Shri Narendrabhai Modi

Here’s a story in India Today on water in Gujarat. The prospects of ground water are particularly grim in India. Gujarat is, however, another story. There the trend is hopeful. Narendrabhai knows what’s important.

When Chief Minister Narendra Modi took over in 2001, he laid emphasis on creating farm ponds in areas like north and central Gujarat where building check dams was not very feasible. As a result 1,81,00,000 farm ponds have been built till date at a cost of Rs 181 crore. Farm ponds are built in that part of a farm where rain water collection happens in natural course.

In 2003, the Gujarat Government launched the Gujarat Green Revolution Company to propagate sprinkler and drip irrigation technology among farmers by giving them hefty incentives. Rated as the best in the country by the Union Agriculture Ministry for last three years, this initiative is one of the reasons why the groundwater level is getting recharged in the state.

. . .

Then there are other big irrigation schemes which have helped in enhancing the water table in Gujarat. For example, in north and central Gujarat, the mud canal of the Sujalam Sufalam Yojana played a key role in bringing up the water level. . .

Besides these long-term projects, certain short-term initiatives have also worked wonders. Last year, Gujarat had a bad monsoon but when the Government realised that rains could hit the state in the last leg of monsoon, it launched a quick water conservation drive by building boribunds (very small dams made by blocking small rivulets with the help of sand bags). In 20 days, over 2,50,000 boribunds came up as a result of a joint effort by the departments of rural development and forest management, NGOs and village committees.
. . .

In 2009, Gujarat registered 9.06 per cent agricultural growth rate while the nation’s growth rate was less than three per cent. The total cultivable area in Gujarat has increased by a phenomenal 15 per cent in the past 10 years. During that period, Gujarat’s agro production has jumped from Rs 18,000 crore to Rs 49,000 crore. The state increased its cotton yield six-fold from 175 kg per hectare to 798 kg, more than the world average of 787 kg.

“Gujarat has set the finest example of groundwater management through indigenous and modern methods and through people’s participation,” says Tushaar Shah, senior fellow at the International Water Management Institute. When Jhamka and Khopala did it, the rest of Gujarat wondered why not they. It’s time the rest of the country asked the same question.

Go read the whole article.

I am hoping that India gets the kind of leadership that Gujarat has had.

Another piece of good news before I conclude this. I am off to the US in a couple of days. I will be in the San Francisco Bay area Monday onwards. For starters, I will be on a road trip. Blogging will be light, as it has unfortunately been in the last couple of months. But there’s a rather large archive and if you find nothing new to here, please do visit some old stuff.

Be well, do good work, and keep in touch.

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.

Bardhan notes that “dignity politics” is one of the debilitating factors. He writes:

. . . even when the [lower classes and castes] come to power, the issue of basic social services gets low priority in comparison with larger symbolic issues of dignity politics (particularly in North India). A perceived slight in the speech of a higher-caste political leader resented by a lower-caste one will usually cause much more of an uproar than if the same leader’s policy neglect keeps hundreds of thousands of children severely malnourished in the same lower caste. The issue of job reservation for backward castes catches the public imagination more fervently than that of child mortality or school dropouts that afflict the majority in those communities. Thus the demand from below for those basic social services is as inarticulate as their supply from above is deficient.

About the demand and supply of basic social services — a missing market of sorts — I too have concluded that the demand arises from an awareness of what is excepted expected, which awareness depends on the basic education system. Public education — by which I mean the education of the public about matters of civic, economic and social importance — is missing. I think that the focus of the government-controlled education system is on raising the peak education level of an elite (the IITs, IIMs, IISc, etc) rather than raising the education level of the citizenry broadly. My cynical conjecture is that the political leaders do understand that they their feet will be held to the fire if the people become aware of the misgovernance.

A lot of books with rousing titles such as “Imagining India” and “India Unbounded” have become hits. Most of them studiously avoid mentioning the dysfunctional — perhaps out of concern for sales figures or perhaps from a fear of displeasing the political powers that be. What we need to do is to look at issues that most would rather sweep under the rug and pretend that they don’t exist. Corruption, for instance, is widely regarded as a problem but I would argue that it is a symptom of deeper causes which are intertwined with other deep causes which form the basis for a whole host of symptoms such as corruption, poor educational system, lack of accountability, the persistence of social conflict, etc.

Bardhan notes that India’s heterogeneity poses problems that don’t arise in more homogeneous societies:

In very recent years, there are some faint signs that good governance is being rewarded by the electorate in some areas. Collective action in demanding and ensuring good governance is, however, particularly tricky in India on account of the extreme heterogeneity of social and economic interests involved, which always makes unified movement on goal formulation, agenda setting and policy pressure difficult to achieve for diverse groups, who in anticipation of this difficulty often opt for populist handouts and clientelistic arrangements instead. As a society we are much more diverse than, say, Japan or China, and coordination on most issues is more difficult here than in those countries. Sociologists have pointed out that extreme social heterogeneity in India is also a major cause of hierarchical industrial relations with attendant mutual distrust and labour supervision problems, and relatively low labour productivity in Indian factories.

I think that the way out of this problem is for the state to be totally blind to the markers of heterogeneity. For instance, the state must not ever inquire about the personal attributes of a person that have no bearing on social services. Thus, the state must not discriminate on the basis of religion. Whether or not a citizen is eligible for economic assistance, for example, should depend on the merits of the case and not on what that person’s religious affiliation is. The moment the state privileges one group over another, it invites the social evil of group-based divisive politics and, as Bardhan puts it, “populist handouts and clientelistic arrangements.”

India’s governance is arguably bad. The party that has been almost exclusively in control of that misgovernance is the Congress party which has been the fiefdom of the Nehru-Gandhi family. The incompetence of the party and that family has been demonstrated beyond the shadow of a doubt. But as I have argued before, they are not there through some divine edict; they are there because the people of India find misgovernance by the Congress and the Nehru-Gandhi family acceptable. The fault, dear reader, lies in Indians and not in the leaders that they freely elect.

“Tell me more,” says I. “You were talking to someone on the phone just now and you said ‘890′. What was that about?” I asked.

“That’s the price that I was negotiating for transporting one metric tonne of goods between Mumbai and Raipur,” replied RL.

I had no idea of how this truck transportation business works. For no particular reason I inquired further.

“So how many metric tons does a truck normally carry?” I asked.

“About 35 tons,” RL said. “But that’s above the allowed limit. The limit for the average two-axle truck is only 16 tons. But if you stick to that, the numbers don’t work out.”

“So you mean to say that the trucks are overloaded?” I said.

“Of course. At the allowed 16 tons max, it would cost 1200 rupees per ton to move material. So we just pile on whatever to break even. It’s a competitive market,” said RL.

“But then aren’t there checkpoints along the route? Don’t they figure out that the trucks are overloaded? Are there weighing stations where the trucks are weighed to see that they are within the limits?” I asked.

“Yes of course. There are many RTO checkpoints. The deal is simple. Every month, for each truck, there’s a schedule of payments. Say between Mumbai and Raipur, the rate is Rs 20,000. Once you pay that for a truck, you are free to load the truck to whatever the truck will bear, never mind the legal limit,” RL said.

“And how many trips does that cover?”

“About 5 round trips a month. On an average it takes three days each way. Works out to about Rs 2,000 per transit. But it allows you to keep the costs down and therefore it works out for all concerned,” says RL. “It’s routine stuff. Once you pay the 20,000 rupees, there are not more hassles. You only pay at one central location and the money is divvied up among the various stakeholder along the way,” replied RL.

“And who are the stakeholders?” I ask.

“You know, everyone. All the way up to the concerned state and central government ministers. There is a regular schedule.”

“Wow! That’s really neatly done. So even the top politician must be getting his cut,” I said.

“Naturally. It would not happen otherwise. Everyone has to have his share, otherwise this could not happen,” said RL.

“What’s the deal?”

“Let me give you the short version,” RL said. “The truckers have to carry more than the legally mandated load. Otherwise it would be too costly per ton. To get around the legal limit, you have to bribe the RTO — the road transportation officials. There are many check points along the route. It helps that the bribe is collected at one point and that too for the entire month. Otherwise it would take too long. Anyway, the collections are passed on to various people, all the way to the top. Government ministers and other bureaucrats, you know. But this scheme works only because there are other interests tied to it.”

“Like what?”

“Consider the truck manufacturing companies. They make more money because they sell more trucks which are rated at a lower carrying capacity. So they are not interested in raising the legal load limit. But the overloading of trucks is good for the RTO. They make money in bribes. That’s not all. The government builds roads. Right? OK, so they get contractors to build roads that are rated to carry say 16 tons per truck. Naturally with trucks carrying 32 or even 45 tons, the roads get f**ked. The contractors make money from repaving the roads frequently. The kickbacks from the contractors for road repairs ends up in may pockets, mainly the politicians. It’s huge. Road repair is huge business,” RL said.

“Is that all?” I asked.

“No, there’s more. It’s a dirty business but then what do I know. I have been in this business for a couple of decades and that is why I know the ins and outs of this one. What do I know about what goes on in say the tire business. Or the container shipping business. You don’t know about the trucking business but I do. But then we are equally ignorant about all the rest. It looks as if this sort of corruption cuts across every aspect of business in India. I have to play the same game because otherwise I could not survive in business.”

“Surely you could refuse to pay the bribes and refuse to ply overloaded trucks,” I said.

“No I cannot. I cannot refuse to play this game because no one can survive in business if one refuses the deal. Never mind me, you cannot survive in politics if you refuse to play along. A fellow got elected as the MP for a constituency close to where I live. He’s not a career politician. It just so happened that family was owed some favor and he got a ticket from this party and he won. Quite a decent fellow, actually. But totally naive about how things work.

“He didn’t know what he was expected to do and how much he was supposed to charge for the deals that he was supposed to help with as a member of parliament. Anyhow, the people who needed to get their interests taken care of had to help the MP learn the ropes. They put people in his office who would tell him which document to sign and how much he was to be paid for each of his signatures. Like I told you, the guy is a decent fellow. He does not know now but in a year he will know the game. And he has to participate in it. Or else,” said RL.

“Or else what?” I asked.

“Else he won’t get elected. If he refuses to take bribes, the work will not get done. More importantly, the political party that he is part of will not make the money that they need to fight the next elections. If he is clean, he would be throwing a spanner in the works. He will be replaced by someone who doesn’t have scruples. He either plays the game or he is out. In a year he will be as corrupt as the rest of the bunch. OK, so he may have got the job of an MP when he was naive and stupid but by the middle of his term, he would have learned what he needs to learn to survive. Why on earth do you expect otherwise? If the guy giving you orders, your boss, is corrupt, just to keep your job you have to be corrupt. Else you don’t play. You don’t get a ticket. You are a spoiler. You wreck the whole deal. You are not a part of the team. They will find a more complaint person.”

I had heard enough. We moved on to less trivial matters. But I continued to worry about the issues raised in that conversation.

It is collectively rational for people to not be corrupt but it is individually rational to be corrupt in a corrupt system. Corruption does not work bottom-up. It works top-down. If the guy at the top is corrupt, you are forced to be corrupt. Why forced? Because you don’t get to make the rules. You only get to decide whether you want to play the game based on the rules that have been dictated by the guys on the top.

The guys on the top make the rules. And if they are corrupt, that’s just the way it is.

I spent this summer talking about matters that lead to economic development. I was teaching a course on economic development at Berkeley. Corruption and its corrosive effects on economic development was a major theme. I tried to get the idea across that poor countries are poor because the system they have in place makes it impossible for non-corrupt actors to play a role. More depressing is the realization that corruption itself causes the poverty that makes the corrupt make the rules. I put it this way in the course — “The corrupt gain power and the absolutely corrupt gain absolute power.”

It is perhaps naivety that makes the so-called leaders like say APL Abdul “Dr” Kalam lecture school students about the moral incorrectness of bribery. Or perhaps it is just plain obtuseness. But I think it is more likely that it is plain pragmatism that motivates people in high places to emphasize corruption at the mundane level while turning a blind eye to corruption at the top — at the level of central government ministers and bureaucrats — because the guys at the top owe their exalted position because they are corrupt. Absent moral turpitude, they would not have reached the top.

Corruption at the lower levels is a survival mechanism. The small-time businessman like my friend RL is just a pawn in the game. He does not have any more influence on how the system is defined any more than he can dictate the laws of physics. The guys at the top, the guys who make the laws, they are the guys who define how the great economic game is to be played. And eventually this great economic game determines how much stuff is produced. Because of the rules of the game, the amount of stuff produced is lower than what is potentially achievable. Dividing up the production is the next innings. There too they have a good racket. Instead of figuring out ways to increase the amount produced, they are busy figuring out who should get how much of the limited stuff. And the division is made strictly upon the calculus of who is going to vote which way.

India is famously touted as the largest democracy in the world. What that means is that the people decide who is going to make the laws. That the system throws up the most corrupt as the framers of the rules that define the economic game is not surprisingly a dire consequence of the choices that the people make. It is not a comforting thought that over the decades of India’s existence as a politically free nation, the people have consistently voted into positions of power those who are arguably the most venal of the lot. But then, is it reasonable to expect something else? Can a people who are almost absolutely ignorant of what the system really is be expected to know what is in their interest? A majority of us are not even literate — and even those of us who are literate, are woefully ignorant of how the system works. I readily confess that I don’t know what the great big machinery of the government of this huge nation is up to. How can I expect that the person who cannot even read the railroad timetable be able to decide which public policy is good and which is not?

So if this is not to be a counsel of despair, I should at least hint at what I consider to be the solution. I think that we — the ones who are have the ability and means to engage in this conversation — have to get out priorities straight. I get asked to support this or that organization which is trying to feed poor school children a mid-day meal. I get impatient at those kind of meaningless and ultimately futile gestures. They perhaps believe that by feeding a bunch of kids meals is going to fix the problem. I don’t deny that it is not important to feed kids. After all, the kids have not committed any crime that they should starve. What I don’t understand is why people don’t take a step back and see that the problem is that there is not enough stuff to go around, and the reason for that is that too much effort goes into extracting rents and too little in figuring out how to make more stuff.

There isn’t sufficient stuff to go around because there are no roads. That’s just an example of what’s missing. No roads is just an example. But the lack of roads is only an instance of what happens when corruption is the name of the game and the rules are made by the abjectly corrupt. I think that it should be the headlines on the newspapers. Instead what occupies the national attention has to do with how made how many runs in some cricket match. Or why someone should not have twittered the words “cattle class” — that matters and not the unspeakable fact that half of India’s children below five a chronically malnourished.

Deva, deva!

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 quote the article below the break, for the record.

Dear UPA Government: Get Us Involved and Lets Get Going
by Rajesh Jain

The verdict is in. A new United Progressive Alliance government is expected to take charge of India next month.With it comes the promise of a change for the better. The new government has the opportunity – and the challenge – to outline a bold vision for India, a vision that fires up the imagination of its people and the vitality of its entrepreneurs.

The new government has to credibly signal its commitment to addressing the major challenges facing India and enlist the support of the private sector in creating innovations for achieving goals that are big, visionary and bold. In the past, whenever allowed the freedom to do so, the Indian corporate sector has risen to the occasion and helped India’s development. It is time once again for the Indian government to present corporate India with a set of truly transformational challenges.

Here is a small set of inter-related broad areas where change is urgently needed and which, with proper government support, Indian entrepreneurs and corporations will eagerly participate in.

–Education: India needs a radically different education system as the current one is dysfunctional and largely irrelevant in the modern context. In a world of rapid and accelerating change, the foundational skill is to learn how to learn. The education system has to produce life-long learners, which the current setup does not permit. Fortunately, a radical re-engineering is possible through the use of powerful tools presented by the revolution in information and communications technologies. To achieve this, institutional reform of the type that encourages private sector participation in education is necessary.

–Energy: Any economic activity, like all processes in the universe, depends on energy. Today’s developed nations achieved their level of prosperity on cheap fossil fuels, an opportunity not available to India’s 1.2 billion people. Fortunately, India is large enough to be able to leapfrog the fossil fuel stage by investing in the development and use of renewable energy sources such as solar and wind. The required investment cannot be raised without leadership which convincingly articulates the vision.

–Urbanization: India’s economic future depends on India’s success at urbanizing its immense rural population. No economy has achieved even middle-income status without being mostly urban. What India needs is to make its agriculture more productive. The labor released from agriculture has to be provided training and opportunities in manufacturing and services sectors. It is important to distinguish between the development of rural areas and that of rural populations. The former is neither necessary nor sufficient for development; the latter is indispensible and can be achieved most effectively by urbanizing them. This challenge is the creation of new, livable cities that would lead the urbanization of the population needed for India’s transition to an industrialized economy.

–Transportation: India is a large country with a large population. For the economy to prosper, people and goods have to be efficiently moved over large distances. India is approximately ten times as densely populated as the US. It therefore cannot afford the solution that works for the US for transporting people, namely, air travel. What India needs is a land-based system and more specifically a rail-based transportation system, both for goods and people. The technology exists for super-efficient, super-fast rail systems. India has to seriously invest in that and replace the century-old current railway system. Furthermore, within cities, India needs to have an efficient public transit system and not take the unsustainable, car-centered approach.

–Digital Infrastructure: Although India has one of the world’s cheapest and extensive mobile networks for voice communications, its data networks are quite inadequate. India needs to make serious and large investments to upgrade its digital wireline and wireless networks to create a high-speed, ubiquitous envelope of data connectivity across the nation. This is what will spur the creation of the next-generation of entrepreneurial outfits creating world-leading applications and services for the domestic market.

–Governance: India has to make judicious use of its financial capital. The problem is that the current leaky system does not allow the most effective and efficient use of those resources. What is needed is to leverage technology in better governance though citizen participation. Technology can enable citizen oversight of public spending and enforce accountability. Innovations such as smart national ID cards and eVoting can increase participation in democratic processes.

India has a limited window of opportunity for getting its policies right so it can participate successfully in a globally very competitive world. It missed many previous opportunities but cannot afford to miss this one. The time has come for government and corporate India to come together to Think Big and drive the disruptive innovations that India so urgently needs to move rapidly up the development ladder.

Good luck, India. You desperately need it.

It seems to me that the biggest barrier to moving ahead is the complacency that comes from having convinced oneself that one has already arrived. Indian leaders talk glibly of India being this or that superpower; they talk of “second fastest” this or “second largest” that. They talk glowingly of the “demographic dividend.” I can understand why they do that. If they were to admit that the population has grown beyond what is good for the country (and more importantly for its people), then they will have to admit that they screwed up — just as their hallowed leaders such as Nehru and Gandhi did.

They figure that the best thing to do is to twist this unpalatable fact and make it into something desirable. The easiest way to avoid having to fix is vice is to pretend that it is a virtue. (When people screwup in software design, they label bugs as features.)

Mr Das quotes his mother approvingly at the start of the article.

She had asked, what is the difference between China growing at a rate of 10% and India at 8%? I replied that the difference was, indeed, very significant. If we were to grow at 10% we could save twenty years. This is almost a generation. We could lift a whole generation into the middle class twenty years sooner. She thought for a while and then said gently, “We have waited 3,000 years for this moment. Why don’t we wait another twenty and do it the Indian way?”

I think that the next time I see a starving person on the street, I will quote her. I am sure that the children on the railway station would be quite content with a bit of wait. What’s a lifetime of hunger, pain, deprivation, and misery when in just a few generations, in a matter of decades, India will be better than China? I am sure that the hundreds of millions of below-five malnourished children would be quite satisfied with this explanation and not bother us for food.

What strikes me speechless is the idiocy that people are willing to sprout just to camouflage their feeling of guilt and inadequacy. Better be branded an idiot than a heartless person.

Mr Das points out the Tiannmen Square massacre and says that in India this sort of thing would not happen. I am afraid that Mr Das is not familiar with the massacre of Sikhs that the Congress party of India engineered and in which thousands of innocent Sikhs were murdered in cold blood. After more than a quarter century, the criminals are still roaming free on the streets of India. Someone should clue him in.

What I really don’t like is the cherry-picking of evidence in support of dubious claims. Sure China has problems — no country is governed by enlightened bodhisattavs and buddhas. But even to imperfect humans is granted the ability to make rational economic policies. It is does not require superhuman skills. Lots of countries around the world have got their economic policies right, and have created the institutions that enable the society to function as well as can be done given the constraints. The matter that Indians need to keep confronting is why is India so desperately poor. Because by pretending that in some mythical future India would be better than China is all very fine in the debating halls of Oxford or Cambridge but that does not move us one inch towards solving the urgent problems India faces in the here and now.

