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BW Businessworld

The Grand Prix Of Nations

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This one of a kind book tells you how over the past 2,500 years, various nations briefly aimed for global hegemony and why they lost that leadership. It is targeted at economic historians and analysts who are the strategic think tanks for their respective governments. Contending nations had a mix n' match of strengths -river bank cities, port cities, good infrastructure, agriculturally rich alluvial soil with irrigation facilities, diversity in agricultural and industrial products, bureaucracy and polity, which was patriotic rather than greedy, wealth disparity, which was not highly skewed, adequate fiscal surplus to support a robust military, which protected banks and traders, who were patriotic and not self-serving, technological strengths and effective patenting. Finally, striking the right balance between state control and market freedom was vital to avoid inflation, meltdown, liquidity problems and flight of capital. The rise and fall of nations related to how well each of the above factors played out.

The Roman Empire became strong because of a disciplined army, strong trade and good infrastructure. It collapsed because of poor fiscal management due to which it could not fund maintainable of its army, a flawed taxation policy - under taxation of aristocracy and over taxation of farmers. Moreover, its peasantry did double duty - foot-soldiering during war and farming during peace time due to which they were eternally exhausted both as soldiers and farmers. Roman Empire was rich in natural resources but had too small a bureaucracy to manage it. It regrettably even outsourced tax collection. The church and clergy amassed wealth and yet received tax exemption.

The Greek Empire was far more socially egalitarian in voting and wealth distribution and also more mature in polity than Rome. The chink in Greek armour lay in its demographic vulnerability to slave economy (1/3rd of its population) who though well treated strived for freedom and liberated themselves when Greece was invaded by Sparta.

India historically has been rich in natural resources, agriculture, industry and trade. It has managed its ports well. For most of history India and China accounted for 50 per cent of global trade. Also for most of history Asia was economically stronger than all other continents. India's chinks were that its bureaucracy (unlike China) were patriotic not to the empire but to its rulers which made it rather sub-optimal. Over a period of time Indian bureaucracy emerged as self-serving rather than patriotic. Hindus looked down upon merchants, Buddhists were somewhat neutral while Jainism was thankfully pro-business thereby delivering some overall economic balance. I do think we were and are becoming excessively federal in outlook making consolidation at central governance level an eternally daunting task thereby weakening our polity.

China historically has seen trade surplus because in terms of imports it never had a craze for European goods. That is now changing for the worse. It had the finest agrarian reforms which delivered optimally sized landholdings and fiscal surplus for more than a millennium. It had vast diversity in agricultural and industrial production. China historically had well developed technology and also did well in shipbuilding which has for long been a good revenue earner. The amazing irony is that despite strength in shipbuilding China has had a weak navy through most of its history. Confucians tended to ridicule trade and merchants to such an extent that exports for most of ancient and medieval history was barely 5 per cent of China's GDP thereby missing huge revenue earning opportunities. China's perennial strength lay in its patriotic bureaucracy which never became greedy or self-serving. China has always been militarily vulnerable on its north. However its military has constant war practice since it was eternally fighting racial and tribal insurgencies and resurgences. Apart from this it has experience in high altitude and cold weather warfare which is an experience many nations lacked. High export orientation and trade surplus is relatively a recent rather than historical phenomenon.

The Arabs rose meteorically and fell equally fast. Tribal polity made for speedy economic development, quick infrastructure build-up and speed of execution. On the plus side Islam was the first religion to treat merchants as first-class citizens even when Christians and Hindus were derogatory or treated them as second-class citizens respectively. Arab world initially had not yet discovered oil. Despite that they had developed currencies stronger than Sterling and the Dollar simply because once gold came into the Arab world they shrewdly ensured that the yellow metal did not easily go out. On the flip side tribal polity delivers very quick downfall whenever a tribe fell from grace. It also guzzles a lot of resources to maintain a military in this kind of polity.

Japan remained a secluded economy for an excessively long period. Among European nations Portugal, Netherlands, Spain, France and Russia took potshots at global hegemony and failed for different reasons. Portugal focused on ports and in building fortified settlements in the Indian Ocean rather than the Atlantic Ocean. It was more piratical rather than militarist in its approach. From the exporter it negotiated prices for commodities at below market rate. On the high seas it actively prevented others from operating unless they bought shipping permits from the Portuguese. To maintain their military they opened very few fortified settlements along coastlines. This proved fiscally non-viable, militarily weak and geographically inadequate.

Spain made a sustained and long term military effort at hegemony but was fiscally ill-managed. They just did not have the liquidity and financial flair to sustain empire building.

The Netherlands did show initial promise. It enjoyed huge immigration of skilled manpower from all religions due to its admirable religious tolerance. It even emerged as a global financier due to extremely good fiscal management. They fell because their powerful mercantile class rather than being patriotic were self-serving. Imagine the irony - Dutch financiers were actually funding the colonial expansion of Britain simply because it was highly profitable to do so. The Dutch were also not as capable as Britain in building up a critical mass to foster an industrial revolution like Britain, so they petered out from the race for power.

