.] They believe that

Many Indian goods have much greater suitability for African than Western markets. Sales of Tata cars, for instance, are booming in many African countries.

India’s democracy in a postcolonial setting has relevant lessons for Africa. India also offers important experience in agricultural expansion, clean water management, and confronting the growing threat of climate change.

But the Indian approach is also similar, in many ways, to the Chinese and the US pattern. Indian firms like IOC-OIL and ONGC-Mittal in Nigeria and Mittal Steel in Liberia have been equally controversial and impenitent in their methods and dealings. India’s hope for success vis-a-vis China in the dark continent is queerly buoyed by statements like this attributed to Zambian opposition MP Guy Scott

People are saying, `The Whites were bad, the Indians were worse, but the Chinese are worst of all.’

Interestingly, Gandhi had predicted that

“commerce between India and Africa will be of ideas and services, not of manufactured goods against raw materials after the fashion of western exploiters.”

How far has India moved since?

Nations usually enter treaties to help themselves, not others. In 1987, the US pushed hard for the Montreal Protocol, which restricted ozone-depleting chemicals. It did so not out of altruism but after a cost-benefit analysis convinced President Ronald Reagan that the US would gain far more than it would lose. Bans on ozone-depleting chemicals were not burdensome for US companies. By contrast, developing nations strongly resisted the protocol. They demanded and received a large side payment from the rich nations.

These side payments are not unusual. When a group of nations needs the co-operation of another nation in some area of international relations, and that nation does not gain through the proposed agreement, then some kind of payment or exemption is typically arranged. With its explosive emissions growth, China is by far the world’s biggest problem for climate change. Like it or not, the only way for other nations to ensure Chinese co-operation is through a special inducement, such as cash or extra emissions rights…

The debate about climate change has finally produced an understanding that the world as a whole would benefit from an emissions control agreement. The next stage is to recognise that a warmer planet presents much greater problems for some countries than others; that emissions controls would cost some nations much more than others; and that no nation is going to spend a lot in return for a little.

It is time for the world to take steps to pay China for its participation in an agreement. The richer US is unlikely to receive such payment or even to ask for it. Even so, we fear that if the world does not persuade the US that it has more to gain than to lose from a deal on climate change, an effective agreement will prove to be impossible.

This perspective, however, presents a huge dilemna for India. Climate change is a much greater problem for India than for other countries. Yet, emissions controls would also cost India much more than others. In essence, India stands on the loosing side of both issues – the cost of climate change, and the cost of climate change action. India should be pushing for international action on climate change, yet it stands to loose significantly by adopting stringent emission standards.

How is this contradiction to be solved? India can ask for monetary compensation – yet if it wants or needs climate change action more than others  it has a weak bargaining position. Ethical concerns notwithstanding, it will not be compensated any more than it benefits other rich countries. But there is a way out if one sees that India’s emissions pose not a current but future threat to the global environment. Simultaneously, climate change is very much a current threat to India, that must be adapted to now.

This means India needs to take adaptive action now, and mitigating action in the future. Nevertheless, to spur other major polluters into action, India must establish a roadmap for increasing emission regulations, while being compensated not directly for migitation, but for adaptation. In this manner, the rich countries pay mostly to reduce their own and China’s emissions now, while India signals its moral and practical commitment to the international process – thus encouraging US action.

I have previously discussed why India must embrace climate change action and push for an international treaty, on the IEB and Pragati. An upcoming article will discuss further what India’s negotiating strategy needs to be.

• A legacy of entrepreneurship and availability of enough role model entrepreneurs in family, society and country to emulate and follow – unlike China, where the communist government did their best to kill the entrepreneurial spirit in the 50s, 60s and the 70s.

• Presence of entrepreneurship-oriented bodies such as the TiE network (The Indus Entrepreneurs) or Wadhwani Foundation – unlike China, where nothing even remotely like this exists.

Turner forecasts the rapid rise of entrepreneurship in China by citing the success of entrepreneur Jack Ma, which portends

…that China is already starting to produce its own iconic role models. It will then be just a short step to creating entrepreneurship support organisations, possibly financed by successful entrepreneurs of the new generation.

It seems a tad too simplistic to arrive at the conclusion. Turner’s own observation about parental and social role models in India betrays his fallacious reasoning.

It’s a matter of entrepreneurship appearing to you in those you see around you as a perfectly normal and widely practiced way of pursuing a career.

The prevalent social structure underpins the incubation and growth of entrepreneurship in a country. It is possible and eminently laudable to generate a large number of regular jobs in manufacturing or service sector by providing specific skills and training to a vast multitude, by creating world class infrastructure and by attracting big ticket investment. Deng Xiaoping and his successors might have undone Mao’s myriad economic misadventures in one generation but the entrepreneurship bug will take a few more generations to spread in China, that too only if a fertile breeding ground is available – of a freer, democratic, vibrant and even somewhat chaotic society.

Link