A short century ago the US and Argentina were rivals. Both were riding the first wave of globalisation at the turn of the 20th century. Both were young, dynamic nations with fertile farmlands and confident exporters. Both brought the beef of the New World to the tables of their European colonial forebears. Before the Great Depression of the 1930s, Argentina was among the 10 richest economies in the world.

That’s from a fascinating article by Alan Beattie in the Financial Times of May 23rd titled “Argentina: The superpower that never was.” The article continues with —

A hundred years later there was no choice at all. One had gone on to be among the most successful economies ever. The other was a broken husk.

There was no individual event at which Argentina’s path was set on a permanent divergence from that of the United States of America. But there was a series of mistakes and missteps that fit a general pattern. The countries were dealt quite similar hands but played them very differently. The similarities between the two in the second half of the 19th century, and in fact up to 1939, were neither fictional nor superficial. [Emphasis mine.]

It’s a very well-written and instructive article. Pankaj Narula sent me the link and wrote that his favorite part of the essay was —

Economies rarely get rich on agriculture alone and Britain had shown the world the next stage, industrialisation. America grasped that building a manufacturing industry would allow it to benefit from better technologies, while trying to squeeze a little more grain out of the same fields would not. It was not as if Argentina consciously rejected the same course. It could scarcely avoid growing its own manufacturing industry. But when industrialisation did come, prevailing prejudices ensured it was limited and late. Argentina’s elites saw no reason to risk their status and livelihoods in the fickle new sphere and anyway there were not enough new workers to fill the factories. Argentina brought the same tendencies that it had to the ossified agricultural sector, preferring cosy, safe monopolies to the brutal riskiness of competition. Its wellbeing rested on farm prices holding their own against the prices of manufactured goods, and on global markets remaining open.

While reading the piece, I could not resist thinking about India and China. In about 20 years or so, say in 2030, someone will surely write a similar article. They would note the similarities between the two: ancient civilizations, deep culture, large populations, somewhat equally endowed with natural resources, etc. They will note that around 1978, India was just a bit ahead of China. Then China changed its policies and took the path to development.

That future article will note that India continued with Nehruvian socialist policies that retarded economic growth and grew at the “Nehru rate of growth” which made it fall behind China. By 2008, China’s per capita income was three times that of India’s. By 2030, the gap had increased to 10 times. India continued with Nehruvian socialism, which is another name for the process which enriches the government officials and impoverishes the economy. China had learnt its lessons that socialism is a guaranteed path to poverty and changed its course.

It does not bode well for India. The political party that made the policies that shackled India to the “Nehru rate of growth” are unfortunately in the driver’s seat like they have been for most of India’s post-independence history. They cannot change because that would be tantamount to admitting that Nehruvian socialism failed. They cannot tell the people that their poverty was engineered by the party. The party depends on the poor and illiterate to continue to rule.

C’est la vie, and all that sort of thing.

I am pleased to note that the BJP believes in the use of technology for development. The BJP recognizes that IT enhances productivity and increases production. Their press release on the IT vision document is unequivocal and clearly lays out the components of the policy. It should be required reading for pundits and lay persons alike. Their policy declaration “IT for All” is bold, visionary, timel and ambitious. It is also fatally flawed and wrong-headed.

BJP’s pledge: IT for All

Shri LK Advani said, “A future NDA Government, if elected to office in the coming parliamentary elections, would give high priority to the realisation of this vision, which would help India overcome the current economic crisis; create productive employment opportunities on a large scale; accelerate human development through vastly improved and expanded education and healthcare services; check corruption; and make India’s national security more robust.”

Exciting though the vision and the specific proposals are, I have a few points that I would like to get a better understanding of. I am not a policy pundit. So my take on the matter is based mainly on simple arithmetic. (The text in blockquotes is from the press release of the IT policy linked above.)

• Multipurpose National Identity Card (MNIC) with unique Citizen Identification Number (CIN) for every Indian citizen in 3 years; to replace all other identification systems.

Perhaps MNIC is a great idea. I imagine that it will be used for a large number of transactions, although what they would be I cannot tell.

Given the context, it will not be a paper card. The US social security number is just a plain piece of paper. But I am guessing that in India it will be a smart card with an embedded chip carrying information about the citizen.

But let’s do the arithmetic. India has around 1,200,000,000 citizens. Assuming a conservative Rs 200 (around $4) per card, that works out to be Rs 240,000,000,000 or around Rs 24 thousand crores. That is the cost of the cards only.

