#276 What Goes Around Comes Around
#276 What Goes Around Comes Around
Looking Beyond the US Presidential Election, India's Critical Minerals Policy has a Starting Problem, and Three Factors that Explain China's Economic Trajectory
Global Policy Watch: Down To The Wire
Insights on global issues relevant to India
— RSJ
The closing arguments have been made in the US presidential race. By this time next week, we will have the 47th US President. I think it is too close to call the race, given how the electoral college works in the US. It is easier to make sense of the data and draw insights after the elections than to predict them with repeat opinion polls and modelling. A handful of counties in about six swing states and within them, the trade-offs between race, education, gender, income and religious orientation is what it comes down to on Tuesday next week. The continued resilience of the US economy, a strong job market and moderate inflation should mean voters would have a more positive view of the current administration. However, that’s not how it feels now. The momentum, the betting markets and most prediction models suggest a Trump win. In fact, the swing in the mood of the electorate towards Trump is evident in the many opinion pieces that have appeared over the past week in the liberal media space on how to survive another Trump presidency or the call for building ‘Resistance’ like we are in WW2 France. Much of it is either belated hand-wringing on what the Democrats got wrong in their messaging or apocalyptic forecasts on how a second Trump will be the beginning of the end of democracy in America.
How much of it should we really worry about?
There are three ways to look at these elections regardless of what happens on Tuesday. Much of what constitutes them is the outcome of Trump's impact on American politics in the past decade. Even if Trump remains a one-term President, he will eventually be in the top tier of American presidents in terms of the lasting impact he’s had.
The first is a set of issues where the ‘Trump doctrine’ has become mainstream even if his detractors won’t acknowledge it. During his first term, Trump viewed global trade as a zero-sum game. The first wave of import tariffs that he initiated was taken forward with enthusiasm by the Biden administration. Economic nationalism and trade isolationism are now more the norm than the exception across the big economies in the world. This will only strengthen regardless of who wins next week, which will inevitably mean that US-China relations will only get more fraught in the coming term. We will see more rhetoric of bringing back manufacturing jobs to America and raising duties on more items imported from a wider set of countries, including India. To put this in context, manufacturing jobs account for less than 10 per cent of the domestic job market (of over 160 million jobs) and the Biden administration possibly added 750,000 new jobs during its time. The US economy will grow stronger if it continues to build its advantage of having the world’s greatest R&D and innovation ecosystem, not by giving tax breaks to the likes of Intel, GE, Boeing and sundry steel manufacturers in Pittsburgh.
Similarly, on fiscal deficit, Trump has successfully transitioned the mainstream Republicans away from being deficit hawks who worked hard to balance the budget. The US budget deficit is at an unprecedented level of above 6 per cent, but it is hardly an election issue or a topic of discussion among lawmakers. The certainty of the US dollar being the global reserve currency, despite China’s efforts to push for an alternative, and a total disregard for the debt burden will weigh the future governments, and we will see the fiscal deficit continuing to expand in the next term.
And to round this off is how the US sees its role as the global policeman or consensus builder. To be sure, the reluctance to play this role traces its origin to the Obama administration, but Trump wrote a new script altogether when he questioned what the US was getting out of NATO, was reluctant to back long-term allies and was happily pulling out of treaties and agreements that previous administrations had signed. While the Biden administration wasn’t as willing to isolate itself from world affairs, especially Ukraine, it is evident that there is no active interest in Washington to play the role of a global policeman unless US interests are directly threatened. There is a not-so-subtle policy direction to thwart China economically, but that’s where much of the current US foreign policy focuses. This is unlikely to change if Harris wins. Of course, no one can predict how far Trump will go down this path if he wins.
The other inevitability is the continued erosion of the middle ground in American politics that will follow this election. More than ever before, we will have to contend with a dominant extreme on both sides of the political divide. There is this feeling that this is a much better prepared Trump who has learnt his lessons from the first term. He has promised to rid the government machinery of people who might stall or delay his plans of draining the swamp this time around. The Trump plan (he hasn’t denied it) of reclassifying anywhere between 20,000 to 50,000 civil servants as “Schedule F” employees who can then be fired without constraints and be replaced by more pliable supporters of his is one way of doing this. There will be no five-star generals or a sober Mike Pence helping him stay in line this time. There are more die-hard supporters surrounding him now who will do his bidding and would love to bait the Democrats with more radical proposals. Whether the institutional mechanism of checks and balances and a sensible Congress are enough to stop this is difficult to answer. What is certain is that the resistance to Trump would correspondingly give the more extreme sections of Democrats the ammunition to take over their party. This is an escalating ideological arms race that had the briefest of pauses during the Biden term. Even in the scenario of a Harris win, this reality won’t change. Any Harris victory will be with the narrowest of margins, and the alarmist tone that’s being used in liberal media space about the dangers of a Trump win will be used by her supporters to build a case of how close we were to an apocalypse or a fascist takeover or whatever else worries them sick. The soul searching after such a win among the Democrats will be about how they should ‘never again’ be in such a scenario as they were in the days leading up to the election. In any case, all of this is predicated on the assumption that a narrow Harris win will be acceptable to Trump and his supporters. I see a long drawn legal battle that will also be played out on streets of US cities that will only deepen the political divide. The only scenario that avoids this widening chasm is if Harris wins by a landslide, leading to a moment of reckoning within the Republicans about Trumpism. To me, that’s an almost impossible scenario.
