The master of the big picture

LUNCH WITH BS/ Martin Wolf, Chief leader, Financial Times

Martin Wolf,
Chief leader, FT

There is a story about Martin Wolf they tell at the Financial  Times (FT). Martin had just returned to London after a visit to India, the year was 1991, and his colleagues in the paper asked how India would do. "Very well," Martin is reported to have responded. "All my protégés are now running the country." Martin smiles and corrects me: "Friends, not protégés."

Martin began working on India when he was in the World Bank, 30 years ago. He thought then that India could and should be growing at 8 per cent, instead of 3.5 per cent, and he argued that India should be changing economic policy rather drastically to realise its potential. "I had come from working on Korea, where they were doing double-digit export growth, but the officials here dismissed Korea as a small country and said its experience didn't count."

Martin's problem was that no one from the Bank was willing to listen to him either. India was the Bank's biggest customer, and if India did not want to go down the policy route favoured by the Bank, then it was the Bank that had to adjust, not India.

And so World Bank money continued to pour in by the billion. Martin suggested that if the Bank money was not available, India would very quickly have a foreign exchange crisis and that would force a policy change. He was right, of course, except that it happened two decades later. "Two wasted decades," he recalls with some frustration.

Martin ended up writing a book on India, but he left the Bank and the then editor of FT invited him to be its chief leader writer. Today, with a CV that most people would die for and awards that he must have lost count of, he has become one of the most widely read and influential commentators on the global economy.

We are sitting at the Imperial's Spice Route (which must now the champion restaurant for lunches with Business Standard), and Martin recalls meeting an official from the now-defunct directorate-general of technical development, who explained how they matched licensed industrial capacity to demand. "What if a businessman came to you and said he could produce the same goods at half the price? Would you give him a licence," Martin asked, and remembers the answer even today: "If someone promised that, we would look at him very suspiciously."

Then there was the meeting with the member of the Monopolies Commission. "I had just come back from Calcutta, where the poverty is a shock to the western eye. And I asked why the Commission was blocking investment by the international companies." "Because we want to avoid the worst excesses of industrial capitalism" was the memorable answer.
Recalling the episode, Martin argues that every country that has achieved rapid growth has done it through manufacturing growth. In India, agriculture is still the labour sink and you can't do agricultural reform without getting people off the land. Only manufacturing can absorb them. "Today India has rapid services growth, but you can't fly on one wing."

Martin is no stranger to the restaurant. We quickly order grilled jumbo prawns and a lamb curry, with rice and vegetables. Martin would like a beer; the waiter offers everything from Australian to Thai brands. Martin likes the idea of drinking Thailand's Singha beer along with Thai food in Delhi, and soon the conversation drifts to politics and economics.

There's mayhem on the market, the new coalition government is having starting trouble, and Martin's response is the expected one: every time India is ready to really get going, something goes wrong. "I still believe India can do 8 per cent growth, but I don't think it'll manage more than 6 per cent. That's not bad, but it could be so much better. I am appalled the new government in Andhra Pradesh would give farmers free power. There is no such thing as free power; someone is paying."

It's a dispiriting subject, and I shift to his latest book (on globalisation), which is yet to be formally released but follows closely one by Jagdish Bhagwati on the same subject. "Jagdish has written a very good book, one of his best. The two books complement each other," he explains.

"Mine is different in that it sees globalisation as the logical culmination of the development of markets." He differs with Bhagwati in that he also argues strongly for a globally integrated financial system. "You benefit enormously if you have a strong financial system because it reduces capital waste. It helps banks keep foreign assets as part of their portfolio, so that they are insulated from national economic disasters. And it gives confidence to foreign investors, so you get more capital coming in."

I point out that every second-rung country has run into a financial crisis after opening up: Russia, Turkey, Argentina, Brazil, most of east Asia.... Doesn't that argue in favour of caution? He counters that local elites were allowed to screw things up. In any case, he adds, financial integration with the world should come last, after all other markets have got globalised.

Does he think the International Monetary Fund (IMF) and the World Bank need to be re-invented? He has a one-word answer: yes. And quotes Montek Singh Ahluwalia (his first boss at the Bank and one of the friends who was running India in 1991, another being Shankar Acharya), who once said that the Bank was a growing business in a declining industry.

Martin now sees the Bank as a declining business in a declining industry. Its best customers (India and China) don't need either its money or its advice any more, its money and policy advice are most badly needed by the very poor nations of Africa, but they need grants and not loans.

Also, they need a much smaller organisation to serve their needs. "I respect [World Bank President James] Wolfensohn for having made an issue of corruption, and he has made it more palatable to NGOs, but he hasn't made it a more effective development institution."

As for the Fund, Martin thinks that the Fund needs much more money to be able to handle a global financial crisis today; and since the Europeans have insisted on the managing director being from their ranks, Martin advocates creating a separate, Asian version of the IMF: "The IMF is really a pool of foreign currency reserves, and exists so that individual countries don't have to maintain large reserves for themselves. Today, it's the Asian countries that have most of the reserves; they should form their own IMF so that the reserves can be pooled. What Asia is scared of is a repeat of the 1997 crisis, that's why each country is playing the mercantilist game and piling up the reserves. They don't need to do that if there is an international pool of money available when they need it."

What of the US, with its twin deficits (on trade and the budget)? Shouldn't the dollar be losing value, instead of gaining ground? Yes, he is quite sure that sooner or later, the dollar has to fall. But again, he thinks the solution lies not in the US but in Asia.

"The Asian economies are saving too much and that money has to be kept somewhere. Because Asia is not consuming enough and is running up these big trade surpluses, the US is taking up the consumption slack. If the Asian countries spent and consumed more, their trade surpluses would disappear and so would the dollar surpluses. Then the US would find no one willing to buy its dollars. This has to happen at some point, and the more it is delayed, the harder will be the landing."

Talking to him, you understand why he is such a good columnist and an easy read on complex issues. There is clarity on the big picture, and the ability to fit in the jigsaw pieces, to make the connecting arguments. You even begin to think that achieving 8 per cent growth would be possible, if only....