The administrative mechanism and the manpower, the computer systems that would be required to handle the data, the process to authenticate the identity of the person before issuing the card, handling the security of the card and the transactions done with it, etc., will be extra. Let’s assume that these involve a one-time cost of Rs 1,000 per citizen and an annual cost of Rs 100.

Adding it up for those numbers, the first year cost of the program will be Rs 24 thousand crores (cards), Rs 120 thousand crores for the getting the system deployed and the fixed costs, and Rs 12 thousand crores for the first year’s operation. That is a sum of approximately Rs 156 thousand crores (or around $30 billion.)

Designing such a massive system and rolling it out will be a challenge. One assumes that the required human capital is readily available in India for such a task. I have no idea how many people and how many years this will take but I am sure that the BJP has worked it out already. The benefits of a Rs 156 thousand crore investment must have also been done by the BJP.

• 1.2 crore (12 million) new IT-enabled jobs in rural areas.

The goal is most impressive. I wonder if the government will provide the jobs because it is unlikely that the private sector will find much use for starting up business in rural areas considering the following facts: lack of trained people, lack of basic infrastructure (most importantly electrical power), lack of demand for IT-enabled services, etc.

• 1 crore (10 million) students to get laptop computers at Rs 10,000. Interest-free loan for anyone unable to afford it.

I assume that there are more than 10 million students in India who are unable to afford laptop computers. So they will have to be given a loan. I presume that the loan repayment will take a few years – time for the student to graduate and earn. So for at least 5 years, the total loan will be an expenditure for the government.

Cost of 10 million laptops (assuming that there are laptops available for Rs 10,000 – which is not so anyway) is Rs 10 thousand crores.

• National Digital Highway Development Project to create India’s Internet backbone, and Pradhan Mantri Digital Gram Sadak Yojana for last-mile access even in the remotest of villages.

There are 600,000 villages in India, some of them really remote. Assuming a conservative Rs 10 lakhs on average per village for providing last-mile access, the total cost is Rs 60 thousand crores.

• Broadband Internet (2 Mbps) in every town and village, at cable TV prices (less than Rs 200/month).

The prices of internet access currently in cities are over Rs 4,000 per month for 2 Mbps service. It is cheaper to provide access in cities, as compared to towns and villages (low density habitations.) Costs dictate prices and therefore to provide this service at Rs 200 per month, the subsidy will have to be around Rs 4,000 per month or around Rs 50,000 per year.

Assuming that there are 10 million internet-enabled households who will get the service, the annual subsidy will cost Rs 50 thousand crores.

• All schools and colleges to have Internet-enabled education.

There are around 1 million schools in India. Assuming making education “internet enabled” in each on average costs Rs 10 lakhs per year, that would cost Rs 100 thousand crores per year.

• 100% financial inclusion through bank accounts, with e-Banking facilities, for all Indian citizens. Direct transfer of welfare funds, preferably to the woman of the house.

Good goal. Assuming that this costs Rs 100 only per citizen per year, it would cost Rs 12 thousand crores per year.

• Every BPL family to be given a free smart mobile phone, which can be used by even illiterate users for accessing their bank accounts.

BPL families suffer malnutrition, are illiterate, don’t have access to clean drinking water, don’t have money to educate their children, cannot afford medical care, most live in slums in cities and in the most desperate conditions in rural areas. Their first priority is unlikely to be smart phones. The best thing that they can do with a free smart phone would be to sell it to someone who can use the phone and then use the money for food, etc.

But even then, let’s calculate the cost. A smart phone costs at least Rs 10,000. Assuming 20 million BPL families, the cost of this program is Rs 20 thousand crores.

Adding up the numbers so far

Just adding up the numbers so far, we have Rs 408 thousand crores, and we are just in the beginning of the wish-list. That is a large number even when I have actually taken lower-bound figures for the expenditure involved.

How large is that? Rs 4,080,000,000,000. That is 4 trillion rupees. That works out to be over $80 billion. (Just for ease of arithmetic, let’s use $ instead of crores of rupees.)

India’s population is around 1.2 billion. Of this, around 800 million survive on less than $2 per capita a day, and the remaining 400 million (I assume) on $ 5 per capita a day.

Governments don’t generate wealth. They transfer wealth from one segment of the population to another. The $80 billion for the government programs listed above will come from the top 400 million. Basic arithmetic alone shows that to transfer $10 to each of the 800 million (to get the $80 billion), it would require $20 per capita from the 400 million, or about $100 per family, in addition to the current taxes they pay.