Here’s as fine a bit of denial as you are ever likely to come across in print:

Because the Indian state is inefficient, millions of entrepreneurs have stepped into the vacuum. When government schools fail, people start private schools in the slums, and the result is millions of ’slumdog millionaires’. You cannot do this in China. Our free society forces us to solve our own problems, making us self-reliant. Hence, the Indian way is likely to be more enduring because the people have scripted India’s success while China’s state has crafted its success.

The state fails and that failure is a feather in the cap of India? Wow!

We are self-reliant while the Chinese depend on the state! How is that supposed to comfort the 700 million or so Indians who have to subsist on less than $2 a day?

And then Mr Das ends on a truly amazing note:

This worries China’s leaders who ask, if India can become the world’s second fastest economy despite the state, what will happen when the Indian state begins to perform? India’s path may be slower but it is surer, and the Indian way of life is also more likely to survive. This is why when I am reborn I would prefer it to be in India.

Unlike Mr Das, I am not privy to the private worries of the Chinese leadership. I can only guess that the Chinese leaders are more concerned about how to grow their $3,000 per capita annual income to $30,000, and what they need to do to challenge the US for world superpower status. I am not so sure that India with its $1,000 per capita annual income (and the “second fastest” growth rate) is something that they lose much sleep over. I somehow think that they would not waste time debating the proposition whether the future will belong to China or to India. I believe that they know (and so does Mr Das) that China has beat India fair and square here and now, and that is what matters.

If you have to rationalize your failures by pretending that the future is going to be different, you might be a third world country.

Mr. Kumar had come to Lucknow from a small village eight days before, leaving his wife and four children behind. He hadn’t found work yet. He tried lowering his daily price from 100 rupees to 80 and then 60, without luck. Like many of the workers around him, he was sleeping on the ground by the temple.

One could safely assume that Mr Kumar’s parents were not well-off and further that he has half-a-dozen siblings. Since he did not get any education, the best he can do is provide unskilled labor. The aggregate supply of such unskilled labor relative to aggregate demand depresses the price of labor to subsistence (or below) levels. Mr Kumar, in his turn, continues the tradition of parenting the next generation of unskilled labor by producing not a couple but four children. This is great for depressing the price of labor and naturally for the upper socio-economic strata which the policymakers inhabit. What literally kills the poor is great for the non-poor. The poor apparently very willingly participate in their own destitution through their fecundity.

These poor then go and vote for the likes of Mayawati. She controls the public purse strings and as the article notes,

Urvashi Sharma, a local activist, says the Uttar Pradesh state government has allocated huge sums on projects of limited social value, including a $90 million monument being built to honor political leaders near the Gomti River. It involves a massive domed monolith and public meeting area stretching over several city blocks, with a statue of Uttar Pradesh chief minister Kumari Mayawati across the street and a gallery of giant stone elephants, her political party’s symbol. Navneet Sehgal, the state’s secretary of urban development, says the project is an economic stimulus and has created jobs.

Navneet Sehgal is an idiot but understandably so because most likely he has no clue about what causes what. However, Mayawati is not an idiot. She fits the pattern of Indian political leadership which has, since independence starting with Jawaharlal Nehru (after whom the great Jawaharlal Nehru Urban Renewal project is named), been of parasites with the morality of pond scum.

But Mr Sehgal and Mr Kumar probably support Mayawati at the polls. It is hard to feel sorry for people who work hard at inviting the disasters that they suffer. What bothers me is that this cycle of stupidity and misery is hard to break through reason and rationality and will eventually only be broken by nature’s vicious intervention.

Coming back to the title of the WSJ piece: megacities are not choking India; people are choking India.

Generally speaking, Indian rural populations and subsistence agriculture are almost exactly congruent notions. As long as that equation persists, India will continue to be underdeveloped and poor. The reason is that subsistence agriculture does not scale, and therefore the productivity is bounded by a very low limit.

One can move beyond subsistence agriculture by raising agricultural productivity. There are two distinct ways of doing that.

Case A: You raise the productivity of agriculture by some means such as using more capital (more mechanization and more energy, for instance). Basically, you “pull” the productivity up without any provocation such as a shortage of labor.

Raising productivity means the same (or even increased) production requires less labor. The surplus labor can then just sit around in the rural areas or migrate to the urban areas to live in slums. Here the labor is “pushed” out of agriculture as a consequence of the pulled up productivity.

I call it the “productivity pull, labor pushed” scenario.

Case B: You somehow “pull” labor out of the agriculture. There are many ways but let’s just say that industry is booming and requires labor. That means jobs in the manufacturing sector. Also imagine that the manufacturing sector jobs require some degree of skills but which can be acquired in a short time and on the job itself. So the labor gets pulled out of agriculture and into manufacturing. Now agriculture gets “pushed” to increase its productivity because there is a shortage of labor in the rural sector.

I call this the “labor pull, productivity pushed” scenario.

The two scenarios have distinct distributional outcomes. In the first case, average incomes in the rural sector don’t go up. Those who continue to be employed in agriculture do see their incomes go up because of greater productivity but that is balanced by the lowered incomes of those who are rendered unemployed. The increase in productivity merely takes from one segment of the rural labor force (those previously employed) and transfers that to those who remain in agriculture. Furthermore, there is no labor linkage between the non-agricultural and agricultural sectors.

In the second case, the average rural income goes up. Increased productivity means increased average income because the labor force has contracted. The labor released from agriculture ends up in manufacturing. Their incomes in manufacturing is higher than what it was in subsistence agriculture. So the average income of the total rural labor force (which was previously only in agriculture but now is distributed in agri and non-agri work) goes up.

That is what can be called “inclusive growth.” It is a consequence of balanced growth. To recount, the story goes this way:

1. Increase capacity in the non-agricultural sector, such as increased manufacturing or services.
2. This pushes demand for labor in the non-ag sector.
3. Labor from rural areas (agricultural labor) is pulled to urban areas.
4. Shortage of labor in agriculture pushes productivity increases in agriculture.
5. Incomes go up for the entire group that used to be previously only in agriculture.

Why do average incomes go up when labor moves from agricultural to non-agricultural sectors? Because agriculture does not admit scale economies while manufacturing and services sectors do. That’s just the way it works.

Which is why urbanization and economic growth are conjoined twins: you cannot have one without the other. Economic growth is what happens when the labor moves from agriculture to manufacturing and services. Which is another way of saying that when people move from rural areas to urban areas. But that move has to be pulled rather than pushed (in the sense I have defined them above.)

It is interesting to note that sometimes the solution to a problem does not lie in the same space as the problem. This is one such case. The problem of rural inclusive growth has a solution but that solution lies in non-rural areas and in non-agricultural sectors. India’s misplaced focus on rural areas (as opposed to a focus on rural populations) has done a lot to promote mass misery and poverty.

As Einstein had famously observed, no problem can be solved from the same level of consciousness that created it. The mindset that created the impoverishment of rural populations was one which did not understand the economic linkages that connect all sectors of the economy. It was a mindset that separated villages (and even elevated them) and tried to make them “self-sufficient.” Persistence of that mindset guarantees persistent poverty in rural areas and rural populations.

We can spend a lot of time debating how entrepreneurship and innovation in rural areas will help the rural people. But that will be of limited use until one re-evaluates the problem of inclusive growth in terms of the growth of urban India. The solution to rural India lies in the urban India that is waiting to be born.

Related post:

1. ADLI: A Lesson from the Age of Industrialization. [Dec 2003.]

2. The Better, Faster Way to Help Rural India. [July 2006.]

I strongly believe that the only way India can sustain its long-term economic growth is by unleashing and harnessing the creativity of its grassroots entrepreneurs, especially in rural areas. But here is the challenge: these grassroots inventions don’t scale up. Indeed, most rural innovation initiatives such as DesiCrew and grassroots inventions like Mitti Cool, however impressive they may be, are sadly limited in their impact to a local or regional market of a few hundred customers, and end up employing no more than a dozen workers in the local community. What is missing is a mechanism to cross-pollinate and scale up these bright ideas among India’s 250-million-strong agricultural community which lives scattered across more than 600,000 villages.

I find the paragraph interesting. His belief that “the only way India can sustain its long-term economic growth . . . by unleashing and harnessing the creativity of its grassroots entrepreneurs, especially in rural areas” is approximately right. The bit that raises questions is “especially in rural areas.” Surely, “the only way” cannot be “especially in rural areas.” Rural areas and “sustained long-term economic growth” are incompatible and inconsistent. This is puzzling since in the same paragraphs he explicitly recognizes the limitation that rural areas have — a matter of scale.

We need to go back to the fundamentals, as always.

Generally speaking, economic growth arises from an increase in productivity (the amount of goods and services that an hour of labor produces). Productivity increases depend on the degree of specialization, a fact that is well-known since Adam Smith’s 1776 book “The Wealth of Nations.” The degree of specialization is limited by the size of the market. The smaller the market for a specific good (that is, the volume of supply and demand), the smaller degree of specialization it can support, and therefore the smaller the gain in productivity through specialization.

Rural markets are small because of fragmentation. The rural market is fragmented even though the rural population is huge. Integrating the fragmented markets is a big task and there are several approaches to it depending on the good or the service under discussion. For instance, for goods markets to be integrated, the transportation system has to be efficient. For services, if it is a service that can be delivered over a wire, a good telecom infrastructure can integrate the market. But if the service is non-transportable — such as a hair cut or plumbing service — then the only way is through aggregating the scattered rural population.

The natural way that markets become integrated is when the scattered village population moves to aggregate themselves into towns and cities. Cross-pollination of ideas and economies of scale (what Navi mentions in that paragraph), and hence the integration of markets, occurs naturally in dense aggregations of people.

The bottom line is this: India is heterogeneous along all dimensions, including people and places. There are leading and lagging places. The broad policy thrust has to be the development of people, not places. That means, the policy should be the development of people in the lagging areas, not the development of the lagging areas. The complementary policy for the leading areas is the development of the place.

Summary: Develop the people of lagging areas (policy A) and develop the infrastructure of leading areas (policy B). The policies A and B have to be implemented simultaneously. Policy A creates human capital who can (by migrating to the leading areas) become more productive given the infrastructure produced by policy B.

Grass-roots entrepreneurs, the ones mentioned by Navi, regardless of how clever they are, are likely to find limited success as long as they are forced to operate in small markets (that is, having to live in villages.) Larger markets are only available either in places with dense aggregations of people, or where the transportation and telecommunications infrastructure is efficient enough to provide integrated market even with scattered populations.

The long-term sustainable economic growth that Navi talks about in the quoted portion above is not possible in the context of rural areas. As long as rural populations are involuntarily restricted to rural areas, they will be forced to low productivity levels. India’s long-term economic prospects are linked to how effective India’s policies are in transforming the currently rural population into an urban population.

India too needs a bold urban vision, as I have been arguing for a while. Fortunately (or unfortunately, depending on how you look at it) for India, most of India does not live in cities. India does not have to reinvent its cities — it has to build new ones. Fortunately though, the world has learned a lot about building livable cities and India does not have to go about reinventing the wheel: India has to be smart enough to learn from the mistakes the others have made. India can — and must — build efficient cities. That’s the only way out for the hundreds of millions trapped in villages in rural India.

I have been arguing for an rail transportation backbone for India. I proposed an “Integrated Rail Transportation System” in July 2005 (with follow ups here and here.) Broadly I have been arguing for a rational urbanization policy, an energy policy (which stresses the long term goal of developing non-carbon based energy technologies), a mass transportation system, and a modern educational system.

Here, for the record, are some bits from the NYT article:

. . . Europe and Asia began to supplant America as places where visions of the future were being built. The European Union spent decades building one of the most efficient networks of high-speed trains in the world, a railway that has unified the continent while leading to the cultural revival of cities like Brussels and Lille. And environmental standards for new construction were not only encouraged, they became the law — and have been for more than a decade.

This investment in traditional large-scale infrastructure projects is increasingly being coupled with serious thinking about the future of cities themselves. The Swedish government recently began a promising competition for a design that would replace a decrepit 1930s-era bridge in the heart of Stockholm with a seamless system of locks, roadways and shops. In Madrid the government is completing a plan to bury a four-mile strip of freeway underground and cover it up with parks and new housing. And only a few weeks ago the French government concluded a nine-month study on the future of metropolitan Paris. The study, which included some of Europe’s most celebrated architects, is the first phase in a plan to create a more sustainable, socially integrated model of “the post-Kyoto city.”

Even China, a country where centralized planning often looks like a grotesque parody of American postwar development, is beginning to move toward more sustainable, dense urban models. The government recently announced an $88 billion plan for freight and passenger trains that will link every major urban center along the country’s coast, from Beijing to the Pearl River Delta. And it is building miles of subway lines in booming cities like Shenzhen and Guangzhou.

Whether personal or societal, transformations generally require will and vision. In the case of personal transformation, unless one is a schizophrenic, a combination of intelligence, basic human values, determination, foresight and will is sufficient. For social transformation, something more is needed. Clearly leadership matters.

Here’s something to think about. Below the fold is an extended excerpt from the book, “Lee Kuan Yew: The Man and His Ideas” by Kwang, Tan and Fernandez. Indian leaders ought to take note. Or at the very least, they should read what Lee Kuan Yew has accomplished.

When Lee Kuan Yew wanted Singapore to become a garden city, to soften the harshness of life in one of the world’s most densely populated countries, he did not write a memorandum to the environment minister or to the head of the agency responsible for parks and trees.

He did not form a committee nor seek outside help to hire the best landscapists money could buy. For one thing, in the 1960s, when he was thinking of these matters, money was in short supply. In fact, having been unceremoniously booted out of Malaysia, the country’s economic survival was hanging in the balance. For another, there was no environment minister to speak of then, so low down in the list of priorities were these matters. When jobs had to be created and communists fought in the streets, only the birds were interested in flowers and trees.

But Lee was interested. And he became personally involved in the project of transforming Singapore from just concrete and steel to concrete, steel, trees, shrubs, flowers and parks. He would become personally knowledgeable about soil and vegetation, trees and drainage, climate and fertilisers. And he surveyed the world for ideas, taking advantage of his travels abroad to look out for them. In France, for example, he discovered that the broad tree-lined boulevards were possible because a drainage system had been built below the pavements. Around each tree was a metal grating through which surface water flowed into the underground system.

The problem of the grass in Singapore, which everyone could see in the bald, yellow football fields, needed a nationwide solution. When he saw beautiful rolling meadows in New Zealand he was moved to ask for the services of two experts from the country under the Colombo Plan technical assistance scheme. Lee was told that Singapore did not have a grassland climate in which rain fell gently from the skies. Instead, being part of an equatorial region, it experienced torrential rainfall that would wash off the topsoil and with it the vital nutrients necessary for strong plant growth. In an equatorial forest, with tall big trees forming a canopy, the rain water drips down. But in Singapore, where the trees had been chopped down, it would all come down in a big wash.

But Lee was not one to let climate get in the way. Fertilisers would replenish the soil, and so began the task of making compost from rubbish dumps, adding calcium, and lime where the ground was too acidic.

Years later, when economic survival was no longer an issue and Singapore’s success was acknowledged worldwide, he was still working at it to make the garden city possible. When expressways and flyovers sprouted all over the island, he had officials look for plants which could survive below the flyovers where the sun seldom shone. And instead of having to water these plants regularly, which was costly, he got them to devise a way to channel water from the roads, after filtering it to get rid of the oil and grime from the traffic above.

The constant search for solutions would not end. When development intensifed even further and the roads and flyovers became broader still, shutting out the light completely from the plants below, he did not give up. The road was split into two so there would be a gap in the middle with enough space for sunshine and rain to seep through and greenery and vegetation to thrive below. “I sent them on missions all along the Equator and the tropical, subtropical zones, looking for new types of trees, plants, creepers and so on. From Africa, the Caribbean, Latin, Middle, Central America, we’ve come back with new plants. It’s a very small sum. But if you get the place greened up, if you get all those creepers up, you take away the heat, you’ll have a different city,” he said.

Making Singapore a different city! That has been Lee’s constant obsession. Even when the difference had to do with trees and flowers, subjects which one would not normally associate with the man who has been at Singapore’s helm for 38 years, 31 of which he served as prime minister, his approach to the problem has been typically hardheaded and pragmatic. For him, the object of the exercise was not all about smelling roses. In the end it was about keeping Singapore ahead of the competition. A well kept garden, he would say, is a daily effort, and would demonstrate to outsiders the people’s ability to organise and to be systematic. “The grass has got to be mown every other day, the trees have to be tended, the flowers in the gardens have to be looked after so they know this place gives attention to detail.” [Source.]

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.

We have had two lectures so far. I am having fun — which is another way of saying that I am learning quite a bit. I think I will share some of what I have learned on this blog in the next few weeks.

The title of the course is pretty descriptive of the content. Manufacturing is what leads to material wealth. India is poor because India is not an industrialized economy. Why it is not an industrial country is a question worth investigating. Whatever the answer to that question, there is little doubt that for India to become industrialized, one of the necessary conditions is that it has to urbanize. Manufacturing requires the urbanization of the population.

More to come. But for now, here’s something that talks about India’s manufacturing. It is from an article from over 100 years ago. It appeared in The Atlantic in October 1908: The New Nationalist Movement in India by Jabez T. Sutherland.

Another cause [aside from taxation] of India’s impoverishment is the destruction of her manufactures, as the result of British rule. When the British first appeared on the scene, India was one of the richest countries of the world; indeed it was her great riches that attracted the British to her shores. The source of her wealth was largely her splendid manufactures. Her cotton goods, silk goods, shawls, muslins of Dacca, brocades of Ahmedabad, rugs, pottery of Scind, jewelry, metal work, lapidary work, were famed not only all over Asia but in all the leading markets of Northern Africa and of Europe. What has become of those manufactures? For the most part they are gone, destroyed. Hundreds of villages and towns of India in which they were carried on are now largely or wholly depopulated, and millions of the people who were supported by them have been scattered and driven back on the land, to share the already too scanty living of the poor ryot [small farmer]. What is the explanation? Great Britain wanted India’s markets. She could not find entrance for British manufactures so long as India was supplied with manufactures of her own. So those of India must be sacrificed. England had all power in her hands, and so she proceeded to pass tariff and excise laws that ruined the manufactures of India and secured the market for her own goods. India would have protected herself if she had been able, by enacting tariff laws favorable to Indian interests, but she had no power, she was at the mercy of her conqueror.

The article is worth reading. It has breadth and more importantly, it is still relevant today. Change some of the names and the nationality of the rulers, the story of exploitation and extraction of wealth — instead of creating wealth — remains the way it was a long time ago.

We have forgotten the history and therefore are doomed to repeat it.

Does makes sense, doesn’t it? Motivating the task is the real job of the leader, not messing around with petty details.

Somehow, Indian leadership has consistently failed in that primary job. Setting the goal and articulating the motivation for why the goal is worth achieving is what leaders should do, and leave all the details to those experts who have professional expertise in the various areas.

Let’s say that the leader wants the educational system to be improved. He or she then should just explain why it needs to be done and get the best minds in the country (or wherever) to figure out how it should be done. The leader should not go into details because it is not possible that he or she is the expert in that domain.

Being unable to acknowledge that one does not have expertize in everything is basically hubris born of a failure of imagination. I see this failure fairly widespread among Indian leaders. Gandhi believed that he had everything figured out: religion, economics, development, history, conflict resolution, etc. Perhaps he could have specialized in conflict resolution and left the economics to those who knew the subject, and left the development to others who had some experience in it. But no! He had to dictate everything.

Same goes for Nehru. Idiot savants are generally phenomenally good at one specific thing and are abysmally below average in most other areas. But if one thinks that one is phenomenally good in every area, then one is merely an idiot without the redeeming savant bit.

A leader figures out which mountain is worth climbing and why, and leaves the actual logistics of the climbing to professional mountaineers, so to speak.

All this is preamble to my critique of Mr LK Advani’s recent address to the Federation of the Indian Chambers of Commerce and Industry (FICCI). At the start he points out that the stock market is down. Fair enough. He correctly characterizes a stock market bubble as “notional prosperity” and laments “greed-driven” financial instruments. “Such undependable devices of the free market economy cannot be the basis for building a truly prosperous nation.” True but I don’t know of anyone who has seriously advanced that thesis that financial shenanigans can be the basis for anything useful.

But more disturbing is Advani’s claim that “unfettered capitalism” is at fault for the distress that the mango man (aam aadmi) is suffering. As far as I can tell, India does not have unfettered capitalism. The financial system is controlled by the government. So are all the organized sectors. Industries have to follow the law of the land which places serious restrictions on what they can produce, how much they can produce, who they must or must not employ, who they can fire and when — the list goes on. India is a socialist economy in theory and in practice.

