Vaporware does not condense into hardware because it fails the pitiless test of the marketplace that the product’s benefits exceed its costs. That constraint does not apply to the government sponsored Aakash because they can choose to ignore inconvenient costs through the simple expedient of spending other people’s money.

The Aakash can be priced at any arbitrarily low number but that does not change the cost. The difference will be paid for not by Mr Kapil Sibal but by the average citizen of India. And for what? To eliminate digital illiteracy, an entirely artificial malady conjured out of thin, blue air.

The failure of the Indian education system must count as the Indian government’s greatest failure. Over 90 percent of students drop out of school by the 12th grade and only six percent go on to tertiary education, to cite just one dismal statistic. We have to understand that the failure is primarily due to flawed policies that the government has consistently imposed on the education sector. Aakash, like its predecessor the “$10 laptop”, is just another distraction, but a very costly distraction.

It is costly in many ways. First, the government should not be subsidizing consumer electronics. Electronics is the most competitive industry in the world and extremely competent huge corporations are constantly innovating with the result that costs move downwards monotonically. Governments are incapable of choosing winners in technology, and the Indian government has demonstrated particular ineptitude in that regard.

Second, the lack of real commitment to fix primary education is especially hard on the poorest sections of the society. Promoting digital gizmos at immense public costs only widens the gap between the haves and the have nots. Something like half the 7th standard students cannot read, write or do simple arithmetic. Where a hundred million suffer illiteracy, attempting to promote digital literacy cannot but be a cynical exercise in self-promotion and aggrandizement.

A press conference saying that India has invested in providing blackboards and teachers in 100,000 schools that lack them would not be as headline grabbing as one which parades a me-too device hyped as an “iPad killer.” A policy of funding toilets in schools (needed to alleviate the suffering of girl children especially) does not have the sex appeal of a policy of handing out digital gizmos. But the production and distribution of hi-tech gadgets offer immense opportunities to profit for the producers and the government – never mind at what cost to the public.

Press releases that repeat the claim by the government that the Aakash tablet will be sold in tens of millions of units fail to do basic arithmetic. The subsidy costs could run into billions of dollars. Like so many other government schemes, the Aakash tablet, in the unlikely event that it is actually produced, will ultimately be funded by the poor through increased inflation. Unlike Mr Sibal, the poor suffer when the government runs the printing presses at the mint overtime.

Our focus has to be on the urgent and important matter of education. The government has a critical role to play, which is to provide the regulatory environment for needed massive investment by the private sector. That role is as a facilitator and not as a competitor to the Apples and the HPs of the world.
Public support for education, particularly education for the poor, is absolutely necessary and beyond doubt. Basic economics argues for subsidies because there are enormous social benefits to an educated population. However that public spending has to be targeted and the interventions have to be sequenced properly.

Perhaps digital illiteracy should be a cause for concern, but I doubt it. Like tens of billions of others, I too was a digital illiterate but that did not interfere with my education in the least. However, basic illiteracy is a critical concern. That is the weakest link in the entire chain of education. Strengthening any link other than the weakest link will not make the chain stronger. A government that has failed to achieve universal literacy cannot be trusted to eliminate digital illiteracy.

When entrepreneurs and start-ups peddle vaporware to get funding, the losers are private investors that are taken in by hype. The rough and tumble of the marketplace eliminates the incompetent or the simply greedy, and rewards true innovators. But when the government gets into the game of funding vaporware at massive public costs, and away from the discipline of the marketplace, it adds one more chain around the citizens, already imprisoned by the shackles of inflation and government control.

The penalty for wrong-headed policies is paid not by the government officials but by people like us. No matter what promises they make about eliminating digital illiterary, we cannot afford to pay the price.

{This appeared as an op-ed in the Indian Express on Oct 8th, 2011.}

Political freedom must be used to fight for economic freedom

Witnessing the recent skirmishes between some segments of the “civil society” and the central government of India, it is hard to keep cynicism at bay. On the one side there are sincere people with not inconsiderable following who are trying to bring about change in governance and the reduction of public corruption which has reached astronomical proportions. While they may be motivated by worthy goals, not all their means are above reproach. Their passion is not matched by their understanding of what should be done and how.

On the other side are powerful people in the government who are not particularly perturbed about the reports that allege, often with substantial evidence, their involvement in scams that run into billions of dollars. These people have the power of the state on their side and are not hesitant in using overwhelming force to defeat the people on the other side. Not just the police force, but they have used government agencies—such as investigative and taxation institutions—to fight their opponents.

The confrontations between the two sides play out with the background consisting of the rest of the population, who for the most part have come to accept their lot with a resignation that borders on fatalism. Decades of increasingly bad governance and ubiquitous corruption have convinced them that that’s how it is and nothing can be done about it. They will not be stirred into action by the civil-society leaders, and apparently the government will not be shaken by the civil society demands.

This adversarial relationship between the citizens and the government has a civil war flavour to it. This is puzzling given that India is a democracy and one would expect the government and the people to have convergent interests. Lincoln had pondered in his famous speech at Gettysburg in 1863 whether a nation with a government “of the people, for the people and by the people” can endure the on-going civil war. The United States did survive the civil war and as one historian put it, it became a country in which the idea of a civil war is inconceivable. The question before us is whether the battles between the Indian government and citizens foreshadow a war between them—which I call a “citizen war” to distinguish it from a civil war which involves warring factions of citizens.

Here I argue that the interests of the people in the government are antagonistic to the interests of the citizens. To make the case, we have to distinguish between two types of governments: one is a development-oriented government which is committed to economic freedom, individual freedom, and political freedom; and the other, a predatory government which denies citizens freedoms for extractive and exploitative (E&E) ends.

It is both an analytically and empirically well-established fact that economic and individual freedoms are necessary for development. It is also beyond doubt that a “license control permit quota” regime—a command economy in other words—is inconsistent with economic growth and development. The explanation for India’s dismal economic performance can be explained almost entirely if one posits that the Indian governments have been of the E&E kind. The evidence is overwhelming.

The reason for why India has an E&E government lies in India’s colonial history. Imperial powers get into the business of running colonies for economic gain. The economic interests of the ruled and the rulers are necessarily mutually antagonistic. The relationship between the colonial masters and their subjects is not voluntary, and as a consequence, power is asymmetric: the rulers have the power to extract economic rents from the economy, at the expense of the ruled. For this, the masters create the laws and regulations which are consistent with their goals. It is perfectly natural and understandable that the British framed laws that gave the colonial government supreme power. During the British Raj, the government was the master and the people its servants.

But of course that relationship between the government of India and Indians changed after India became politically independent. Or did it? The laws which the British had framed for their purposes continued to operate. The institutions continued as before, with minor cosmetic changes, such as renaming “Indian Civil Service” to be “Indian Administrative Service.” Different people occupied the chairs but the functions remained exactly the same. Admittedly the new rulers had more pigment in their skin but they were actors in the same old play on the same old stage with the same old script. Like their predecessors, the new rulers went around with the same red flashing lights on their cars as they did before 1947. They still do. It was, and still is, what in modern parlance can be labeled “British Raj 2.0.” It would be, in the immortal words of Yogi Berra, déjà vu all over again for us except for the fact that most of us were born after 1947.

Unlike the United States, India did not have a “Revolutionary War of Independence.” Actually, India never had any revolutions to speak of, unlike other countries; nor did it have a civil war to iron out what India really stood for. Indians are as a lot not very excitable, and prefer the laid back chalta hai attitude. The British left in their own sweet time when it suited them. They had extracted enough wealth out of India by then, India had become too impoverished, and in any case, colonialism was fast going out of fashion. Their imperial power and hegemony was waning. They left because the sun was setting over the British Empire and it was time to go home.

There are major differences in the cases of India and the US, though they were both British colonies at some time. The Americans won their freedom by defeating the British, and decided that they will not ever be subjects of a king. They gave themselves a new set of rules, and were not interested in reusing or recycling British rules. They wrote an absolutely brilliant constitution which gave the people power over their government. It is short enough for one to read over a lazy cup of coffee, and most Americans have read it in high school.

The American constitution spelled out what the government could and could not do. The constitution severely limits the power of the government, and prudently distributes it across three institutions—the legislative, the executive, and the judiciary. The people are the masters and the government that they elect does what the people allow them to do. In India’s case, the government is the master and the people exist to serve it. The Indian constitution is a set of prescriptions and prohibitions limiting the freedom of the people.

What India needs is a fundamental transformation, a change in the rules of the game, not a mere change in the set of players. The independence that Indians should have fought for should have been about real economic and personal freedoms. Granted that Indians have the political freedom to choose but it is more a matter of servants choosing which master they wish to serve, rather than free people choosing who is to serve them. My contention is that the independence of 1947 was at best a partial one. Because Indians of the previous generation avoided a real war of independence, it remains for us to fight and win the upcoming war.

The sad thing is that it is not entirely clear to the people in these early battles being fought in the Jantar Mantar and the Ramlila grounds in Delhi that what they should be fighting for is economic and personal freedoms, and against imperialism. They apparently believe that a bad set of people are at the root of the corruption and that if the corrupt are replaced or punished, corruption will disappear. They are calling for another government institution which will have supreme executive power to investigate and punish the corrupt. One supposes that in due time there will be a call for yet another government institution to “guard the guards”, and so on.

The relationship between corruption and control is real, enduring and easy to elucidate. The more control the government has, the greater the opportunity for the people in government to profit from their power. The colonial British government was powerful. Those who took over the reins of the government did not see any reason for surrendering those powers. The transfer of power from one set of people to another happened seamlessly and indeed, the man at the helm of affairs, Jawaharlal Nehru even boasted that he was the last Englishman to rule India. No doubt the powers he inherited sat well with his English sensibilities.

The way ahead for India is to reduce the power of the government and shift it to the people. For this to happen, the people have to wrest the power out of the clutches of the government. It is a monumental task and it will neither be an easy nor a quick victory. It is not going to happen through fasts or any other form of blackmail because the powerful are never moved by others’ suffering—there’s sufficient involuntary fasting going on in India anyway, and that has not affected anything.