France's imperial ambitions were ruined by its self-serving aristocracy cum bureaucracy and huge corruption. French Monarchy in order to maintain liquidity sold Political offices, Titles and Honours. It also outsourced tax collection. This was done in order to generate cash to meet the costs of running a kingdom. All this obviously resulted in a vicious cycle of severe corruption, mis-governance, tax evasion and fiscal deficit both in French colonies and in its own dominion. France was also inordinately slow in patenting technological innovations.

Russia never really stood a chance. It was the only European power to make inroads into Central Asia when it invaded Siberia. At the time it did so Russia had not yet identified nor harnessed its natural resources (oil and gas). All it mainly did was to hunt down furry animals and export furs till even those animals became virtually extinct. By the time they woke up they were already on the wrong side of history.

Only Britain got its act right. They actively supported mercantile expansion by creation of a mercantile company by an Act of Parliament and then ensured that their army and navy worked extremely closely with that company. Their strength in executing this was far superior to other European nations. They colonised globally rather quickly and cleverly created an effective trade pattern - gold and silver from the mines of South America, slaves from Africa as cheap labour for cotton plantations in North America, low priced high quality cotton from India and finally export of poor quality finished goods to their colonial markets across the globe. As a result of this trade pattern two things happened. Firstly, transfer of gold and silver from the West to the East made Asia and the Indian Ocean region rich but the West and the Atlantic Ocean area poorer. Secondly it reduced gold reserves within Britain and eventually made Britain poorer. A lot of gold got squirrelled away by British private merchants and affluent merchant families strewn across Europe. Also since the Sterling had not yet become an International currency Britain and other European nations had often paid for imports from Asia in gold. Net result - Bank of England discovered that it had too little gold to back the Sterling. This naturally resulted in inflation and liquidity crunch for Britain - inflation because of a weak Sterling and liquidity crunch because most payments needed to be made in gold and silver and Britain now did not have much of either. Fiscal deficit collapsed Britain's hegemony. When push came to shove the British merchants proved themselves to be self-serving rather than patriotic. Had Britain early on managed to establish Sterling as international reserve currency and as an international convertible currency it would not have yielded leadership to USA.

The US chose to learn from Britain's mistakes before aiming for global hegemony. It focused on buying or conquering large masses of land. It took over a lot of land from the Red Indians who were local settlers. It did not prematurely or excessively federalise, choosing instead to focus initially on building a strong centre. Its Central Government focused on developing education, technology and railways by offering development subsidies and monitoring how those subsidies were spent. It built up a strong domestic market using protectionism. It built up the world's largest gold reserves. It created enormous fiscal surplus because of these synergies.

Next, it created two organisations - International Monetary Fund (IMF) and World Bank as a front for its central bank, The Federal Reserve. Having done this it presented its case for global hegemony rather innovatively. It tactfully decried the profit centric approach of Britain's hegemony and presented its alternative model as an economic developer and aid provider to the rest of the world. This canny spiel was cleverly sold and naively bought since most nations were already suffering a huge trade deficit. After that it tied strings between exports and aid. Exports also meant creation of Transnational Corporations (MNC's) headquartered in USA with subsidiaries worldwide. The world was hooked. At peak USA accounted for 50 per cent of world production (which has come down hugely now). Having a troika of 3 financial organisations was a shrewd approach which enabled the Federal Reserve to focus on global dollar management.

Dollar reserves were built up in North America and repatriably in its Transnational Corporations across the world. When banking controls on dollar outflow from USA became excessively restrictive significant dollar reserves squirrelled away to Europe. This became known as Euro-dollar and borrowers needing to borrow dollars now found it easier to do so from London rather than New York. A worried New York was nonplussed and wondered how to bring back its dollars from Europe when they got plain lucky. OPEC nations jacked up petroleum prices and dollar denominated the sales of petroleum products in various bilateral agreements. This became known as Petrodollars. Since these trades were huge and few it was easier for USA to spot these Petrodollars and bring those dollars back to USA. Finally USA moved its dollar away from fixed exchange rate and gold standard to a floating exchange rate system. This made it more difficult for all nations to understand the true value of the US Dollar. This inscrutability suited USA just fine!

The race for global hegemony just continues with new twists, turns, learnings and insights. India needs to focus on reining in unbridled federalism in order to strengthen polity at the centre, raise gold reserves and bring back currency which has flown. Bureaucratic reforms are required to make our bureaucracy loyal to our nation rather than to its political parties or to itself. This would make our bureaucracy more patriotic rather than self-serving.

The book generates a love hate relationship with readers. In terms of genre and content it is rare and insightful; in terms of readability it is heavy and often unreadable. Curiously readability improves hugely from the 17th chapter onwards! Since readability bears direct correlation to the quality of editing it would be practical for authors to focus on content and let editors focus on enhancing readability. This teamwork would help both reader and publisher. We definitely need to kill one deplorable mindset — books on economics and finance need not be heavy or pedantic just because the subject is economics and finance.

The author is a retail consultant and is contactable at rameshkumar23writes at gmail dot com

(This story was published in Businessworld Issue Dated 21-11-2011)