This massive transfer would require a massive governmental administrative mechanism. The more money public servants handle, the more there are opportunities for corruption. This opens additional channels for corruption in a system already beset with massive corruption. If the goal is to reduce corruption as Mr Advani states, then increasing governmental interference and control of the economy is certainly not the way to go about it.

Conclusion

Reading the document so far is exhausting enough and so I will leave the rest of the press release for later. I have yet to muster up the courage to read the 40-page pdf of the IT vision.

IT is important and definitely holds a major promise of enabling India’s growth. But the items above are neither necessary nor sufficient to do so. And most importantly of all, there is not even the slightest indication of whether the massive spending will result in any benefits to the poor who need help.

One of the most important lessons one learns from the centuries of human development experience is that people do achieve economic growth provided they have economic freedom. Economic freedom coupled with even modest levels of human capital is sufficient for economic development and growth.

The currently developed countries did not have IT tools during their development. What they had was human capital (quite modest by today’s standards) and economic freedom. Human capital and economic freedom enabled them to develop the IT required for further increase in human capital and therefore economic development.

The lesson is that IT is not necessary and certainly not sufficient for economic growth

Technology – and more specifically information and communications technology – multiplies the capabilities of a system. If the system is itself dysfunctional, IT enlarges the dysfunction; if the system itself is good, IT enlarges the good. The key is therefore to make the system good before empowering it with IT.

Related posts:

Formula for Milking the Digital Divide.

. . . it is anomalous to expect reform to be carried out by an administrative setup that for many years has functioned as an inert heavy-handed, corrupt, over-centralized, and uncoordinated monolith. Economic reform is about competition and incentives, and a governmental machinery that does not itself allow them in its own internal organization is an unconvincing proponent or carrier of that message.

Drysdale says “that India and Australia are on the cusp of an historic opportunity for sharing a new, much more important relationship in the future than we have shared in the past.” He notes that India’s externally oriented reforms are driving India’s economic integration with the world and has regional and global implications.

India’s continued growth and industrialization is forging a relationship between Australia and South Asia that, 10 or 20 years hence, is likely to match the well-established relationship with East Asia.

All this is changing fundamentally the stature of our bilateral relationship and the priority that it must now attract. The context of that change is the emergence of the Indian economy and the opportunity for integration of the South and East Asian economies, including Australia.

He goes on to talk about the policies and strategies required for realizing the potential gains from this opportunity.

I look at development with microeconomic lenses. So I would like to quote an excerpt from his talk which especially resonates with me.

Good microeconomic policy is at the heart of the process of domestic reform and liberalisation that delivers better economic outcomes and drives effective international integration, both in real and financial markets. In seeking remedies for the under-realisation of trade and investment potential as well as superior strategies for economic integration, we need to look at, but also well beyond, trade and trade policy (or border) measures and focus on domestic reform and liberalisation (behind-the-border) measures. Domestic reforms that strengthen commodity, financial and factor markets through increased competition and efficiency now have much more important effects in promoting growth through economic integration than traditional trade policies at the border.

This emphasis on domestic reforms is important and is consistent with the view that Prof Pranab Bardhan expressed in my conversation with him. (See “Walking around the Indian elephant” and “Reforms do not address the anxieties of the general population.”)

East Asia Forum

Prof Drysdale co-edits a blog on politics, economics and public policy in East Asia and the Pacific, titled “East Asia Forum“. About the EAF:

The blog is run out of the East Asian Bureau of Economic Research (EABER) housed in the Crawford School of Economics and Government. Contributors are from the Crawford School, across the Australian National University and other regional institutions in EABER. Content includes Australian, East Asian and Asia Pacific region perspectives, with guest bloggers from right around the region.

Prof Andrew MacIntyre of ANU’s Crawford School introduced me to Prof Drysdale. Now I have a guest blog post on EAF. How cool is that?

The two broadest generalizations one arrives at from a study of economics are that markets work and that incentives matter. People respond to incentives because that is at the core of what it means to be rational. To the extent that humans are rational, their behavior is predictably in the direction that existing incentives point to. Trade between humans is rational because both parties in any voluntary trade benefit. The abstract mechanism which enables trade is called the market. Markets work in the sense that they maximize the gains from trade among an arbitrary number of entities. There are other methods of enforcing trade among people, such as the command and control mechanism often employed by communist governments. But they are at a distinct disadvantage relative to the market because the latter is based on the premise that rational actors respond to incentives.