The way forward is through the only freedom that Indians have—the power of their votes. The government knows this and proof of that knowledge is in what the government does: it fragments the population along caste and religion, easily manipulating them by withholding and granting favours to groups as needed to maintain control. That divide-and-rule works in the British Raj 2.0 equally as well as it did during British Raj 1.0.

Democracy is not just about elections and voting periodically. If the concept is to have any meaning in its implementation, it must be informed voting. If enough people become aware of the reality of the government’s miserable role in their present predicaments, they would at least choose a different set of people who credibly commit to reducing the size and power of the government. Of course, the present government knows this and deals with that threat by choking the flow of information to the people. The internet is on the government’s radar and they are working hard to prevent people from getting informed through that channel.

If the people send a message via the ballot box to the government that they will definitely throw out people who continue to increase the power of the government, in due time there will be people in government who will limit the power of the government. For this to happen, the biggest challenge is to inform and educate the voters. At some point, they have to understand what Gerald Ford warned Americans about: “A government big enough to give you everything you want is a government big enough to take from you everything you have.”

The unfortunate fact is that we have to realise that freedom does not come without a struggle. The illusion that India is a free country is persistent and hard to shake off. The time has come for the revolutionary war that we should have been done with decades ago, a war that demonstrates that the people are the principals and the government is their willing agent. Since political freedom is a reality, that war has to be now fought politically. Mobs and blackmail will not bring about the structural changes India needs to prosper. The transformation of India will be good but it is definitely not going to be fast or cheap.

Atanu Dey is the author of Transforming India: Big ideas for a developed nation and blogs at deeshaa.org

Indians are Poor Because India is Not Free

There is much to be celebrated about India and the progress it has made since it gained political independence, especially over the last couple of decades. Various observers have pointed that out in bestselling books and articles in the popular press. Indeed, it’s become a cottage industry of sorts to write books on how India is going to be a superpower, if it isn’t one already.

Yet the fact remains that India is an extremely poor country. For instance, half of its children below the age of five are malnourished, and around 40 percent of Indians are illiterate in the 21st century. India should have at the very least solved the problems of underdevelopment such as widespread poverty and illiteracy since they are precisely what the government of India has ostensibly been focused on ever since independence. Practically every policy of every government that India has ever seen has avowedly been made to eradicate poverty and its concomitants. Clearly it is not for lack of trying by the government.

Why is India so poor? Implicit in asking that question is the assumption that there is nothing inevitable about India’s poverty, that it is not as if it were an unalterable fact of nature. That question, hard though it may be to admit it, has to be asked and answered honestly for there to be any hope of achieving that state in which that question is rendered meaningless.

India does not lack any of the necessary ingredients required for prosperity. It has adequate natural resources. Granted that it does not have an over abundance of them but neither has nature been exceptionally unkind. India has human resources – indeed it has a super abundance of raw human resources. By all measures, they are fairly close to average in intelligence, motivation, and have considerable cultural and social capital. India does not suffer frequent widespread civil unrest and natural disasters which destroy all the accumulated capital, leaving death and destruction in their wake.

It is worth noting that Indians do quite well outside India. In the US and other developed countries, they are extraordinarily successful. Their ability to prosper outside India is in sharp contradistinction to the inability of their counterparts within India to prosper. Could that imply that it is not nature but rather something in the Indian environment which accounts for Indians not prospering in India? Since it is the government which largely creates and controls the environment, could it be that India’s greatest handicap is the quality and nature of its government?

Robert Solow, Nobel prize-winning economist, observed that poverty is not simply an economic problem and that “underdevelopment is a web of economic, political, institutional, ethnic, and class-related connections with persistent historical roots.” My conjecture is that India’s continued struggle with poverty and underdevelopment are the understandable consequences of its governments’ objective. I believe that roots of the Indian government’s “license permit control quota” regime lie in its history of British colonialism.

In 1947, Indians got political freedom but little economic freedom, and only limited personal freedom. Merely changing the people who ruled India without changing the rules is superficial change which does not change the objective of the government. The government’s objective continued to be extractive and exploitative. It was “British Raj 2.0”.

Under the British Raj, the rules were made for the convenience of the rulers. Power was vested in the government and the people were subservient to it. The British government employed a strategy of “divide and rule” effectively and pitted one community against another. The government controlled important sectors of the economy: the railways, telecommunications, power, education. There was no violent revolution that overthrew the British. When they left, every institution that the British had created was left intact. The people who replaced the British found the system suited them quite well.

While controlling the economy is good for those in power, it is bad for the economy. First, it reduces economic activity and consequently growth. Second, it gives rise to rents (profits made from being able to manipulate regulations), which then attracts the most criminally corrupt to gain control of the government. Rent-seeking, rather than good governance, becomes the sole aim of those in government.

Transforming India into a developed country within one generation by 2040, is possible if, among other things, Indians gain comprehensive freedom. For that to happen, a new set of politicians and policymakers have to enter government and in effect change the government objective. Given India’s democratic setup and the Indian preference for non-violence, change will have to be brought about at the polling booth. This means that the voters have to elect a different set of people to office, people who are honest, committed and visionary.

Change of awareness precedes change in behaviour. Therefore for the citizens to vote differently there has to be a change in their understanding of reality. Most Indians would reject the idea that they are not really free and that the government may not have their best interests at heart. As Ram Dass pointed out, “If you think you’re free, there’s no escape possible.” The illusion of freedom is as good a prison as ever constructed. For India’s transformation, the challenge therefore is to make people aware that they lack freedom and that they have to struggle to get them.
A large country like India cannot be ruled without some degree of popular consent. That the population gives that consent despite the enormous harm the tyrannical government does to them would be inexplicable but for the fact that the rulers make sure that the population does not ever become informed enough to know that they are living under a tyranny.

Alexis de Tocqueville pointed out over two centuries ago that liberty and democracy are not the same thing. Indeed, there is sufficient evidence over the centuries that democracy has existed to show that democracy can be the enemy of liberty. India’s government is elected by the people. But being popularly elected as a democratic government does not mean that it cannot also be a tyranny and deny the people freedom. The subjugation of the population can be as real in a democracy as in a despotic rule.

Indians have had democracy for a long time. Indians need liberty as well. Only then does India have the possibility of becoming a rich and developed nation.

It’s been a while since I contributed to “The Indian National Interest Review: Pragati.” I had to write a piece. I didn’t want the editor, Mr Nitin Pai, to get mad at me. It’s always best to be on his right side. Never get the press angry, is what I always say. Now if you know me, you know that it takes me forever to write anything. At the very mention of writing, I feel a writer’s block coming on. Writing is the hardest thing I try. But anyway, I dusted off the old keyboard, put on my thinking cap and pondered market failures, government failures, and what can be done about them. Here it is for the record.

(Click on image for a PDF copy of the issue.)

The Good Vote Banks

Atanu Dey. Nov 2010. For Pragati.

The institutions of markets and democracy are arguably two of the most elegant and useful creations of humankind. Like twins, they are often found together, and naturally share some features. They are alike since both involve collectives of humans behaving strategically. A study of markets and how they succeed or fail to deliver the socially optimal outcome can illuminate how the workings of a real democracy with its real failures can be improved.

Economists do it with models, often very elegant ones. Beginning with models of ideal markets, they have identified what are called market failures that plague markets in the real world. They have discovered ways to address those failures so that real markets can be nudged to grind out results closer to that of ideal markets. Consider Peter Diamond’s work, one of the three winners of this year’s Nobel prize in economics, which includes the study of labor market imperfections and their consequences.

Diamond’s insight, called the Diamond Paradox, involves the friction introduced by search costs in the functioning of labor markets. Workers incur the cost of searching for jobs, and firms incur the cost of recruiting workers. Add to that the matter of expectations, and the outcome can deviate from that of an ideal labor market. If the workers’ expectations are that firms will strenuously seek recruits, workers will put expend effort in job seeking; and if firms anticipate workers will carefully examine job opportunities, firms will put effort into differentiating themselves to attract the most suitable workers. The outcome, or equilibrium, will be good for all. Instead, if both parties’ expectations are that the other party will not bother much, then the outcome will be disheartened workers and uninterested firms leading to unemployment, or a bad equilibrium. The paradox is the existence of unemployed workers simultaneous with job vacancies.

The existence of multiple equilibria arising from expectations at the aggregate level can be easily understood through Diamond’s fun little “Coconut economy” model. It is set on an island far away where people consume only coconuts which they harvest from (where else) palm trees. Peculiarly, the custom is that a person can eat only coconuts that are obtained in exchange for coconuts that the person has picked. It is costly to pick coconuts since it means climbing a palm tree. If an islander expects no one else to gather coconuts, then it will be pointless for her to incur the cost of picking coconuts since she will have no one to exchange them with. This will be a rational expectation if all others also have the same expectation, and the predictable outcome will be starvation all around. Contrariwise, if everyone believes that a sufficient number of others will also pick coconuts, then a vigorous coconut market will evolve with full tummies all around.

Moving from markets to democracy (substituting voters for workers, and political parties for firms), we can see an analogous mode of failure for a democracy. Like for workers in a labor market, the voters’ rational expectations about the usefulness of their vote on the aggregate can lead to either a good or a bad outcome.

Democracy is not just about voting but rather about informed choice. It is costly for voters to inform themselves about political parties. Besides there’s time and effort required to vote. If the expectation is that others will not be making the personally costly effort of making informed choices, then the individual voter will rationally conclude that it is not worth the cost of informing himself about which party best deserves his vote and then voting – because his vote would not count in the outcome he desires.

Political parties, in their turn, noting that voters are not bothering to inform themselves, and/or are disinclined to vote, will rationally not put in any effort in differentiating themselves – which is costly for the political parties – to appeal to voters. The outcome will be disastrous: political parties that don’t have to put in any effort in attracting informed voters and a set of political parties that are hard to differentiate. The parties then don’t bother to address the concerns of voters and thus misgovern without fear of consequences. The desirable outcome would occur only if voters expended effort required for informed voting, and political parties responded appropriately to the voters’ efforts.

