Changing the pyramid's shape

Changing the shape of the pyramid

By Roopen Roy Nov 29 2011

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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