The final point I have is about the depleting strength of the US constitutional institutions and, therefore, the rule of law that will gather pace after this election. Trump and most Republicans now see them as an impediment to whatever future they want to build. But while the fears of what extent could Trump go are played out widely this week as the odds of his victory get shorter - doctoring of electoral rolls in future, running for a third term and his apparent fixation with using the Insurrection Act, 1807 to send in soldiers to put down protests - I would not be sanguine about Democrats not taking a leaf out of Trump’s playbook if they were to squeeze out a victory over him. The Biden administration also went down the slippery slope of hiring ideologues as heads of key institutions and supported what could only be described as woke proposals that reduced everything to identity and race, especially at schools and universities. We have discussed the example of the FTC in multiple editions of this newsletter, where the verdict about Big Tech being predatory and bad for customers was already taken before any antitrust investigations even started because of the ideological orientation of its chair, who had once written a famous paper on it. The due process didn’t really matter because the mind of the FTC chair was already made if you read her interviews on this topic. Is it any surprise, then, that most tech entrepreneurs (and job creators) are covertly or overtly supporting Trump? A Harris win, I suspect, will only call for a doubling down on these tendencies. The fear of another Trump-like figure supported by billionaires who could rise in future would bizarrely push them to undertake Trump-like measures that would weaken the institutions. Among the things that look inevitable regardless of who wins on Tuesday, this should perhaps distress most right-thinking Americans. The one thing that separates mature democracies that have stood the test of time is the resilience of their institutions. They may occasionally bend to the whims of the elected, but they won’t break. That might not remain true after next week.
p.s:
All this talk of institutional strength is a timely reminder that Acemoglu, Robinson, and Johnson (ARJ) won the Economics Nobel for 2024. Their citation reads:
“(They) have demonstrated the importance of societal institutions for a country’s prosperity. Societies with a poor rule of law and institutions that exploit the population do not generate growth or change for the better. The laureates’ research helps us understand why.”
ARJ, their papers, and their book ‘Why Nations Fail’ are perhaps among the most quoted works in our newsletter. Simply put, states that create and sustain institutions that share power, are accountable, focus on productivity and innovation, and improve over time have fared better than those that have extractive institutions that steal resources and benefits from society for the private gains of a few.
India Policy Watch: Critical Minerals in a Critical Stage
Insights on current policy issues in India
— Pranay Kotasthane
Remember the headlines from last year that one of the largest deposits of lithium ore in the world had been found in J&K’s Reasi district and that it could potentially transform India’s energy transition?
Well, it was just another case of premature exhilaration. Eighteen months later, that mineral block hasn’t attracted any interest in government-run auctions and remains unsold as of this writing. The more worrying part is that this isn’t a one-off failure. Turns out that India’s critical minerals drive isn’t going well: only 37 per cent of the minerals blocks on auction have found any bidders.
This situation isn’t explained by government neglect. If anything, policies to encourage the exploration and mining of critical minerals have rapidly improved over the last three years. In June last year, the government created a list of 30 critical and strategic minerals. Before that, a joint venture of three PSUs called Khanij Bidesh India Ltd. (KABIL) was incorporated to “identify and acquire overseas mineral assets of critical & strategic nature such as Lithium, Cobalt & others”.
In August 2023, the Parliament passed the Mines and Minerals (Development & Regulation) Amendment Bill, 2023, which paved the way for private companies to be involved in this domain. Hitherto, many of the critical minerals—including those of rare earth elements—were classified as ‘atomic minerals’ because some of them were found in monazite beach sands. They were thus closed off to the private sector and came under the purview of the Department of Atomic Energy. Through the 2023 amendment, six such minerals were taken off the ‘atomic minerals’ list. With this change, private sector companies could apply for licenses to explore and mine these minerals.
The second major change was the introduction of the ‘exploration license’. Many of these critical minerals are deep-seated in the earth, making their exploration difficult, time-consuming, and technically challenging. The International Energy Agency estimates that major global mining projects take nearly 16 years on average from discovery to production. The Act foresaw that mining firms would be sceptical of making such commitments. It hence introduced a separate license that permitted companies from across the world to participate only in reconnaissance and prospecting operations. Such exploration agencies would be reimbursed 50% of the exploration expenditure once mining starts. Essentially, a new category of players has been allowed to prevent vertical integration and to bring advanced exploration techniques to India.