One mechanism to nudge democracy from the bad equilibrium to the good equilibrium readily comes to mind. That is, somehow change the expectation of the voter from one that says that his vote does not matter (which would be rational if he believes that others will not be voting) to one that says his vote matters (because others will also be voting.) Our voter will vote if he is assured that sufficient numbers of like-minded voters will also vote. This can be achieved by creating a coalition of voters who ex ante commit to voting, and this coalition choosing the party or the candidate to vote for based on a set of values shared by the members of the coalition.

Let’s consider this in the context of Indian educated urban voters. It is generally known that they largely choose to not vote, believing that their votes don’t count. With sufficient numbers of them holding this view, the expectation is rational since it amounts to a self-fulfilling prophesy. Political parties, in turn, also rationally respond to this by not even bothering to seek the votes of this segment of voters, and after elections, ignoring their concerns. This further alienates the urban voters. In essence this is voluntary disenfranchisement of the urban voter which partially accounts for the election of undesirable people to political office.

The remedy for this could be the formation of an association of voters whose members will internally decide on specific candidates (“primaries” so to speak) based on how closely candidates match the principles of the association, following which all members will vote, and equally importantly, vote only for those chosen candidates. This allows the association to make a credible claim that its members’ votes matter on the aggregate – both to every individual member of the association and to political parties.

In other words, this association of urban educated voters is an artificial “vote bank,” much like the existing vote banks that are based on other demographic characteristics such as caste and religion, and which currently have a baleful influence on the political outcome. Based on the idea that “if you can’t beat them, join them,” it recognizes that in a second-best world (one in which there are numerous distortions, as opposed to a first-best world in which there are no distortions), the introduction of another vote bank (which would be unthinkable in a first-best world) may lead to improvements.
Democracy as an ideal works flawlessly in an ideal or first-best world. But like markets and their failures, in the real world democracy failures lead to seriously flawed results that have awful consequences for hundreds of millions in a country like India. It is time that we honestly confront the reality of democracy failures and figure out a way to address them urgently and seriously.

It is an analytically and empirically verifiable fact that cities are the engines of growth that power all economic development. Therefore it is argued that for catalysing economic development, a policy of assisting the inevitable (and indeed desirable) urbanisation through the creation of liveable, deliberately designed cities is effective and efficient.

The development of economies largely follows a predictable trajectory where the majority of the labour is first employed in agriculture, then in industry, and finally in services. With rising productivity, agriculture releases labour to industry, which in turn through the use of technology becomes more efficient and releases labour to the services sector.

The services sector is of particular importance because it is where research in the sciences and development of technologies occur; it is where ideas are generated. Those ideas are critical for greater productivity and production in the two older sectors — agriculture and manufacturing — which consequently release more labour for the services sector. The production, delivery and consumption of services happen more efficiently
in cities.

Humanity is getting rapidly urbanised. About 27 million people — about three percent of a total of 900 million — lived in cities in 1800; by 1900, 10 percent of 1.6 billion were urban; now over half of the world’s 6 billion live in cities. It is estimated that over 70 percent of the world’s 10 billion people of 2050 will be urban.

Despite all the negatives such as crime, pollution and overcrowding one associates with them, cities are disproportionately productive. Today around the 1.2 billion people living in 40 mega regions of the world produce two-thirds of the world’s output of goods and services. They also produce more than 85 percent of all global innovation. A person living in a mega-region compared to a person not living in a mega-region is eight times as productive in terms of goods and services, and about 24 times as productive in terms of innovations.

Cities “manufacture” wealth. This is literally true as most manufacturing occurs in urban locations. That is why rich economies are predominantly urban, and those economies that are largely rural are relatively poor. The transition from a poor economy to a rich one depends on the transition of the majority of the population from being rural to urban. The central concern of economic growth is the development of people. The development of rural populations must not be conflated with the development of rural areas and the rural population cannot be—and must not be—confined to villages. The rural population has as much right and the aspiration to live and work in cities as anyone else. In fact, rural populations will get urbanised whether one likes it or not. There is an instinctive drive which motivates people to seek greater opportunities in places where there are greater choices. As the great scholar of urban areas Jane Jacobs put it, “The point of cities is multiplicity of choice.”

Building from scratch India’s urbanisation cannot be accomplished with the stock of existing cities. They are already bursting at the seams and cannot conceivably accommodate the 300 million estimated to be added to the urban areas by 2030. There is an urgent need to create new urban centres that are designed to be efficient, human centric, and liveable.

That is the greatest opportunity India has — of building from scratch to take advantage of all the knowledge of how to build cities and specifically to avoid the mistakes of the previous generation of cities — which is not available to any developed economy such as the United States. American cities are notoriously inefficient in terms of resource use and sustainability. Their legacy urban centres will burden the transition to living in more sustainable cities.

Just like India leapfrogged the expensive landline era and became a leader in the use of cheaper, modern and more flexible wireless telecommunications, India can urbanise more efficiently and faster by building new cities instead of the costly exercise of giving old cities and towns expensive face-lifts.

This author has proposed that India needs are new “designer cities”: cities that are deliberately designed and that have a distinct character to them. Complex artefacts such as computers and commercial jetliners are the product of deliberate design learned over generations of hard work. Cities are some of the most complex creations of humans and must be designed to be good.

The distinctive characters of cities arise from the major functions that cities serve such as commercial, financial, educational, recreational, pilgrimage, art, manufacturing, and hundreds of other activities. Singapore, for example, serves as a financial hub for South East Asia much as London and New York do for the Western world. It was deliberately designed to be one. Similarly a city could be designed with the primary purpose of hosting a set of great universities, and so would need all associated supporting services such as theatres, art, museums and sports. A city whose core function is manufacturing would have different needs such as access to ports, vocational institutions and transport hubs.

There are many interesting ideas on how to enable urbanisation. Paul Romer, senior fellow at Stanford University, has been promoting the idea of “charter cities.” A charter city is a green-field project that starts off with a constitution or a set of rules. People and organisations which like the charter come together to build the city. Mr Romer says, “…[P]roposing some new rules [in a charter city] and then asking who would like to opt in—who would like to live under these new rules—could give us a mechanism to reform the rules under which we live, to change them, to improve them much more rapidly.”

India is at that stage of its development where bold policy decisions have the potential to accelerate its economy and thus lead hundreds of millions out of poverty and into prosperity. The time is ripe for a national policy that allows new cities to develop and permits the market mechanism to fund them. India needs to adopt big ideas because the idea of India is too big to be paired with little ideas.

The August 2009 issue of Pragati is out. I have a contribution in there. My perspective is that the Indian government must stop subsidizing Muslims who go on haj, and the more general case that the government must stop meddling in private religious affairs of the citizens. The text of my article is below the fold, for the record.

Stop Subsidising Pilgrimages
The Haj should be financed from private charity

In theory, according to its Constitution, the Indian state is secular; in practice, unfortunately, it is far from it. Indian governments routinely meddle in religious affairs and do not treat all its citizens as equal in matters of religion. They involve themselves in matters such as temple administration, fund management of temple donations, and subsiding pilgrimages. The most blatant example of such gratuitous meddling is the subsidy given to Muslims for going for haj to Saudi Arabia. In 2008, Indian taxpayers paid around Rs 700 crores (US$140 million) for Muslims to travel to Saudi Arabia.

Is that a reasonable thing for the government of India to do? No: it is bad in principle, economically inefficient and morally wrong. The government of a secular state must not concern itself with religious matters. India would do well to consider the example of the United States.

The first item of the US Bill of Rights, authored principally by James Madison and adopted in 1791, begins with the injunction that “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof . . .” The absence of sectarian strife in the US is at least in part attributable to that amendment which, in the words of James Madison establishes a wall of “total separation of the church from the state.”

Something like the first amendment is vitally important and must be among the core set of rules of all civilized states. It traces its origins to the ideas of John Locke who held that each individual is free and equal, and that the job of the government of a civilized society is to protect the property rights of its citizens. The US strictly maintains that separation, as it should since it claims to be a secular state. It contrasts sharply with what goes on in India.

The rationale behind the Indian government’s Haj subsidy goes against any notion of social justice, fairness, and economic reasoning. Firstly, religion is a purely private affair and the government of a purportedly secular state should not get into the business of promoting any religion. Subsidizing the Haj is discriminatory and tantamount to endorsement of Islam. No other country on earth – including Islamic states – subsidizes haj.

Second, the subsidy is unfair. Fairness is the cornerstone of justice. It is unfair — and therefore unjust — for the government to force non-Muslims to subsidize the Haj because ultimately it is the taxpayers’ money that the government hands out. For an Islamic state to tax its non-Muslim subjects is understandable since Islam dictates that non-Muslims pay jizya — “a poll-tax levied from those who did not accept Islam, but were willing to live under the protection of Islam, and were thus tacitly willing to submit to the laws enforced by the Muslim State.” The Indian government is not Islamic and therefore must not impose jizya on its citizens.

Third, the haj subsidy politicizes a purely religious matter. Political parties attempt to woo Muslim votes by increasing the subsidy. They are in effect robbing non-Muslims to pay Muslim, thus attempting to gain the endorsement of Muslims. This is totally unconscionable.

From an economic point of view, subsidies and taxes are sometimes justified. For instance, revenues required for the provision of public goods have to be raised in some way and taxes are one way of doing so. Subsidies are justified in cases where markets fail to provide the socially optimal quantities of public goods. Even then, from an economic efficiency point of view, the taxes required for balancing the subsidies should be paid by the beneficiaries of the public good in question.

A case can even be made for the tax-funded public provisioning of some non-public goods and services, as when very high transaction costs are involved. Collective provisioning through taxes of a private good is justified when it is too expensive to determine individual quantity consumed for apportioning costs among a very large number of users.

The haj subsidy paid for from general tax revenues cannot be justified on the economic grounds mentioned above. The Haj is a not a public good; there is no market failure in its supply; the apportioning of costs is simple and efficient.