An Example

An illustration of markets working and incentives propelling action is contained in a recent paper by Vivek Wadhwa of Duke University, et al, provocatively titled “How the disciple became the guru“. Based on the paper, Wadhwa wrote a couple of pieces in the popular press, published on 23rd July: the BusinessWeek article is “What the US can learn from Indian R&D“, and the Wall Street Journal one is “India’s Workforce Revolution“.

The authors note that in the past 15 years or so, Indian IT companies have developed competencies by learning how to compensate for poor infrastructure. Now Indian companies, not just in IT but also in global R&D, are doing well and are compensating for another major deficiency in India: India’s education system. In the popular press articles (both are essentially the same), Wadhwa reports that Indian companies are, in essence, educating their employees in-house. Workforce training is being used by Indian companies to correct for the failure of Indian high-schools and colleges in providing properly skilled graduates.

Wadhwa’s Lessons

Wadhwa, writing from an US point of view, draws lessons from the success of Indian firms despite being severely handicapped by the quality of the Indian education system and concludes his BusinessWeek piece with:

The achievements of companies in India show that employee investment, development, and empowerment are central and critical means to building and sustaining long-term competitiveness and innovative capacities in a global knowledge economy. The U.S. can learn and incorporate these lessons from India as it rethinks how to train and develop its workforce to maintain its global competitive edge. U.S. companies have long played the guru. Perhaps the time has come for the guru to learn from a disciple.

Wadhwa concludes his WSJ piece with:

The result of this workforce productivity is clear to see. In the aerospace industry, Indian companies are designing the interiors of luxury jets, in-flight entertainment systems, and collision-control and navigation systems for American and European corporations. In pharmaceuticals, Indian scientists are discovering drugs and performing clinical research for nearly all of the largest multinational drug companies. In the automotive industry, Indian engineers are helping to design bodies, dashboards, and power trains for Detroit vehicle manufacturers — and soon may develop entirely outsourced passenger cars.

The Indian experience highlights what can be achieved by investing in upgrading workforce skills. That lesson has implications for policy makers in the U.S. who worry about how the economy will adapt to globalization. If workforce training can take the output of an education system as weak as India’s and turn its graduates into world-class engineers and scientists, imagine what could be done with an American worker base that has received amongst the best education in the world.

Lessons for us

There are larger lessons we can take away from the paper and the associated reports. The first and the most obvious one is that incentives matter. The firms have an incentive — profit — to create the human resources that they need. It is profitable for them to invest in the training of people and do so cost effectively and efficiently. The training they do has to pass the market test of the benefits exceeding the costs. The corollary to it is that in their drive to seek profits, they are increasing the human capital of the society and therefore are contributing directly to economic development and growth. The corporations are obviously promoting the social good even though that is not their aim. Adam Smith’s invisible hand very much in evidence there.

The second lesson is that markets find a way around. The educational system is under a command and control regime and produces not surprisingly very faulty products. Yet the market given sufficient time figures out a way of recovering from the error the government system leads to.

The third lesson is that the private sector has the ability and the incentive to intervene positively in education. If allowed to, it can not only employ people but it can make them employable. This limited demonstration has a wider implication. Right now, only at the high end of the employment spectrum are firms engaged in creating the human resources they need. But there is only so much demand for high-tech research and development as in aerospace, pharma, automotive design, etc. There is a much larger untouched potential for employment in more mundane sectors of the economy.

Not everyone can be trained to do high-tech work. An economy not only needs a wide spread of abilities and skills, any large population has people with a matching wide range of abilities and who have to be trained appropriately. There’s a need for plumbers, mechanics, carpenters, other skilled craftspeople, and as there is a need for scientists, doctors, engineers, and teachers. Just as in the high-tech sectors firms where training is demand driven, in the other sectors as well one can reasonably expect firms will do their respective training provided that these skills are required in the organized sector.

That last clause — skills required in the organized sector — is important. The organized sector of the Indian economy is estimated to employ only around seven percent of the labor force. The overwhelming majority of the labor force in the unorganized sector is most likely not skilled and is probably poorly educated. Consequently their productivity is low. As the organized sector expands to include more activities within its sphere (retailing is a good example), it too will require trained employees. Here one can foresee the private sector once again stepping in to fill the required gap in the education sector.

As the spread of skills required widens, the private sector will widen the areas in which they do their own private training. The expansion of the organized sector, a natural consequence of market forces, will force a change in the human capital resource base.

