Consequences of the ballooning U.S. trade deficit

U.S. consumption is highly import-driven. So the weakening of the dollar will become a means by which living standards will decline. Oil will get expensive; WalMart will feel like J.C.Penney; no more ten limes for a dollar.

Let's, naively, classify the U.S. population into two categories: the Brilliant and the Average (I beg the reader's pardon for this classist distastefulness). Now, consider the following two factors:

• The explosion of global consumption -- resulting from a dollar flow into developing economies -- that is being caused by ballooning U.S. imports, be it outsourcing services to India, or sourcing goods from China, or importing oil from the Middle East. [OK, so this consumption is not yet happening in China, but my friend Purnendu sent me an article by Morgan Stanley Chief Economist Stephen Roach where he argues that there is an ongoing consumption explosion in India.]
• The levelling of the playing field that unites 6 billion people into one large global labor pool.

I think these two factors put together will bring great economic growth to the world at large: in the U.S., the Brilliants will be huge beneficiaries. Factors 1 & 2 will have opposing effects on the Average. My sense is that, when you net out the impacts, if free trade is unhindered, this latter category will hurt.

Certain groups within the Average will probably do not-too-shabbily-- such as the (Average) auto mechanics or the (Average) family practice physicians; if free trade is liberalized enough to allow as much free movement of labor as of goods, then it's another story. In any case, with the resulting oversupply of U.S. labor even the firewall that this category may have initially will go away.

[BTW, on this last point, one of my pet peeves has been that even mediocre family practice physicians do well in the U.S. because of a structural advantage. I recently read in the WSJ that several drug chains are going to have on-premises offices staffed by nurse practitioners. I can't imagine this can be good news for the family practice guys.]

However, much smarter people than me think that the net effect will be a massive plus for everyone. From what I understand, Ray Kurzweil, for instance, thinks that it's going to be one unending Christmas for everyone: we are entering a period of such explosive technological productivity, he says, that a huge economic leap is forthcoming. Another champion of the optimistic view, it seems, is Warren Buffett; here is a question/answer from a Buffett interview (again, thanks for the link Purnendu!).

Q: Do you feel global wealth is being transferred or created?
A: Too much intelligence and energy is being devoted to scraping the crumbs off the table of capitalism instead of preparing the meal.

Now the guys at the research consultancy GaveKal, have argued that more and more Western businesses are heading towards the "platform company" business model; for instance Apple sticks to the high-margin activity of designing and branding iPod, leaving the rough and tumble of manufacturing it to the low margin players elsewhere. I think the Brilliants of the U.S. (and the world) will head that way and prosper. It won't be an option for everyone. It won't be gloom and doom for the Averages in the West. But I don't think the Averages will be able to protect their current high standard of living either. The U.S. has 5% of the world's population and consumes 25% of the world's natural resources. Unless there is a Kurzweil-style technological Golden Age, that kind of consumption is untenable.

Can American children compete?

Nearly twenty years ago when I came to the United States, I came to receive an edge in the form of a graduate education in, what was then and what is still, the best educational system in the world. So did a number of my friends. As time progressed, our justifications for staying on changed: for the last few years Viji and I have said to each other that living in the U.S. gives our children an edge. I think highly of the American school system, and even though my compatriots rue the lower standards of Math education in American elementary and middle schools, I think this is more than adequately compensated for by the creativity that is fostered in students.

But, lately, I've begun to worry about the The World is Flat argument made by Thomas Friedman. If the field has been leveled for students across the globe, then, are the work ethics of our children, here in the U.S., such as to let them compete effectively with the hardworking, ambitious kids from Bangalore and Beijing?

My buddy Balan Menon has expressed this concern well:

..There is an issue brewing on the horizon. And it has to do with our children. In ten years, assuming she does a masters, Maya, our older daughter will be in the work place. In ten years, the global work place will shrink further and will make absolutely no difference whether an employee sits in Mumbai, Moscow or Madrid. I returned from India a few weeks back and had an opportunity to speak to some 12 to 15 year olds in Palakkad, Kerala. All of them (and this is the norm) attend tuition classes, after school hours, so that they can hone their competitive skills at entrance exams for admission into Engineering, Medical and other lucrative fields. While this takes away childhood as we know it, these kids in India become a bunch of lean, mean competitive machines, competing against my kids who are for the most part lost in Sponge Bob country. Our kids, growing up here, will be blissfully unaware that there is a Tsunami coming their way.