It is a government of the poor, for the poor, by the poor. The poor outnumber the rich by an order of magnitude. And in a country with universal adult franchise, that means that the governments are elected by the poor. It is definitely government by the poor. Every political party of whatever color (red, green or saffron) is loud in its proclamation that its primary concern is the welfare of the poor. That’s government for the poor.

Surely, after all these years, the cancerous effects of capitalism must have been eradicated from India. But apparently not. There is still some lingering capitalism that needs to be urgently dealt with.

Advani is not happy about “unbridled capitalism”.

We believe that the new as well as the entrenched developmental challenges before India cannot be met by carrying the influence of either free-for-all capitalism or freedom-killing communism. What India needs is a robust, self-confident Swadeshi (nationally-oriented) model of development, which is rooted in the ideals of democracy, equality, justice and integral human progress.

“Swadeshi” is a nice word much beloved of MK Gandhi. It means “self-sufficient.” It is closely related to a word that I love, autarky. I like the sound of the word, not what it represents and its effects. “An autarky is an economy that is self-sufficient and does not take part in international trade, or severely limits trade with the outside world. Likewise the term refers to an ecosystem not affected by influences from the outside, which relies entirely on its own resources. In the economic meaning, it is also referred to as a closed economy.”

Autarky is not a nice thing, nice sounding though the word is to me. Swadeshi too sounds nice but its effects are damaging. Gandhi liked the sound of that word and loved what it did, I presume. So anyway, Advani wants to dress up swadeshi in nicer clothes so that it does not look as bad.

The “Swadeshi re-interpreted creatively” goes this way.

Swadeshi means that national priorities must override policies that have benefited only a minority and largely excluded the majority in the nation’s progress. In other words, just as the centre of gravity of the world economy is shifted from the West to Asia, the centre of gravity of our national economy must shift from “India” to “Bharat” ― to agriculture, revitalization of our villages, small and medium enterprises, and unorganized and informal sector of the economy. . .

Similarly, it sees no conflict between the public sector and private sector. There is no place for dogmatism in favour of or against either, since both have to be strengthened. In view of the recent global experience, the public sector needs to be further strengthened in the financial system and in core sectors like energy.

Swadeshi is not antithetical to cooperation with the international community, just as the concept of Swaraj was not. Nevertheless, its cornerstone is national pride and the belief that the India of our dreams has to be built only by our own genius, with our own efforts, and principally with our own natural and capital resources. India’s problems need Indian solutions.

Swadeshi wholeheartedly embraces the knowledge and products of modern science and technology. It holds, however, that our country should revive its own rich and diverse knowledge traditions and emerge as a major contributor to global scientific and technological progress, instead of remaining mere consumers of outside knowledge.

Swadeshi affirms that business and economy should serve as a means and not an end in themselves, and the higher possibilities of human progress should not be sacrificed at the altar of acquisitiveness, consumerism and environmental destruction.

I will concentrate on the above extended quote in the next post in this series.

In the meanwhile, you may wish to take a peek at my thoughts on Gandhian self-sufficiency.

And for real substance, check out the series on “The Fake PM’s Speech to the CII” from June 2007.

Should governments go with the flow and encourage the growth of cities or should they instead be spending money on rural development?

For the first time in history more than half of the world’s population live in cities -home to some of the poorest, as well as the richest, people on the planet

This mass migration from the countryside to urban areas is now being championed by the World Bank, which believes that cities – slums and all – offer the best hope of ending poverty. Cities, the argument goes, drive economic growth – encouraging entrepreneurship, innovation and wealth creation.

So should governments go with the flow and encourage the growth of cities?

Or should they instead be spending money on rural development?

Featuring some of the world’s foremost economic thinkers – from Nobel laureate Paul Krugman to anti-poverty campaigner Jeffrey Sachs – ‘Slums and Money’ explores the arguments for and against. At stake is the poverty or prosperity of billions.

. . . 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.

Singapore, Oct 10: Mr Lee Kuan Yew, Minister Mentor, Singapore, on Friday said the PURA model advocated by the former Indian President, Mr A.P.J. Abdul Kalam, will not work in bringing about India’s transformation into a developed country.

Answering a question at a session of ‘PBD Singapore’, he said, “He is a great scientist and a very powerful man. I don’t want to cross swords with him.

“But if you study very carefully how other countries have industrialised and become knowledge economies – Korea, Japan, China and Eastern Europe – you will realise you cannot bring urban amenities to rural areas.

“How can you do it? Where is the manpower? How will you get the best doctors to stay in the rural areas?”

Getting into the area of some “hard headed analysis”, he said one needed to look at the fact that while companies such as Pepsi and Citicorp were headed by Indians, “they are outside India.”

The way to do it, Mr Lee Kuan Yew said, was by rapid urbanisation as Singapore had done it (“we don’t have a single village left in Singapore”), or by planned urbanisation, as China was doing it by moving 10 million villagers to urban areas every year. “Look at Brazil: They are building huge centres, factories for making cars, aeroplanes and all kinds of things.”

Villagers are moving to these centres, he noted.

“If you look at ancient Greece – Socrates and Virgil, were they in the countryside?

“They were in the cities where all services were concentrated.”

(Link thanks to a comment by t.)

As I always argue, Singapore got lucky in the random draw for dictators and drew Lee Kuan Yew; India got unlucky and drew Nehru. (Nehru did not know much but had at least tried to educate himself, though somewhat unsuccessfully. But what he spawned — the whole uneducated khaandaan — would not know which end of a book was the correct end to start from.)

LKY is smart. He understands why urbanization matters. He has practical understanding of it. It’s interesting that Krugman who got the Bank of Sweden Prize in economics (the economics Nobel prize) has done important theoretical work on urbanization.

LKY is also very diplomatic. I like the way he says, “I would not want to cross swords with [Kalam].” Basically he means that it would be an uneven match and it would be unsportsmanlike of LKY to fight Kalam.

I think that Mr APJ Kalam was (and still is) very powerful. His PURA model was flawed from the word go and yet it got a huge amount of press and a lot of attention among the movers and shakers of industry. No one of any importance ever spoke out against it. I did but then my name is nobody. I did develop RISC before PURA came along, though. Here’s a comparison of RISC and PURA (Nov 2006).

RISC and PURA are in some sense diametrically opposed concepts. There is of course a superficial commonality of objective: economic development. But even that superficial commonality disappears once the objective is stated in more details.

PURA’s objective is based on what I would call “village centric development” while RISC is about “urban centric development.” PURA is about distributing economic activity among a group of villages and then connecting these villages so that people are constantly moving from one village to another to get something achieved. (In one version of PURA, I believe they want to connect all villages with bi-directional high speed modern alternative fuel buses — which makes me wonder why not implement PURA in Pune since this metropolis lacks a decent public transportation system.)

RISC concentrates all economic activity of a large number of villages in one location so that it can catalyze economic growth through lowered transaction costs, and economies of scale and scope are achieved. PURA attempts to keep people in 600,000 villages and disperse economic activity around the rural countryside. RISC says that the village as an economic social unit is inherently incompatible with development, and that the rural economy can be helped by urbanizing the population in place. RISC is feasible with limited resources while PURA is only possible if there is about $600 billion spare cash. RISC requires minimal government involvement, while PURA is what can be a license-permit-control-quota bureaucrat’s wet dream.

But once again, it is unsportsmanlike to pitch RISC against PURA.

Let’s get a little more wisdom from LKY. Here’s a bit from a 2005 Der Spiegel interview, “It’s Stupid to be Afraid.” (Thanks t again for the link.)

SPIEGEL: You’ve been the leader of a very successful state for a long time. Returning from your time in China, are you afraid for Singapore’s future?

Mr. Lee: I saw it coming from the late 1980s. Deng Xiaoping started this in 1978. He visited Bangkok, Kuala Lumpur and Singapore in November 1978. I think that visit shocked him because he expected three backward cities. Instead he saw three modern cities and he knew that communism — the politics of the iron rice bowl — did not work. So, at the end of December, he announced his open door policy. He started free trade zones and from there, they extended it and extended it. Now they have joined the WTO and the whole country is a free trade zone.

SPIEGEL: But has China’s success not become dangerous for Singapore?

Mr. Lee: We have watched this transformation and the speed at which it is happening. As many of my people tell me, it’s scary. They learn so fast. Our people set up businesses in Shanghai or Suzhou and they employ Chinese at lower wages than Singapore Chinese. After three years, they say: “Look, I can do that work, I want the same pay.” So it is a very serious challenge for us to move aside and not collide with them. We have to move to areas where they cannot move.

SPIEGEL: Such as?

Mr. Lee: Such as where the rule of law, intellectual property and security of production systems are required, because for them to establish that, it will take 20 to 30 years. We are concentrating on bio medicine, pharmaceuticals and all products requiring protection of intellectual property rights. No pharmaceutical company is going to go have its precious patents disclosed. So that is why they are here in Singapore and not in China.

SPIEGEL: But the Chinese are moving too. They bought parts of IBM and are trying to take over the American oil company Unocal.

Mr. Lee: They are learning. They have learnt takeovers and mergers from the Americans. They know that if they try to sell their computers with a Chinese brand it will take them decades in America, but if they buy IBM, they can inject their technology and low cost into IBM’s brand name, and they will gain access to the market much faster.

SPIEGEL: But how afraid should the West be?

Mr. Lee: It’s stupid to be afraid. It’s going to happen. I console myself this way. Suppose, China had never gone communist in 1949, suppose the Nationalist government had worked with the Americans — China would be the great power in Asia — not Japan, not Korea, not Hong Kong, not Singapore. Because China isolated itself, development took place on the periphery of Asia first.

Further down in the interview, he talks about democracy and why he had to do things differently.

The British came here, never gave me democracy, except when they were about to leave. But I cannot run my system based on their rules. I have to amend it to fit my people’s position. In multiracial societies, you don’t vote in accordance with your economic interests and social interests, you vote in accordance with race and religion. Supposing I’d run their system here, Malays would vote for Muslims, Indians would vote for Indians, Chinese would vote for Chinese. I would have a constant clash in my Parliament which cannot be resolved because the Chinese majority would always overrule them. So I found a formula that changes that…

People voting for narrow sectarian interests — sounds familiar, doesn’t it? Worse yet, how the politicians do their best in India to divide the population on caste, creed and religious lines just so as to get the vote. The wonders of democracy in India are a marvel to behold. A few days ago I saw a full-page ad in the Times of India which declared proudly what Mayawati had done to privilege Muslims over non-Muslims. It was a blatant display of religious discrimination and a shameful admission of the failure of the Indian political system.

Singapore gets Lee Kuan Yew. India gets Nehru and soon enough will have Mayawati. Makes you want to weep.

India’s experience suggests that democracy can also hinder development in a number of ways. Competitive populism– short-run pandering and handouts to win elections– may hurt long-run investment, particularly in physical infrastructure, which is the key bottleneck for Indian development. Such political arrangements make it difficult, for example, to charge user fees for roads, electricity, and irrigation, discouraging investment in these areas, unlike in China where infrastructure companies charge full commercial rates. Competitive populism also makes it difficult to carry out policy experimentation of the kind the Chinese excelled in: for example, it is harder to cut losses and retreat from a failed project in India, which, with its inevitable job losses and bail-out pressures, has electoral consequences that discourage leaders from carrying out policy experimentation in the first place. Finally, democracy’s slow decision-making processes can be costly in a world of fast-changing markets and technology.

So what’s the latest on poverty in India from the World Bank? It is reported that the WB released some study which talks about the changes in the recent past. Good news or bad new? Depends on who is reporting the study. Sort of like assessing beauty — which we all know lies in the eyes of the beholder. Rediff says “India has fewer poor people: World Bank“. IBNLive reads the same report and says “Number of poor in India has gone up: World Bank.” (Thanks Dr A for the links.)

How’s that for objective reporting?

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?

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.

Underdevelopment, poverty, and all other ills that plague India are an unavoidable consequence of poor public policies and choices.

One does not have to know criminology to suspect that criminals cannot make good public policy makers. For support of this position, one has to look at the dismal record of the criminals in charge of public policy in India. It is not that every single politician in India is a criminal; only that a significant number of them are criminals. But it is unbelievable that even one member of the Indian parliament should be a criminal. That we don’t rise in revolt against this outrage shows that we have come to accept it as par for the course and have resigned ourselves to it. Worse, it could mean that the Indian population is so morally bankrupt that it finds crime so normal that it elects criminals to political power.

All this lends support to the claim that the people deserve the government they get. Perhaps because the people in general are immoral criminals that they accept — perhaps even promote — criminals to represent them. The resulting Hobbesian existence — solitary, poor, nasty, brutish and short — the majority live is something that they are ultimately responsible for. Until the people change, there is no possibility of a change of leadership, and the consequent change in the circumstances.

But there is still some hope; as long as there is life, there is hope. India has not yet descended to the depths plumbed by its western neighbor because it still has as part of its civil society people who deeply care about the quality of leadership. One organization of note is the Association for Democratic Reforms. I got introduced to it when I met one of its founder members, Prof Jagdeesh Chhokar, in New Delhi last week.

ADR’s mission is “to work towards improving and strengthening democracy and governance in India.” I will leave you to take a look at their many achievements since they started in 1999. Here I would like to share with you some statistics that ADR has compiled. (Thanks to S Ramachandra for forwarding the files.)

Here’s an excerpt from a press release dated July 10th, 2008:

The coming general elections to the Lok Sabha do not forecast a bright future if the composition of the Lok Sabha 2004 at present is any indication. There are 120 MPs with criminal cases against them out of 543, or 22.1%. Among the major parties, the BJP has 29 MPs with a criminal record, the Indian National Congress (INC) 24, the SP 11, RJD 8, CPM 7, BSP 7, NCP 5 and CPI 2.

The number of cases of serious crimes is 333, with several MPs having multiple cases. If we look at violent crimes like murder, attempt to murder, robbery, dacoity, kidnapping, theft and extortion, rape, other violent crimes like assault using dangerous weapons or causing grievous hurt, the Samajwadi Party (SP) leads with 80 cases, followed by BSP 43, BJP 17, INC 16, RJD 9, CPM 5, CPI 1, NCP 2. Other crimes like cheating, fraud, forgery, giving false oaths to public officials and so on have BSP 23, RJD 22, INC 21, BJP 11, SP 11 and CPM 6. [Emphasis added.]

Becoming informed is the first necessary step to bringing about change. So do talk, write, blog, etc., about this. Spread the word. Most of all, blog about this frequently enough that it becomes impossible to not know about it. And put your money where your mouth is — for starters, you could help support ADR. They need Rs 3 crores (US$ 750,000) for the coming 2009 Elections campaign.

For the record, I am publishing their proposal below.

Strengthening Indian Democracy:

Proposal for the coming General Elections in 2008-09

Association for Democratic Reforms (ADR: www.adrindia.org)
July 8, 2008

About ADR

ADR was founded in 1999 by a group of Professors from the Indian Institute of Management (IIM), Ahmedabad and some alumni to work towards strengthening democracy and governance in India by focusing on fair and transparent electoral processes. Since its founding, it has worked with over 1000 NGO partners around India, disseminating information on candidates and political parties to voters. ADR has also worked closely with the media, the Election Commission of India and eminent citizens around the country. Its founder was elected as a Young Global Leader by the World Economic Forum in 2008.

The major impact of ADR’s work is at four levels:

1. Lobbying lawmakers and implementers (various Courts, Election Commission, parliamentarians, etc.) to institute laws and procedures to increase accountability and transparency
2. Strengthen the monitoring of candidates and political parties on accountability, funding and for transparency.
3. Increase awareness among the public about important facts and issues regarding candidates, funding, political parties, elections and democracy.
4. Cause a shift in the profile of candidates winning elections towards people with clean backgrounds.

Sample Impact of ADR’s work

Here is a representative list of impact achieved by the activities of ADR:

1. ADR filed and won two landmark judgments on candidate disclosure of criminal and financial records from the Supreme Court in May 2002 and March 2003.
2. Made transparent the financial details of political parties using the Right to Information Act in 2008 after 14 months of persistence with the Income tax Authorities and the central Information Commission.
3. Has established a network of over a thousand NGOs around the country to do Citizen Election Watch for all major elections since December 2002, disclosing candidate background information to the media and the public.
4. Has initiated Civil Society non-partisan Election Watches in different states:
a. In the Lok Sabha 2004 Elections, 19 States and 5 Union Territories carried out Election Watches.
b. Have conducted Election watches in about 20 states
5. Bihar Election Watch in Oct-Nov 2005 resulted in intense pressure on the Chief Minister designate for the first time perhaps in decades to have a Council of Ministers without any known criminal record.
6. Clearance of lakhs of rupees of outstanding dues to the Government for rent, electricity, phone bills, etc. by Members of Parliament (MPs) before standing for (re)elections.
7. A measurable impact in the fielding of non-tainted candidates by applying pressure on political parties to filed clean candidates.

Objectives for Lok Sabha elections April-May 2009

The coming national elections in April-May 2009 provide a unique opportunity to leverage the network already in place, and the information already collected, to carry out a campaign to further improve democracy. ADR wishes to take a campaign to:

1. Improve the profile of candidates contesting elections: ADR has already achieved this in the past in state assembly elections, but we expect to take this nationwide through the proposed campaign. Political parties have started reacting to media exposure and have begun cleaning up their Act (e.g., see in Sample impact for Bihar)
2. Enable voters to make an informed choice: As of now, the information available to voters is limited, and the existing database of over 25000 candidates with ADR will be used to raise voter awareness significantly.
3. Help keep election expenses transparent and within the legal limit: Again, information dissemination is key.
4. Strengthen democracy by making candidates and parties more accountable to voters and citizens: Our experience shows that in pockets where dissemination was intense, the candidates and political parties did respond. The campaign will take this nationwide.
5. Create a platform or platforms beyond the elections to help citizens and Governments work more closely together: We will use our network of over thousand NGOs in the campaign to achieve this.

ADR has information on all major National and State elections in India since 2002. Specifically, ADR will disseminate information to voters around the country through following means:

1. Traditional print and electronic media,
2. The Internet (though its reach is still limited in India),
3. The network of NGOs,
4. Through mobile technologies(which has grown rapidly in the recent past) ,
5. And Voice technologies.

One time support needed for Lok Sabha elections April-May 2009:

ADR is currently supported for its establishment expenses by the Ford Foundation. However, it does not have financial support for next year’s general elections. This involves 543 seats to the Parliament (Lok Sabha), and involves around 670 million voters. It is the largest democratic election held anywhere in the world. We estimate that a modest $750,000 can help us do the campaign. We are looking for a one time support for these elections.

How the fund will be utilized

The broad strategy is to use the existing information base, supplement it with more research, and disseminate it steadily starting now until the general elections. As mentioned earlier, this will be done traditional print and electronic media, the Internet, the network of NGOs, mobile and voice. Previous experience of such limited campaigns in Gujarat and UP showed good results with positive reaction from political parties.

For instance, we will build Member of Parliament profiles, political party profiles, and election expense information from our existing data base. Dissemination will be done in English and Hindi (the major language that about 35% of India knows) at the very least. We also hope to do it in 7 other major languages.

“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.

I sincerely doubt if Indians are capable of building LARGE world class institutions EFFICIENTLY, without external assistance.

While asking for help does not make anyone particularly proud, I don’t see any shame in approaching a university system consistently known for its high standards and asking for administrative, structural and vision related guidance. This is not a begging bowl scenario, in my opinion. Learning from the best and involving them formally and intimately is an excellent idea, and a respectable form of learning.

Self reliance

I am all in favor of learning from others. In fact, one can achieve very little if one steadfastly refuses to learn from others. (See related post “Ideas on the road to development“, where I discuss briefly the two gaps: the ideas gap and the objects gap. The ideas gap is more constraining and can be bridged by judiciously learning from others. Also see “On Gandhian self-sufficiency” where I argue that ” A goal that seeks self-sufficiency (at any level of analysis) is a prescription for poverty — not just of the body but also of the mind. We are deeply and inalienably connected with all others, however one defines the ‘other.’)

A sure-fire recipe for poverty is to insist on inventing everything before you use it. “Not invented here and therefore we will not use it” is the philosophical underpinnings of the disastrous “import substitution industrialization” (ISI) that Nehru thrust down India’s throat.

Now it is silly to expect Indians to build world class educational institutions by 6 PM next week Saturday if they are only allowed to do so. Today’s world class educational institutions were not built last week. It took them hundreds of years. Indians will not take that long because it has the benefit of the learnings of those institutions. But I am confident that India can have excellent institutions within our lifetimes, iff the government allows Indians the freedom to do so.