Can the Haj subsidy be justified on the grounds that it is charity? It is said that charity begins at home. And that is where it should stay. As a general principle, governments must not appropriate for itself the purely personal decision of its citizens on the matter of which charitable activity to support and to what extent. It is a matter of property rights: one has a right to spend one’s income as one sees fit. Using tax money to support discretionary spending is tantamount to extortion under the threat of violence, since one can be imprisoned for refusing to pay taxes.

Finally, there is the pernicious endowment effect: once an unearned benefit is granted, it is very difficult to remove it without incurring the wrath of the beneficiaries. No government would like to run the risk of removing the subsidy and antagonizing a large voting constituency.

The problem has a straightforward solution: move the funding of the haj subsidy from the public domain to the private domain. Constitute a non-governmental body whose task is to raise funds from private citizens. It is possible to do so in this day and age of low transactions costs due to the internet and mobile telephony. When people voluntarily contribute to fund the subsidy, it moves from the realm of coercion and becomes truly charitable.

This also takes the politics out of the whole matter and reduces the temptation that politicians have in robbing one group to gain the support of another group. By making this entirely voluntary, it removes the deep resentment many non-Muslims feel regarding the matter.

But there is a larger point which goes to the heart of what the job of a government is. Protecting the lives and property of its citizens is the primary reason for its existence. Everything else is secondary. Citizens should be on guard and prevent the government from usurping the freedoms that rightfully belong to them. When the government intrudes into such personal matters as whether or not to support the religious activities of some specific group, the state moves a little bit closer to fascism.

India needs to become a truly secular state since it is multi-religious. Its government has to be constitutionally directed to maintain a strict distinction between matters of religion and matters of state. If this requires a constitutional amendment, then it is time to introduce such a bill. The Indian government has to stop riding roughshod over the basic inalienable rights of its citizens – that of the rights to personal property and equality before the law. India needs the equivalent of the first amendment to the constitution of the United States of America.

This month’s Pragati is about “What the new government should do in its first 100 days.” I have a piece in there about the structural changes required in education. What else is new, you’d ask. Below the fold are the editorial comments for the issue. Please read and distribute.

India goes to the polls in a few weeks’ time. A new government will be in place in a couple of months.

The ‘honeymoon’ period of the first hundred days offers a new government the opportunity to implement important reforms that might otherwise face the greatest resistance. Of course, follow-through is important, but setting the momentum early is crucial. Most importantly, the honeymoon comes but once in a government’s life: so it is important to have a plan of action to make the most of it. Plan ahead, as they say, to avoid disappointment. This issue outlines a honeymoon agenda for the new government in three vital areas: economic reforms, national security and education.

Some of you are involved in preparing policy agendas for political parties. A few of you are even contesting the elections. We hope reading this issue will help you make a difference.

Our proposals are ambitious. How can they not be? But we are also realistic about how much a government can accomplish. Our recommendations, at the least, will allow readers to see how far the actual performance falls below our benchmarks.

This leads us to the other theme in this issue: the importance of voting. At an individual level you will make a difference when you vote. Don’t wait for the perfect candidate to come along—please vote for the best of the existing lot, and encourage your friends to do so. The articles in our perspective section make the case for voting as the necessary condition to effect change.

In addition to the other regular features, we present the results of our reader survey in this month’s issue: we had asked you if you’d subscribe to a print edition of Pragati. Two-thirds of the respondents said “Yes”, but those who said “No” gave some good reasons. Your feedback was extremely useful: we’re acting on it. More on this later.

[Download PDF of Pragati April 2009]

As I am an economist, I am supposed to understand the financial system. Luckily, I am not that sort of economist and so I don’t feel the slightest embarrassment admitting that I don’t have much of a clue. But sometimes I think that perhaps not too many people — even those whose business it is — have a clue either. Some suspect that even the chairman of the Fed, Ben Bernanke, too is not fully clued in. Go figure.

Anyway, I wrote a piece on the meltdown of the US financial system for MailToday. Why? Because everyone and his brother is writing one. So why not I? It will be in the papers tomorrow. But you, dear reader, get to read it today!

Atanu Dey’s Musings on the Financial Crisis

On September 10th, the Large Hadron Collider at CERN, went operational. The largest physics experiment ever built, the 27km-circumference accelerator took decades of planning, over a decade to build, involved 10,000 scientists from 75 nations, and cost $10 billion. For guiding particle beams, it uses over 1600 superconducting magnets, most weighing over 27 tonnes, cooled with 96 tonnes of liquid helium. On September 19th, a “quench” occurred that affected the magnets in one of the sectors and the LHC had to be shut down for repairs.

Critical failures can be expected to happen in any sufficiently complex system, whether mechanical or institutional. Though they are engineered by people, and therefore humanly comprehensible, the complexity can surpass human ability to fully manage and control them. This appears to be true of the global financial system which is a critical component of the modern global economic engine.

September appears not to be too good for complex systems. In September 2001, the US sense of invulnerability collapsed with the Twin Towers of the World Trade Center. This month’s spectacular near-meltdown of the US financial system is another collapse.

Whatever happens in the US happens on an unprecedented scale. Like its successes, its failures have global impact because of its disproportionate influence in the world. You cannot talk of the modern world without reference to the US. Practically every bit of modern science and technology – from bombs to computers – was developed there. It innovates and naturally so because 40 percent of the world’s R&D spending happens there. Seventy percent of the world’s Nobel prize winners work there, and is home to 30 of the world’s top 40 universities.

The figures one comes across in the reporting of the US financial crisis boggle the mind. The US Federal Reserve and the Treasury Department have asked for $700 billion to buy distressed mortgage-related assets. Add to that the $200 billion to rescue the mortgage guarantee firms Freddie Mac and Fannie May. Top it off with the loan of $85 billion to keep the giant insurance company American International Group afloat. The total assistance allocated to prop up the financial system so far – and it is anyone’s guess how much more will be spent eventually – is approximately the annual GDP of India, a country of a billion people.

All this spending by the US government will raise the public debt of the US to around $11.3 trillion. That makes it the biggest borrower in the world. The creditors, among others, are the central banks of many countries such as Japan, China, the oil-rich nations, and even India. Many countries maintain foreign reserves in US dollar denominated financial instruments. The US borrows approximately $2 billion dollars from the rest of the world every day. Why does the world permit the US to get away with it?

It is perhaps for the same reason that the US government is rescuing AIG, Freddie and Fannie: they are too big to fail. To recount briefly, there was a housing bubble in the US and it burst. With asset prices falling, there was a rush to sell assets. But if everyone rushes to sell, the prices fall. This leads to a downward spiral called a ‘debt deflation’. The housing bubble was created over years of easy money thanks to Greenspan, and subprime mortgage lending. The pendulum of market sentiment swung from the one extreme of greed to the other extreme of fear, as it always eventually does.

The financial system is a web of interconnected banks and financial institutions. AIG the mortgage insurer (assets of $1 trillion) cannot be insulated from the troubles of the mortgage guarantee firms Fannie and Freddie (combined assets $5 trillion.) They in turn are linked to other financial institutions globally and the contagion could spread unless action is taken urgently. Financial insolvency is contagious. By nationalizing Freddie and Fannie, and giving a bridging loan to AIG, the US government put a backstop to the slide. They were too big to be allowed to fail. But Lehman Brothers ($600 billion in assets) was allowed to go under because the collateral damage was manageable, and Merrill Lynch was sold. It was simply a matter of maintaining market confidence to arrest the domino effect of major institutions failing.

The US government rescued the US financial institutions it did because as noted before they are too big to fail. The US government is able to spend all that money it does not have simply because the US is too big to fail. The domestic financial crisis could have snowballed into an international financial crisis, the beginning of which would have been a crisis of confidence among the investors of the corporation known as the US.

It is said that if owe the bank a little money, and are unable to repay, you are in trouble; but if you owe the bank a billion dollars that you are unable to repay, the bank is in trouble. In the larger context, the US owes the rest of the world a lot of money. If it cannot pay it back, the rest of the world is in trouble. Therefore, the rest of the world has to make sure that the US never fails. That is why the US continues to get a massive line of countries credit –- often from relatively very poor countries such as China which has lent the US an estimated $2 trillion.

But it does not come without a cost to the US. Economists estimate that the financial crisis will cost it around two percentage points in GDP growth for the next couple of years because recession in the US is a given. Global economic slowdown is also guaranteed. As Niall Ferguson wrote in the Financial Times recently, it is not merely gloom but doom in terms of more shocks to the global economic system. The financial system cannot be isolated from the economic system.

Which is of course very depressing news for India because India any slowdown of the global economy will adversely impact India’s growth. India’s high technology sector income is tied to the US economy’s prospects. Global economic slowdown will have a major impact on the growth of emerging economies.

It is well to remember what Nietzsche said, “What does not kill me, only makes me stronger.” Financial crises, not unlike the problem with the collider, are not random. They are indicative of systemic problems. But in the final analysis, they are generally good because they force necessary changes. The complexity of the system had overtaken the ability of the regulatory authorities to manage the system. Now more thought would be given to regulations that work. The unreasonable success of the US is built upon a culture of innovation. The US will figure out a way out of this self-created mess and build a more robust system. The immediate effect of this financial turmoil will be short term pain but in the long run it would make the system less vulnerable.

In a few months time, both the LHC and the US financial system will be back up and running—at least till the next failure. You can bet your money on that.

India’s successful mobile revolution story is poised to have an exciting and much anticipated sequel. The government of India has decided to auction radio spectrum in the 2.1GHz and the 700MHz bands to telecom operators for providing the so-called “3G” mobile phone services. The fast data transfer rates of 3G technology permit services that involve vast amounts of information needed for audio, video, gaming and other sophisticated services. The stated objective is to increase the number of users who use phones to access the mobile Internet.

Auctions are well understood and are an efficient mechanism for determining the price of economic goods. They have been used in India (tea, coal, spices) and abroad quite effectively. In the US, the Federal Communications Commission conducted two spectrum auctions recently, one in 2006 and the other in 2008, yielding $13.7 billion and $19 billion, respectively.