How will our children cope?

Recreating Home

I was speaking with our friend Sowjanya the other day. Sowjanya was describing how she misses India -- by this she meant not, just, her family and friends, but the whole Indian living experience. I feel the same way. I recently read Jhumpa Lahiri's novel Namesake, and I strongly empathized with the Gangulis' nostalgic longing for their roots.

I think, many emigres live with this sense of disconnect from their cultural roots. They, then, attempt to recreate the country of their memories; sometimes, funnily enough, they recreate things that are no longer in vogue in the old country. For instance, today, I was thinking back to the pre-refrigerator, pre-TV days of my childhood. Remember, the earthen pots (matkas) from which we drank the cool, fragrant water with a delicate flavor of clay, in the summers? I figured I wanted to buy some matkas for our house here. Now, who keeps earthen pots any more in urban India?

Here is an interesting story about the Shahs, a wealthy family in Mumbai. Girish Shah is a diamond merchant living in a Malabar Hill skycraper. Here's what his flat is like.

The doorbell is a thick multi-coloured cotton string attached to a hook with a tiny bell. Pull on it and a brass bell booms inside, like the temple bells in villages. Shoes remain at the door, and you step onto a brown floor made of one-inch thick cow dung spread evenly on a half inch base of clay.

Also,

... the housemaid lights a concoction of dry cow dung, dry neem leaves, a dash of homemade butter and a pinch of camphor at dusk.

As for the kids,

Sons, Tanmay and Rishabh, and daughter Dhwani attend an exclusive gurukul nearby. "I keep them away from television and movies," says Shah. "They are trained in archery, which has done wonders for their concentration and memory development."

Mr. Shah is recreating his rural roots in Mumbai (I should say, though, that he is a social and environmental activist, and this, more than nostalgia, is why he has chosen to do what he does.) For the full article, see http://www.the-week.com/25jun12/lifestyle_article1.htm

Here in the U.S., we, Indians, attempt to recreate the India of our past with our Hindu Sunday schools, weekly temple visits, our insistence on speaking our mother tongues at home. This is all well and good, and perhaps, the best one can do. But truth be told, one can hardly recreate an entire living experience through a patchwork of practices.

Fostering Local Innovation

While the case for stepping on the gas in the matter of rural education has drawn much popular support and journalistic attention, much less has been said about creating channels for local, paticularly rural, innovation to emerge. One result of not fostering such innovation has been that ideas and solutions from other contexts have to be transplanted, and, many a time, these have proved inappropriate and suboptimal.

Speaking of rural innovation, considering that Indian rural living has had the benefit of centuries long continuity, it's highly likely that there are centuries of wisdom and experience in rural India, epecially that which is suited to that context. Important technological breakthroughs like drip irrigation have emerged from other settings somewhat similar to this.

I had read about the Honey Bee network in this context. You can visit them here. This is an effort by a bunch of dedicated folks at IIM Ahmedabad. Their main focus is to create a network for the collection and dissemination of practical ideas in the context in which most of the Indian public is situated.

Another organization I recently heard of is the Rural Information Network. Check them out. Their web page describes their mission as follows:

RIN avidly identifies and incubates innovations that sprout in rural areas and lie untapped, in spite of their potential to transform lives.

Some innovations RIN has incubated include a water-efficient rain gun, an insect trap and a herbal pesticide.

Author! Author!

I came to the United States as a graduate student, from India, in 1987. I completed a Ph. D. in 1992, and took up an academic position. I had always wanted to return to India, like so many others back then. I made an attempt to return to India: I spent a sabbatical 6-month visit at an Indian academic campus in 1996. I enjoyed the visit, but I figured a return to Indian industry would be, materially speaking, a more comfortable option. That is how I made a transition to an industry position in the U.S.. A return to India has gotten complicated by foreseen and unforeseen factors.

But, as R. K. Narayan once wrote, you can take an Indian away from India, but you can't take India away from the Indian. So, thoughts of India remain unextinguished in my mind. I wanted to write this, both as a way of recording those thoughts, and of engaging in a dialogue with people with a similar obsession.