Learning by Doing

I am repeating myself but this point is worth repeating till there is no mistaking the essential lesson. There is such a thing as learning by doing. If you allow people freedom to do something, then over time you find some people who get pretty good at doing something. This is a natural process — as natural as natural selection. The marketplace is a strict but fair taskmaster and given sufficient time, it picks winners.

The problem with Indian education is that it is not free. It does not allow the natural selection to take place. The government either runs the institutions (Type 1) or permits some to run educational institutions by licensing them (Type 2). IITs are an example of the former. Those who get the permission to run educational institutions are generally those who have political power or can buy political power. They buy their permissions and run the Type 2 institutions.

IITs

Let’s stick with Type 1 for now. Aditya in his comment writes about his experience at an IIT and his assessment of the quality of teaching there which was good. (Note “was” as opposed to “is.”) But he points out that even the IITs are inflexible and don’t keep up with the times. He thinks it is the mindset which is rigid. I am not surprised. The IITs receive public funding and that is a good thing but only to a limited extent. The drawbacks of public funding are many but the most debilitating bit is that they are prone to political meddling. But aside from all that, IITs operate in a sellers’ market and therefore have very little incentive to actually perform.

Just to remind ourselves, IITs are not universities. They are technical teaching colleges. Their job is to teach some useful technical skill. How good are they at that? I am not sure whether they are any good or not. No one can dispute that some IIT graduates are extremely successful. It is, however, not clear how much value addition the IITs actually do. The top 1 percent of any population can be expected to be good. The IITs, because of their reputation and the fact that they operate in a supply-constrained environment, have the luxury of picking about one or two percent of the applicants. Take any highly motivated bunch of people, select the top few from them, make them compete for grades for a number of years, and it does not matter whether you are good at teaching or not — the resulting graduates are bound to be good.

What if there were hundreds of IITs? What if there were so many that the IITs had to compete amongst themselves to get the best students, instead of the students having to compete to get into a handful of IITs? What if the IIT tuition fees were priced at full cost instead of the heavy public subsidy? What if the intake of the IITs were the average student (instead of the cream of the high-school classes)? If with an average quality intake the IITs produced above average output, one can confidently assert that the IITs do indeed add value; otherwise one can reasonably suspect that the IITs are simply sorting mechanisms merely separating the good students from the not so good.

Other institutions

There are hundreds of type 1 (that is, government funded and controlled) institutions. Most are nothing to write home about with the possible exception of the IITs and IIMs. These successful type 1’s don’t face much competition because free entry is not allowed. Those that the government allows are what I have labeled type 2. Type 2’s don’t pose a threat to the premier type 1’s because the type 2’s are not really interested in performing. Once an institution has the permission from the government, it can get into the business of recovering the costs it had incurred in getting the permission. It can recover the costs because it is also operating in a sellers’ market. Desperate for any sort of degree, people scramble to get into one of these and parents often go into considerable debt to pay for the outrageous under-the-table bribes. Because these type 2 institutions never lack willing customers, they could not really care less about what they teach.

Shifting gears

Let me shift to a different sector to illustrate the major point that I wish to make in this post. Consider the automobile sector in the 1970s in India. There were two manufacturers only and free entry was not allowed. The two companies turned out shoddy cars that were of 1950s vintage. They had no incentive to improve the product because people would be willing to take anything they could get their hands on — and indeed waited for years to get their “allocation.” There was a thriving black market for cars as well. People were willing to pay a premium even for those shoddy cars just so that they won’t have to wait for years. The sector was controlled by the government and for the best of reasons: because manufacturing cars was too important an economic function to be left to free private enterprise that only government control could ensure a plentiful supply, assure quality, and prevent the public from being cheated by unscrupulous private companies.

Imagine that someone had claimed that India could not ever manufacture cars that could meet global standards back in the 1970s. Absolutely reasonable claim. It takes decades of manufacturing cars in a competitive market to learn how to make cars. By not allowing not allowing that learning to occur in the Indian manufacturing sector, the government guaranteed that Indians could not ever manufacture cars.

We all know the rest of the story in the automobile sector. It was liberalized and now Indians are manufacturing cars that can compete in the world markets. But note: India is not a Japan or a Germany in terms of the automobile sector. Indian manufacturers are learning. For now they are collaborating with foreign firms but soon enough they will be competing with the best. For a while now India has been a supplier of intermediate goods to the global automotive sector. (Note especially the phenomenal success story of Bharat Forge.)

Free markets

Analytically the free-market story is simple. Allow firms to enter the market. Let them compete. Firms learn by doing. Let the market pick the winners. The result: world class products. So also the socialist-economy story is analytically simple. Rigidly control who enters the market by predetermining the “winners.” Forbid competition and thus ensure that there is no learning by doing. The result: shoddy products.

The lesson is simple to learn provided one is willing to learn: competition that arises from allowing firms free entry into the market is good for everyone. Refusing to learn that lesson is too costly and India cannot afford not to learn that lesson.

Now back to education. Aditya writes:

I don’t believe Indian universities are far enough along that with the improved communication methods and additional money available that they could be transformed to a world class institution, completely indigenously.

Quite true. India cannot build world class institutions without learning from others. But even learning from others requires a certain degree of preparedness. India cannot build Stanford, Harvard, MIT and Berkeley overnight and cannot do so under the current system of absolute government control of the educational sector. What can it do? India can allow free entry into the education sector. Indian firms will figure out as best as they can what to do. Some will collaborate with foreign institutions perhaps or figure out some other strategy. In the end, the competition will ensure that those that have been most successful in learning succeed in the marketplace.

What will not work is for an “education minister” to go around with a begging bowl to foreign officials for aid in building world class universities while continuing to keep the same old rigid system of government control of the sector. Even in the unlikely event that some foreign government agrees to help, what can it actually do? What does help entail? Will the governments come and build the infrastructure, hire the faculty, set up the research labs, determine the curricula, admit students, teach the courses, conduct the research, administer the tests, and grant the degrees? The best they can do is to say, “We have good universities in our country. Do come by and see what they are doing. Do the same thing.” If Indian cannot learn by carefully observing what it is that makes those institutions tick, I don’t see how else India can emulate — and later surpass — their success.

Liberalization as a dirty word

Now to address the question that Pramode CE raised:

Atanu’s solution?

Liberalise. Liberalise. Liberalise.

That brings up my questions. One, isn’t the Indian education system already “liberalised”?

First, I have often (though not in the present instance) found that “liberalize” is thrown back at me in an accusatory tone, as if I was recommending something dishonorable and immoral. For the life of me I cannot understand what it is that people don’t like about freedom. Does it frighten them to think that they have freedom? Are they so insecure that they find comfort in restrictions on behavior? Have decades of living in a socialistic state where some official sanction is required for even the most trivial of enterprises warped their psyches to the extent that freedom is seen as threatening?

Which part of the cry, “Freedom, freedom, freedom!” don’t they understand? What makes them think that living under bondage and under the paternalistic dispensations of politicians and bureaucrats is preferable to living as free humans? That’s the question that I struggle with. I think that Indians have to introspect deeply and answer that question first before India can truly hope to achieve its potential.

Let me throw out a conjecture: Indians have lived so long in the socialist prison that they have forgotten the meaning of freedom. They falsely believe that they are already free. Are Indians the largest group to suffer a sort of collective Stockhold syndrome?

That could explain the frequently raised objection: “Isn’t the Indian educational sector already liberalized?”

In India today, you cannot run an educational system without government permission. That permission is not given freely but under certain conditions. One condition — not mentioned in the books of course — is a very fat bribe. The other conditions require that you have to be a “trust” or a charitable organization and whatever resources you put into it, you can never ever recover. Then the real shackles come out: everything that you do, you will do only as the government dictates. Whom you hire, how much you pay, whom you admit, what you teach, how long you teach — every trivial matter is dictated by the government. What is worse, the dictations of the government are usually harmful to the whole enterprise and process of teaching and learning.

If this system is called “liberalized,” I am sure that the word means something else to others than what I think it means.

Conclusion

We have a long way to go. The path to development is not easy even with eyes wide open. With eyes firmly shut, it is well nigh impossible to make any progress. India is poor today because Indians lack freedom.

Let’s remember that India was a British colony and therefore Indians did not have freedom, and were dictated to by their colonial masters. The result of that lack of freedom was a steady decline of the economy. By the time the British departed, India was impoverished. In fact, having extracted whatever they could, the British left because the well was sucked dry and little of economic value remained. The institutions that the British had built in India were for the extraction of wealth from India. Controlling every aspect of the economy was the means that the British employed for enriching Britain at India’s expense.

The British have been gone from India for over 60 years. In their place, Indians inherited the system of extraction and exploitation. The Indian government continues in the grand old tradition of the British: control, permit, license, quota. And the effect is the same: impoverishment of the economy and continued misery of the people. Yes, the gora sahibs left but in their place the indigenous brown sahibs are doing quite well.

I am quite sure that corporations are not benevolent higher beings whose only motive is universal peace and prosperity. I am sure that firms supply to my needs out of their self-interest. But in a free market, the firms have to compete for my patronage because otherwise I will go to their competitors. That is what essentially distinguishes private firms from governments: firms have to please me but the government knows that I am a captive and I am powerless against its whims and fancies. That is what frightens me about government control of education: it prevents me from choosing, it denies me freedom.

The denial of freedom is a common enough occurrence in the world for us to be sure of one thing: someone gains and that gain is at someone else’s expense. People wouldn’t be in the denying of freedom business unless it made sense to do so. This is so trivially true that I feel stupid even mentioning this. But then, how frequently do we ask who exactly is gaining by the denial of freedom in Indian education? Someone has to be gaining and we must have a national debate to expose them because the nation is losing any hope of a decent future as a result of their greed. These people should be identified and charged as traitors.

New Delhi, May 27: India has asked Britain for financial and technical assistance to set up a new “world class” university (WCU), nearly half a century after it last asked for foreign help in starting a premier education institution.

Junior higher education minister Purandeswari Devi has also asked her British counterpart Bill Rammell for assistance in upgrading facilities and teaching standards at the Indian Institutes of Technology, government officials told The Telegraph.

I hang my head in shame to see India debased so pathetically. Indians are second to none when it comes to talent, drive, hard work, and entrepreneurial ambition. Whenever they have had the freedom to do so, Indians have demonstrated all those through their considerable success. Until very recently, those success stories have mainly been associated with Indians abroad because it was in free countries such as the US that they had the freedom to achieve their destiny. The government of India, until very recently, following the enlightened policies of socialism, denied its citizens the freedom to achieve, to build, to compete in the world, to serve domestic and foreign markets. To the limited extent that the government has deviated from its avowed socialistic goals of scaling the commanding heights of the economy by controlling every minute aspect of the economic lives of its citizens, the people and corporations of India have prospered and gained global respect and attention.

Why does the government of India continue to imprison the educational system even now? What is the reason that it will not allow Indians the freedom to build educational institutions in India? Why does the government then go out with a begging bowl to foreign governments asking for help with building “world class universities” when Indians are quite capable of doing so?

Do you have any doubts that Indians can build world class institutions of learning? Let us recall that the world’s best universities were in India once upon a time. That was a time when India did not have “The Ministry of Human Resource Development of the Government of India” and did not have a minister for higher education or an education minister. Do you have any doubts that India has world class scholars and professors? Just two days ago I had the honor of meeting two celebrated Indian professors — both working in world class universities abroad. You cannot examine the faculty list of any top class American university without picking out dozens of Indians on it.

Why, oh, why does the government of India have to imprison the education sector? There may be many reasons for India’s pathetic economic performance. (Yes, ladies and gentlemen, let’s be honest about this. India is pathetically poor. Sure the GDP is growing at a respectable rate after decades of 2 and 3 percent Nehru rate of growth but that growth rate is on a really small base. India’s per capita GDP of US$700 cannot be compared to the per capita GDP of the US of US$28,000.) It is my opinion that one of the primary reasons is that its education system is flawed. It is also my considered opinion that the reason for India’s pathetic educational system is that the government has total control over it.

So back to the question: why does the government control the educational system? I believe it does so because it is the life-blood of the economy. By controlling that, it gains a stranglehold on the economy which it can exploit for its objective of extracting every bit of rent that it can. Let’s remember that government is made up of people — the bureaucrats and politicians. People are motivated by self interest. Through their control, they gain personally in terms of power, prestige and most importantly money. Like any monopolist, these people limit the supply of educational opportunities and then ration out the limited supply to favored groups to buy their allegiance. Reservations based on caste, religion and other non-relevant criteria are obvious symptoms of this rent-seeking rationing.

Control is the operative word. The last paragraph of that Telegraph article is revealing. It says,

The universities will be controlled by the Centre but kept distinct from existing central universities, and will be nurtured to compete with institutions like Harvard and Cambridge.

Centralized micro-level control is inimical to growth and development at the macro-level. We have to continually refer to those sectors where the government has relinquished control (even partially) and note how those sectors have prospered. And why shouldn’t they prosper? As I never tire of pointing out, there is nothing inherently lacking among Indians that they cannot build world class companies. It need not be necessarily so but the broad generalization is forced on one after even a cursory examination of India’s economy that the Indian government is the greatest impediment to India’s economic growth, and that the government of India is perhaps the greatest enemy of the Indian people.

Allow me to quote some more from the Telegraph:

Sources said Purandeswari told Rammell at a meeting in Delhi yesterday that India needed assistance in modernising teacher-training programmes in higher education.

Faculty support — a euphemism for greater participation of guest lecturers from the foreign country — was another request put forward by Purandeswari, the sources said, adding that she also dwelt on skill development — educating students for the job market — as a “key issue”.

Rammell is learnt to have told the minister that the UK was in the process of restructuring its own skill development process, and was willing to share its experiences.

The two ministers are expected to meet again in London on July 18 or 19.

The sources said India, at yesterday’s meeting, indicated its desire to firm up details of the plan before the end of the year. Higher education secretary R.P. Agrawal asked Rammell if the deal could be finalised by July, but the British minister evaded any commitment to a timeline. [Emphasis added.]

Now why would the British government official not be overly eager to help India in this regard? Let me try to answer that. If my allegiance were to Britain, the last thing I would like to see is that India become so successful in the education sector that it hurts British interests. In fact, I would wake up every day and give thanks to the gods that the Indian government has crippled India’s education system and thus ensured that Britain continues to gain from the flight of human capital from India. Lacking educational opportunities in India, those among the talented Indians who can afford it are forced to go to the UK and the US for higher education. Once there, they add to the human capital of those foreign countries as they settle down and further enrich their adopted countries. I don’t blame them. Humans value freedom like they value the air they breathe: without it, they suffocate and die.

(Aside: Just moments ago, the power failed. Yesterday afternoon where I live in Pune, the power failed about a dozen times, with outages ranging from a few minutes to half an hour. God alone knows how long this failure would be. Power here is predictably unpredictable. My laptop power will last about 3 hours and I just hope that the power returns before too long. You need not ask which agency is responsible for power in Pune. It is the Maharastra State Electricity Board — a government undertaking. Now back to the current rant.)

So will the US and the UK help out India build world class universities in India? Like hell they will. Indians are forced to spend billions of dollars each year in education abroad. (Estimates are of the order of US$10 billion annually.) They have to be stupid to do something that will hurt their national interest. They will not only lose the income from providing education to India, they will lose out on the added human capital. And most of all, they will lose jobs that Indians educated well in India can do in India.

Here’s a story from the NY Times of April 4, 2007, which should scare the pants off of the Americans: India’s Edge Goes Beyond Outsourcing. They are witnessing job flight to India on a scale that they had not anticipated. Corporations such as Boeing, Morgan Stanley, Eli Lilly, Accenture, IBM, Airbus, Cisco, and Microsoft are mentioned in the context of the number of jobs they are transferring to India. Here’s a bit:

With multinationals employing tens of thousands of Indians, some are beginning to treat the country like a second headquarters, sending senior executives with global responsibilities to work there. For example, Cisco Systems, the leading maker of communications equipment, has decided that 20 percent of its top talent should be in India within five years; it recently moved one of its highest-ranking executives, Wim Elfrink, to Bangalore, the center of the Indian industry, as chief globalization officer.

(Just by the way, last month I met Wim Elfrink at the opening of a Cisco Systems training and development center in the Zensar campus in Pune.)

So what is happening over here? Globalization. It is the erasing of national boundaries with respect to jobs that can be outsourced through the magic of the recent revolution in information and communications technologies (for services) and manufacturing jobs through the magic of the 52-year old shipping container revolution. Transnational corporations shifting jobs wherever they find labor-cost arbitrage opportunities.

Yes jobs are moving to India. So far, the foreign corporations are picking up the low-hanging fruits among the employable in India. But that well (to mix metaphors shamelessly) is going to go dry very soon. From the NYT article:

. . .specialists warned that a continued flow of work to India required drastic improvements in its educational system and basic facilities. Water and power shortages are endemic, and industry experts predict that India could lack 500,000 engineers by 2010. Yet the country has already tapped a deep well of English-speaking engineers, attracting more outsourced work than any other country.

(Oh goody, the power just came back on. Now I can save this draft and continue my rant.)

Within just two years, India will face a shortage of half a million engineers! If that is so, the labor-cost advantage of India will most certainly disappear as the price of engineers will be bid up. As it is the reported churn among software engineers in India is phenomenally high and wages are going up 30 percent per annum by some estimates.

Wouldn’t liberalizing the educational system be the most rational response to solve the shortage of skilled manpower? Yes, it would. Will it be done? Not if India continues to have a ministry of higher education and a minister of education of the likes of Arjun Singh.

Economist Alan Blinder has characterized outsourcing as “the third Industrial Revolution.” The first one was missed thanks to the British: they were the colonial power ruling India and it was not in their interest to see that India become an industrial giant. I don’t blame the British. If I was a loyal Britisher, I too would not like to hurt Britain’s interests. The second industrial revolution (I am guessing) that Blinder refers to is the off-shoring of manufacturing that mainly happened to the East Asian tigers and later to China. India missed that because of the Nehruvian socialist policies of barriers to foreign investment, archaic labor laws, xenophobia’s, and plain old fashioned stupidity.

This third industrial revolution bus is about to depart. India does not seem too eager to get on that one. No, I take that back. Indians are desperately impatient to get on this one. They are struggling to get on board. But the government of India is doing its best to prevent that from happening. It is as if the government is saying, “Just try to get on that bus and we will break your kneecaps for you. Don’t you dare escape from our clutches.”

If I had my way, I would charge junior higher education minister Purandeswari Devi with treason for having debased the country by begging a foreign nation for assistance with doing something that Indians can do. She has shamed Indians and implied that Indians are incapable of creating world class universities. I think that all Indians in the education professions — both at home and abroad — should tar and feather her for her direct insult at them. Shame on you, Ms Devi. Just resign from your post and go beg for a living instead of feeding at the taxpayers’ expense — the tax payers whom you insult so deeply.

End of rant.

From the Chicago Graduate School of Business magazine a brief talk with Gary Becker, “one of the first economists to study topics traditionally considered the purview of sociologists including racial discrimination, crime, family organization, and drug addiction. His work on those subjects earned him the Nobel Prize in economic sciences in 1992.”

Becker is big on human capital. He talks about the importance of human capital in organizations. Economists consider human capital to be critical to development of economies. Education is therefore directly implicated in development. Here are a few quotes from Becker. (The Becker-Posner blog is worth reading.)

[On Chicago economics.]

Fields evolve. And I think Chicago still emphasizes that economics is a powerful tool for understanding the world, whether it’s finance, accounting, consumer behavior, or antitrust. That remains the same, and that’s been a hallmark of Chicago—to take economics seriously. Economic analysis is important; it’s not just a game being played by clever academics.

The precise things that economists are studying evolve over time as economics itself has evolved: developments in finance, human capital, in theory of a firm, and understanding how firms behave. You can go on and on. Those have changed, and that means a lot of problems that are attracting people are different.

But at a fundamental level, Chicago economics is the same as it was—people taking economics seriously as a tool, an engine for understanding the world, and, hopefully, making the world—the business world and the world of public policy—a better place.

[On human capital.]

I’d like to think that businesses now appreciate the fact that, by far, their most important assets are their employees, and how they invest in their employees, how they treat their employees, how they raise the skill level of their employees—that is the dominant factor that determines whether they’re going to succeed. Bill Gates once said, “You take away the top 20 employees of Microsoft, we’ll just be an ordinary company. Top employees are what makes us.” And that’s true in a lot of companies.

Businessmen and women now think much more about the role of human capital in their success—how to attract it, nurture it, and invest in it. Certainly the concept of human capital has had a significant influence on business.

