Monday, December 23, 2013

Diplomatic Slavery of the Middle classes

Devyani Khobragade, an Indian diplomat, hired Sangeeta Richards as domestic help and took her to the US. There, she was arrested, handcuffed, strip searched for paying her servant less than the US minimum wage, while clearly paying more than the Indian minimum wage. This issue has raised a major conflict between the US and India, and between Indians on what the primary focus of the incident should be.

The hue and cry is on three issues: one on diplomatic immunity and the US treatment of individuals who are detained. This is the power of the State issue! Can absolute power be abused and to what extent? On this first issue, we have no comment to make for it concerns not only the middle classes, but also the poor and even the fallen mighty like our own French Dominique Strauss-Kahn with his brilliant mind, extraordinary virility and incompetence of the former to control the latter. Perhaps, the US laws and procedures are meant as deterrents; perhaps they are part of the perquisites of being a police person: to be able to discover intimate details of others' cavities and insides. With today's radar and scanning technologies, where is the need for such search procedures, Obviously, this is the sex and peeping tom angle which is raising passions in one part of media readership. However, for those who have been following the rape cases in India, there is more: any insertion into a woman's orifices now amounts to rape in India. So, by an Indian defintion, the American police are indulging in rape. Moreover, another Indian news complicates things further. Homosexuality is against the Indian constitution: at least anal sex (so male only?). Which means that same sex searches with sexual penetration may be considered more undignified than heterosexual searches. Therefore, deep interrogations in public and private international law are at stake.

The second issue is whether anyone who pays someone less than the minimum wage in US, is a criminal. And whether international law would and should decide the application of Indian laws or American laws for diplomats on State service in the USA with regard to their use of domestic help hired in India. Conversely, should US diplomats abroad, pay their domestic workers according to Indian minimum wage rates or American minimum wage rates? This is the business angle because it reminds you of Nike and other US companies who used child labour abroad and were punished not by the US legislator but by public opinion.

The third issue is whether anyone should hire full-time help. It is the use of full-time, which is creating the most problems. How full is full-time? If it is 24 hours, it is clearly slavery and may lead to murder. But what about 16 hours? Duly allowing a person to sleep a minimum and take time to do the essentials? How long can people work on such a regime: three days a week or seven? What if we reduce this to 12 hours or 9 hours? How many days a week is acceptable? How many hours a week? 9*7=63? Or 35 as in France? Indeed, why can't life be sorted out so that no one needs to work more than 35 hours a week, or, as I have often maintained, 28 hours (32 could be a compromise). This would allow unemployed people the world over to get employment. This diplomatic incident only brings us back to the point.

But, matters are sometimes more complicated. At the time when a similar slavery issue took place in Paris a few years ago (maybe 10), I talked to a couple of diplomats. What they told me is that the amount of entertainment they are required to do, means that they are virtually using their spouses as the first full time domestic worker. The maids are in turn helping their spouses.

The entertainment which I mentioned above includes looking after all the VVIPs who decide to come to Paris and as VVIPs feel they deserve to either reside at our friends' places after finding appropriate connections or being at least invited for dinner, lunch and other meals. And of course, they need to be taken out to cultural events at State expense (Indian taxpayer). As a result, the social and cultural agenda of these diplomats is full, leaving them little time for their own kids and families. Of course, it's a two way street: the connections to these VVIPs can pay off later when they are back in India...

Diplomatic services' payscales are such that wives do not get paid for their labour and that the maids are not hired on a diplomatic contract. Perhaps having the Indian Foreign Service employ their own maids and butlers would be a solution, but then the taxpayer must ante up... basically the middle classes. But tax being a dirty burdensome word, the middle classes and the rich prefer to focus on the first two issues than the main issue of who pays for the social system.

To this slavery of underpaid domestic workers, we are now raising the question of slavery of unpaid spouses. They must be getting rewarded is some other way… oh! What a Sweet surrender. Certainly, a lot remains to be done.

The middle class party, as I have said, is on. It’s a party to discussing what are the rights and obligations of middle class people to each other. It’s a party to understand the examples we need to sort out the diverse claims. Certainly, no one person is expected to be perfect in all respects, but having standards, at least lets one know when one's performance is going haywire. A few rich people are outliers and the millions of poor people cannot possibly be expected to perform according to the same standards.

This discussion needs to include the elite. In France, elite women have come out in favor of prostitution. While reading Indian history (after Gandhi), I discover that already 65 years ago, elite Indian women were against reservations and quotas for women. Evidently, there are people who are able to go beyond the obvious and look deeper at social issues. People who discuss with their neighbours and get deeper understanding of why people do what they do.  