Policy Implications

For me, the implications are simple and strong. First, liberalization of the education system. The private sector is quite capable of providing tertiary education. Tertiary education has very high private returns and therefore the market can be expected to provide it. Here’s how it works in short. Take an engineering degree, for example. The cost of the degree has to be less than the net present value of the future stream of earnings. If it were not so, then it is clearly not privately beneficial (nor socially beneficial) to gain the degree. Therefore if one desires and has the ability to gain an engineering degree, one should be able to pay for it as well, unless there is a credit constraint. If there is a credit constraint, then once again the private sector can step in and provide the loan.

What about secondary education? The middle class (and above) is quite motivated to educate its children, and also has the ability to pay for secondary education. Only the poor need financial assistance for secondary education. This can be publicly funded as the returns to secondary education are significantly social.

And what about primary education? The returns to primary education are mostly social and the return on investment is long term. Therefore, primary education has to be entirely publicly funded for the poor; the non-poor can and do pay for primary education.

If the government withdraws from funding tertiary education entirely, it will have funds for the public funding of primary and secondary education for those who require it. Here I would stress one thing: I am talking about government funding, not government provisioning. Providing the education should still be in the private sector. (See the post “How to make India 100 percent literate in three years” for more on this.)

Second policy implication is that there should be greater range of educational institutions. After secondary school, one should have the option of going to a four-year degree college or to going to a two-year “junior college” (the equivalent of a community college in the US.) The junior colleges can be the equivalent of vocational education institutions. These can teach freshly minted high school graduates or even people who want to update or learn some new skills.

The Market Driven Future

If I were to put on my predict-the-future hat, this is what I believe is going to happen. The private sector, driven by sheer necessity, is more or less on track to enter the tertiary education business. This it is doing in a disguised way, as reported in the Wadhwa paper. It is making the best of a bad situation. It would have been much better if India did have a good tertiary education system. But there are limits to how long this disguised education will go on. I strongly suspect that the private sector will eventually twist the arms of the government and force the liberalization of the education system. It is in their interest to see that the people they hire are as whole as possible–it is better to not have to fix damaged goods, so to speak.

The second change I see is the growth of junior colleges, or as I like to call them, “Advanced Basic College” or ABCs. It would take a person about 2 years after high school to become good at some vocation. The graduates of these ABCs will be younger than the graduates of current 4-year colleges and will be better prepared to enter the workforce. These ABCs will be privately owned and will turn a hefty profit. I also believe that they will use information and communications technologies rather intensively for training.

With the LAFIA Delegation

Last month I spent a week in Delhi and Chennai with a delegation from Australia on a program called “Leading Australia’s Future in Asia-Pacific” or LAFIA. It was comprised of senior government officials from Australia and NZ. LAFIA is a joint program run by the Australian National University and the Australian Public Service Commission which visits a set of countries each year to get an in-depth understanding. This year it was Singapore, India and Thailand. I got the opportunity to present my views of where I thought India was headed (and also got to meet and hear some interesting people across a wide spectrum of activities.)

Discussing India with LAFIA delegates was an intensely learning experience. It helped me figure out how I feel about India and it revealed to me what I knew subconsciously but that I had never articulated. What I figured out is this: that India is going to succeed. And that the success is going to be driven by the people of India — through the private sector. Remember that the private sector is made up of people, just like the public sector. It is the people of India with their entrepreneurial skills and their desire to do well that will end up with India doing well.

What I finally realized was that the government could have been a force for good but it isn’t and we have to live with it. The education sector is government controlled and it is bad. But eventually, at significant cost, that system will be made irrelevant. It will become irrelevant because it cannot be reformed. It cannot be reformed because the government won’t allow reform.

It has been observed by many that China’s growth is top-down, or government driven. India’s growth, to the extent that the government has allowed it to grow, has been enterprise and entrepreneur driven, or in other words people driven.

I suppose it was nationalistic pride in me when I was talking to the Australians that made me come to the defense of India. It was not they were attacking India; on the contrary, Prof MacIntyre of ANU who was leading the group, had observed India over a number of years and had been remarking on the positive trends that he saw. He was clearly optimistic. It was that I felt that I had to somehow give a more positive image of India than what was evident to the delegation — the inefficiency, the senseless bureaucracy, the evident poverty and crowding.

In Conclusion: India will be Free

In my concluding statements I told them that India is not really a lost cause because the people are becoming aware of their potential and that they are struggling to get free from the clutches of the government. The quest for freedom is an exponential process. The nature of exponential processes is such that eventually growth is rapid even though the initial changes are not that perceptible. The people through the private sector, as the main driving force behind the private sector, will overcome the limitations that are currently imposed by the government, and eventually overthrow the government where appropriate and make the government irrelevant in others. This can and will happen with a speed that will astonish.