This is a sound policy design. Nevertheless, the results have been discouraging. The National Mineral Exploration Trust‘s(NMET) website reveals that only a handful of exploration license projects for critical minerals such as Lithium, Rare Earth Elements, and Graphite have been green-lighted. That, too, most of these projects have been awarded to other PSUs, and I couldn’t locate a single foreign company in the mix. Further downstream, the mining license auctions have also been a dud. Despite multiple attempts, only 14 of the 38 blocks on auction have found any bidders thus far.
What Could’ve Gone Wrong?
Reports suggest that a major stumbling block is India's archaic resource classification standards. As the current standards do not require the exploration agencies to provide sufficient information on the economic viability of mining a mineral block, miners are wary of making any bids. Moreover, none of the blocks on auction hadn’t undergone detailed exploration, making bidders all the more circumspect. Here’s what an excellent Business Standard report says on this topic:
According to the United Nations Framework for Classification of Resources, the exploration of minerals is divided into four stages — G4 (reconnaissance), G3 (prospecting), G2 (general exploration), and G1 (detailed exploration).
Of the 38 auctioned blocks…none underwent G1 level exploration; 6 completed G2, 19 reached G3, and 13 were at G4. [Business Standard]
However, this explanation still doesn’t account for the lacklustre response to exploration licenses. The key insight is that exploration is the leverage point, not mining itself. The earlier that the government can get blocks through the various levels of exploration, the better the mining auction will be. So, let’s understand this stage better. From a public policy lens, the exploration stage resolves the market failure of information asymmetry. Here’s how.
In a well-functioning market for mineral rights, sellers (government) and buyers (mining companies) should have good information about what's being sold. This helps buyers value the blocks correctly and make informed bidding decisions. A lack of detailed exploration data creates a classic "market for lemons” problem: buyers can't distinguish good blocks from bad ones, and they must assume higher risk when valuing blocks. This further leads to lower bids than blocks might be worth, while some experienced companies stay away entirely.
The classic way to solve an information asymmetry problem is to regulate disclosure, like nutrition labels on packaged food products. But in this case, such regulations already exist in the form of resource classification standards (even if inadequately so).
So here’s an idea: the solution might be approaching critical minerals extraction as a semiconductor fabrication project. As with a fab, mining critical minerals is important strategically. More importantly, both these projects have long gestation periods and involve huge upfront capital investment. The Indian government solved this problem in chip fabrication by promising upfront capital support to fabs in the construction phase—companies don’t need to wait for production to begin before the government financial support kicks in. A similar approach could work with exploration license holders as well. The current incentive of reimbursing a firm after a mining project has begun doesn’t seem to be an attractive proposition for private and foreign firms. Upfront capital support for exploration would also rank favourably from a Marginal Cost of Public Finance (MCPF) perspective, as it would resolve a market failure and help unlock value many times over in downstream mining, exploration, sales, and exports.
Global Policy Watch: Explaining China’s Political Economy
Insights on global issues relevant to India
— Pranay Kotasthane
There’s a whole gigafactory of opinions that try to make sense of China’s economic trajectory. Pick any industrial sector—from agriculture to technology and space to electric vehicles—and you have expert opinions on how specific policy moves and politico-economic foresight made China catch up and go beyond.
Such explanations are often rich in detail but also self-limiting. They do not explain how or why China could make growth-enhancing choices in so many sectors at once.
That’s where complexity theory comes in. Deploying the complexity lens makes us think beyond narrow sectoral policies. As with any complex system, the economy is greater than the sum of its parts, and these parts interact and share information with each other. Complex systems display non-linear behaviour, as small actions can have large effects while large actions can have small effects.
Using this lens, the China question can then be reframed thus: what is the smallest possible set of political choices that can explain China’s economic trajectory? In other words, what are the initial conditions that produced a long-term momentum? What were the leverage points in the system?
In my view, such a set would probably have three elements: bureaucratic decentralisation, a focus on primary education, and fruitful land use.
Bureaucratic Decentralisation
Even though it is a one-party authoritarian State, China is more decentralised than India. The credit for this goes to Deng Xiaoping, who created a mechanism for accountability and bureaucratic performance measurement within the confines of one-party rule. This ‘appointocracy’ allowed local leaders to move up the chain provided they met the local economic growth and other parameters. Yuen Yuen Ang, in her book How China Escaped the Poverty Trap, explains that the central directives were broad enough for local governments to try different ways to achieve growth or reform goals.