Arvind Ashta

Saturday, December 7, 2013

Unemployment up in France: Have to change the policy equation

Yet again, dismal news. French unemployment is up to 10.5% or 3.2 million people. This is the official statistics of people who are officially looking for a job.

It does not count people who have given up looking for jobs. It does not count people who are taking some traning course to improve themselves to increase their chances of finding a job. Total unemployment if we include all this may be twice as much, but who is counting?

Youth unemployment has risen to 25%. This includes people less than 25 years old. Evidently, these people do not have work experience and no one wants to employ them. There is a paradox: if no one employs them, then how will they get any experience?

Lack of growth, but stagnation. So unemployment should also be stagnant. But its increasing. An obvious explanation is that productivity has increased too. So, some people are working harder to retain their jobs, thus exacerbating the problems of those who would like to find a job.

A second explanation is that employers are continuing to increase investments in new technology and therefore increasing the capital intensivity of their firms. Evidently, the low interest rates may lead to this. The increase in capital intensivity means less labour is required. So, unemployment increases.

A third explanation is that French population has increased in precisely the segment of 20-25 year olds (this would suggest a lot of human productivity occurred in the late eighties). Or a lot of new young immigrants have entered in this age group recently. Perhaps from Europe with the opening out to new countries or from existing EU countries which are doing worse than France.

Evidently, we need to re-look at our relationship with technology and go back to notions of appropriate technology: technology which permits everyone to participate in society. Technological innovation should benefit the middle classes: not throw people out of the middle class into poverty.

Evidently, we need to look at interest rates and their impact not only on growth which should boost employment but also on investments and the kind of unemployment it can create.

Finally, we need to understand that beggar-thy-neighbour policies may lead to beggars coming into your country. The cost of creating walls to keep them out or hiring planes to deport them may be more than making appropriate economic and political chocies of redistribution and competitiveness.

Arvind Ashta

Monday, November 25, 2013

Micro-payments, Major impact on banking, unemployment, education and the middle classes

British Bank Barclays will be removing 1700 jobs from their branch network. These include personal bankers, cashiers, operational specialists, assistants and branch managers. See The major reason is that mobile payment technologies are no longer requiring such personal interactions as consumers reduce their transaction costs of commuting to banks and waiting in queues.

The growth of the mobile payment industry has been talked about for quite some time. Although the impact on developed economies may be new, we know that mobile payments are making a major impact on transaction costs in developing countries where distances travelled for making remittances can be huge and unsafe.

The impact of this news is certainly known to bankers. However, educational institutes would do well to start preparing for a change in the nature of jobs that bank managers will be required to undertake. There is probably a greater need for accountants reconciling millions of tiny payments and less for operational managers. Evidently, software for bank reconciliations will find a growing use.

Creative destruction à la Schumpeter is certainly good news for those who believe in capitalism. Certainly, new kinds of jobs will be created in developing, maintaining, and perhaps even hacking competitor payment sites.  Jobs in website security are therefore another new area of developement. However, the changeover from one kind of technology to another may have a time lag as far as unemployment is concerned. The soon to be unemployed bankers would need training and education. But to do what?

In today's world, it is easy to keep a watch on jobs which are threatened. It is far more difficult to predict and prepare for new opportunities which will reflect tomorrow's needs.

Since the bankers who are laid off are likely to be from the middle classes, and since the unemployment may not be temporary, it is possible that these people will fall into poverty.

Thursday, November 21, 2013

Cooperative Group Limited: An image tarnished

The Rochdale Society, one of the earliest experiments in cooperatives in the 1840s, fawned many cooperatives either directly or indirectly. In the last few decades, we have been watching the merger of many of these cooperatives in Britain. A reading of these mergers reminds one of the external acquisitions for growth necessary for the continuing survival of worldcom and other catastrophes. There is no reason why cooperatives cannot be badly managed, and it is evident that they can easily grow astray. Bigger players may wreck greater havoc.

Is big bad? The Cooperative Group Limited in Britain has sales and other income of over £ 12 billion to over 7 million members. Its businesses include food, travel, banking, funerals and many other businesses. It has a profit of £ 180 million pounds, just 1.5% margin on sales. This is about 27 pounds per member.

The businesses of the cooperatives includes banking. Cooperative banking laid the foundations of the microfinance movement. While customer satisfaction with cooperative banks seems to be high, the rating agencies have been downgrading the Cooperative Group's bank because of inadequate capital. This comes from having absorbed an over-leveraged cooperative bank a few years ago. A lack of due diligence means one bad apple can spoil the barrel.  Mergers and acquisitions often lead to poor returns, and they often hide the fact that one, perhaps both the firms, need to merge to hide past failures, including the failure to generate internal growth, a mantra which justifies high salaries.