Poverty is a big word. It is multi-dimensional. It is complex in its causes, it is hugely complex in its implications, and it is perhaps the most intractable of all social challenges that humanity faces. Poverty has been the characteristic condition of humanity since its birth. It is not the existence of poverty that should surprise us but rather that some significant portion of humanity in the relatively recent history (about 100 years or so) are not living in poverty. Though it is not as inescapable as death, poverty has been much of human history’s most common condition. Ending poverty on a global scale will require a combination of technical ingenuity, enlightened political leadership, compassionate societies, and such on a global scale. Just technology alone cannot solve any problem as enduring and non-technical as the complex problem of global poverty.

You know that Monty Python skit involving a dead parrot. The character that John Cleese plays comes to the pet shop to return a parrot which he had “purchased not half an hour from this very boutique.” The problem was that the parrot was dead. The shopkeeper insists that the parrot — a Norwegian blue — is not dead. It is, he variously claims, merely resting; pining for the fjords; that it prefers to kick back. John’s character is frustrated and finally explodes:

“It’s not pining, it’s passed on. This parrot is no more. It has ceased to be. It’s expired and gone to meet its maker. This is a late parrot. It’s a stiff. Bereft of life, it rests in peace. If you hadn’t nailed it to the perch, it would be pushing up the daisies. It’s rung down the curtain and joined the bleedin’ choir invisible.

Viz-a-viz the metabolic processes, he’s had his lot. All statements to the effect that this parrot is still a going concern are from now on inoperative. This is an ex-parrot.”

I feel a bit like that guy. I repeatedly keep insisting that technology is not the answer to all of the world’s problems. Technology helps only on those aspects of a problem that are technical in nature. So here’s yet another of my attempts at explaining why I think technology cannot solve the problem of global poverty.

In its most general formulation, problems involve constraints and their solutions involve choices within those constraints. If there were no constraints in a system, there would be no problems. To the extent that any particular problem has a solution at all, the solution involves making choices. Good solutions are the consequence of correct choices. Technology often relaxes some constraints to some degree, and thus expands the choices available. This expansion of choices is good but it is not costlessly so: greater choice implies a greater burden in making the correct choices. In other words, when the choice set expands, the chances of making the wrong choices also goes up.

Specifically in the case of mobile phones, we can immediately note the constraints that it relaxes. It essentially makes long distance communication of information possible. But then so do carrier pigeons, smoke signals, semaphores, the telegraph, the pony express, and land line phones. Mobile phones have an advantage over those earlier technologies because it is better, cheaper, faster, more accessible. So the second constraint the mobile phone pushes back is financial. For a given amount of money, you get more capacity. Third, the technology is transferable and is easily adopted. You don’t need to be literate, and you don’t need expensive terminal equipment.

What economic function does the mobile phone serve? It reduces transaction costs, to put it in economics terms. When you use the phone to ask for directions perhaps, you save time that you would have otherwise wasted in going round in circles. When you call ahead to fix up a meeting, you avoid a wasted trip if the person is not available. Telecommunications is a substitute for transportation in many instances.

By reducing transaction costs, the efficiency of the process goes up. That is, increased productivity and therefore more production for the same effort. More production, in turn, means more stuff. More stuff for a given population means more stuff per person. Stuff, as you all know, is what it is all about. If a person has too little stuff, he is poor. To the extent that global poverty can be helped through increased production of stuff, and to the extent that more efficient communications helps in production, only to that limited extent can cell phones affect global poverty.

Technology is an amplifying mechanism. Another way of saying that is that technology enters the production function multiplicatively. You have to have something to amplify to be able to use an amplifier. If there is no signal, no matter how powerful the amplifier, there will be no output. The productive capacity is multiplied by technology but where there is any production going on and what is being produced is a consequence of choices that were made outside of technology. That is the bigger challenge because the ability to make the correct choices is something that cannot be as easily imported as the importing of technology.

In the end, affluence — which I define here as the absence of poverty — is a consequence of correct choices made deliberately and consciously over the long term. Affluence is the result of economic policies made by thoughtful and wise policymakers. The existence and the necessity of such people is independent of the level and sophistication of the available technology. To solve our problem of poverty, technology is definitely necessary but it is far from sufficient.

Related links:

(1) Stuff and Ideas.

(2) The Importance of Producing Stuff.

(3) The Tathagata’s Sermon on Economics.

What follows is a rough transcript of our talk.

Me: Prof Smith, the world has seen immense increase in the wealth of some nations since your time. What fundamentally explains the differences between the wealth of today’s nations?

AS: The world indeed has changed in the last couple of centuries. One word encapsulates the differing experiences of development among nations: Freedom. The human spirit’s ability to thrive in an atmosphere of freedom is enduring. Those nations that have granted themselves that freedom have developed. Lack of freedom explains the differences in development.

Me: So that raises the question why all people don’t grant themselves freedom. We must go into that a bit later. But I am puzzled by the Indian experience. India gained freedom from British colonial rule over 60 years ago in 1947. Yet, India has had only limited and qualified success in development and indeed in economic growth. What accounts for that?

AS: Political freedom, though important, is only one aspect of the much wider concept of freedom. The comprehensive freedom which allows individuals to flourish—and therefore groups to flourish—must include economic freedom. India’s lack of economic freedom undermines the potential gains that arise from political freedom. Colonialism is a package deal that denies both economic and political freedoms. Post-colonial India did not have economic freedom.

Me: Please speak a bit more on the nature of colonialism.

AS: Colonialism is motivated by the quest for wealth. Wealth is created by a process that combines natural resources with human agency. So you need not just a lot of land and its resources but also people to eventually create wealth. Compare and contrast the two distinct cases of colonialism in the 18th century: Bengal in India and Massachusetts in North America.

Massachusetts had land and other natural resources but had very few people. To translate the resources into wealth that you could later extract, you had to first get people to settle there. To attract people and for them to create wealth, the policies had to be development oriented. In other words, the policies gave settlers economic freedom, the freedom to create wealth.

Bengal, in contrast, already had people who were creating wealth. The policies for colonial Bengal were therefore designed to extract and exploit that already existing wealth. Therefore controlling economic activity through the denial of economic freedom was required. Command and control of the economy was a more direct route to exploitation. Doubtless, the consequence was similar to that of killing the goose that lays golden eggs. It is a short-term policy since by denying economic freedom, eventually wealth creation comes to a halt. When all the existing wealth is extracted, it is time to move out. Colonialism ended in India when the cost of extracting wealth became greater than the value extracted.

Me: Then why did not the post-colonial government of India immediately after political independence grant economic freedom to the population?

AS: The rulers of politically independent India inherited the entire institutional, administrative, and organizational structure of colonial India. The objectives of these did not change merely because the controls moved into the hands of people with a different skin color. The ability to command and control people is power that is hard to let go of. Private gains, however short-term, trumps long-term public gains. Human nature is hard to argue with. Self-interest is the key motivating factor in every human breast.

Me: But Dr Smith, it was you who pointed out that the self-interest of people gives rise to the public good that no one actively seeks. You wrote:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. … [Every individual] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.

The new rulers of politically independent India were self-interested as well. Why is that not a good thing?

AS: The distinction is between the self-interest of a few powerful people as opposed to the self-interested actions of the entire population expressed in an atmosphere of economic freedom. The former have the power to coerce others to do their will; the latter lack the power to command economic servitude from their fellow humans. The average person has to seek the economic cooperation of others in society by providing them with goods and services that they value. That is, they have to offer in trade something that others value. This impels the individual to produce something of value and which on the aggregate amounts to the wealth that society produces.

Me: Economic cooperation appears to be inconsistent with competition that is supposed to be the hallmark of a market economy. So is it cooperation or is it competition that we should be more in favor of?

AS: Both competition and cooperation are essential. People are heterogeneous in their inclinations, natural talents, and developed skills. By cooperating, a group of people becomes capable of producing more than otherwise would have been possible through solitary enterprise. Economic freedom allows a person to not only engage in an economic activity that it most suited to his or her talents but also allows the person to seek the cooperation of others with complementary skills. Any successful economy can be thought of as a large number of people voluntarily cooperating in the process of producing wealth.

The production of goods and services, which involves cooperation, is one side of the coin. The other side of the coin is trade. What an individual or a group produces is traded at the marketplace. That is where competition plays its critical role.

Me: So cooperation is critical to production. But how does competition in the marketplace help us all. Should they not be cooperating in the marketplace also?

AS: Markets are where people come to buy and sell, or in other words, exchange goods and services. They compete as sellers – selling to the highest bidder – and they compete as buyers – buying from the lowest priced seller. Through this process, the market determines how much of what is produced by the economy and by whom. This process of competition determines how society’s limited productive resources are allocated to meet the variety of wants that it has. The market is that invisible hand which guides self-interested economic actors to promote the social good without the need for a centralized command structure. The important thing to remember is that while the marketplace is impersonal, to successfully compete in the marketplace, one has to have sympathy.

Me: Sympathy? Surely, you mean selfish ruthlessness and not sympathy.

AS: No, sympathy is important for without it, a producer will not be able to put himself in the position of the buyer and thus be unable to divine what is it that the buyer will value.

Me: So for an economy to thrive, it appears that rather than command and control, what is needed is economic freedom for people to best use their skills in productive activities and a functioning market where voluntary trades can take place. From those generalities, I would like to move on to the specific case of India. What are the impediments to India’s economic development?

AS: As we have been discussing, economic freedom is central because the raw ingredients for economic development exist in India. It has a large population and considerable natural resources. Given economic freedom, people would naturally produce wealth. Liberalization—the notion that people should be economically free—is the key concept. Free people grow and realize their potential naturally.

Me: In the hunter-gatherer stage of human history, there was no central command and control structure. They were free to do as they pleased. Yet, we don’t consider them to be prosperous. What explains that?

AS: The stock of human knowledge explains the difference. Technology allows humans to amplify their abilities. For instance, technology allows humans to use energy from a wide variety of sources. Technology is embodied knowledge. The practical aspect of knowledge is how to do something; it is know-how. The hunter-gatherer society had a very small stock of knowledge.

Me: I agree that today individuals have access to a phenomenal stock of knowledge accumulated over centuries in all parts of the world. Indeed, the revolution in information and communications technologies such as the world wide web and the Internet, have reduced the cost of accessing information and consequently gaining knowledge. It is puzzling therefore that economic growth is still an elusive goal. What’s the major barrier to India’s growth?

AS: Having access to the stock of knowledge is a necessary but not a sufficient condition. One has to be educated to a certain degree to make meaningful use of knowledge. So the short explanation for India’s predicament is the lack of educated people and the lack of economic freedom.

Me: Perhaps you have been out of touch with Indian reality lately. The Indian education system is often held up as a shining example since India has become what is called an “IT superpower.” India does not lack educated people.

AS: Actually, I am familiar with the state of the education system in India. I grant you that there are some very globally successful people who got part of their education in India. But their numbers are not in proportion to India’s vast population of over a billion people, a sixth of all humanity.

The Indian education system is a throwback from a bygone era. It is extremely costly in terms of the resources it uses relative to what it produces. Only about 10 percent of India’s children pass high school and of its college graduates, only about one in four are employable. The real cost of the education system is the immense waste of potential human resources that never become sufficiently trained to become highly productive.

The lifeblood of the wealth of the nation is being bled away due to its dysfunctional educational system. Leave alone an educated population, nearly half of India’s population is illiterate. That is unforgivable after 60 years of self-rule. Fixing the education system is the first unavoidable challenge.

Me: Why is the educational system so important in the wealth of a nation?

AS: Because people are at the core of an economy. People matter because they are what transform the other resources into wealth. Educated people are more productive and therefore create more wealth. But educating people requires resources and the most efficient allocation of resources, as I have stated earlier, is through the market, and not through command and control. You can easily enough figure out that government control of education is responsible for its failures. I leave that as an exercise for you.

Me: I see your point, especially from the experiences of the United States and other advanced industrialized economies. What intrigues me is that their development is also accompanied with their populations becoming urbanized. Why is it that a population concentrated in cities is more productive than the same population living in villages?

AS: Urbanization is a cause and consequence of economic growth and development. If you recall, I had pointed out that specialization and the division of labor increases productivity and therefore greater production. Cities allow what we call economies of scale, scope and agglomeration to occur. In other words, resources are more efficiently used when a population is geographically concentrated. Most significantly, infrastructure is cheaper to provide per capita if the population were concentrated compared to if they were dispersed. People need infrastructural services – such as power, water, telecommunications, transportation, sanitation, security, medical, entertainment, etc. – to live productive and enjoyable lives. Cities are the natural outcome of the need to provide infrastructure as efficiently as possible.

Me: The economies around the world today have widely divergent standards of living. Which is another way of saying that some economies are more productive than others. What are the real constraints on an economy becoming wealthy, say, like the US?

AS: What you have to recognize is that wealth is produced by people. Where people are free to engage in activities that they themselves choose, they are good at it. More wealth is produced by free people than by slaves. So the first requirement is freedom. The Constitution of the US and the Bill of Rights guarantee its citizens freedoms that others outside the US rarely enjoy.

The second fortunate fact is that the US is big. Its land area is large compared to its population. Its endowment of natural resources is enviable. The third factor is that it developed a very large stock of human capital. The US learnt quickly as a young nation that education matters. It not only learnt from the Europeans about great universities but it improved upon them.

So the US had sufficient number of educated people, vast amounts of natural resources, and the freedom for the natural entrepreneurship of people to create wealth. Yet, there is one more factor that I did not mention till now. That factor is energy.

Using energy amplifies human capacity. All manufacturing depends fundamentally on energy. The US developed the technologies that made energy available for manufacturing. Most of the energy that the US had during its early development into an advanced industrialized economy was fossil fuel based. If the US had not developed the technology, it would not have access to the energy, and without inexpensive energy, it could not have become the pre-eminent nation it is today.

Me: Given the critical need for energy, the currently developing economies do need a source of energy other than fossil fuels because they are running. Besides they are polluting. So what is the way out?

AS: The US became rich because it developed technologies. It invested in research and development. That is the road to riches. If India needs an affordable energy source, it will have to develop the technology. The source of practically all energy on earth is the sun. India has to develop technology that will give it access to the solar energy.

Me: Dr Smith, developing technology is extremely costly. Hundreds of billions of dollars will be needed. India cannot afford that.

AS: It is a choice that India has to make. It could invest a few hundred billion dollars in developing the technology to use solar energy. Or it could continue to import increasingly costly fossil fuels, and when the fossil fuels run out, it could pay high prices for licensing the use of solar energy technologies developed by other nations. India has to decide whether it wants to be a leader or a follower in this regard. That is a political decision which its democratic system has to address.

Me: What do you recommend for India then?

AS: What India needs the most is for its citizens to achieve economic freedom. The people are entrepreneurial and inventive enough that they will figure out most of the problems by themselves. Education has to be freed from the control of the government.

The role of the government has to change from being a meddlesome overlord to one of facilitating development. The government has to become an institution that the people use for the provision of public goods. It has to stop attempting to control the economy because control is inimical to the creation of wealth.

India needs energy for development. The primary public good that the government has to facilitate is that of funding research and development of technologies for energy.

Me: Thanks much. Let’s see if we can figure out the details by ourselves.

Let’s pause for a moment and figure. $13 billion every year. Or in the last 10 years, about $100 billion. Imagine what you could buy for that money. How about 100 colleges with first class infrastructure with housing, classrooms, labs? Each year India could have an additional capacity for 10,000 college students and in 10 years you could have 100,000 additional capacity. Imagine the multiplier effect of that spending — in construction, in salaries to teaching and non-teaching staff. Imagine the boost to the industry from creating human capital. The imagination boggles at the sheer waste.

Imagine how much infrastructure you could build for $100 billion.

One of the principal lessons one learns as one studies economic development is that success or failure depends largely on the set of economic policies that govern the economy. India, for instance, is poor and economically a failure because its economic policies are extremely brain-dead. Of course one can explain why these brain-dead economic policies exist. We will not visit that now. Here I would only mention that the policy on education is the most brain-dead and that educational policy is largely to blame for why India is poor today, and if the policy is not changed, then it will certainly doom India in the future.

In other words, India is poor because Indian policymakers are either (1) morons who are too bloody stupid to realize that they are continuing to keep India poor and are killing any future that India may have, or (2) they are evil immoral bastards that know what they are doing to the country but do it anyway because by controlling the system they line their own pockets. Or perhaps a combination: some policymakers are of the first kind (morons), and some of the second (bastards.) In end result is the same, however.

Here’s the text of that article — for the record.

Industry body Assocham said on Monday that over $13 billion is spent every year by about 450,000 Indian students on higher education abroad.

Over 90 per cent of students appearing for the Indian Institutes of Technology (IIT) and the Indian Institute of Management (IIM) entrance examinations are rejected due to capacity constraints, of which the top 40 per cent pay to get admission abroad.

“Over 150,000 students every year go overseas for university education, which costs India a foreign exchange outflow of 10 billion dollars. This amount is sufficient to build more IIMs and IITs,” it said.

The primary reason for a large number of Indian students seeking professional education abroad is lack of capacity in Indian institutions. The trend can be reversed by opening series of quality institutes with public-private partnership by completely deregulating higher education, Assocham President Venugopal Dhoot said in a statement.

Higher education in India is subsidised as an IIT student pays an average 120 dollar monthly fee, while students opting for education in institutions in Australia, Canada, Singapore, the US and UK shell out 1,500-5,000 dollars as fees every month.

Deregulation of higher education in the country will result in creating annual revenues of 50-100 billion dollars, besides providing 10-20 million additional jobs in the field of education alone, the chamber said. India has only 27,000 foreign students, as compared to four lakh in Australia.

Assocham further said vocational education in India is a meagre five per cent of its total employed workforce of 459.10 million as against 95 per cent in South Korea, 80 per cent in Japan and 70 per cent in Germany.

[See follow up article on Educational Spending.]

Of shoes and ships . . .

Let me tell you a story. This happened many years ago on a train journey. A couple of children were running around the compartment playing. The father of one of the kids, busy talking to a fellow traveler, would every now and then stop his son and tie the kid’s shoelaces. He repeatedly retied the laces but in a few minutes they would mysteriously come untied. I watched with growing frustration and anger at the senselessness of what the man was doing.

He had correctly identified the superficial problem: kid running around with untied shoelaces is likely to trip and go for a toss. But he had no idea of what the deeper problem was, and that he was indeed the cause of the problem. In fact, his actions merely intensified the problem. He was mechanically reacting to the untied laces without stopping to figure out why they were coming untied. He did not realize that they were coming untied because the kid was untying them and why.

The man would sit the kid down on the seat and, while continuing to talk to his friend, use all his adult strength to tighten the laces. Then, and out of sight of his father, the kid would untie them because they were uncomfortably tight. The next round the father would tie them even tighter and the pattern was repeated. If only the man had had enough sense to figure out the problem, he would have tied the laces lightly. The kid, busy in his play, would not have even have noticed that he was wearing shoes.

I think that story illustrates a general point. Not paying sufficient attention to figuring out the real problem has consequences. Often it leads to counter-productive action, and in some cases actually exacerbates an existing problem.

A bit of Arithmetic

Let’s make a simple 2-sector, 2-good model. The sectors are agricultural (A) which produces food (F), and non-agricultural (NA) which produces manufactures (M). Let’s assume the following conditions.

1. Total population is 100.
2. Full employment.
3. Autarky. That is, there is no foreign trade.
4. Food satiation. You cannot consume more than one unit of food.
5. No non-food satiation. You can always consume as much M as you can get.
6. Perishable. Both F and M have to be consumed in the period produced.
7. Terms of trade determined by the demand and supply of F and M.

So if 70 people work in A, then the maximum production is 100 units of F.  That maximum is dictated by the total demand for F, which is 100 units for the total population. Therefore the average income in A is 100/70, or approximately 1.5 units of F. Per capita they consume 1 unit of F, and so the average disposable income in A is 0.5 units of F, which can  be used to buy M. Let’s call this state “I2008″ — what is pretty much the condition in 2008 in India.

If instead of 70, only 35 people work in A but still produce 100 units of F. With this higher productivity, the per capita income doubles to approximately 3 units of F, and the per capita disposable income is 2 units of F.  Let’s call this state “I2050″ — possible but not certain for India in 2050.

If the US population were 100 people, then their A sector employs 2 people. The average income in the A sector is 50 units of F and the average disposable income in the A sector is 49 units of F. We will label this state “US2008.”

The worker in the A sector in the US is wealthier than the Indian A sector worker because the former have higher productivity. That higher productivity is the result of capital: more machines, more inputs (mostly hydrocarbons for fuel and fertilizers), and more human capital. Whether the A worker in the US is more efficient than the A worker in India is a matter that we will not go into: it is a different issue and going into it will only complicate the point that we are investigating now, which is why are Indian farmers committing suicide and what can be done about it.

