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Changing the pyramid's shape

Changing the shape of the pyramid

By Roopen Roy Nov 29 2011

Tags: Op-ed
In the 1960s the American meteorologist Edward Lor­enz, a pioneer of the chaos theory, discovered, mo­re or less by chance, that the ma­thematical models for the we­ather system were extr­em­ely sensitive to initial conditi­ons. His discovery ca­me to be kn­own as the “butterfly effect”. A popular version of the theory: a butterfly flapping its wings in Calcutta can cause a storm in distant Caracas.

All through this calendar year, much of the world has been witnessing unprecedented social unrest, political ch­aos and economic turmoil. Political, social and economic “m­e­­teorologists” do not have a clue about what is going to happen next. Little sparks are triggering chains of events that are unpredictable. Late last year, the authorities confiscated the wares of a poor Tunisian street vendor whose name was Mohamed Bouazizi. He felt extremely humiliated. On Dec­e­mber 17, he set himself on fire. This act of self-immolation was the flutter of a butterfly’s wings that ignited the Tun­is­ian Revolution and heralded the Arab Spring. The collective an­ger and unrest following Bo­u­azizi’s death, led to the overthrow of President Zine El Abidine Ben Ali on January 14, 2011, after having enjoyed 23 years in power.

In Europe, Silvio Berlusconi had to step down. Not because of his bunga bunga parties but for what he did to his country’s economy. In Europe, the eco­nomies as well as the currency are looking increasingly vulnerable. It started with Greece, followed by Ireland, Portugal and Spain (the infamous PIGS countries). But it did not stop there. The contagion extended to Italy. In the hushed corridors of power in Brussels, bureaucrats and bankers alike are talking about problems and bad assets in Belgium and France.

In Europe the masalas for a recession seem to be in the pr­essure cooker: lack of confidence, tough fiscal policies and tight credit. And all these three ingredients are combining to cook Euro’s goose. Even in Germany the forecast is of economic contraction, not growth. Between August 6 and10, several parts of UK, including London, were in fla­mes. There was widespread rioting and looting. While the debate is still on as to the causes for the unrest, part of it was ce­rtainly economic.

While dark clouds are looming in Europe’s economic skies, the US also has its own cup of woes — at least half-full. The Occupy Wall Street (OWS) m­ovement has brought to focus the disparity in wealth and income in the country. Americans are unwilling to continue with the status quo. Unemployment remains at an unacceptably high level in the US.

Joseph Stiglitz, the Noble-prize winning economist, has said that the OWS protesters are standing up against a government that is “run by the one per cent and for the one per ce­nt”. On a recent visit to Calcutta, he had visited the Coffee House in College Str­e­et. He told me that he was ra­ther delighted to see a poster which proclaimed “Occupy Wall St­reet, Occupy All Str­eets”. The sentiment is resonating the world over.

His colleague and fellow economist Paul Krugman has joined the chorus. He has sharpened the focus, “If anything, however, the 99 per cent slogan aims too low. A large fraction of the top one per cent’s gains have actually go­ne to an even smaller gro­up, the top 0.1 per cent — the ri­chest one-thousandth of the population.”

India does not have the luxury of basking in schadenfre­ude ( taking delight in the tr­o­u­ble of others). The UNDP H­u­­m­an Development Report pl­a­ces India at 134th rank am­o­ng 187 countries in its hu­ma­n development index for 20­11, as against a rank of 119 among 169 countries in 2010. Acco­rding to the Human Develop­ment Report 2011 published by India’s planning co­m­mis­sion, the socio-economic and demographic profiles of eight of our poorest states show hu­ge regional imbalance and disparity.

While the euro has run into rough weather, the rupee has plunged this month to an all-time low against the dollar. The flawed theory that the Indian economy is strong because it is loosely linked to the world ec­onomy is in tatters. The storms raging in Europe and in the oil-producing Arab world have not spared India. We have woken up to feel the pains of the ch­aos theory fi­r­st-hand. The drying up of fu­nd flows from global markets into India has ca­used the Indian bourses to take a serious blow. The sentiments have been im­pacted by GDP gr­o­wth projections of be­low 7 per cent.

There is a saving grace, th­ough. India has a foreign currency reserve of $314 billion. Our external currency borrowings are less than half that am­ount. The government has at last demonstrated some fi­mness of going forward with its second generation reforms ag­enda. If it can weather the st­orms inside and outside Pa­rliament and stick to its gu­ns, confidence will return.

Indian businesses have welcomed the reform agenda and with good reason. But our businesses must also partner the government in an overarching agenda of economic inc­l­usion. Perhaps too much th­inking is now being focused on making fortunes at the bottom of the pyramid. Too little action is being directed in changing the shape of the py­ramid. A pyramid with such a broad base is not sustainable — we must move in the direction of inverting it.

(The writer is managing
director of Deloitte Consulting, India. These are his
personal views)
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