That India of the Nehru rate of growth — 2 percent a year — is a thing of the past.

I read in Wadhwa’s paper a clear indication of what is to come. The story he told was meant for the Americans. He told them that they don’t have to worry too much about the US losing competitiveness as long as its corporations learn to train their workforce more effectively. The story that I took away from his paper is that what Indian corporations are doing in learning best practices from abroad and training their employees is just the thin edge of the wedge. Soon enough it will transform the Indian education system. India would have achieved freedom finally from a rapacious government.

It’s about time, don’t you think so?

“Of course, that does not mean that every poor Indian has chosen to be poor. Someone else in a position of power made choices whose consequences are evident. India’s leaders – past and present – have consistently made choices that have had, and are having, a disastrous effect on the lives of hundreds of millions of human beings.” [From a post made in June five years ago.]

Economic policies chosen dictate the outcome. “Economic growth, development, progress—whatever you call it—is neither inevitable nor impossible. There are lots of examples of economies that continue to struggle with economic growth. And there are many examples of economies that have made rapid progress. What distinguishes the ones that that succeed from the ones that fail is economic policies.” [From a post made in December 2007.]

The fault lies in our economic policies, not the stars. So forget astrology when it comes to figuring out the future. Pay close attention to what economic policies the high and mighty are proposing.

Take the case of the pricing of petroleum products. For a long time to come, India will have to suffer the consequences of controlling them. Messing with prices is inviting disaster.

Omkar Goswami explains in his May 30th column in Businessworld (hat tip: Amit Panhale) how India once again made a major policy mistake in not decontrolling petroleum prices when it had the opportunity.

Any adult can make a mistake once. Even Twice. But when many adults responsible for the economic life of our nation enact the same mistake time and time again, you need to sit up and think. Nothing illustrates this better than the licence-control-commissar approach to the pricing of petrol, diesel, kerosene and LPG.

But I am getting ahead of myself. Here’s the story that will make you realise how peculiarly atrophied we are when it comes to decision-making. In January 2002, the price of crude was averaging less than $19.50 a barrel. It was when oil pundits spoke of a so-called ‘long-term equilibrium’ of oil ruling at around $20-$25 per barrel. It was also a time when a very far sighted man called Vijay Kelkar was the secretary at the Ministry of Petroleum and Natural Gas.

Kelkar figured that $20 per barrel was the best time to start dismantling the regime that controlled the prices of petrol, diesel, kerosene and LPG.

Kelkar produced a report which was ignored. The disastrous effect of controlling prices kept piling up over the years. The result we all know.

Reflect on what we have done. We have bankrupted three good public sector companies: IOC, BPCL and HPCL. We have not allowed prices to ration demand. Now we are talking of rationing petrol and diesel. Worse still, there are crazy ideas about raising petrol and diesel prices by over Rs 10 per litre in cities, but leaving village prices unchanged. You don’t take the right decision at the right time; you bankrupt oil companies and the fisc; you don’t allow prices to temper demand; and then you think of dual pricing which always fails before the ink is dry! What do you say about adults who make the same mistake time and time again? Words fail me.

Sure, words fail Goswami because he cannot use the word “stupidity” in connection with the politically powerful in the main stream media. But on this blog, I say it like I see it. Let me recall what John Kenneth Galbraith had said: “Ignorance, stupidity, in great affairs of state is not something that is commonly cited. A certain political and historical correctness requires us to assign some measure of purpose, of rationality even where, all too obviously, it does not exist.”

NOTES:

1. You may recognize some of the phrases I used are from Shakespeare’s King Lear Act 1 Scene II:

Edmund: This is the excellent foppery of the world, that, when we are sick in fortune,–often the surfeit of our own behaviour,–we make guilty of our disasters the sun, the moon, and the stars; as if we were villains on necessity; fools by heavenly compulsion; knaves, thieves, and treachers by spherical pre-dominance; drunkards, liars, and adulterers by an enforced obedience of planetary influence; and all that we are evil in, by a divine thrusting on: an admirable evasion of whoremaster man, to lay his goatish disposition to the charge of a star! My father compounded with my mother under the dragon’s tail, and my nativity was under ursa major; so that it follows I am rough and lecherous.–Tut! I should have been that I am, had the maidenliest star in the firmament twinkled on my bastardizing.

“Suppose you have two integers, each between 0 and 5. You add them up. What is the range of their sum?”