To sum up . . .

Average income depends on average productivity. When the surplus production of food by seven people is only sufficient to support an additional three persons, the disposable income of the agricultural sector is very limited.

In the next piece, we take a look at how we can move from I2008 to I2050. That move is what will stop the suicides. That move is unlikely to happen if the policymakers persist with their current policies. These policies are not new. Those policies have ensured the continued misery of the farmers of India. We have to recognize that these policies are a rational response to the larger system. Both the policies and the unfortunate consequences flow inexorably from the logic of the context. The current debt relief to some farmers is undeniably a rational response in the current political climate. That it is shortsighted and severely harmful is part of the package.

The farmers’ face a chronic problem and therefore an acute short-term solution is inappropriate because it will merely postpone the actual solution and thus set the stage for intensified and more wide-ranging problems.

The biggest problem India faces is the inability–and I think more unfortunately  the unwillingness–of its policymakers to understand what the basic problem is. They routinely try to apply band-aid solutions to systemic problems.  That’s our greatest challenge.  

Related post: The Plough and the Keyboard. This one provides some background for the current situation. I highly recommend this post.

NOTE: I will keep using the 2×2 model above. It has a lot of simplifying assumptions but as I go along, I will relax some and work out the consequences with the objective of arriving at a more realistic picture. This series continues in a few days.

Thomas Jefferson claimed over 200 years ago that “it is error alone that needs the support of government. Truth can stand by itself.” I agree only partly. I don’t think that without courageous people truth has a chance. Truth, in the abstract, of course exists. But for it to triumph, surely it has to be expressed by humans and be part of the mental makeup of at least one human being. The world is spherical is a truth in the abstract. But at some point in the history of human civilization it became a concrete truth. But it required courage to express a truth that in some parts of the world was considered against god and morality.

Truth would have a hard time prevailing in a nation of people cowed down from fear and threat of violence. A recent example of violence shutting out an attempt at finding the truth occurred in Chennai. A bunch of people shut down an exhibition which revealed Aurangzeb to be a tyrant. The police were also involved in the vandalism. The state was involved in suppressing the expression of a viewpoint that some considered unpalatable. Most of the newspapers did not report this.

Isn’t it true that India’s motto basically pokes fun at India’s public actions?

Link: Details of what happened and Kanchan Gupta’s opinion piece.

[Follow up post: B Raman on "Aurangzebs of Today."]

A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public treasury.
– Alexander Tytler

Some numbers are well beyond human comprehension. We can talk glibly about millions and billions of this or that but we cannot intuitive grasp what they actually mean. Evolution has equipped us with fine brains but those brains never needed to deal with thousands — leave alone millions — of anything. So we have to do some mental gymnastics to get a fleeting glimpse of what very large numbers represent.

Here’s a way of realizing how large millions, billions, and trillions are relative to a thousand. One thousand seconds passes in less than 17 minutes. A million seconds takes around 13 days. A billion seconds takes a bit over 31 years. We humans live for something between 2 and 3 billion seconds. A trillion seconds is over 31,688 years. We don’t really know what thousands of years mean, of course. Human civilization is not a trillion seconds old.

The US war in Iraq has been estimated to cost around $3 trillion. That is, $3,000,000,000,000. Details are in Joseph Stiglitz and Linda J. Bilmes’ new book, “The Three Trillion Dollar War: The True Cost of the Iraq Conflict.” See The Cold Price of Hot Blood in Salon for more on that. The total cost globally could well be over $6 trillion.

In any case, one way of looking at that number of $3 trillion is that every man, woman, and child in Iraq could have been paid over $100,000. In other words, the average family of five could have been given over half a million dollars. Most of us, of course, don’t quite fully understand how much money half a million dollars is. We just know that it is a real truck load of money.

Even for the US, a few trillion is a large sum. As has been plausibly argued by some that it is possible that the wars in Iraq and Afghanistan will eventually hasten the decline of the US. In a sense it is a self-inflicted wound which will bleed the US. It is the pitiable ignorance of the people that is the cause of this. Think about it. They voted for the warmongering dictators. These dictators then did what was in their best interest and in keeping with their ideology. Turning nations into rubble — not just other’s but even their own — is not too high a price for them.

Yes, I know that democracy is all the rage these days. India is the largest democracy and the US (for a while at least) is the most powerful democracy.

In other news, the government of Manmohan Singh has decided to cancel the debts of small farmers. It will cost Rs 60,000 crores (US$ 15 billion.) That once again is a large number even though it is several orders of magnitude lower than the US cost of the Iraq war. However, the US is an order of magnitude richer than India and so it can afford things that India cannot. If not exactly cripple India, the cost of debt cancellation will most definitely very severely adversely affect India. Its long term growth will suffer.

So why is the UPA government doing it? Because it is good for the party. It is the very nature of democracy that creates the perverse incentives for the politicians to implement policies that help themselves at the cost of immense harm to the country. Those who make the policies enjoy the indirect benefits of the policies — votes from specific groups — without paying any of the costs.

There is another asymmetry. The direct beneficiaries of the policies naturally have a concentrated interest in voting for the politicians. The costs are diffuse and poorly understood by the rest of the population. So while they bear the costs, they do not connect it with the policies and the politicians.

So in very simple terms, here’s the model. Groups A and B. Politician P determines that by robbing group B and giving it to Group A, Group A will definitely vote for P. Group B does not realize that it is being robbed. So group B does not penalize P. Politician P wins, and handles the cash register with very sticky fingers as long as it can. Strictly speaking, group A is voting to steal group B’s money — with the eager helpful intermediation of the politicians. This is democracy. Meanwhile, group A suffers in the short term, and both groups suffer in the long term. The only winner: the politicians that figured out how to buy votes using someone else’s money.

In the final analysis, a country is only as rich or as poor as its collective wisdom allows it to be. The politicians can be expected to make those decisions that are good for them, just like you and I make self-interestedly rational decision in our daily lives. However, we get to play with whatever little money we have; the politicians can play with billions and trillions that do not belong to them. So they are understandably less careful with billions than we would be with out few thousands. We are poor because we make poor choices and our poor choices arise out of ignorance.

It is all karma, neh?

The world has come a long way since the 1960s when the future was defined by one word – “plastics” – as Mr McGuire advised the young graduate Ben. Now the future is defined by another word and the word is “information.” Plastics was a wonder product of the world of industrial technology which fundamentally transformed the world of objects. Information is the new thing, the product of information technology, which is going to transform the world of ideas. Actually, information is not a “thing” in the usual sense of the term. So it is the new non-thing which defines the new and exciting future.

Let me enumerate some fun facts about information. First, people produce information. So now that more people are producing information, a lot of information gets produced. Second, information accumulates. Once produced, unless every copy disappears, it persists. Third, it is a “public good.” One person’s use of a particular bit of information does not preclude another person from using the same information. Fourth, when information is “internalized” it becomes knowledge in a human brain. So the monotonically increasing stock of information raises the potential of acquiring knowledge by other humans. Processing information is one of the necessary steps in the acquisition of knowledge. Knowledge in turn is a necessary ingredient in the process of generating ideas. Ideas eventually fuel the engine that drives human civilization.

So this note is about information, knowledge, ideas, human civilization, and the rest of it. A pretty large subject which I will necessarily deal with fairly superficially given my own limitations. First I will explore the subject from a micro perspective and then move to the macro. The objective is to draw some plausible conclusions about where we as a collective of humans are headed.

Rejecting Information

The object of analysis at the micro level is the individual human. At the bare minimum, a human has to have a brain and a set of sense organs for acquiring information. Mostly it is through hearing and seeing that one receives input information – touch, smell and taste are not as important in the modern world as it would have been in our pre-literate past. Only if one is blind, or cannot read and is unable to comprehend language, do touch, smell and taste predominate – with the possible exception of tasters, noses, lovers and toddlers. Observe a toddler and note how he or she acquires information.

Physiologically the sense organs take in a huge amount of information that gets filtered and most of it is rejected. For example, from the total visual input from the eyes only a tiny fraction of the information gets processed by and stored in the brain. What we perceive is much smaller than what we see. Our brains would be overloaded if it were to process every bit of information that is presented to it. The different kinds of living organisms filter out different bits of information from the environment. Who you are determines what you perceive.

Biological versus the Artificial

A person acquires information from the environment and also the ever-increasing stock of created information. At this point it is useful to distinguish between what we can call the biological (or natural) environment and the cultural (or artificial) environment. The natural environment is that world which our species evolved in over evolutionary time scales. Our sense organs and our brains are in a strict sense biologically fit to deal with the natural world. The ability to deal with the information from the natural environment is hard-coded within us. We don’t have to go to school to learn how to process the information.

The artificial environment is created by human action. The information from it comes in terms of language and words. We have to go to school to learn, so to speak, how to process that information. An artist and a neurologist could see the same brain scan images but perceive it entirely differently because their training is different. The neurologist has over the years taken in a lot of information about brains and internalized it into knowledge. That knowledge allows the neurologist to process the information of the brain scan differently and thus acquire additional knowledge. The artist also acquires additional knowledge from the brain scans but that knowledge is different from that of the neurologist.

Sequencing

The point is that what you know already determines what you are additionally capable of knowing. There is a path dependency in the knowledge sphere that is tied to the sequence in which information was presented. Though the information available may be comprehensive (in the sense that it is complete), if the sequence of presentation of that information is out of order, it will not be comprehended. Graduate level physics information has to be presented after the undergraduate level physics has been internalized for it to make sense.

Knowledge accumulates in a human brain to the extent it is presented information in the correct sequence. It is not even theoretically possible for an external agency to determine what the correct sequence for a particular individual is. It is so because an external agent cannot fully know what the knowledge base of an individual is at a specific time. The solution is therefore to let the individual himself or herself pick out the next bit of information to internalize from a reasonably broad set of information.

Teaching versus Learning

This is where we need to distinguish between teaching and learning. Traditionally “teaching” is when an external agent presents information and expects the individual to internalize it into knowledge. “Learning” is when the individual picks up the next bit of information from the available collection. Learning can never be out of sequence. Teaching often fails in its attempt to impart knowledge because it is not even theoretically possible for an external agent to fully comprehend the internal knowledge state of the student and therefore competently present the information in the right sequence.

Summing up the points so far: information is the basis for knowledge in the brain; knowledge accumulates by internalizing information in the correct sequence.

Infinite Ignorance

The totality of information available to humans is enormous. Let’s call that “public information.” From that collection, each human being internalizes whatever little bit it is able to. That is “private information” leading to “private knowledge.” Since there are around 6 billion brains in the world, each brain has unique private knowledge but derived from the same public information. The larger the population, the greater is the stock of public information. But given the limitations of the human brain, progressively any human’s private information shrinks relative to the public information. In other words, a person becomes more ignorant relative to what is potentially knowable. All of us are privately ignorant in a world awash in information. Some time ago – perhaps as recently as a few hundred years ago – a person could potentially know a reasonable fraction of the available public information. Today that percentage would be approximately zero.

A world of infinite information is also necessarily a world of infinite individual ignorance.

This poses enormous challenges for the individual as well as humanity as a whole. As individuals, we have to accept that we cannot know everything that we potentially know. A trivial example. A few decades ago, you could have enjoyed watching within the year every movie made anywhere in the world that year. The trouble would have been that you would have had to be fabulously rich to go see them. You had the time but accessing the movies would have been costly. Today, it is fairly trivial to have access to all movies produced. But you just don’t have the time to watch even the good ones produced in just one year. World enough but time.

The Challenges and Opportunities

The challenge for the individual is how to choose which bits of the public information to consume and in which sequence. We are biologically equipped to filter out the massive amount of information coming at us from the natural world. We are not equipped to naturally filter out the currently massive amount of information coming at us from the artificial world. An individual’s success in doing so determines how successful one is in this artificial world. One of the primary jobs of the education system we need is to give us that skill. We did not need that ability and therefore our current educational system which was created for a different environment is totally ill-equipped to handle this task.

That brings us to the macro level. Any organization which does the filtering of the public information for individual use is going to be phenomenally successful. The largest corporations will be those that deal with information in the future. One can be accused of Monday morning quarterbacking for saying that. You could point to information technology giants of today and say that the lessons are plainly evident. But I don’t think that we have fully understood what the real lesson is. The point isn’t making a lot of information available to the individual. The point rather is that any institution that most efficiently and effectively reduces the information available to an individual will succeed.

General Purpose Machines

The other lesson pertains to education. The old paradigm was one-size-fits-all because only one size was available. It was an older, simpler, static world where you could learn a small set of skills and hoped to cope with the world for the rest of your life. The dynamic world of today requires constant learning and the acquisition of new skills. A useful analogy would be the distinction between a special purpose machine and a general purpose machine. A typewriter is a special purpose machine while a computer is a general purpose machine. Depending on what software you load, a computer can do a range of things – from guiding spaceships to controlling your microwave oven. People have to become the equivalent of general purpose machines. People must become capable of “loading the appropriate software” to handle any task they want done.

The education system of today churns out special purpose machines. To make it produce general purpose machines requires a few basic changes. First, it has to teach a set of very basic skills so well that everyone is literate and numerate. That is equivalent to designing a machine which has a complete set of machine instructions which it executes very efficiently and all the other tasks are just the execution of a long sequence of these basic operations. Once you know how to competently read, write, do arithmetic, and reason logically, you can pretty much learn how to do pretty much anything that the human mind is capable of.

That bit is the “teaching” bit of the educational system. Nothing else needs to be taught. The rest is entirely dependent on what the individual is interested in and capable of learning. Here the job of the educational system is to make accessible to the student a comprehensive information set – and NOT the entire public information – for the student to pick from, and in the sequence that he or she feels naturally inclined to, and internalize it. By allowing the student freedom to choose what he or she wants to internalize, it releases the information constraint (that is, the problem of knowing what the student knows) which otherwise is impossible to circumvent.

Development

The age of agriculture yielded to the age of industrialization. Agriculture did not go away. It just became sufficiently productive that it released labor that was absorbed in producing non-agricultural goods and services. The percentage share of agriculture declined – not the absolute amount of agricultural production. Wealth, standard of living, or whatever you call it increased in pace with the decline in direct employment in agriculture.

The industrial age is giving birth to the information age. Once again, it is not that the amount of goods produced by the industrial sector is itself declining. It is not. Indeed, it is increasing. But that increase is due primarily to an increase in productivity and hence it releases labor to the rising sector – the information sector. As the labor force increases in the information sector, the production and subsequent consumption of information is bound to increase.

In the agricultural age, those parts of the world which were the most productive agriculturally prospered. It largely depended on the endowment of natural resources and a bit of human capital. It was a simple world and the social order was commensurately simple. Not much investment in terms of human capital was required. Education was largely an informal affair.

In the industrial age, prosperity depended on industrial productivity, which in turn depended on a reasonably educated work force. Education had to be formalized and the requirements could be met with standardized schools. The public information was limited but sufficient to meet the needs of the industrial worker.

In the information age, prosperity depends on how efficiently the people can produce and consume information. It is critically dependent on a very highly educated labor force. Needless to say that agriculture and industries will continue to need labor as well and that that labor would not need to be highly educated. Conversely, if a population is very minimally educated, then it can only be engaged in agriculture; if the population is moderately educated, it can move up to manufacturing.

So at the highest level of abstraction we can reasonably say this. Prosperity in the world to come depends on how highly educated the population is. So those economies that are able to create the most effective and efficient educational system will count. The rest will be forever falling behind.

Most of India lives in the agricultural age because overall our educational system is only able to supply to that. A small part of India lives in the industrial age. That part is increasing but slowly because of the inability of the educational system to provide the human resources required. Less than one percent of India lives in the information age. To a first approximation, the Indian educational system does not create any human resources for the India to live in the information age.

This is a dismal assessment. But there is nothing in the laws of the universe that actually prevents the Indian educational system from creating what is needed for India to prosper. What is lacking is the understanding, the vision, and the will of the people and their leaders.

The micro details are: family lives in one of Bengal’s 4,600 backward villages; unemployment is over 40 percent; female literacy is 21 percent; father barely gets 70 days of work; the rice from the little land they own runs out in five months; the family starves most of the year. And one more detail the implications of which never seems to register: the family has six children.

The story, in keeping with the script that the writers of this sort of tripe have to follow, intersperses the struggles of the unfortunate family with contrasting details about IIT Kharagpur, the amazing GDP growth rate of India, and other such information that is supposed to shock the reader into the realization that he or she is complicit in the misery of the poor and has to do something about it as he or she is clearly responsible for the disparity. There isn’t even a hint in the article that perhaps the poor may have something to do with the poverty they suffer.

The family must have been poor when it was just the man and wife. Then instead of having one or two children, they decided that they would be all be better off by producing half a dozen children. They don’t have the resources to support even themselves in any degree of material well-being and yet don’t have the slightest hesitation in producing more babies. It is a vicious cycle: the fecundity of the poor ensures that the next generation is large and even poorer. Since no exponential process in nature can be sustained, this cycle meets its boundary condition soon enough: the land, however fertile, is unable to sustain the population and the population collapses from starvation, conflict and disease.

However, we live in a world where at least for a short time, the inevitable can be postponed and people shielded from the consequences of their own folly. The solution is generally to provide just enough food from outside the region to sustain the population for a short while. This relief provides the population breathing room to produce more babies so that in the next cycle, there are more people at risk of starvation. By continually supporting a poor but fecund population through the simple means of redistributing resources from a relatively more productive and non-fecund population, the general prosperity of continues to go down, while the overall population continues to spiral upwards. The boundary condition is once again reached: there are no surplus resources available anywhere as everything that is produced is consumed to just keep the immense population at subsistence level. Thermodynamic equilibrium has been attained.

I think that is what the aim of the socialistic government is: keep everybody at the edge of starvation because in this state of affairs, there is no inequality. Everyone is equally miserably poor and as there is no surplus production, there is no wealth and there is nothing for one person to envy another.

I am willing to bet that the budget that the UPA government will present today will make its contributions in terms of speeding India along the road to that socialistic heaven of equality.

Related Post:

The Sustaining of Poverty

People Matter: India’s Population Problem — Part 2

The Persistence of Poverty

Basic decency and propriety prevents me from suggesting what should be done to the Indian minister she writes about. Shame on you, Dr Manmohan Singh. Please, in the name of everything decent and human, resign.

Lavatories before laptops

The World Bank concludes that a country’s capacity to absorb and benefit from new technology depends on the availability of more basic forms of infrastructure. This has clear implications for development policy. Building a fibre-optic backbone or putting plasma screens into schools may be much more glamorous than building electrical grids, sewerage systems, water pipelines, roads, railways and schools. It would be great if you could always jump straight to the high-tech solution, as you can with mobile phones. But with technology, as with education, health care and economic development, such short-cuts are rare. Most of the time, to go high-tech, you need to have gone medium-tech first.

I have been arguing that point that sequencing matters for a while. Here’s a bit from a post “It’s the small stuff, stupid.”

I am not a Luddite and I am not against hi-tech. Some of my best friends are techies and my education is in computer sciences and engineering and my salary is paid by a technology company. I just happen to believe that hi-tech needs a foundation and that foundation is made of lo-tech. Hi-tech without the lo-tech is about as useful as a car with a fancy engine but no wheels. Hey, that is a good analogy. A car with a fancy engine ain’t going anywhere in a hurry without wheels. And even if you do figure out that wheels are needed, you can’t go far if you don’t get round wheels. Square wheels just won’t do. Then even if you get round wheels, if the tires are not inflated, you get around with a lot of loss of fuel and in discomfort. That is, without air in the tires, your transaction costs are higher.

As a development economist, I have often asked myself what are the invariants that underlie development. I know for sure that high technology (computers, internet, cell phones) are neither necessary nor sufficient for development. Most of the developed economies of the world developed at a time when all those were not yet invented. I believe that one invariant is the ability to adopt innovations.

Just off the expressway from Mumbai, on the road leading into Pune, you see huge billboards advertising new housing developments with fancy names like “Whispering Pines” and “Orchard View” crowding each other, promising idyllic lifestyles of lavish comfort. They convey very urgently a palpable sense of how rapidly the market for private luxury dwelling is blossoming thanks to increased salaries and easy housing loans.

These billboards reflect the increased aspirations of the growing upper middle-class in India. Curiously, one set spoke to a deeper and disturbing reality. One billboard said, “Power Cuts? No problem. We have 24-hour generator backup.” Another one down the road said, “Water Shortage? Have a shower. We have our own water supply.”

