#277 Defending the Defensible

What to expect from Trump 2.0?, Agricultural Productivity vs Agricultural Employment, and are Multilateral Trade Agreements Back on the Table?

Global Policy Watch: Not Even Close

Insights on global issues relevant to India

— RSJ

It was not even close. On Tuesday, Trump led a Republican surge that saw them winning the popular vote, the Electoral College, the Senate and possibly even the House. The Supreme Court already has a conservative majority. A total capture of power. A viral CNN video showed the interactive map that drew a blank when checked for counties where Harris did better than Biden in 2020. Not one in the entire country.

Trump gained votes in almost every single demographic group across gender, race, education and age. He gained crucial votes among young voters of colour and Latinos despite his often over-the-top rhetoric about race. In 2016, possibly, a lot of Americans voted for Trump, thinking an outsider would drain the swamp and shake things up a bit. They got way more than they bargained for in terms of political and economic disorder, a revolving door of associates and cabinet members and mishandling of the pandemic in its first phase. This time, they have voted for him, knowing all about him. And they have done it decisively handing over to him the keys of all the branches of government.

There is always a risk you run in any democracy where populism and demagoguery can sway emotions, leading to citizens voting against their long-term interests. It is easy to conclude that’s exactly what happened on Tuesday in America. But when you lose vote share across almost every demographic segment to an opponent whose leadership and character flaws were on public display for four years, you must stop blaming the intellect of the electorate and ask yourself how badly you must be doing in their eyes.

Also, it is unclear to me why the mainstream media got the opinion polls so wrong. Is it simply that Trump voters chose to stay silent on their preference, as is widely suggested, or was there an underlying bias in the models that crunched the raw data? Mainstream media has been losing audience in America for the past decade as the post-millennial generations shift away from them. But it is also clear that this verdict and the narrative built upon it by Trump, Musk, and the alt-media will mean the distrust of the mainstream media will only deepen. They are on their last legs. Both sides are throwing the accusation of falsifying truth now with conviction and evidence. The term ‘post-truth’ was often bandied about when Trump won in 2016. That was a bit premature. We might be entering into that era now where it is what you feel that’s truer than the facts. Unless mainstream media goes into a deeper reflection than merely believing that the electorate doesn’t know what’s good for them.

When the rout is so complete, it is important to question your fundamental premises. To ask if the truths you have arrived upon, that you believe are worth fighting for, resonate with the people you want to represent. It will take some time for Democrats to get there. The early blame game among them seems to be about whether Biden should have stood down earlier and allowed a challenger to emerge through the primaries or should have stayed on to fight Trump. I don’t think any of it would have mattered. Given the momentum in favour of Trump in the weeks leading up to the election, it is likely the Harris campaign might have unravelled even more had they got more than the 100 days that Biden stepping down gave them. Harris inherited the Biden electoral machinery and its funding. The Democrats raised a billion dollars to fuel their campaign - two and half times what Trump managed. If this wasn’t enough, no amount of extra time or funding could have made a difference. Even the economy, especially inflation, which seems to be the immediate reason offered by many observers for the defeat, might be a misleading answer. It is true that the post-pandemic fiscal stimulus was huge, and it inevitably led to inflation. But the economy was doing fine, employment was running full, and housing and equity markets were doing well. The fears of a hard landing were past us. Of course, there’s a counterfactual. There was an alternative to slam the brakes on growth by keeping rates high, thus taming inflation, but that would have meant higher unemployment. Who knows how the voters would have taken a low inflation and high unemployment scenario then? On the balance, a choice had to be made, and I guess the Biden administration chose the lesser of the bad options it had. It could have resisted the urge to provide that large a fiscal stimulus back in 2021 which widened the fiscal deficit to over 6 percent. But that’s hindsight. That original sin came back to bite it, or so it seems. The state of the economy in 2024 wasn’t the kind that sweeps a party out of power if you were to compare it with the previous elections. There’s way more to this loss than just the economy.