“It can vary.”

“Sure, it can vary, but what is the largest possible value of the total?”

“Five.”

“I said sum, not average. What is the maximum possible value of the sum?”

“Five.”

[FYI, my original intention was to say these two random numbers were uniformly distributed and ask what the distribution of the sum was. This person had traveled to IIT by train, possibly using IIT money, to do an interview like the above, with the hope of doing a PhD some day. Your tax rupees at work here, folks. Lest you think there was a language problem here, I give another example below.]

“Consider the loops below:
for i = 1 to n
for j = 1 to i
loop body
How many times will the loop body execute?”

“n times”

“How much time does it take to sort n items?”

“Big oh of 1.”

["Uh oh"]

Let’s remember that this student has spent at least 16 years of his life in school (four of which in undergraduate studies). This is a telling vignette which is indicative of how woefully inadequate our educational system is.

Allow me a personal anecdote. Some years ago, my friend and thesis advisor Peter Berck at UC Berkeley requested me to receive a visiting faculty from Delhi University at San Francisco International. The visitor was coming to Berkeley for a summer teaching and research appointment. I went to the airport and hung about for about three hours fruitlessly. The guy was not on the flight.

Later that day I received an email from him from Delhi. It seemed he needed permission from some Indian governmental bureau to take up the summer appointment at UCB. They kept him waiting and denied him permission at the last moment. He did not get on the flight. He was severely disappointed as he was looking forward to being back, however briefly, in Berkeley where he had received his PhD.

Governmental policies matter. And they differ from country to country. Peter told me later that Israel not only allows their faculty to take short-term positions abroad, but that they actually encourage it. They give their faculty full pay even when they are working abroad short-term. They consider it a win-win situation: the faculty member grows professionally through contact with the outside world. The country gains because the terms of employment include the freedom to come and go as they please and therefore a professional is more inclined to work in the country.

I can imagine that really competent professors give up on trying to build a career in India after a few years of struggling with the bureaucratic machinery of India. Not only are the teachers paid poorly but to add insult to injury, they are arbitrarily denied the freedom to pursue their professional goals. The list of top-notch economists (just to take one small sample) that the Delhi School of Economics has lost to the US makes dismal reading.

The hollowing-out of Indian universities should be a major cause for concern. Without the foundation of great universities, it is unlikely that India will ever be able to compete in the world. We should take a break from patting ourselves on the back about how many BPO call centers we have and take a serious look at what ails our education system. Granted that many non-resident Indians are returning to India by the droves, at least as compared to before when the traffic was mostly one-way. But the picture does not look quite as rosy under even minor scrutiny.

The returnees are mainly those who come to India as ex-pats employees of multinational corporations such as Yahoo, IBM, and others. They are managers and executives whose contribution to the economy certainly cannot be ignored but is nothing as substantial as those of professors and researchers. If there is any flow which can be termed as “brain-drain,” it is the one-way migration of those who form the cornerstone of a modern economy, namely, top-class highly educated researchers and teachers, and who not just make the university but are the university. Ultimately they are the ones who train the thousands of bright young men and women who go on to build society in all its aspects—social, commercial, political, and educational.

Clearly, those returning are doing so for personal and professional reasons, just as those leaving are doing so. The liberalization of the economy from the clutches of the government has offered some degree of opportunities in India and thus the limited reverse migration of the managerial and executive class. That should give us a clue: to halt the migration of educators and indeed reverse it, what is needed is liberalization of the educational system. This may be equally, if not more, critical to India’s development as was the liberalization of the economy.

Liberalizing the educational system must begin with the dismantling of the bureaucratic control of the system. There are examples of countries freeing up their educational systems. New Zealand abolished their Department of Education and transformed their dysfunctional school system within a few years to one which is world-class. It is hard to fathom what good bureaucratic control of the educational system does in the first place. What do bureaucrats have to do with education anyway other than not allowing the moribund system from changing?

Bureaucracy rules in the Indian school system. Who is allowed to run a school, what is to be taught, who is allowed to teach, how much a teacher is to be paid, who is allowed to attend and for how long, who must be allowed to attend, how much can be charged—all these things are bureaucratically determined and no freedom of choice is permitted. The system lacks freedom and the not so surprising effect is the system is dead.

I am confident that Indians are no less smart than any other group. Indians are poor because they lack freedom to act, to perform to the best of their abilities. Given the opportunity, in free societies Indians do just as well as the others. It is time for Indians to build world-class schools and universities. It is time for Indians to have real freedom from the government of India, not just the political freedom won from a colonial power over half a century ago.