Existing and new telecom operators, domestic and foreign, are expected to bid for licences in the electronic auction to be announced on 30 September. The reserve prices have been determined. For example, for Mumbai and Delhi, the reserve price for a 2×5MHz block of spectrum is Rs160 crore. It is estimated that the auction will get the government around Rs40,000 crore.

Naturally, how much the 3G auctions raise is uncertain. But there are a number of certainties that follow the basic economic logic. First, the degree of competition allowed in a market, that is, the number of operators given licences to serve it, determines the competition for the market, in turn dictating the amount bid.

Competition for the market and competition in the market are substitutes. By restricting competition in the market, the amount bid will be higher due to higher competition for the market, but it also means that prices will be higher for the end users. Whatever the operators pay to serve the market will be eventually recovered through user prices.

Ultimately, it is the users who pay whatever the government gathers as licence fees, with the operators acting merely as intermediaries. Higher prices in services which have network externalities — that is, the more users there are, the greater the benefit to all users — lead to economic waste.

Second, higher prices directly translate into fewer users, with the poorer users getting priced out of the market. The objectives of telecom infrastructure development and rapid user adoption of 3G services is incompatible with the policy of imposing high licence fees on operators. The government temptation to make a quick buck has consequences in terms of retarded growth of telecom infrastructure and the digitization of India. The adoption and widespread use of telecom services positively impacts productivity and economic growth.

A quick comparative look at South Korea is instructive in this context. It has the most sophisticated digital infrastructure in the world and the most digitally empowered population. More than 90% of Korean households have broadband connectivity, compared with a world average of 20% and India’s 2%. More than 50% of Koreans use 3G mobile services, 10 times the world average. Their Internet is 100% broadband (the world average is 30%) and besides being the fastest in the world (between 2 and 10Mbits per second), it is also the cheapest. Only 5% of the world uses mobiles to make payments; 63% of South Koreans do.

South Korea achieved leadership in information technology use through enlightened public policy. The revenue from spectrum auctions and licence fees from telecom operators is used as investment by the government for initiatives that attract private investment into telecom, thus building infrastructure. The telecom sector has enormous scale economies and network effects. The wider the usage, the higher the benefits; the bigger the infrastructure, the lower the average costs. Widespread telecommunications use makes the South Korean economy more productive and further raises revenues in a virtuous cycle of growth and investment.

There are important lessons that India could learn from the experience of South Korea, a developed nation that pulled ahead of India even though at the time of India’s independence it was at par with India. One clear lesson is that the temptation to extract resources from the telecom sector with an aim to use it for non-telecom related expenses is short-sighted and inefficient.

A robust, affordable, technologically advanced telecom system is as vital to an economy as a functioning nervous system for a human being. A short-term policy of taxing the sector does have a long-term negative impact on the growth of the economy.

The case for auctioning the spectrum to the highest bidders is sound. However, two important considerations must be kept in view. First, the regulations must ensure a level playing field so that the most efficient set of providers compete vigorously in the market, not just for the market, during the auction. Most of all, incumbents must not be favoured because it would have a chilling effect on competition with negative welfare consequences. Second, the proceeds of the auction and licence fees must be invested back into the telecom sector.

India’s position in the emerging world of globally interconnected economies will doubtlessly be dictated by how successful it is in overcoming the severe limitation of its education system.

With an estimated 360 million of its citizens in the school-going age—a third of its entire population—it has an unmatched potential of becoming a major economic powerhouse. It has an opportunity to shape not only its own future but the future of the world at large. The challenges it faces in realizing that potential are many but the most formidable of them are those that are in a sense “self-inflicted.” The greatest hurdle in India’s path to the future is the near-monopoly government control of the education system.

The Numbers

A quick review of the numbers illuminates the challenges and opportunities. Of the total 360 million who should be in the K-12 system, around 140 million children are not in school. Not just a private loss—they will never have the opportunity to participate fully in the global economy—it is a loss to society because they will never be able to fully contribute to it.

Yet the spending for education is large. The Indian government has allocated around US$ 8.6 billion for FY2009 for education; private spending annually on K-12 tuition is an additional US$ 20 billion; tutoring adds another US$ 5 billion a year; private professional education is another US$ 7 billion. The education sector is expected to grow to around US$ 70 billion by 2012. Compare that to the US$ 45 billion spending for power, telecom, and transportation infrastructure in the 11th Plan.

Failed Public System

Regulations allow only non-profit trusts to run educational institutions. The results are disappointing and point to a failed public education system. The private sector schools do deliver much more than the public sector schools and do so comparatively more efficiently. Private schools account for only 7 percent of around 1 million K-12 schools and yet they accommodate 40 percent of the total enrolled. Studies show that public sector schools are plagued by teacher absenteeism, lack of basic infrastructure, and poor performance. India urgently needs to remedy the shortage of quality private schools.

The situation in tertiary education is not very good either. Published figures show India graduates 350,000 engineers and IT professionals a year, compared to China’s 600,000, and the United States’ 130,000. The quantity appears reasonable until one recalls that only about one out of four engineers is employable. This creates the paradoxical situation of vast numbers unemployed engineers on the one hand, and on the other employers desperately seeking skilled engineers.

Compared to China

Comparison with another comparably large developing country—namely China—is instructive. By 2005, China was graduating around 12,000 PhDs a year, about seven times what is did in 1995; India maintained an average of 700 PhDs every year during the same period.

The education system is supply-constrained. Around 400,000 compete in the IIT-Joint Entrance Examination for 10,000 seats in the few Indian Institutes of Technology, for instance. Another 240,000 took the common admissions test for the Indian Institutes of Management. On aggregate, over 2 million students take entrance tests for seats in the 1,200 private and 400 public professional schools. Test preparation is a huge market but ultimately the spending is directly unproductive and only serves as a means of rationing the limited quantity on supply relative to demand.

Foreign Education

Unable to find the opportunity domestically, Indians spend an estimated US$ 10 billion every year for higher education abroad. This lends support to the claim that if the education sector were to be liberalized—that is, if for-profit domestic and foreign private sector entities were allowed entry—then the capacity constraint will be released. Furthermore, market competition would ensure that the quality of the education would also improve.

The private sector is essentially denied the opportunity to fully participate in the education sector. Resistance against commercialization of education is held with what approaches religious conviction. Profit from education is anathema to Indian policymakers. The Supreme Court of India in a 1993 decision wrote:

“Imparting of education has never been treated as a trade or business in this country since time immemorial. It has been treated as a religious duty. It has been treated as a charitable activity. But never as a trade or business. . . The Unni Krishnan Decision does not imply that private schools cannot exist but states that they should not ‘commercialise education’ and impart education with the motivation to profit from it.”

The Market Response

But the market does find a way around and somehow manages to overcome to some degree the serious defects of the hobbled education system. However it is a costly exercise. Infosys spent US$ 120 million for a training facility employing 300 teachers to train its raw recruits; Wipro trains its recruits for three months before putting them to work; Satyam trains thousands in-house similarly. Therein lies a very clear and important lesson: that for-profit entities can and do promote social welfare in the education sector—they train people to become productive, thus enhancing private and social welfare.

Education as an Attractor

The argument for liberalizing the education system is simple enough to state. Globalization, which is essentially the free movement of capital in pursuit of profits, is an established fact. It means that global capital will continue to move differentially to those parts of the world where it most profitably complements the human capital available. Even though motivated by profit, global capital has the capacity to contribute directly to rapid economic growth, as evidenced by the growth stories of the East Asian economies in the past and of China more recently.

Only those economies that have the human capital to absorb global capital will benefit from globalization. Modern manufacturing is the basis for any large modern economy. It requires skilled manpower and therefore the emphasis on education and training. Currently India does have a small but significant position in the skilled services sector of business process outsourcing and information technology enabled services. But the news there is that shortage of skilled manpower is becoming a reality.

Diversifying the Economic Base

India needs to diversify its talent pool because economic development demands the ability to produce a diverse set of goods and services. Furthermore, for India’s economic growth, it has to serve as a global talent pool for all aspects of a modern economy—from services to manufacturing to research and development. Otherwise the unskilled and poorly educate will find themselves unemployed in the structural changes that are guaranteed in a globalized world. Most importantly, for driving domestic innovation, at the higher end of the education spectrum, one not only has to have quantity but world-class quality which can only be achieved if one has world-class institutions.

Manufacturing Human Capital

India has the raw numbers but lacks the financial resources to transform them into human capital in world-class educational institutions. Fortunately, global capital itself can help India build capacity for creating human capital. The argument for it is straightforward. Return on investment in education is positive and significant in the case of individuals. Therefore, given the ability to pay for it and the opportunity to gain an education, most people would educate themselves to their full potential. Therefore there are immense profits in education in India that global capital cannot afford to ignore.

The Indian government has to withdraw fully from tertiary education. The private sector has the incentive and the ability to provide tertiary education. Private sector investment will release the capacity constraint in education. For those who are unable to pay for the education upfront, they face what is called a credit-constraint, and they can be helped with educational loans from private and public sector financial institutions.

For K-12, the private sector already does address 40 percent of the market. By removing the restriction that only allows non-profit institutions, the capacity will grow and thus permit the scarce public funds to address the needs of the 140 million children not in school currently. The role of the government could then shift from funding schools to funding school children.

Paradigm Shift

What Indian education urgently requires is a paradigm shift, a different way of approaching the matter. The ostensible reason for not allowing private for-profit institution is to safeguard the interests of those who are poor. But one can be skeptical of that and a reasonable hypothesis advanced that through its monopolistic control, the government and its agents find an opportunity to extract rents from the supply-constrained market. This creates a system in which only the rich can afford to pay the rents and the poor get rationed out.

India cannot afford the current education system any more. Too many of its children are denied an education today. Globalization is a double-edged sword: it rewards talent as handsomely as it penalizes those who are unskilled. It is quite possible for India to employ global capital to solve its local problems—provided that it understands that voluntary trade is beneficial to both parties and both profit from it. Undoubtedly global capital will profit from investing in education in India. But that is only because India will profit even more from an educated population.