You see these billboards along narrow crowded roads that are often no more than stretches of uneven pavement littered with deep potholes. The contrast between the crumbling road and the beautiful picture of a luxuriously appointed home advertised is jarring. It is also a demonstration of some fairly simple economic principles which if sufficiently widely appreciated may eventually reduce the contrast.

Club Goods

Roads, homes, and privately provided utilities are all goods but of different types: common property resource good, private good, and club good, respectively. Broadly speaking, and under a set of conditions more or less generally satisfied, markets can be relied upon to efficiently produce private goods to meet the demand. A private good is rival in consumption meaning that the quantity consumed by one reduces the overall quantity available for consumption by others. They are also excludable in the sense that one can be prevented from consuming it.

Utilities such as power and water are generally widely available in all developed economies. They are supplied by large private or public corporations because they exhibit scale economies: the greater the quantity supplied, the lower the average cost of production. They have high fixed costs as they involve the use of high cost infrastructure such as large power plants, water treatment plants, wires and pipes. When such utilities are not available in sufficient quantity or acceptable quantity—which is the often the case in a developing economy like India—they can become what is called a club good: a good that is provided to a select homogeneous group who can pay the higher per unit cost of the utility.

Roads are generally a common property resource good and therefore have to be publicly funded. It is prohibitively expensive to monitor usage, apportion costs and collect user fees over a large set of heterogeneous users of roads. Tax revenues are therefore used for the provision of roads without user fees. The involvement of the government is unavoidable in the matter of funding of roads which are open access.

The growth in many Indian cities of a large number of housing developments with power and water supplied as club goods is a rational response to the failure of the government to supply those public utilities widely. So for a very small segment of the population of a city, those with very deep pockets, that government failure can be compensated for within the gated communities. Roads outside the gates, however, are still at the mercy of the government and that everyone, rich or poor, has to live with.

Public Goods

The role of the government in the provision of a physical infrastructure such as roads is critical. The government failure to adequately provide physical infrastructure is also correlated with broad failures to provide other public goods such as universal primary education, public health, dispute resolution institutions, security, and so on.

So the question arises: why are certain governments unable to provide those public goods that the market either cannot provide efficiently or can only provide them at a high cost and thus only to a select few? One of the basic reasons for the existence of a government is precisely the provision of public goods. What explains the failure?

Public utilities are important for any complex economy as they complement the use of private goods and assist in the production of goods and services. Therefore, government failure to provide public goods directly affects the productivity and production of the economy. Surely, there must be a reason why certain governments fail in that basic task and thus contribute to the failure of the economy. Public choice theory and agency theory inform that question, and that is what we explore here.

Benevolent and Predatory Governments

One can assume that the government is comprised of enlightened politicians whose altruistic objective is to maximize social welfare. In other words, the government is benevolent. Or one can take the more realistic albeit extreme position that governments are run by self-interested people whose venality compels them to maximize their private gains at the cost of social welfare. In short, the government is predatory. Still, depending on how long the time horizon of their predation is, predatory governments can be classified into “roving bandits” or “stationary bandits.” The former have a short-term outlook and do not “cultivate” the private economy to maximize their loot. Part of that strategy would be to steal the resources that would have provided public goods. In contrast, the stationary bandit would attempt to maximize the total output of the economy all the better to extract the most over a longer time horizon by providing public goods that complement private goods and private effort.

One can reasonably conclude that in India’s colonial British government was mostly predatory with a short planning horizon and was not benevolent. The interesting question is whether the governments after political independence were roving bandits or stationary bandits. Because India is a democracy of sorts where governments get voted out of office, it imposes a severe endogenously determined short planning horizon and therefore the governments are forced to play the roving bandit role. This could partly explain the lack of adequate amounts of public goods. Any government could reason that there is no point in spending money on public goods instead of just stealing the resources if the rewards of using public resources to provide public goods end up enriching some successor bandit government. This is the classic tragedy of the commons scenario.

Principals and Agents

The Indian story gets more interesting when considered in the light of agency theory. In any sufficiently large economy, the politicians cannot directly implement policy. They are forced to rely on a bureaucracy. Broadly speaking, the citizens are the principals and the politicians are their agents who are entrusted with the task of executing the desired goals of the citizens. The politicians, in turn, are the principals who employ bureaucrats as their agents to execute the policies.

This is analogous to the situation where the shareholders are the principals and the CXOs are the agents. The CXOs in turn are the principals and depend on their agents—the middle and lower level managers—to carry out the implementation of their plans. Regardless of whether the CXOs are benevolent or not, their agents have a role to play in the overall achievement of the objectives of the organization.

The basic problem called the “agency problem” is that the principal’s objectives and the agents’ objectives can diverge. Thus, the citizens’ objective would differ from their agents’—the politicians—and the politicians’ objectives differ from the bureaucrats’ objective. The principal’s objective can be served by actions that are costly to the agent and therefore unless the agent’s actions are observed and the consequences properly evaluated, the agent is likely to not take the costly actions that meet the principal’s objective.

There are mechanisms that create the proper incentives for agents to do the bidding of the principals, however. Which mechanism is appropriate depends on the nature of the principals and the nature of the agents. The politicians (as the principals in the government) could be either benevolent or predatory. The bureaucrats as the agents could be “professional” in the sense that they care about social welfare, or they could be “selfish” where their objective is to maximize their own incomes by extracting bribes from the citizens for the public goods. In this simple model, only one out of four possibilities yields the socially optimal amount of public goods—the case where the government is benevolent and the bureaucrats are professional.

Consider one of the other three cases: predatory government and selfish bureaucrats. The bureaucrats extract bribes from the citizens and also steal some of the resources meant for the provision of the public good. The bureaucrats then share part of those gains with the government based on some form of bargaining that reflects how easy or difficult it is for the principal (the government) to monitor the efforts of the agents (the bureaucrats) and the amount of bribes extracted by the agents from the citizens. If monitoring is costly, then the government has to take a smaller share of the earnings of the bureaucrats.

Uninformed Citizens

And that is not all. What if the citizens are wrong in their evaluation of what is socially beneficial and in their best interests? If they systematically err in their objectives, then even if those objectives were faithfully accepted by their agents (the politicians), and the bureaucrats as the agents of the political principals were to faithfully implement the policies consistent with those objectives, it could still lead to sub-optimal outcomes. Now we have eight alternative outcomes from the interaction of “informed” or “informed” citizens, “predatory” or “benevolent” governments, and “professional” or “selfish” bureaucrats. And in only one case out of those eight—informed, benevolent, professional—is the outcome a socially optimal quantity of public good. This analytical result stands up to empirical observation. In real life, the percentage of cases where the socially optimal outcome is obtained is extremely rare.

The above analysis can be illustrated with a concrete example: the provision of electricity by public sector undertakings in India. Chronic and acute shortage of power is the norm. The installed capacity is not only insufficient but the maintenance of the plants is inadequate for the plants to operate at capacity. Around 40 percent of the electricity generated is stolen through a complex mechanism which frequently involves the employees of the power company and users. This is written off as “transmission and distribution losses.” This loss severely impacts the resources available for plant maintenance and for increasing installed capacity. Furthermore, part of what is allocated for maintenance, is also lost through corruption. A chief engineer’s position in the power corporation in charge of purchasing supplies can go for crores of rupees (or, millions of US$). That money goes up the chain and a significant portion reaches the minister in charge of power in the state. That is an example of a predatory government and selfish bureaucrats systematically undersupplying a public utility, making significant private gains and leading to massive social welfare losses.

In this story, the citizens are of the “uninformed” type. They are against privatization of the power corporations, and that opposition is part of the larger opposition to the liberalization of the economy. Though it may appear harsh, it is accurate to point out that the citizens are ignorant of some basic economic truths: that there is no such thing as a free lunch. If they vote for politicians that promise them free power, they are basically complicit in the miserable outcome that they suffer. That they continue to be willing participants in what can only be called a kakistocracy – government by the most corrupt and the least principled – is partly because they don’t realize that alternative forms of governance and social order exist. And it is not in the interests of a predatory government to take steps to educate the citizens. Which incidentally could also explain the systematic neglect of universal basic education.

Finally, the lack of adequate supply of infrastructure is only one of a large set of symptoms of deeper systemic failures. Rectifying those failures can fix the system while all attempts at grappling with the symptoms are doomed to be in vain.

He states the standard view explaining the rapid growth of the two countries:

What explains this strikingly rapid growth? The answer that continues to dominate public discussion in the United States runs along the following lines: decades of socialist controls and regulations stifled enterprise in India and China and led them to a dead end. A mix of market reforms and global integration finally unleashed their entrepreneurial energies. As these giants shook off their “socialist slumber,” they entered the “flattened” playing field of global capitalism. The result has been high economic growth in both countries and correspondingly large declines in poverty.

Then he proceeds to demonstrate why that explanation is incomplete at best and provides a more nuanced and comprehensive explanation which touches on matters that are often neglected in the narrative explaining the growth miracles. For instance:

Start with the claim that global integration and associated market reforms resulted in high growth, which in turn produced dramatic declines in extreme poverty. Applied to China, the timing simply does not fit. China has indeed made large strides in foreign trade and investment since the 1990s, but well before then, say between 1978 and 1993, the country had already achieved an average annual growth rate of about nine percent—even higher than the impressive seven percent growth rate in East Asia between 1960 and 1980.

It is a very well-reasoned article and must be read in full. Let me close with the concluding paragraph of the piece.

Chinese and Indian economic performance has been far better in the last quarter-century than in the previous two hundred years—and this is one of the striking events in the recent history of the international economy. Other countries must adjust to this reality, and learn to treat the partial restoration of the earlier global importance of these two countries as an opportunity for trade, investment, and exchange of ideas, not as a threat. (We also need to work in tandem with them on the environment.) But we must remember that the story of their rise is more complicated and nuanced than standard accounts make out. That more complex story includes the positive legacy of China and India’s earlier statist periods, which offers general lessons for the process of development much too often ignored.

A friend of mine in California asked me one of those questions which seem simple on the surface yet is anything but. One of the “top women in storage” as a leading business publication had rated her, she had gone home to Ireland for the Christmas holidays. In an email detailing how everyone was and what happened in Ireland, she concluded by asking, “So, Mr Economist, tell me why is the US so cheap?” The context of her question included the price-levels of various places she is familiar with such as the US, Western European countries, NZ, and Australia. My own comparison of Indian and US prices adds further validity to that question since I find that the US is cheap relative to India. Why is it so?

It is one of those questions that if investigated sufficiently in detail, it would involve the entire discipline of economics. You could start off with a study of Adam Smith’s “An Inquiry into the Nature and Causes of the Wealth of Nations” (aka “The Wealth of Nations”), published in 1776, the same year as the American Declaration of Independence; and end with reading the papers of such people as Stiglitz, Krugman, and Romer. Or you could just take the quick and dirty route of figuring that it all comes down to how efficiently the US produces and distributes stuff.

A Simple Widget Economy

If you don’t like arithmetic, skip this section.

Let’s do some arithmetic. Suppose 100 people with their bare hands over one year produce and distribute among themselves 100 widgets. “Widgets” is economist-speak, a catchall for the generic good. Economists are always talking about producing widgets without really going into the details of what they are good for and how they are actually produced. Strange but that’s how it is. Anyway, the GDP of this 100-person economy is 100 widgets. The annual per capita income is therefore one widget, the same as the annual per capita production. Let’s underline that point: production and income are different ways of looking at the same thing.

Now imagine they suddenly (magically) come in possession of fancy machines that allow the same 100 people to produce 1,000 widgets in a year. The income per capita goes up to 10 widgets per year. Two important things have happened for that increase in productivity. First, the machines represent a technological change. The same amount of human effort is expended but given the machines, the output has increased 10-fold. Second, the machines use energy. So the production process now involves the use of non-muscle power and machines.

But machines don’t fall out of the sky like gentle rain upon the ground beneath. Someone has to make them. Say at some time, only 50 people are making widgets using machines (total production 500 widgets) and the other 50 are busy building the next generation of machines. The new machines increase productivity by a factor of 20. So now if you want to maintain the overall production of widgets to 500 per year, you need only 25 people to produce widgets and it releases 75 people to continue to build even more sophisticated machines.

The story is simple. The more efficient they become in producing widgets, the more people are free to innovate upon the machines. And as the machines improve, it allows further reduction in the number of people engaged in direct production of widgets. Note also that all this increase in production requires the use of machines which require external sources of energy. Figuring out new energy sources and developing the technology to use them also involves people. And people have to be trained for doing the job of inventing new machines, and the technologies for discovering and using energy. Let’s call that activity of training people “education.” At some point we can imagine this to be the structure of the economy:

100 people economy
10 people producing widgets 10,000 widgets a year using machines
Per capita annual income: 100 widgets
20 people involved in the manufacturing of machines
30 people involved in the research and development of machine technology
40 people involved in the education of the entire population so that some can do technology R&D, some work in factories making widget-making machines, and some who make widgets on the machines

The Big Picture

If you have skipped over the previous section, here’s what the main point is. Economies produce stuff. The more stuff they produce relative to the effort expended, the richer they are. The US is more productive than other economies because they use lots of machines, lots of energy, and produce a great deal of R&D. History and geography have been kind to the US, besides. Somehow they got lucky and had a bunch of smart people who figured out that both economic freedoms and political freedoms are important. Entrepreneurship flourished. Geographically, the US is huge with lots of natural resources. It was not always as rich as it is today. At one point it was on average as poor as say the people of Bihar today and had as little technology available to it. But the US developed quite well. Cars, laptops, the world wide web, and Google came much later. What the people of Bihar (and India in general) don’t have today and which the people of the US had from the birth of that nation was the smarts to figure out a set of rules and institutions that made the people more productive, not just the land and natural resources.

The US is cheap relative to India because it takes a lot less effort to get something done in the US than in India.

The Cost of Gas

Yesterday, I ventured out to get a cylinder of cooking gas. I had run out a couple of days ago, and after much inquiry I heard of a store that was willing to sell me a cylinder of LPG (liquefied petroleum gas). The store was about 2 kilometers away. I could have leisurely walked that distance in 20 minutes. But I had to drive as I had an empty gas cylinder weighing 16 kilos. It took about an hour to drive the 2 kilometers. Total time expended in acquiring a cylinder of gas this time: 3 hours. Cost of the gas: Rs 550 (or around US$15.) Over the last couple of years that I have been in Pune, I estimate that the effort in acquiring cooking gas was about Rs 1,500 and three full days of running around.

Anyone running a middle-class household in India knows that there is a shortage of cooking gas. Demand for it at the government mandated price far exceeds the supply. The price is around Rs 300 per cylinder but the cost to the manufacturer is around Rs 500. The government subsidizes the consumption of cooking gas. Mukesh Ambani’s household gets that subsidy, and so does any household which is not so poor as to not be able to afford the gas stove. That subsidy is not available to the really poor as they do not have the money to pay for the capital expenditure involved in using the gas. And besides, if you are not already a consumer listed with some gas supplier, you cannot get one as the supply is severely limited and it is not easy to become a new subscriber. I tried but I was told that the bribe is around Rs 6,000.

The perverse effects of controlling prices should be evident to the meanest intelligence. Which makes one wonder whether those who make these policies don’t even possess the meanest intelligence. Their claim is that subsidizing cooking gas is good for the poor. But it isn’t. Only the comfortably middle-class and higher actually get the subsidy. That subsidy costs the public treasury billions of dollars. Removing those subsidies will free up funds for things that would actually help the really needy – such as say education or health care.

In the end, markets figure out the solution. The distributors of gas cylinders price the gas cylinder to those who desperately need it and who can afford to pay for it at the market-clearing price. I paid Rs 550 for the cylinder which the distributor is supposed to sell at Rs 300. In effect, he pocketed the major part of the subsidy that the government gives to the consumers of gas.

Socialism suffers from the persist illusion that by lowering the price of something below the actual cost it somehow benefits the poor. That is arrant nonsense because a price ceiling pegged below cost of production is the best way to ensure a shortage of supply, and the limited supply can only satisfy the demand of those who have the deeper pockets, thus rationing the poor out. Socialism hurts the poor. Indeed, socialism creates poverty by ensuring that production suffers and thus incomes are low.

The US and the former USSR were similar in many respects such as the quality of the people (talented, educated) and the stock of natural resources. The major distinction was that the US was a free-market economy while the USSR was a socialist workers’ paradise. The average consumer in the US faced market price, and found shelves overburdened with goodies in their supermarkets. The average consumer in the USSR faced bare shelves of phantom goods—goods if they had been there would have been sold at affordable socialist prices.

The Road to Poverty

While sitting in creeping bumper-to-bumper traffic yesterday on my way to somehow get a cylinder of cooking gas, breathing the exhaust of diesel trucks, assaulted by incessant honking of cars, three-wheelers, and motorcycles, I wondered where it was all going.

Economics is called the dismal science. It does not get any more dismal than when you are forced to confront the absolute stupidity that leads to waste of human potential of such gigantic proportions that the Indian economy barely produces enough to keep its body and soul together. India is unable to feed all its children—about 50 percent of children below 5 years of age are malnourished. India does not produce enough to be able to provide a vast segment of its people decent housing, education, sanitation, health-care, and even a clean glass of drinking water.

I don’t wish to dwell on the obvious shortcomings of the Indian economy gratuitously. The intent is to force attention to the basic problem, which is that we have through our own stupidity not paid attention to what it is that makes people productive. Here’s one line of thinking. If people are forced to spend hours on end getting from one place to another, it leaves a lot less time to do productive work. The roads everywhere are congested because they are too narrow. There is a one-time cost to building wide roads or even for leaving sufficient space for building wider roads in the future. But the saving in building narrow roads is dwarfed by the cost incurred year after year of wasting time and fuel crawling along congested roads. It requires only a bit of foresight, only a bit of reflection to realize that so many people would need to move from this place to that and so the transportation system has to be designed such.

That brings us to an important point. People need transportation, not cars. Cars are a means of transporting oneself from point A to point B. Cars are not the end but only one of the many means of getting around. Roads are one obvious solution to urban transportation needs but not the only one. You could have light rail, for instance. And even if you do go in for roads, you could plan for a healthy mix of private cars, taxis, public buses, bicycles, and footpaths. The important point is that it involves planning, not just a random sequence of interventions made by ignorant policymakers.

Private firms are good at meeting the demand for private goods. That is what the market does so effectively: provide private goods. A car is a private good but it depends rather heavily on the availability of a complementary good: roads. Roads are not generally a private good. In the development where I live, Magarpatta City, they have internal roads which are wide and well maintained. The developer of the township owns the roads and has planned them to reflect the capacity of the township. There are no traffic jams within Magarpatta City. But step outside the gates, and you are forced to crawl along the roads of Pune.

Unlike private goods like cars, roads are “collective goods” and have public goods characteristics. The market does not provide public goods automatically in what is called “socially optimal amounts.” In the case of some public goods (such as pollution, a public “bad”), the market over supplies, and in others such as roads, it under supplies. Correcting for such market failures is the job of what is called the government. This does not mean that the government has to get into the business of supplying the public goods. It only means that the government has to make such rules that will correct for the market failures and thus nudge the market to produce the socially optimal amount of the public good in question.

Tata Motors about to market an “affordable car” – the cheapest car in the world, we hear. I suppose if one is only interested in owing a car and not really much bothered with the matter of whether it will take you anywhere, then it is a grand thing to have. Because irrespective of whether you have a BMW 740i or the Tata car, sitting in traffic does not get you very far. The existing roads of Pune will not magically expand to accommodate the additional affordable cars. The average speed will drop further and the total cost of transportation will go up appropriately. The total cost of transportation includes the cost of the car, the cost of the fuel, and the cost of moving along at 2 km an hour. I don’t think that the Tata car will be all that affordable.

Indian Cities are Expensive

The US is cheap because it is cheap to produce stuff in the US. Try doing a business in India. It will take months of hard work to figure out a route through the bureaucratic jungle to get the various permissions and permits required to get the business started. Running the business will require constant approval from a large number of interested parties. Much of this approval depends on how much you are able and willing to pay as bribes. A lot of effort in the economy overall is expended in either extracting rents from those who produce stuff or in minimizing the amount of rents a producer has to pay. The end result is that most of India is in what is termed the unorganized sector – a sector that suffers from low productivity because it cannot gain from the economies of scale and specialization. The organized sector accounts for about 7 percent of India’s labor force.

Even in the organized sector, the costs are high. The organized sector is necessarily urban based. The stock of urban locations is low and therefore the rents (here we are talking of rents as what you play for a place to live and work in, and not the rents that are bribes to those who control the economic activity) are high. A decent apartment in a good location in Mumbai or Bangalore can be upwards of Rs 100,000 a month. On top of that, you have to make your own arrangements for a basic utility such as electricity.