As Manoj Kewalramani and I wrote earlier:
Unlike India, where city-level governments account for less than three per cent of total government spending, a staggering 51 per cent of government spending in China happens at sub-provincial levels. Local governments also have a much broader qualitative mandate. They are almost exclusively responsible for unemployment insurance and pensions…
For instance, Guangdong interpreted the central goal of economic opening by experimenting with Special Economic Zones. Other regions were free to follow alternate models. Likewise, the central leadership permitted local innovations in the housing sector, rather than imposing a particular solution. This policy innovation process was locally determined and not micromanaged by the centre.
This factor alone has enabled many experiments—good and bad—to happen rapidly. While the industrial successes we often hear about are attributed to China’s top leadership, they are often the result of local governments’ fail-fast approach, investments, corruption, greed and commitment.
Universal Primary Education
The second piece of the puzzle was China’s focus on universal primary education, sometimes at the expense of tertiary education. At both primary and secondary levels, India had more enrolled students than China at the start of the twentieth century. But over time, China closed the gap and left India behind. China’s focus on primary education preceded communism. By the time Deng opened the economy, China had a large, literate workforce eager to escape the tyranny of agriculture. Despite the prevalence of cultural norms against women in both countries, higher female literacy rates also meant that more women in China were willing to defy patriarchal norms. This phenomenon is explained well in a paper titled The Making of China and India in the 21st Century: Long-Run Human Capital Accumulation from 1900 to 2020 by Nitin Kumar Bharti and Li Yang. They write:
The neglect of compulsory primary education in India left much of the population without the education needed to leave low-productivity agricultural sector. In 1987/88, 62% of the workforce in both India and China was in agriculture. Over the next 30 years, China reduced this to 15%, while India only reduced it to 40%. By 2018, China had 25 percentage points more of its workforce engaged in non-agricultural sectors than India. Additionally, a larger share of India’s working-age population, remained outside the economic workforce (34% in 1987/88, rising to 40% in 2018, compared to China’s 10% and 23%, respectively), especially women, due to cultural norms against women working outside the household (Chen 1995; Field, Jayachandran, and Pande 2010). Last but not least, within each sector, China has a higher average years of education than India, implying more skilled workforce. All of this contributed to the divergence in economic growth.
Getting Land Policy More Right Than Wrong
The effective use of land is key to economic success. Here again, China has gotten more things right than wrong. This factor is closely linked to the first factor of bureaucratic decentralisation. Here’s what we wrote earlier:
Since economic growth was an important determinant of local leaders’ political prospects, they started prioritising industrial construction over the provision of public services. They offered industrial land at deep discounts compared to residential land in the hope that industrial outputs would increase regional economic growth and also become a source for future local tax revenues. Local governments attracted investors with attractive land rights. Firms accepted the offer, churned out goods at low rates because of cost advantages, and exported to the world.
The limits of this investment-led model, one that’s structurally prone to overcapacity, are now showing up. Nevertheless, as long as the geopolitical climate was salubrious and central government diktats not overbearing, the use of land for more productive purposes worked out well.
This is a point that Mihir Sharma also makes in his insightful column comparing land policy and economic outcomes in the UK, US, China, and India. From his article:
When land value is monopolised and not shared, economies turn into stagnant rentier societies. When land is not allowed to improve in productivity, economic growth declines. When land tenure and ownership are compromised, counterparty and political risk imperil the entire economy…
China is perhaps the most obvious example. Growth accelerated, took hold, and spread across large parts of the country because of how land was improved, and how the value of this improvement was captured and put to work. Here’s a reduced-form model of the process: Local governments that could build land banks then could borrow against the future value of land. They would use this capital to improve the land, capture a large part of the value increases alongside the owners of capital, and plough it back into further improvements. Through this process, infrastructure was built up across the country and multiple areas and sectors rendered productive.
The problem is, of course, that debt also grew. A debt crisis is, in fact, an ownership crisis. The stability of land tenure is threatened: Who controls the land and its value? The local government? The real estate companies that responded to the local government’s calls to build on that land? The owners of the capital that financed the building? Or the central government, because in the end in China all power flows from the emperor? [Mihir Sharma, Business Standard]
I submit that these three factors, taken together, can explain China’s economic trajectory rather well. These three factors can explicate not just the meteoric economic growth but also the contemporary decline.
What would your list comprise? Is there a leverage point I’ve missed? Send us your comments.
HomeWork
Reading and listening recommendations on public policy matters
[Report] India’s Hunt for Critical Minerals by Charith Konda and Kaira Rakheja is an exceptionally well-written report for people interested in this domain.
[Podcast] Don’t miss this Puliyabaazi with Rukmini S on all things government data.
[Course] A seven-part video series on the political economy of China based on Yuen Yuen Ang’s two fantastic books, How China Escaped the Poverty Trap (2016) and China’s Gilded Age (2020).