Democrats will have to go deeper to understand what demolished the so-called Obama coalition over the years. As much as they have taken a position against neoliberalism and the excesses of the Reagan era market-dominated economics, which had resonance among the working class, they have gone too far into what’s loosely termed wokeism and intersectionality. Instead of appealing to wider swathes and building a larger, diverse coalition of interests, the effort was to find narrower and narrower intersections or slivers of identity and grievances and find ways to address them. This navel-gazing by the left meant the working class had to look elsewhere for allies. And the Trump rhetoric of America being taken for a ride by China, by foreigners and immigrants let in freely and by wokes who placed climate and social justice over everyday concerns of people, fitted right in. The over-reliance on identity as a vector in politics and pretty much everything else, a complete loss of trust with the blue-collar working class, being weak on law and order, the out-of-control virtue signalling that alienated ordinary people, and the ideological animosity to the tech sector—these are possibly the places to start for them to build a new compact. It won’t be easy for the many who have built their careers on exactly these issues. It will take time and some fratricidal bloodletting.

That takes us to Trump and the Republicans. What to expect from them in Trump 2.0?

While a victory like this gives the illusion of everything being perfect, the core of the Trump administration and those who will influence it are far from being a cohesive unit. There are free market libertarians, big government believers, global trade advocates, import tariff hawks, climate skeptics, Tesla fanboys and many other strange bedfellows. Chaos is guaranteed. Amidst that chaos, a few things will definitely change from the direction of the Biden administration.

First, Trump loves tariffs and thinks they solve most economic problems—balancing the budget, creating jobs in America and keeping the dollar strong. This has no basis in economic reasoning, but expect him to escalate trade wars with China and raise tariffs across the board for other countries. The only way to manage this will be to tackle him bilaterally, offer him optically some kind of ‘deal’ that he likes and then let him go to town on how that’s the best deal possible for America. His business track record and Trump 1.0 have shown he’s not the best dealmaker and all he needs is a few concessions that show he’s winning, a bit of a boost to his ego and some golf. But expect China and its exports to be under pressure around the world.

Second, things will change on the international relations front. Trump will find a way to end the Ukraine war. The worst possible way would be to ask Ukraine to fend for itself as it cuts funding and arms support to it. That risks Russia and China to push their luck further geopolitically and signals to US allies that it won’t come to their aid like in the past. That’s less likely. It is possible that Trump will broker some kind of an arrangement where Ukraine cedes some territory to Russia, and the US gives additional assurance to Putin on how far NATO will go in what Russia considers its sphere of influence. Things will not change as much in the Middle East, though. Trump would be happy to let Israel knock out Iran’s proxies, whatever is left of them. His view of Iran is rather coloured, and he wouldn’t mind Israel baiting the regime there now that it was clear the so-called strategic depth Iran had built against Israel through Hamas and Hezbollah was a chimera. The strong relationship Trump and their family have had with MBS will mean Saudi Arabia will continue to keep away from Israel’s actions in Gaza and Lebanon so long as they don’t extend it to the West Bank, too. I don’t see Asia-Pacific capturing Trump’s attention, so he will let the State Department continue with the status quo. I do see the military support for the Philippines, Japan or South Korea against China come at a price because Trump will see an opportunity for a deal there. For India, I don’t think much changes regardless of how much the domestic right-wing ecosystem would like to believe about the depth of Trump and Modi's friendship. The US-India relationship has progressively strengthened over the years based on shared interest in trade, belief in democratic values and India, as part of the Quad, providing a bulwark against China. We should expect nothing different with Trump 2.0.

Lastly, Trump will pick up hot-button issues like immigration and law and order to deliver on his election promises. There will be tougher border controls, some deportation of illegal immigrants from states like Florida and Texas and stronger policing. But on a lot of other issues which seemed to have attached themselves to Trump’s campaign based on personalities who have supported him - a significant reduction in federal staff headcount (Musk), going after the pharma cartel (RFK Jr) or curbing Bank profits (JD Vance) - I foresee a lot of talk but limited action. A lot of these are pet issues of strong personalities that will face resistance from another group within Trump’s circle who will be against it (hedge fund bros, old dyed-in-the-wool Republicans and his own family). There will be a lot of jostling around to be seen as the real second-in-command to Trump, and in many ways, these will cancel each other out.

Trump is 78 now. In any case, he will be a lame duck in another 3 years when the next Primaries get serious. He will be 81 then and even his robust health won’t possibly permit him to move the wheels of constitutional changes to get himself a third term. For all the hand-wringing in the liberal world about Trump’s second term, the good part is they have seen an earlier version of this. There will be a lot of sound and fury, and American democratic institutions will be tested like never before. But this will end way sooner than people think. Perhaps three years is a long time. But it isn’t that long a time for the kind of damage people think Trump can unleash. Maybe a consecutive second term would have been more worrying.

