CAIRO: If Egypt’s latest period of significant economic reform and growth began in 2004, India’s began 10 years earlier, said Kaushik Basu, advisor to India’s Minister of Finance.
The global economic crisis of 2008 slowed India’s growth, but as he pointed out, emerging markets were markedly less affected than developed economies.
"The financial crisis brewed in the US and Europe and never went to developing countries; however, it became a recessionary tendency for production in developing countries, and subsequently, output dropped.
"In India, the growth rate rose from 2003 onward for five years, [then] dropped in one quarter to 5.8 percent, and stayed at around 6 percent for three-quarters of a year, or slightly below. This was very poor, given its recent performance, he added.
The Information and Decision Support Center (IDSC) at the Egyptian Cabinet recently invited Basu, also a former Cornell professor, to present a paper on cooperation among emerging economies.
He spoke with Daily News Egypt prior to meeting with Egyptian Minister of Investment, Mahmoud Mohieldin, about Egypt’s similarities to India, and how Egypt could learn from India’s ability to achieve economic success while balancing the needs of a large, and largely impoverished population.
Like countries all over the world, including Egypt, the Indian government deployed stimulus packages to jump-start their economy to combat the crisis.
"Fiscal deficits went up around the world, some more than they should have, he explained, "Yet the nature of stimuli was different: in the US it was to help the banks considered ‘too big to fail’. India was lucky, whether by design or otherwise, a few years ago it had begun spending huge amounts of money on the poorer segments of the population. These big injections of cash, like the National Rural Employment Guarantee Scheme – which guaranteed jobs and income for poor rural households – meant that the global slowdown had less effect on India’s poor.
He explained that two years ago, the Indian government had undertaken the controversial decision to give loan waivers to poor farmers, writing off $15 billion in debts.
"It turned out to be a lucky stimulus, because it put more buying power in people’s hands, he said, exactly at a moment when they might have otherwise felt pinched by economic slowdown.
Subsequently, after nine months of poor growth, India surged back to 7.9 percent GDP growth. India’s fiscal year, which ended on March 21, saw growth at 7.2 percent, with projections for fiscal year 2010/11 at 8.5 percent.
Driving growth
"India’s fast growth only began in 1994. The main driver was services, IT, software, banking . India’s service sector has grown faster than any other country’s even China.
He pointed out that growing concern at India’s insufficient manufacturing sector has begun to quiet as the last six months have seen rapid increases in manufacture of heavy capital goods, pharmaceuticals, cars and car parts.
"In February we saw 16.7 percent growth in manufacturing, he stated proudly, though added that "we don’t yet know if this is a fluctuation or the start of a new trend.
Of foreign direct investment (FDI), he sighed, "It’s such a political topic. He explained the FDI can act as a double-edged sword, because courting investments from large multinational companies can result in exploitation of naïve governments desperate for growth at any cost.
He pointed to examples in Latin America where debts incurred by development contracts led the World Bank to essentially take control of the country. In India, however, he believes the country has reached "that critical point at which legal services have evolved sufficiently to handle large multinationals’ investments safely. He admitted that India had cut a few bad deals, such as with Enron just prior to its collapse in 2001.
In terms of Egypt’s situation, he said, "Savings and investment figures could do with a push. One of the factors that helped India grow rapidly was a savings rate of 32.5 percent of national income . There is 23 percent savings in Egypt. If this were pushed up, it could grow faster. Egypt’s high human capital is comparable to India’s, although Egypt is in fact richer than India, average per capita income is 60 percent higher even now.
On innovation
Yet more than investment, Egypt needs new ideas. The US remains exemplary in this, Basu said, by funding experts and academics to innovate new ways to innovate not just in science but in management.
"In India there used to be a total lack of [this]. Now there is a huge amount. The group that invited me to Egypt, the IDSC is exactly that, its function is to generate ideas for the cabinet and government.
He commended India for its early investment in institutes of science and technology, how the city of Bangalore experienced a boom as a result, similarly to how investment in Stanford University led to the tech boom in Silicon Valley.
However, he warned that while India invested heavily in higher education in the 1950s and 60s following independence, similar to Egypt under Nasser, and is still reaping the benefits, education has received less support in recent years.
"Malaysia and China have been investing heavily in higher education. I would say to Egyptians, don’t ignore this sector, he warned.
Of the topic of cooperation between emerging countries, the subject he came to Egypt to discuss, he pointed to the relationship between India and Egypt.
"Trade between the two has been growing rapidly, up to $3.8 billion last year. Egypt has the trade surplus, while India has the investment surplus, although there is investment in both directions; Orascom has invested in India.
"Both countries are known to be relatively tolerant big nations with civilizational commonalities and the possibility to grow immensely. In addition, the USA is a crucial trading partner.
He suggested that the Egyptian and Indian governments communicate more, that leaders all over the developing world could contribute to global stability by building stronger relationships.
Specifically, he advocated the exchange of students, especially in the IT and research fields, to help with cross-fertilization of ideas. Areas of bureaucracy reform and poverty reduction are also common to many developing markets, and to India and Egypt in particular.
"Encouraging markets to function is good for growth, but they don’t have a natural mechanism for removing poverty. For this, the government must act. It’s true everywhere that the market can’t pull people in; there needs to be a direct measure for poverty reduction.
Although he denied overt rivalry between India and China, he twice cited the prediction from The Economist that 2011 would see 8.1 percent growth for China and 8 percent growth for India; he pointed out that estimates are overly conservative, but regardless, growth should be almost equal.
"China’s growth spurt begin in 1978, while India’s didn’t begin until 1994. One very important difference is that the Chinese government is much more in command of the economy, 40 percent of China’s national income comes from government owned industries while in India it’s only 14 percent.
"Most textbooks will tell you that if the government is so involved in the economy, it won’t do well. China contradicts that. However, it carries a certain amount of risk, because if something goes wrong in an overly centralized system, it can backfire rapidly.
"I do believe that India’s system of multiple sectors and less control is ultimately stable. Yes, there are troubled regions and significant poverty. But it’s my hunch that India’s on more solid footing than China. Still, the per capita income in China is double India’s, wealth is better distributed among people.
That emerging economies drive world economic growth he termed an "accepted view, but he acknowledged that such a significant change in the balance of economic power amounted to a paradigm change, a "tectonic shift that could give rise to earthquakes.
"More trade flows more through the Straights of Malaka between Malaysia and Singapore, than any other part of the world.