Issue Contents

PERSPECTIVE

Making a leader
Excerpts from a lecture on leadership and discipline
Sam HFJ Manekshaw

Our voice in our history
Academic freedom, private funding and historical research

Jayakrishnan Nair

Letters
On whether or not India has a coherent foreign policy

FILTER
A survey of think-tanks
On China policy; Fixing the FATA; An Indo-Israeli alliance?
Vijay Vikram

IN DEPTH
Hold steady in Afghanistan

India is on the right track and it should stay that way
Shanthie Mariet D’Souza

A bigger military presence is essential
…if India is to shape Afghanistan’s future
Sushant K Singh

The myth of Taliban tribalism
The folly of trying to set tribes against each other
Joshua Foust

IN PARLIAMENT
Monsoon Session 2008—What’s in store
Legislative brief
Sarita Vanka

ROUNDUP
When it’s good to slow down
The why and what next about rising inflation
V Anantha Nageswaran

The historical roots of the services sector
…calls for a strategy that plays to India’s strengths
Stephen Broadberry and Bishnupriya Gupta

Profiting from education
Resistance against commercialisation is fruitless
Atanu Dey

BOOKS
Four books about Pakistan

On nuclear proliferation, military politics and society
Nitin Pai

There is a definite positive relationship between the size of the habitation and the productivity of the population.”

The full article is below.

Urbanization and Development of India

Atanu Dey

Economic growth and development is intimately connected with the urbanization of the population. The relationship holds empirically, both across time and space. Analytically it is easy to see why economic growth and development is both a cause and consequence of urbanization.

The scale and quality of the basic habitation unit determines the success of an economy. A large number of small villages is sufficient for poverty; a number of large cities is necessary for prosperity. Specifically with reference to India, the vast majority of the population lives in villages and ekes out a meager existence from agricultural related activities.[1] For India to develop, it is imperative that India’s 700 million rural inhabitants have the opportunity to live in urban areas and work in non-agricultural sectors.

The world is getting urbanized

The big picture clearly shows that the world is getting urbanized at an accelerating pace. The entire world’s population was around 900 million in the year 1800. Less than 3 percent of that population—about 27 million people—lived in cities. The world population nearly doubled in the next hundred years. By 1900, the global population had grown to 1.6 billion, of which only around 10 percent were urbanized. Now, another hundred years later, more than half the world’s population of over 6 billion lives in cities. Estimates place around 70 percent of the world’s projected population of 10 billion in the year 2050 in cities. Human civilization is becoming a predominantly urban civilization.

Mega-regions

There is a definite positive relationship between the size of the habitation and the productivity of the population. From ancient times, larger cities have produced disproportionately more of the innovations, advances, and the production of every sort of goods and services. We recall the names of ancient cities because things of importance happened in them, mostly of the type that advanced human knowledge and capacity.

As global population has grown, the size of the average major city has grown alongside. Today we have what can be called “mega-cities” or “mega-regions.” They bear the same relation to the average city of today as in the past a large city bore to a small town or a village.

The mega cities are easy to identify. They are collection of tens of millions of people whose annual production is measured in trillions of dollars. Their names are familiar: Greater Tokyo (a $2.5 trillion economy of 55 million people), Boston-Washington corridor ($2.2 trillion, 54 million people), and mega regions around London, Frankfurt, Chicago, Atlanta, Rome, Amsterdam, etc.

Around 1.2 billion people live in 40 mega regions of the world, and produce two-thirds of the world’s output of goods and services. They also produce more than 85 percent of all global innovation. Which means that the rest of humanity – nearly 5 billion people, or four times as many people as those who live in the mega regions – living the 191 countries produce only a third of the global output and only a sixth of the innovations? [3]

That point is worth stressing. A person living in a mega-region compared to a person not living in a mega-region is eight times as productive in terms of goods and services, and in terms of innovations is about 24 times as productive.

Cities are engines of growth

Cities are engines of growth because they “manufacture” wealth. This is literally true as most manufacturing occurs in urban locations. That is why rich economies are predominantly urban, and those economies that are largely rural are relatively poor. The transition from a poor economy to a rich one depends on the transition of the majority of the population from being rural to urban.

There is a definite trend and a correlation between the growth of cities and the progress of human civilization. This relationship is established by the increased production of goods and services. This creation of wealth is a consequence of the urbanization since urbanization makes manufacturing possible.

There is more stuff relative to people today than existed any time in our history because manufacturing stuff requires less labor per unit of output. That’s what economists call “economies of scale”: the cost of production per unit goes down as the volume of production goes up. Large manufacturing units produce stuff more efficiently.

Large manufacturing units require lots of people and large amounts of supporting activities, which in turn require even more people. In other words, a population living in a collection of villages is not as productive as the same population living in a city and engaged in manufacturing. Cities are the engines of growth because they make manufacturing possible, and manufacturing has scale economies.

Infrastructure and Cities

Manufacturing requires cities because the high population and high population densities of cities reduces the cost of getting things done. Another way of stating that is to say “transaction costs” are lower in cities. This is explained by the nature of infrastructure.

Infrastructure has “scale economies” – the larger the amount of infrastructure, the lower the cost per unit of infrastructure. Thus the high aggregate demand for infrastructure in urban areas allows sufficiently large supplies at lower average costs. Lower costs translate into more efficient services and therefore the advantage that cities have over rural areas in conducting business.

An example: Providing Education

There are a number of well-known causative factors that lead to economic growth. Among them are an educated and healthy population, reliable and adequate infrastructure, a free and fair market-driven economy, and the availability of public goods such as law and order, political freedom, efficient governance, etc. These causative factors have complex interdependencies and have to be present—simultaneous in time and co-located in space—for economic growth and development. These factors of economic growth can be most efficiently provided in—and are usually associated with—cities.

Cities provide educated people the opportunity to use their skills because cities have the supporting infrastructure and other skilled people, both of which are necessary for skilled people to fully utilize their specialized skills.

Cities aggregate a large number of people with different skills which make all of them mutually dependent for being productive. Furthermore, the education of the next generation itself is most efficiently provided in cities. Thus cities are the centers not just for the use of education but also the provision of education.

An attempt at providing highly diverse and sophisticated education to small village populations is prohibitively expensive. Every center of excellent learning – schools, colleges, and universities – is associated with urban areas, either from the beginning or from the urbanization of the place where a great center of learning is created.

Given a large enough population at a specific location, the demand for education will be sufficient for its efficient supply. A lot of people are required to provide the educational services. These people in turn need supporting services that are provided by even more people in that location.

To provide for the needs of the people, infrastructure—power, telecommunications, houses, parks, roads, water, sanitation, etc—is needed. To provide all the infrastructural services, you need yet more specialized people. Following this line of reasoning you soon reach the conclusion that it needs a city. It needs a city because a city is at the heart of a developed modern complex highly skilled highly specialized economy. Any developed and rich economy is primarily a collection of cities.

Rural Development

It is important to keep in mind that the central concern of economic growth and development is the development of people. For far too long, Indian policy has conflated the development of rural people with development of villages. That confusion has predictably led to waste of time and resources. Village development is costly because India has too many – over 600,000 – and if the limited resources available for development is spread out over them, then per village the amount available is not sufficient to affect major changes.

By insisting on the development of villages, scarce resources, which could have been more efficiently used elsewhere, are wasted. There is another way of using the same resources, and that is the development of cities. Thus, paradoxically, the answer to rural development – or more accurately the development of rural people – actually lies in the development of urban areas.

Urbanizing India’s Population

The rural population of India has to urbanize. The existing cities, however, are bursting at the seams and cannot possibly accommodate any more people. Practically all Indian towns and cities are unplanned and inefficiently use land and other resources. They are arguably inadequate for the current residents, leave alone adding hundreds of millions more people to them. The existing urban centers would do with a massive makeover but doing that is expensive. [4]

There’s a need to have new urban centers to accommodate the hundreds of millions of rural people. Imagine building absolutely new cities from scratch for 600 million people. Imagine 600 new large cities of one million people each. Imagine building houses, schools, shopping centers, parks, factories, roads, public utilities, hospitals, libraries, . . . And imagine doing that using the best urban planning known to humanity.

That is the greatest opportunity India has – of building from scratch – which is not available to any developed economy such as the US. American cities are notoriously inefficient in terms of resource use and sustainability. Their legacy urban centers will burden the transition to living in more sustainable cities.

But India does not have that legacy burden. [5] Most Indians living in villages would welcome the chance of living in well-designed efficient cities. They are already doing so as is evidenced by the fact that tens of millions of rural people migrate to cities – often choosing to live in urban slums. They are voting with their feet saying that life in an urban slum is preferable to life in a village.

Conclusion

The economic development of India requires economic growth. Cities are engines of growth because there is a bi-directional link between urbanization and growth. Therefore the rural people have to be urbanized for India’s development and growth. Every economy has followed that path which begins with agriculture being the main source of income for the majority of the population and ends with agricultural employment being a very small fraction of the total labor force.
India needs to stop making little plans and start thinking big.

Make no little plans. They have no magic to stir men’s blood and probably themselves will not be realized. Make big plans; aim high in hope and work, remembering that a noble, logical diagram once recorded will never die, but long after we are gone will be a living thing, asserting itself with ever-growing insistency. Remember that our sons and grandsons are going to do things that would stagger us. Let your watchword be order and your beacon beauty. Think big.

Daniel Burnham (1846 – 1912)
Visionary urban planner and Chicago architect

NOTES:

[1]. It is a reasonable guess that you, the reader, are unlike the average citizen of a developing country in the sense that you live in a city and are engaged in non-agricultural work. Moreover your above average income is related to your living and working in an urban area.

[2]. In the year 1900, the world’s 10 largest cities were (in descending order of population) London, New York City, Paris, Berlin, Chicago, Vienna, Tokyo, St Petersburg, Manchester, and Philadelphia. The combined population of those 10 cities was approximately 26 million. By 2005, just Tokyo — the largest city then — itself had 35 million people, followed by Mexico City with 19.4 million. Mumbai with 18.2 million ranks 5th. [Source: www.192021.org ]

[3]. The Rise of the Mega Regions Wall Street Journal April 12, 2008.