Right now, in the education sector there is severe competition for the market—a limited number of entrants are allowed. So there is limited competition in the market leading to high prices (and economic rents, part of which has to be paid to the operators of the state control machinery to gain their patronage). Limited competition in the market implies not just high prices but assures low quality also. The people, given the supply constraints, in desperation put up with high prices and low quality.

My prescription is simple. Allow free entry into the education business. Give absolute freedom to schools and universities to charge what they wish, to hire who they wish, to pay what they wish, and to admit who they wish. By allowing free entry in the education business, there will be no competition for the market. There will be competition in the market. Prices will reflect true costs and quality will improve.

One hears the argument that if you allow free entry, would not all sorts of shady fly-by-night operators open up schools and bilk the general public? Let’s paraphrase that argument a bit. If you allow anyone to open a bakery, would not people who have no expertise in baking open up shop and sell garbage to the general public and make tons of money? Now that is a stupid argument, is it not? After all, unless the general public is totally brain-dead, the bakeries with crappy bread will go out of business because given free entry, there will be other bakeries. It is only when the government hands out limited number of licenses for bakeries that the people don’t have any choice but to take what they can get from government licensed bakeries.

Of course, one must distinguish between different levels of education. First, there is primary and secondary education: all, irrespective of their ability to pay, must have access to that. The government must help those who cannot pay by financing their education. School vouchers is the mechanism. The government must not be in the business of running schools—whether primary or secondary.

Next there is college education. Again, the role of the government is limited here. For those who cannot pay and are credit constrained, the government should guarantee educational loans which are given by financial institutions.

That’s it. Get the government out of the education business. And within a generation you would have India really shining in education.

A recent video Some Lessons from Economic Reforms in India features Montek Singh Alhuwalia, and has Brad DeLong, Richard Eckaus, and Nurul Islam as discussants. From the site, here is what I gather.

Gradualism is what Indian reforms are about. Reform works slowly in India because the political establishment has to be pushed to liberalize the system. Thus gradualism in the reforms is forced on the system due to India’s participatory democracy. The push is mainly from technocrats from within the country and not from outside as in the case of many developing countries. Reform such as privatization is therefore home-grown and internally initiated and not as a part of the Washington Consensus type of externally imposed condition.

Ahluwalia notes that gradualism in reform reduces the pain but postpones benefits as well. It also allows opponents time to mobilize against reforms.

The site summarises Brad DeLong’s commentary:

” … the Indian experience allowed the losers in the process the time necessary to make adjustments. He said the lecture left listeners with the hope that technocrats can move democracies. He complimented the privatization process Ahluwalia described by suggesting the Latin American experience left it vulnerable to interpretation that it was a corrupt process. The Indian experience also suggested to DeLong that sequencing is possible via gradualism. India’s comparative advantage in the future, DeLong suggested, would be through further integration of technological knowledge and skills in its service sectors. He alluded to the fact that US domestic politics and international trade issues will also have a large impact on India’s development. He asserted that the US needs to open its markets to Indian goods, and the benefit would be to both countries.

My reaction to India’s reform is basically: It’s about time! I understand why it took so long and why it is going so slow. Fundamentally, the rigidity of the Indian system opposes any reform. The structural rigidity is due to the bureaucratic system designed by the British government to control the Indian economy for exploitation, and not meant for development. When the British left, that bureaucratic system was not dismantled because the political system which inherited the government of the country found it expedient to use the bureaucracy for continuing to exploit the economy for perpetuating its own hegemony over the country.

It took over four decades since political independence for the extractive political party to lose its stranglehold on the economy. The economy started gaining a degree of freedom. One must note that liberty — freedom — is implicit in the world “liberalization”.

We should also note that liberalization is not the same as privatization. Privatization happens if what was in public sector is moved to the private sector. Liberalization of a sector is about allowing firms to enter a sector and letting market forces to determine the actions of these firms, rather than by dictat from up on high. The Indian telecommunications sector, therefore, can be said to have been liberalized but not privatized.

If one thinks about it, one soon realizes that the larger society is what determines the politics of a country. And then the politics determine the economy of the country. Unless the politics change, the economy cannot change. And the politics don’t change until the society changes. Therefore, fundamentally, it is social change that lies at the root of all economic growth or disaster.

India’s economy is poor because Indian society is poor. It is an easy conclusion to arrive at but an immensely bitter conclusion for an Indian to accept.