The CEO of the Cooperative Group Limited may earn over a million pounds a year, while other top executives earn closer to £360,000 per year. Certainly, managing large cooperatives pays as well as managing large businesses of any kind. The competition to get these jobs and the kind of people they attract may also be similar to those running any other kind of company. Undoubtedly, these top executives are the political organs reflecting cooperative beliefs. If they are earning 28 times the minimum wage which is paid to many of the 100,000 employees, they must be believing more! The table below shows the calculations and assumption.

Hours per month
Minimum wage
Minimum wage per month
Minimum wage per year
A Salary of £360,000 compared to minium wage
A Salary of £1,000,000 compared to minium wage

The Cooperative Group Limited is also linked to the Cooperative Party, one of the largest supporters of the Labour Party. Business and politics are closely intertwined. Big players in business can have a lot of influence on how we shape our society. Their beliefs and image are therefore crucial to the belief in cooperation.

The recent scandal of a top executive of the Cooperative Group buying crack is similar to the Mayor of Toronto buying crack. Therefore, at the least we can say that top executives and politicians are as human as anyone else. Should they therefore earn thirty to seventy times the minimum wage? Or should there be a ceiling to reflect that they are imposing risks, which greater potential downsides than those of people earning less because the image of the co-operator is at stake.

Wednesday, November 13, 2013

EU interest rate cuts: Impact on the middle classes

The EU Central Bank has decided to cut interest rates. 

The European Central Bank (ECB) has cut its benchmark interest rate to a record low of 0.25%, down from 0.5%. The move came as a surprise to many analysts.

Why? We know that in the USA, they want to increase them. Why? What do interest rates do? Here is a simple, perhaps simplistic, response.

Interest rates determine whether you should invest or not. For most projects, interest rates are a cost that projects must cover. If your project is getting more than the interest cost, it's worth investing. Obviously, if interest rates are high, only very highly profitable projects will be taken up. So, investment will be very limited and therefore growth and new employment would be limited.

When interest rates are decreased, it is hoped that less lucrative investments are now worth investing in. So, more projects materialize. As investments increase, it is hoped that there will be growth and increase in employment.

Now, here is the catch. If there are bottlenecks, then instead of increasing employment, interest rate cuts cause inflation.

So, low interest rates can lead to high employment and high inflation.

High interest rates should lead to lower employment and lower inflation, even deflation.

The question in each country is what the employment situation is. If it's close to full employment, it's advisable to keep interest rates up to keep inflation in check.

If there is a lot of unemployment, it is advisable to lower interest rates because there is less risk of inflation.

Therefore, one can assume that if the US is increasing interest rates, it's because they feel either that unemployment is not a problem or that inflation is the greater of the two threats.

In the EU, with its vast unemployment in most countries, it is clear that there is little risk of inflation. In fact, the news reports say that the Central bank is afraid that inflation is less than 1% and we may go in for deflation, thus hurting growth prospects. In other words, the European Central bank is reducing interest rates to raise prices.

ECB president Mario Draghi said the decision to cut rates reflected an outlook of low inflation and economic weakness in the eurozone. Inflation in the eurozone fell to 0.7% in October - its lowest level since January 2010, stoking concerns of deflation in some countries.

This obviously merits further analysis.

Why do people not like inflation? Why should it be controlled? This is because it distorts the meaning of money. Partly. Partly also that it's a tax on fixed income workers and retired pensioners. Inflation erodes their purchasing power. Business people are able to raise prices and therefore profits. So, in fact, inflation usually takes away wealth from fixed income people, usually middle class and poor, and provides it to richer business income people.

The ECB's target is to keep inflation just below 2% - seen as a healthy level for economic growth.

To some extent, minimum wages and doles are increased in periods of inflation. However, very few countries have adequate indexation for inflation. And what indexation does occur, follows with a time lag of a year or six months.

This lowering of purchasing power eventually leads to strikes, protests and loss of valuable time and lower economic growth. So, inflation is not a tool that governments like. Yet with the growth mantra being so important to the rich (they always want more), when they find they cannot tax any more the middle classes, they try to usher in inflation.

Having understood that monetary policy is a risky tool, and there is no certainty of what it will really achieve, the task becomes even tough in federal country where different States have different levels of deficit financing. It becomes even more arduous in an economic union where each country has even less synchronization of economic policies.  

Prices in Greece – one of the urozone members worst hit by the economic crisis – have not risen since July. Some economists are also worried about deflation in Spain.

What is clear is that the lack of price increase is probably a source of solace for those in the middle classes who still have jobs, and so too for those on the dole.

Note : all italics are quotes from BBC, 7 November 2013