[4]. Fires, earthquakes, carpet bombings have served that function for many other cities in the past.

[5]. There’s an interesting analogy illustrating the burden of a legacy. The US had one of the best landline based telecommunications system in the world by the early 1970’s. That legacy system actually prevented them from transitioning to a more efficient mobile telephony system in the 1990’s. India, given that there was no landline telecommunications system to speak of, immediately leapfrogged the twisted copper-wire stage and went straight to the more efficient wireless system. Sometimes it helps to arrive late.

The advanced industrialized economies were lucky to have had their development fuelled by cheap fossil energy. Today’s developing economies have a much tougher challenge. It was a very short window of opportunity which opened just about 150 years ago and is likely to close in the next 40 years, by when the known reserves will be depleted at current levels of consumption.

All told, 200 years is a very brief interlude considering thousands of years of human civilization and hopefully hundreds of thousands of years yet to come. At some time in the distant future, they will look back and remark that the age of fossil fuel was a short inflection point, a point at which humanity passed through the bottleneck of dependency on oil from the ground. Before that point, humanity’s primary source of energy was the sun, and so it will be after that point.

The full article is below the fold.

The price of crude oil rose above $140 a barrel this month. The world at large is getting used to high prices at the pump, and even the Indian government finally decided to let the Indian consumer have a taste of what is to come by marginally increasing the prices of petroleum products.

Various theories are being advanced for this unprecedented rise in the price of petroleum — from the machinations of speculators to the derived demand for energy due to the growth of economies such as China and India. The rise in global oil prices even provides a handy excuse to the Indian government for the recent double-digit inflation.

India urgently needs to develop. Energy and economic vitality are conjoined twins. Energy is the binding constraint that faces all of humanity, not just the developing economies. Of course, given the projected increase in demand and the decline in the supply of fossil fuel energy, the price of energy will continue to move up — with predictable adverse effects on the growth prospects of the emerging economies.

The advanced industrialized economies were lucky to have had their development fuelled by cheap fossil energy. Today’s developing economies have a much tougher challenge. It was a very short window of opportunity which opened just about 150 years ago and is likely to close in the next 40 years, by when the known reserves will be depleted at current levels of consumption.

All told, 200 years is a very brief interlude considering thousands of years of human civilization and hopefully hundreds of thousands of years yet to come. At some time in the distant future, they will look back and remark that the age of fossil fuel was a short inflection point, a point at which humanity passed through the bottleneck of dependency on oil from the ground. Before that point, humanity’s primary source of energy was the sun, and so it will be after that point.

All sources of energy — fire, coal, oil, nuclear — for human use have been the result of discovery and invention. Some entity somewhere invests what it takes for research and development, usually some corporation in search of profit, and invents the technology to exploit some new source of energy. All indications are that solar energy will be the major player in the next stage.

Solar energy is non-polluting, abundant, widespread and inexhaustible. India’s development, if it has to happen, will depend critically on whether it has the technology for converting the abundant incident sunlight — insolation — into usable energy. The question is whether India will develop that technology for domestic use as well as for export or, as it has done for all the previous technologies, wait for others to do so and then import it.

It is important to remember that governments do not develop technologies. They do not have a comparative advantage in the type of skills needed for invention and discovery. Which is not to say that governments have no role to play in the process. On the contrary, private players succeed or fail in developing technologies to a large degree on the conditions created by the government. Governments help by outlining the broad goal, assisting with funding, and encouraging competition among private players. Public policy creates the necessary conditions for private enterprise to deliver.

High oil prices can be reasonably expected to continue till the end of the age of oil. For prices to fall, either the supply has to increase or demand has to fall, or both. There are really no reasons for oil producers to increase the supply. Oil is an exhaustible resource whose optimal rate of extraction is dictated partly by revenue requirements of the producers. At current high prices, they meet that goal at low levels of production. If prices climb higher, paradoxically the supply may contract even further.

The road ahead is steep for India, made steeper by rising energy prices. But this is a blessing in disguise because it is a wake-up call. There is time to prepare for a post-peak oil future. Independence from foreign energy — whether oil or nuclear fuel — is not an option but an absolute must. That will only happen if India develops the technology for solar energy use in all its forms, such as concentrated solar thermal and solar photovoltaics.

Solar technology is at its infancy. Costs are constantly declining but it will be several years before it achieves “grid parity” — costs comparable with conventionally generated electricity. Costs have fallen by 20% for every doubling of installed capacity. Projections indicate that by 2020, installed solar capacity will be 20-40 multiples of current levels. Even then, solar electricity would account for only 3-6% of total electricity generation. Solar energy has a long and promising future. How quickly that potential is realized depends on national will.

India has a lot of advantages in this regard. It is a large country and can afford the human and financial capital required for the challenge. As John F. Kennedy had observed regarding the manned mission to the moon, we must do this not because it is easy but because it is hard. Challenges don’t come any harder. India needs the vision to face it and win.

The greatest technological advancement of the modern world, after the personal computer, has to be the cell phone. The power that it gives its approximately three billion users around the world arises from its participatory nature. Consider the recent protests against the Chinese repression of Tibetans. The use of mobile phones to send pictures of the protests in Lhasa and elsewhere and regular updates of rapidly unfolding stories is power that is hard to contain.

Nothing new for the regulars of this blog. So don’t even bother.

As it is tempting to be seduced by the power of technology, it is good to be mindful of a few caveats. First, the nature of the solution must be dictated by the nature of the problem. While a technical solution is appropriate to a technical problem, it would be wholly inadmissible for, say, a sociological or a psychological problem. Quite frequently, technologists advocate technical solutions to non-technical problems. It illustrates the old adage that to a man with a hammer, every problem looks like a nail.

Second, the production of advanced technology usually occurs in a certain context. It co-evolves with the society that creates it. It is not always possible to transplant technology without paying attention to the ecology of the place. The technology has to be supported by human capital and appropriate physical infrastructure usually transparent to the user. Successful adoption of technology is predicated on the preparedness of the adopting population and place.

In the context of the development of India and other developing economies, ICT holds a special fascination with policymakers and global hardware and software giants. Lavishly sponsored by the peddlers of ICT and heavily attended by government officials and NGOs, the narrative is that there is a “digital divide” and bridging it is not only necessary, but perhaps is sufficient for development. One cannot dispute the existence of a digital divide any more than one can dispute the existence of all sorts of other divides — ranging from the “basic food and clean water divide” to what I call the “BMW divide”. What matter are the prioritization and sequencing of the divides to be bridged.

Let me recount what happened to me the other day. I was staying at the guesthouse of a major multinational in New Delhi. The fully appointed guesthouse had a room for Internet access. As the young Nepali housekeeper had a lot of time on his hands and he had access to several connected PCs, I offered to teach him how to access the World Wide Web. I would do my bit towards bridging the digital divide for the day.

With great enthusiasm, I was demonstrating the wonder of the Web when he muttered that he did not know how to read and write. Aside from noting down phone numbers and knowing the alphabet, he was illiterate. Crossing the basic literacy divide is a prerequisite for crossing many other divides, including the digital divide. That episode underlines the basic nature of technology: it is an amplifying mechanism. There has to be a basic capacity first. Only then can technology be brought to multiply capability.

Technology holds the promise of allowing short cuts. The classic example is the adoption of cellular telephony and leapfrogging the costly landline stage of a telecommunications infrastructure. In less than 25 years, well within a human generation, half of humanity — more than three billion people — adopted that technology. The same cannot be said about the personal computer (PC) and the Internet. Aside from the fact that PCs and Internet connectivity are significantly more expensive to own and use than a cellphone, there is the matter of having the capacity to use it. Leapfrogging technology is possible, but there is no way of leapfrogging human capacity requirements.

Widespread use of technology is mandatory for any economy to develop in the 21st century. India has a number of positives in this regard. First, it is a latecomer and, therefore, has the benefit of leapfrogging in some instances. Second, technological tools are increasingly becoming cheaper, thanks in part to Moore’s Law. The cellphone of today packs the same power of the PC of just a decade ago. Third, information is becoming cheap. This has profound implications for one of India’s great problems, that of educating hundreds of millions.

The negatives that relate to technology and development of India do give some cause for worry. First, the missing deep backend has to be created rapidly. Cheap, reliable, good quality electricity must be available. So also sufficient human capital for supporting the use of technology has to be available. Fortunately, technology itself can help with the human capital formation. Second, entrepreneurial activity is what drives the maximum gain from the use of technology. Bureaucratic control of economic activity is inimical to this.

India’s development can be accelerated by the use of technology, as though by magic. But magic cannot be done without appropriate props. In the case of India, the major props are the understanding of the power of technology among its leaders and the politi-cal will and vision to let magic happen.

The reason I like that quote it because it goes to the very heart of the problem of India’s economic development. Indians as a collective are no less than other collectives around the world; India is endowed with natural and human resources; yet India is desperately poor. Why? Because we have failed to develop a set of rational rules to play by. Refusing to acknowledge that failing will ensure our continued poverty.

Anyway, here’s the text of that India Express piece.

Perverse Subsidy for the Rich

Nobel prize-winning economist Douglass North observed that “economic history is overwhelmingly a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth.” Producing a set of rational economic rules is a political rather than an economic process. Frequently basic economic truths are willfully disregarded in a myopic but cynically calculated process of short-term electoral gains. In the long run, however, the persistent practice of politically motivated economically unsound policies has the unsurprising and unfortunate effect of impoverishing the economy.

India is a case in point. Despite being endowed with substantial human and natural resources, it has failed to provide a vast majority of its citizens the basic necessities for a decent life. It is hard to avoid the conclusion that what India mainly lacks is a rational set of economic rules. An important contemporary example of a flawed economic policy is the subsidy that the consumers of petroleum enjoy.