The real danger is what wrong lessons are learnt from the Trump era after he’s gone. Unlearning those will take more than a generation.

P.S.: Almost coinciding with Trump’s win, China announced a $1.4 tn fiscal package to help bolster its economy and reduce off-balance sheet debt. This was the expected fiscal stimulus after the monetary stimulus announced last month. This didn’t enthuse the analysts who were expecting a much larger stimulus to revive the housing market and possibly prepare for a 60 per cent tariff regime that Trump has promised. Maybe Xi is keeping some powder dry to see how Trump operates in the early part of his tenure. Reports suggest that Trump might bring back Robert Lighthizer, who scripted the trade war with China during Trump’s first term as the US trade representative. If that happens, I guess Xi will have to find a lot more dry powder in the coming days.

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India Policy Watch #1: Defending Agriculture

Insights on current policy issues in India

— Pranay Kotasthane

I agree with the notion that the only way to rescue Indian agriculture is to reduce the number of agriculturists. In other words, we need to create many manufacturing jobs to effect this structural transformation. As the number of people doing agriculture reduces, the productivity (output/worker) difference between agriculture and other sectors will narrow, and the fewer agriculturalists left will be able to achieve scale and profitability.

Given these Bayesian priors, Ramesh Chand’s Business Standard article last week caught my attention. He challenges this notion and argues that, empirically, agriculture has played an underrated role. That’s because even though agriculture's contribution to the GDP has declined considerably in many countries, the drop hasn't been accompanied by an equivalent reduction in the number of agriculturists. So the idea that once more manufacturing jobs are created, a large number of people will exit agriculture, and hence, the productivity of these two sectors would converge seems to have a weaker empirical basis than we would like. Here are the relevant portions of the article.

.. during the three decades between 1991 and 2021, per capita GDP (measured in 2015 in US$) increased by more than 10 times in China, 4.8 times in Vietnam, 3.4 times in India, and 2.4 times in Indonesia. However, this did not lead towards convergence in labour productivity (gross value-added per worker) in agriculture and non-agriculture sectors. In the set of these four emerging economies, highest disparity in per worker productivity or income between agriculture and non-agriculture is witnessed in China, which experienced very high growth in PCI (per capita income) and output of manufacturing in the last three decades. An agriculture worker in China generates merely one-fourth of the income generated by a non-agricultural worker. India and Vietnam are close to China while Indonesia shows lower disparity. It emerges from these experiences that faster growth in non-agriculture and so-called modern industrial sector did not lead to commensurate shift in workforce from agriculture. As a result, share of agriculture in employment remained stubbornly higher than its share in output or income of the economy — three times in China, two-and-half times in India and Vietnam, and more than two times in Indonesia. [Ramesh Chand, Business Standard].

The charts below from Our World in Data bear out these claims. The relationship between agricultural output and agricultural employment differs widely. In the developed world, there is a convergence. For instance, farmers account for just 2% of total employment (and 1.6% GDP) in France and 1% of employment (and 0.7% GCP) in Germany. On the other hand, large developing countries seem to have sticky employment in agriculture. Even in China, an exemplar of the structural transformation story, agriculture accounts for just ~7 per cent of its GDP but ~22 per cent of its employment.

Having established that moving people out of agriculture will likely be slower than expected, what’s the way out? The article suggests making agri jobs more remunerative through modernisation, “on-farm value addition”, and skill-intensive farming—all good things one can’t possibly argue against.

However, the public narrative is stuck on one issue—a legal MSP guarantee for grains benefitting a few powerful farmer groups. This one issue bypasses all other policy changes required to make agriculture truly remunerative. Like protectionism allows the Indian industry sector to survive at a low-level equilibrium, the demand for an ever-increasing MSP destines Indian agriculture to the current performance levels. The Overton Window is only so large as to occupy this one issue of the MSP. Everything else seems to be outside it.

The other aspect of interest here is the sharp rise in service sector jobs—China and Indonesia have a higher proportion of workers in this sector than India. So, a call for focusing on agriculture might underestimate the manufacturing sector's spillover effects: it creates indirect employment through supply chains and support services far more than agriculture does. Moreover, the evidence from the structural transformation in the developed countries shows that the employment transition from agriculture to other sectors does happen, even if it takes much longer than we ordinarily imagine.

