How effective were the Chinese capital controls?

One key element of the monetary policy debate of 2006 and 2007 was the extent to which capital controls would `solve the problem' and help regain monetary policy autonomy. On one hand were people who cut their teeth on India of the 1970s and 1980s, who were used to instinctively assuming that India was a closed economy where the government had full power over capital flows. They claimed that there was no impossible trinity; all India had to do was bring in capital controls against ECB and FII and the problems would be solved. On the other side were people who understood the de facto convertibility that has come about.

China has loomed large in the Indian monetary policy debate. How do the Chinese do it? was a question which was asked over and over. Is China proof that you can have stringent capital controls while having the full benefits of trade openness? Or did China lose monetary policy autonomy, adopting very low interest rates which were inappropriately inflationary?

As this story in The Economist shows, it is increasingly clear that capital controls in China were not effective. Massive capital flows have been coming into China in response to a one-way bet on the exchange rate, despite an elaborate system of capital controls. In other words, China `did it' by distorting monetary policy (i.e. having very low interest rates) and not by having capital controls that worked.

I remember one seminar at the Centre for Policy Research in New Delhi: a talk on whether India should do convertibility. In my discussant comments, I said this is a debate about how many angels can fit on a pinhead, for India already has more de facto convertibility than you think. It no longer makes much sense to debate whether India should do convertibility, thinking that it is a zero-one binary decision. One of his responses was: If this is correct, then there is no meaningful debate about China's decision on convertibility also. That is correct; there isn't.

Replace the word `China' in the Economist article by the word `India'. Its amazing, how much of this story works for India also.

You might like to also read my recent article on why India should not emulate Chinese monetary policy.

Zimbabwe's hyperinflation

The firm that helped produce currency for the German hyperinflation is helping produce currency in Zimbabwe's hyperinflation. Just as arms dealers love wars...

Though I would ask: Why should a counterfeiter work on the Zimbabwean currency? The seignorage value is low. If counterfeiters are a reduced threat, then the government could probably get away with printing on ordinary paper.

The two hot spots in improving governance in India

In India, we often have a broad notion that the performance of government at producing core public goods is bad. In order to make progress, it helps to focus on the hot spots, where things are extremely bad, so that the maximum bang-for-the-buck can be obtained in return for applying scarce resources of money, top management time and political capital.

Today in Mint there is a very interesting set of statistics showing results from a household survey focusing on poor people, done by Transparency International India and Centre for Media Studies, focusing on corruption. See the results and associated interview with Bhaskara Rao who heads the Centre for Media Studies.

The main result of this survey is:

Area	Perception	Experience
Police	78	52
Land records	69	36
Housing	70	32
Water	42	12
Hospital	46	11
Electricity	44	11
NREG	47	11
Forest	36	11
PDS	54	8
Banking	26	7
Schools	28	5

I would take away one key message from this: the two areas where the maximum focus is now required are the police and land/housing. These are the hot spots with the worst corruption. Making progress on the police is inevitably tightly interlinked with the larger justice system, which includes the judiciary.

The larger discussion on `improving governance in India' would hence benefit from a focus on these two hot spots: making the police and judiciary function properly, and ending the corruption of the land market. If a prime minister or a chief minister or a mayor has to prioritise the use of his resources, these are the two areas which deserve top priority.

John Gieve's departure

Willem Buiter has written a fascinating blog post on John Gieve's departure as deputy governor of the Bank of England. None of it directly concerns us here in India. But the deeper issues are universal and worth pondering over. And, we need more people with the stature of Willem Buiter who are willing to speak bluntly, and name names, on questions of public policy.

Inflation and the macroeconomy

Watch me on CNBC TV 18.

RBI reforms

Saubhik Chakrabarti has written a call for RBI reforms in Indian Express. He reminds us that this is one area where a series of expert committees have argued in favour of fundamental change and there are no political constraints.

Recent RBI tightening

I wrote an article Useful but ineffectual in Financial Express today, on the recent RBI tightening.