The price of a barrel of crude is hovering around US$ 100 a barrel and yet the price of petrol at the pump remains essentially what it was when crude was selling at half that price about a year ago. The resultant gap between the cost and the price has to be bridged through a subsidy that is estimated to be around Rs 70,000 crores this year. The case is made that by keeping the price artificially low, the so-called “common man” benefits. But that is certainly not the case. It is a perverse and regressive subsidy for a number of reasons.

First, it is the “uncommon man” who actually benefits directly from the subsidy. In fact, the wealthier you are, the more vehicles you own, the more subsidy you capture. For every litre of petrol or diesel you consume, you benefit by around Rs 10; for every cylinder of LPG, someone else chips in Rs 250. The really poor person does not own cars nor has a gas connection.

Second, when distorted low prices do not reflect the full costs, it sends the wrong signals and consumption is more than is socially optimal. India meets about three-quarters of its petroleum needs through imports at an approximate cost of US$ 50 billion a year. Increased consumption inflates that import bill and is economically wasteful.

Third, the burden of the opportunity cost of the subsidy falls squarely on the people who cannot reap its benefits. The resources that the subsidy consumes are not available for services that the poor benefit from such as subsidies for public transportation systems, primary health and education.

Fourth, the subsidy is financed by bonds issued to oil marketing companies. These bonds represent a future liability. Essentially it is a mechanism employed by the present voting generation to secure benefits that will be paid for by the future generations who do not have a vote and therefore do not have the option to reject that burden.

Fifth, if prices were more aligned to true costs, alternatives such as better public transportation system can have a fair shot at being developed. It would also send the right signals for more conservative use of private cars, leading to less congestion and pollution.

The basic economic truth is that there is really no such thing as a free lunch. Today’s subsidy comes at a cost that will only grow larger the longer the delay in pricing petroleum products at full cost. It is fairly simple to remedy the situation. Raising the price at the pump is the simplest but the most politically risky. The UPA government knows that and will definitely not risk losing power even if raising prices is for the larger benefit of the economy.

But those subsidies have to be reduced, if not totally abolished overnight. A start could be made immediately to reduce the subsidy to the rich while continuing it for the poor. A mechanism for doing so would be to impose a tax on car owners which would reflect the full cost of the petrol they use. Depending on the size of the engine and average fuel consumption, an annual fee could be assessed which has be paid to maintain registration. So if a particular make and model of car typically consumes, say, 1,000 litres of petrol a year, the tax could be Rs 10,000.

This type of a mechanism would leave all two-wheelers, three-wheelers, and buses untouched. Since it is usually the common man who uses public transportation, the common man would continue to enjoy the subsidy.

Implementing rational economic policy is not impossible for India even though for decades on end we have been burdened with flawed policies. We are moving slowly towards a more rational way of running an economy. Whether we persist on along that path is a political matter which can only be determined ultimately by the enlightened self-interest of an educated population.

Here’s the text of the article.

Profits are Corporations’ Social Responsibility

My dentist is superb at fixing my teeth, but I suspect that if he ever tried his hand at fixing my computer, he would make a mess of it. And I cannot bear the thought of my computer technician giving me a root canal.

Specialization is the cause of much of the progress that has been made by humans. It takes years of training to become competent in a chosen field. Fortunately, we differ in our preferences and our abilities, and the variety of things to be done are more or less matched by the variety of people who wish to do them.

One finds the benefits of specialization at all levels of aggregation in society, not just at the individual level. Financial institutions don’t muddle around in public health, and automotive companies don’t mess around in hospitality, and so on. By merely sticking to what they are best at, they increase social welfare, even if that is not their intent — a fact that Adam Smith recognized centuries ago.

Companies play an important specialized role in our complex societies: that of creating wealth in terms of the goods and services they produce. That is what they are good at doing, and the market takes care of weeding out those that are unable to meet that goal. They are required to play by the rules that are made by the other very critical institution of our society: the government. There is a natural division of labour between the two. Companies serve the greater good by efficient production, by following the rules.

The role of the government is to set the rules and enforce them, not get into production. Nobel Prize-winning economist Douglass C. North has noted that “economic history is, overwhelmingly, a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth.”

When the government fails in the task in which it is expressly required to specialize, it leads to the well-known problems that plague society, such as poverty, inequality, corruption and discrimination.

So, it comes as a bit of a surprise when one finds politicians lecturing companies about their social responsibility. Companies are neither responsible for social problems and nor are they capable of solving them.

Astonishingly, in one speech, Prime Minister Manmohan Singh even asked companies to deal with the problem of inflation, as it affected the common man. One can reasonably expect companies to take on the responsibility of fighting inflation, if one gives them the power to control money supply. So also one can expect companies to address inequality only after giving them the power to tax citizens and then redistribute the revenues — a job normally reserved for governments.

Most successful corporations around the world do have objectives other than just being financially profitable. But profits have to be there for the continued existence of the corporation.

HP, for instance, says on its website that profit is its second objective, after customer loyalty: “To achieve sufficient profit to finance our company growth, create value for our shareholders and provide the resources we need to achieve our other corporate objectives.” Further down the list, its objective of being a “good citizen” is predicated on making profits.

But, even the mere pursuit of profit can indirectly lead to great social benefits. The Silicon Valley in California is responsible for generating trillions of dollars of wealth and commensurate amount of social welfare around the world. All this wealth, and its benefits, can be plausibly traced to the establishment of Stanford University by Leland Stanford from the profits of his companies. The biggest names in high technology today — HP, Sun, Yahoo, and Google — in some sense owe their existence to Stanford.

Too often, the temptation to burden our companies with additional jobs arises out of envy and impatience. The Indian economy is only recently reaping the benefits of a small degree of liberalization. Indian companies are growing up and, given sufficient support in terms of a good set of rules to play by, they too will flourish. The wealth that they will generate and the profits that they make will surely not go to waste. It has happened in the past in India and continues to happen: a case in point is the Tatas.

The social responsibility of corporations is to make a profit while following the rules. They have a comparative advantage in doing that, just as the government has a comparative advantage in making rules and solving social problems. Insisting that companies solve social problems is like expecting the dentist to fix a broken computer. Yes, he can possibly fix the computer if I lean on him hard enough and he spends a lot of time learning hardware maintenance, but that will be at the cost of a lot of untreated toothaches.

It is easy to see why it takes all sorts to make a world. We differ, and therefore have comparative advantage in different areas, which makes division of labour possible and which, in turn, makes us all more effective and efficient. We neglect these simple truths at our own peril.

A high profile contemporary example of an inappropriate technical intervention is the XO laptop promoted by the One Laptop Per Child (OLPC) project headed by the celebrated technologist and former head of MIT Media Lab, Nicholas Negroponte. The grand vision is to assist in the education of children in developing economies by providing each child at government expense with a laptop created especially for that purpose.

The XO is a technological masterpiece of good design and fabrication. It costs around US$200 and has features suitable for use by children. It consumes power frugally, can withstand rough use, and can be used in hot and dusty environments. However, the OLPC promoters claim that it is not a laptop project but rather it is about education. Their goal is to bridge the digital divide so that children in poorer parts of the world can also have access to the digital educational resources through the Internet.

The poor of the world are on the wrong side of many divides, not just the digital divide. There are numerous other divides —nutrition, health-care, basic education, infant mortality, even safe drinking water. All these divides are rooted in the greater underlying divide we can call the income divide. Fixing the income divide involves economics. The most significant flaw of the OLPC is that it ignores basic economics.

The digital divide is real enough but it is not the most pressing problem facing poor people. That it is not even a real hindrance to basic education is evidenced by the fact that 99.99 per cent of humanity has become educated without the use of high technology. Saying that laptops and access to the Internet can potentially assist in educating the poor is akin to claiming that one car per family can help with transportation needs. Of course it can. But technical feasibility does not imply economic feasibility at all.

The economics argument against the XO is about “opportunity costs”. When evaluating alternatives, one has to weigh the benefits of an action, buying cakes for example, against the forgone benefits of other actions, buying bread and butter, which are precluded because of the costs of that action. A full implementation of the XO project for India would involve the purchase of 100 million laptops and would cost around Rs 50,000 crore every year. That is obviously impossible but even if it were possible, the benefits of a laptop for every child have to be weighed against the benefits from spending the same amount in schools, teachers, nutrition and healthcare for those children.

The Indian education system has failed to live up to its mission. School dropout rates by the end of primary education are around 50 per cent and by the XII standard rise to around 90 per cent. The failure is partly due to the low priority given to primary education despite all the high sounding rhetoric of policy makers and the language of the Constitution of India. That is a problem of political economy, not of technology. Thankfully, by some stroke of luck, the Indian government decided against buying into the OLPC project. It is easy to imagine that the XO could have become one more of the goodies distributed by the government to favoured constituencies in exchange for political patronage.

For India to develop, it has to find a way to educate all its children. The current system is severely supply-constrained and therefore is only accessible to those who are well off. The poor are unable to secure a decent basic education because the total governmental control over education ensures low quality and limited supply. Lacking a good basic foundation, the poor are unable to compete for the limited tertiary education opportunities.

Educating its population is arguably the most important task of any society, perhaps second only to the primary needs of food, shelter and clothing. It is a fact that many societies — even some very poor ones — have achieved universal primary education. However, a functioning educational system is not impossible. It is always a matter of political will and collective social consciousness, not a matter of building laptop bridges across digital divides.

“Entrepreneurship creates immense wealth that permeates healthy economies. Entrepreneurship alone has the capacity to create innovations in education that no bureaucrat or centralized planning authority can ever hope to achieve. Yes, central control can control, but it cannot create.

“In an age where each of us is immensely ignorant relative to the sum total of human knowledge, the skills that the individual acquires over a lifetime of learning cannot be imparted by an educational system that was created for a different world. The resources for building that educational system are already there. All that society has to do is keep the state out of it so that private enterprise can do its job—which it invariably does. The role of the state is limited to light-handed regulation.

“Liberalization of the educational system from the political-bureaucratic nexus is absolutely necessary. Without economic freedom, we cannot expect the entrepreneurial innovation required to make the educational system in step with the dramatic changes that the future has in store. It would be profoundly ignorant to not liberalize education.