Given these realities, it still feels that agricultural non-performance—like emigration and population—falls in the category of problems which cannot be directly targeted. The way to reduce their salience is to make changes outside that domain. For example, making Indian cities more liveable might likely be the best way to tackle high-skilled talent emigration. In complex systems, everything’s connected, and the true leverage point might be outside the domain under focus. So, while Mr Chand’s arguments made me update my priors about agriculture’s importance to the India story, agriculture still feels overwhelmingly part of the problem rather than the solution.

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India Policy Watch #2: Rethinking China Economic Policy (RCEP)

Insights on current policy issues in India

— Pranay Kotasthane

The other news of note this week was the statement by the NITI Aayog CEO BVR Subrahmanyam urging the government to reconsider its position on the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). He pointed out that India wasn’t the main beneficiary of the “China+1” move, and being outside major trading blocs was a major reason for its underperformance.

It’s good to see this conversation is doing the rounds again. More importantly, it’s good to see chest-thumping being displaced by informed realism. Until a few months back, the FTAs with UAE, Australia, and the EFTA gave a veneer that India didn’t need to be a part of any big trading bloc—all it needed was to sign many bilateral trade agreements. Back then, we had pointed out the flaws with such an approach:

“A multilateral trade agreement is useful also because it can override points of bilateral contention. Moreover, multilateral agreements also make it easier for a government to convince its domestic stakeholders (recall Putnam’s paper Diplomacy and Domestic Politics).

India seems to have opted for a bilateral approach instead where it will fine-tune the deal specifics with countries. Such an approach will be protracted. It will face opposition from domestic lobbies, who will want to keep their products out of deals with states having competing suppliers. Finally, this approach would require immense and sustained political, intellectual, and administrative capacity. Without building this capacity, the Commerce and External Affairs ministries are likely to satisfice rather than maximise. So, I remain sceptical of the outcomes.”

India’s trade policy requires hard-nosed realism, not amateurish brooding over the bilateral trade deficit with China. Mihir Sharma persuasively argues for a rethink here.

“If you intend to offer an alternative to China in global value chains, you first need to participate in them. Every time a new trading power has supplanted another, it has done so with the compliance of the corporations, investors, and traders of the older manufacturing hub. British investment industrialised the US in the 19th century. Japanese companies were pivotal in China’s rise.

Nor can Indian manufacturers continue to be paralysed by fear of Chinese competition. For one thing, India already has a free-trade agreement with ASEAN — countries that are, in turn, closely integrated with China.

It’s hard to pinpoint, in today’s value chains, where value is being added. It’s doubly hard for slow-moving bureaucracies such as India’s. In other words, local producers are already pretty exposed to Chinese competition through trade with Southeast Asia, but without any of the benefits of participation in RCEP, from increased investment to export markets.” [Mihir Sharma, Business Standard]

There’s a tactical angle at play, too. RCEP and other trading blocs are not straitjackets. India-sized countries can carve out exceptions for themselves, just like China managed to secure a gentle reduction in tariffs on ICT goods in the Information Technology Agreement of the WTO at the start of the century. Similarly, India can secure its interests by a step-wise reduction in tariffs on manufactured goods, especially in sectors where Indian companies have existing export capabilities. Moreover, security-based exceptions can always be used to keep specific items out of the discussion, as trade agreements don't forbid country rules on the grounds of national security. It’s better to have predictability for most goods with security carve-outs on items of concern (a black list is better than a white list).

Rather than a binary decision to be in or out of RCEP, it should be an analogue call determined by the concessions India can extract. The current change in the India-China equation and a weakening of China’s future economic prospects since 2019—when India decided to opt out of RCEP—provide an opportunity for India to rethink its stance on multilateral trade agreements.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Video] Check out our Puliyabaazi with Varun Aggarwal on the reasons behind India’s low corporate R&D spending.

2. [Papers] The latest edition of the Journal of Economic Perspectives features a symposium on industrial policy. Worth reading.

3. [Talk] This talk and paper have some counter-intuitive points on the high costs of land in India. TL;DR - the problem isn't a scarcity of land but a continuing License Permit Quota Raj. Worth reflecting on. 

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