The Solution

If not the solution, at least the outlines of what should be a matter of public debate in India. I am not minimizing the progress that India has made in the last couple of decades. It is a matter of great personal satisfaction to me that India has moved out of its 3 percent a year “Nehru rate of growth” achieved by his wonderfully brilliant socialistic license-permit-control-quota raj. But I am concerned that for India to grow at a sustained double-digit, some fundamental changes have to occur.

The first is continued liberalization of the economy. Economic liberalization would allow the entrepreneurs of India to produce stuff. Not just stuff, it will produce the most important ingredient of all: education.

Second, India has to plan new cities. New cities will be cheaper to live and work in compared to stuffing even more millions in the existing cities. The existing cities were built for a time when the population of India was a tenth of what it is today. Furthermore, they were built for a time when practically nobody owned cars.

Third, India has to invest heavily into figuring out a way of having cheap energy. The US and other currently developed economies had the luxury of cheap fossil fuels. India does not have that. Joining the struggle to get a larger share of diminishing stocks of fuel worldwide is a loser’s game. Investing in research and development for alternate energy sources is something that the private sector cannot fund. It requires public policy and public funding.

The problem fundamentally boils down to why we cannot have a rational growth plan and enlightened public policy. My conjecture is that it is due to our political setup. I will go into that matter in the next bit.

[See the followup post -- The AN-WWTSD-MFGTT -- for responses to some of the comments below.]

Economic growth in a sense, and to a much larger extent economic development, is more akin to a game of golf than a game of chess. In golf, the opponent’s moves matter very little; you may as well play by yourself and later compare scores if needed. In chess, your move depends on how your opponent has moved and how he is likely to respond to your move. In other words, chess is a strategic game while golf is not. All this is very broadly speaking, naturally. I don’t mean to imply that there are no dependencies among economies as they grow; what I mean is that, especially for a large economy like India, how much it produces and how determines how materially prosperous it is and is independent of how other economies are growing. For strictly benchmarking purposes, one can glance over at the neighbors. And if one is smart, one can learn from the experiences of those neighbors. Still, when it comes to economic growth, it is largely the case that you are playing against yourself.

Here I want to glance at India’s large northern neighbor and recently a strategic competitor in the fiercely competitive game for control of scarce resources. China has been moving mountains — quite literally as you will soon note — for quite a few years for growing its economy. From an Indian perspective, it is a chilling reminder that there are no shortcuts to economic growth and that it takes something special in terms of will and perseverance to overcome the ill-effects of flawed economic policies and failed leadership. It is also a story of hope and the indomitable human spirit, a story of almost superhuman striving by mere mortals.

Words, not Numbers

Regular readers of this blog may have noticed that rarely do I have charts, graphs, and tables of statistics in my posts. It is not that I mistrust those devices as they do illuminate the subject. But I leave the numbers to sources that do rely on them for making their points. Honestly speaking, I am fairly suspicious of numbers that have pretenses to a degree of precision that is not even theoretically possible. In one report I had read (from some global consulting firm), I had seen figures which made my head hurt. It said something like, “By July of 2010, the US would have outsourced 10,573,425 jobs to India.” I wondered if they meant July 1st or July 31st; and whether it was by 10 AM of a particular date or was it by 10:30 AM. How did they know that the number in the units’ place was 5 rather than 6 or 4?

I am convinced that you, gentle reader, have seen a lot of numbers projecting what is going to happen to India by such and such a date. One report that I recently glanced at was from KcKinsey which Sramana Mitra has blogged about recently on the growth of India’s middle class. Makes fascinating reading, I am sure, for MBA-types. But I digress. I will get back to that McKinsey report in a different post shortly.

For now, I would like to point you to a National Geographic feature titled “China’s Boomtowns” from June 2007 (Hat tip: Abhishek Sarda.) It is well worth the 10-odd minutes it takes to read it. No charts and graphs there. But it tells a story that makes you admire the spirit of the Chinese. There are lessons in that story that underline some of my obsessions that have to do with the prerequisites of economic growth in the modern world. Without any charts or graphs, the story is replete with lessons that we should have learnt and perhaps we still can if only our benighted leaders were to pay attention.

Similar Pasts

For much of the recent past, China and India were similar in many respects. Very large populations, very deep and widespread poverty, largely agricultural, and saddled with brain-dead economic policies rammed down the throats of the powerless populations by ignorant policymakers. Then the Chinese people got lucky: they got a dictator who was smart. This dictator was different from the other dictator who had propelled China into a “Great Leap Forward” which left tens of millions dead. India matches the first part of China’s story — it got a dictator who wanted to personally control India’s climb into “The Commanding Heights” but succeeded in digging a very deep hole for most of the 350 million living around 1950 that even 60 years later, the number of deep-hole dwellers is variously estimated to be between 500 and 800 million. Thanks awfully, Mr Jawaharlal Nehru.

The new path that the dictator of China took around 1970 propelled economic growth and lifted hundreds of millions out of the hole that had been dug for them by communism. India, by contrast, continued along the path blazed by Nehru, and the path was solidified into an 8-lane superhighway by his daughter. (She was another ignorant autocrat — and appeared to be fairly convinced that ignorance was better than knowledge since she saw no need for the education of the masses. Though she had all the opportunity in the world, she herself never got any formal education and I believe was kicked out of Shantiniketan, a school where you would have to work hard to get kicked out of. The irony that numerous educational institutions are named after her would not be tolerated but for the ignorance of the Indian population.)

India went careening down this superhighway of socialism until it was wrecked through a collision with the barrier of a balance of payment crisis. Headless chickens have been known to display more foresight than the architects of India’s economy.

But I digress once again. Let me get back to what China did: it became the world’s manufacturer. Manufacturing is capital intensive but if you do enough of it, you do require lots of people. Lots of people churning out stuff means that there is more to go around. So labor is attracted into the sector and the laborers get paid wages. Those wages may be low compared to advanced industrialized economy standards but are far superior to the alternative of starving on a farm in the rural interior of China.

Manufacturing

Where did all the wealth that exists in the world today come from? (Wealth is stuff — not money. Stuff that we eat, stuff that shelters us, stuff that transports us, etc.) It is largely manufactured. 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. The fact though is that manufacturing has what economists call “economies of scale”: the cost of production per unit goes down as the volume of production goes up. So large manufacturing units produce stuff more efficiently. And 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 bunch of villages is not as productive as the same population living in a city and helping with manufacturing. Cities are the engines of growth because manufacturing has scale economies.

Cities, not Villages

Indian policy makers have an obsession with villages. Villages were Gandhi’s fetish; and Gandhi is an Indian fetish. So I think that the policy maker’s obsession derives from the fetish**2 (the fetish of a fetish) that Indians indulge in. I am not against fetishes, mind you. My own obsession with the primacy of individual freedom compels me to approve of all personal fetishes. Whatever floats your boat, is what I say. But when fetishes intrude into sensible policy making, I draw the line.

So the point that I am attempting to make is this. Build cities. That will require a great deal of manufactured stuff. So you need lots of manufacturing. And forget the crumbling mega-slums we currently pretend are cities, and forget the tiny impoverished settlements we call villages. Build livable cities and build factories that will produce the stuff that the poor currently don’t have because it is not produced. Manufacturing so much stuff will require lots of people. And we have people coming out the wazoo — they are currently stuck in a declining agricultural sector.

Yeah, move a few mountains. They do that in China. India can imitate that bit at least.

Dr MM Singh. VP Singh. The monsters created for gaining political power by legislating divisions of the country along caste and religious lines are beginning to have a life of their own.

Soon to be released, the sequel to the hit drama, “August 1947: The First Cut.” New updated imported Gandhi. Bigger bombs. In production, “August 2017: The Final Cut.” Totally new cast, with hundreds of specially recognized castes. Supporting mega roles by ISI in Bangladesh and Pakistan. Islamic terrorists and RDX will blow you away. You can’t miss it. You won’t be able to.

The flight from Delhi (Patna is not directly connected to Mumbai) was seriously delayed. It was late in the evening when I checked into the hotel Maurya Patna, the best hotel in the best part of town. A machine-gun equipped policeman stationed close to the lift on my floor did much to remind me that I was in a state that is largely lawless and has massacres with fair degree of regularity.

Surveying the room and the bathroom, I did a quick calculation of the number of hours that I will spend in Patna and consoled myself that I will be too busy to note the passage of time. The air conditioning system vented an unpleasant stream of humid air into the room. I was told that the restaurant closes at 10 PM. The front desk informed me that hotels everywhere around the world shut down their restaurants at 10 PM. After checking out the room service menu, I decided to skip dinner.

The next two days I spent in the conference rooms in the hotel, meeting with a group of people who had finished touring three selected districts of Bihar: Samastipur, Muzaffarpur, and Patna. The organizers were from the Aga Khan Development Network and I was invited to take part in the de-briefing proceedings. My host was Dr Somnath Bandyopadhyay who was leading the mission to figure out what the AKDN should do to help with the development of those three districts.

The short answer to what’s wrong with these places: everything. Listening to the experiences in the field, it became clear that it is a systemic problem and that the entire ecosystem was sick. Too many people, too little land, too little production, too little education, too much government, under-performing government schemes – the list goes on.

Bihar has a population of over 80 million people, approximately that of Germany. While Germany’s annual production is valued at US$2.9 trillion, Bihar’s production is around US$24 billion, or less than 1 percent of Germany’s. Bihar’s statistics are depressing even compared to India. Its per capita annual product is a third of India’s. The growth of Bihar’s economy actually decelerated as the rest of India’s growth accelerated. In 1980s, Bihar’s real per capita income grew at 2.6 percent (national average 3.3 percent), but in the 1990s, Bihar slowed its real per capita income growth to 0.0 percent (national average 4.0 percent.) It was at the bottom of the list of 16 major Indian states.

Bihar’s agricultural productivity is half of India’s. That is all the worse because agriculture accounts for 45 percent of Bihar’s income (compared to overall for India 25 percent.) Bihar is actually almost all rural – 90 percent of the population lives in rural Bihar (compared to India’s 70 percent.) And the rural areas are crowded: the population density is nearly 900 people per sq km, about three times India’s population density. [Source.]

Not surprisingly, Bihar is at the top of the list of negative indicators. Kidnappings: 3rd highest after UP and Rajasthan. Murder rate: 2nd highest after UP. Total fertility rate: 4.4 second to UP (national average 3.3.) [Source.] Bihar trails in practically all indicators of development such as literacy rate to income distribution.

Sitting on in the de-briefing meetings, a picture of gradual and steady decline began forming in my mind. The signs were apparent. The power failed intermittently. Bihar produces no electrical power of its own. Somnath informed me that Bihar gets about 1000 MW of power from outside the state, 700 MW of which is unaccounted for. Patna consumes 300 MW, a good bit of which appears to have been used by the Rabri Devi household. It is reported that when she vacated her official Chief Minister’s residence, they had to remove 53 air conditioners.

Bihar is in dire straits and can be the textbook example of a failed state. One wonders whether bad governance is the result of poverty or whether poverty is the cause of bad governance. I suspect that it is a little of both given that democracy is the link. The people deserved their leaders such as Lalu Prasad Yadav, the guy who was at the helm of affairs for over a decade in Bihar. He is reputed to have dismissed development as of no relevance to his people.

In some sense, Lalu is right. Bihar does not need development, thank you very much. The state has over 80 million inhabitants. Sure they don’t have the GDP of Germany, but the people get by, don’t they? The land provides. And that may be the reason that Bihar is poor. You can get by somehow by doing nothing. The land is fertile to a fault. Water is abundant. In north Bihar, water is not only plentiful, there is too much of it. The story of north Bihar and its floods is something I had not known about.

[Previous post: Part 1. To be continued.]

The Buddha’s enlightenment was centered around the realization that the universe is characterized by impermanence (called annicha in Pali) and change, that nothing abides eternally. That event occurred when he was intensely meditating under a tree 2,500 years ago in a grove. That place is known today as Bodh Gaya, a small town in the state of Bihar. There is a certain aptness to the Buddha’s realization about impermanence when one considers Bihar.

Bihar, from the Sanskrit word vihara meaning abode, used to be one of the most important places on earth in history. It’s capital, Patna, then called Pataliputra, was the capital of the Mauryan Empire (321 – 184 BCE) “which ruled over much of the Indian – Subcontinent and extended as far as Iran and Afghanistan to the West. Emperor Ashoka, one of the greatest monarchs in the history of the world, who ruled between 273 BC and 232 BC was the most famous ruler of the Mauryan dynasty.” [Wiki]

Bihar is associated with not just Buddhism. Mahavira, the 24th and the last Tirthankara of Jainism, was born in Bihar. He attained moksha in Bihar as well. Bihar lays claim to being the birthplace of Sita, the wife of Hindu god Ram. She was the daughter of King Janaka of the Mithila kingdom. Guru Gobind Singh, the 10th guru of the Sikhs, was born in Patna.

One cannot refer to learning and scholarship in the ancient world without mentioning Vikramshila and Nalanda universities. Nalanda was the equivalent of today’s Harvard, Yale, Oxford, Cambridge, Berkeley and Stanford, all rolled into one. At its peak, Nalanda used to house 10,000 students and 2,000 teachers. The Buddha and Mahavira were certainly visiting faculty at Nalanda. Emperor Ashok must have been like a VC benefactor to Nalanda: he built a temple there.

It’s all gone now.

Islamic invaders destroyed Nalanda in 1193 CE, just a little over 800 years ago. Bhatkiyar Khilji, the Turkish Muslim invader, took care to inquire whether there was a Koran in the library before he burnt it and sacked the university complex. Wonder if his ideological descendents worry about the Koran before flying planes into buildings. Just incidentally, it is interesting to note that Islam has been in the business of destroying what Buddhists built for many centuries, and so the destruction of the Bamiyan Buddhas is just a small comma in the history of the world (as the POTUS Dubya may describe it.) I don’t know if the descent of Bihar into the disaster zone it is today began with the destruction of Nalanda. Perhaps it did.

My visit to Patna for a couple of days recently was enlightening. I had visited Bihar before, of course. Many years ago, when I was on a tour I called “Following the Footsteps of the Buddha,” I had gone to all the places associated with the Buddha: birth, enlightenment, first turning of the wheel of dharma, various important sermons, and death. In Bodh Gaya, I even sat all by myself for a couple of hours at the same spot where the Buddha became a buddha, under the tree which was a direct descendent of the original bodhi tree. Nobody else was around—by a sheer stroke of luck for me, it was election day in Bihar. But that is a different story.

Anyway, it was my first time in Patna. This time I learnt a bit about Bihar today and its future. I will come to that in my next post.

A head’s up from Rajesh Jain on an article Asia Times Online titled Why India’s Economy Lags Behind China’s got me thinking once again about popular misconceptions about development matters. Journalists are particularly susceptible to some of these. An example appears in the article.

The real bad news lies elsewhere. India’s agricultural sector, which continues to employ about 60 percent of the country’s workforce, has seen a real decline in terms of its contribution to GDP growth and its share of GDP.

I don’t know where to begin to unravel the illogic of that statement. Perhaps I should start off with an analogy.

Consider my grandmother’s GDP. She spent the bulk of her time in the kitchen and in rearing children (and later in her life, her grandchildren such as yours truly.) Her time in the kitchen was food-related and so let’s just call that her agriculture sector. Rearing children could be considered her service sector; and producing children, three boys and three girls, her manufacturing sector. I’d assign her GDP shares as

Agriculture:     50%
Manufacturing :     20%
Services :     30%

Now move ahead about 70 years and consider my sister’s GDP. She has two boys, works full-time managing a medical transcription service company, and spends a little bit of time in the kitchen after she gets home. Her sectoral output:

Agriculture:     10%
Manufacturing :     10%
Services :     80%

In other words, my sister spends most of her time working outside the home and very little time in the kitchen. Also, she has to rear only two children, as opposed to my grandmama’s half a dozen. Clearly the share of the GDP accounted for by “agriculture” has fallen dramatically as the generations progressed. Concluding from that that perhaps my sister’s family is starving would not be very clever.

In other words, the structural change in the GDP is a good thing. Lamenting it is somewhat idiotic, not to put too fine a point on it.

Anyhow, enough of that analogy. Let’s move on to the figures that India’s Tenth Plan states for shares of the GDP and growth rates.

Sector . . . . . . Growth rate .   Share of GDP
 . . . . . . .  2002-07  1997-02    2002-07  1997-02

   Communications   15.0     17.14      2.3       1.7
   Manufacturing     9.82     3.68     16.7      15.3
   Agriculture       3.97     2.06     20.5      24.7

The growth rate of the agricultural sector accelerates in the next plan. So in absolute terms it gains and there is no decline. That is good news. In relative terms, the decline of agriculture in the share of GDP from 24.7 to 20.5 is also good news. That decline implies that services and manufacturing are gaining share and that implies that we are moving away from a subsistence economy to one in which we may have some hope of improving our lot.

Of course, as a developing economy, agriculture is the core of the economy. No one is advocating a destruction of the core of one’s economy. What I maintain is that agriculture’s share in the GDP had better decline (but not a decline in the absolute value of the agriculture sector) if India is to ever develop. It is only very severely underdeveloped economies have high ag sector share of GDP.

For instance, here are some numbers of the share of agriculture in overall GDP of some nations. No prizes for guessing which are developed and which not.

 Country    % share of AG in GDP 1999 data

    Albania     54 (was 37% in 1990)
    Australia    3
    Bangladesh  21
    Belgium      1
    China       17 (was 27% in 1990)
    Ethiopia    49 (was 49% in 1990)
    France       2
    Germany      1
    Ghana       36
    Mali        47
    Nepal       41 (was 52% in 1990)
    Pakistan    26 (was 26% in 1990)
    India       28 (was 31% in 1990)
    Sri Lanka   21 (was 26% in 1990)
    Thailand    13 (was 12% in 1990)
    US           2 (was  2% in 1990)

The level tells you roughly if the country is poor or not. Albania, Ethiopia, Mali, Nepal, Ghana — economies with agriculture accounting for a large share of the GDP. Australia, France, Germany, US — agriculture accounts for low single-digit shares of the GDP. The trend is even more telling.

The direction of the change between 1999 and 1990 tells you whether the country is developing or not. See China, for instance. Compare that to Pakistan. Note that the trend for India is good. Sri Lanka is doing good and it will do even better when the civil war finally ends. Albania is a disaster zone and note that from 37%, Ag is now 54%. The US has the world’s largest agriculture sector — it can feed the entire world with only a bit more effort. US’s ag share of GDP is almost negligible.

For India to develop, its share of the ag sector has to decline rapidly (with an increase in the absolute size of the sector).

There is little gained by not listening to one of the greatest polemicists of our age talk about free speech and the evils of monotheism, Mr Christopher Hitchens. Go watch the video.

My distaste for cricket (which I wrote about earlier here) arises from the same apathy I have towards the mindless worshipping of idols by the masses. I am pondering this general phenomenon of fanatical worship because of the recent suspected (and most likely true) murder of the Pakistani cricket coach Woolmer in Jamaica. The team lost, some fans called for the murder of the coach, and within a day of the defeat, the coach was dead. Shocking? Not really considering the incredible fanaticism of the fans. That the word “fans” is derived from “fanatics” is instructive.

“Woolmer used to tell stories of the fanaticism of subcontinental fans who would wait at a train station at some dusty township at 3am just to see a train carrying Indian great Sachin Tendulkar flash by, in a land where every avenue of life is magnified in the extreme.” [Source.]

It’s the economics, stupid. Great masses of people follow the game on TV and radio. That attracts not just advertisers of soaps and sodas, but bookies and bureaucrats also. With millions of dollars at stake, match-fixing is a predictable outcome. Finally the meta-game of money and jingoism results in senseless murder and random acts of mob violence.

No, no, it’s the religious zeal, stupid. Rootless individual identity seeks to tie itself to some group with a large following, whether Scientology, Islam, cricket, movie star—the details are not important. It is primitive tribalism, a drive to be part of something that is much larger than oneself, a drive to belong to a group and thus inherit some of the power of that group.

No, no, it’s the combination of economics and religious fanaticism, stupid. Material poverty coupled with cultural poverty (which manifests itself as a fanatical devotion to an ideology) give rise to the observed phenomenon of violence. Take away either of the two ingredients, and you don’t get cooked. Civilized cultures (Jains and Buddhists, for example) no matter how materially deprived do not descend to mass murder. Similarly, materially rich but still nominally Christian societies do not indulge in generalized violence within their own societies.

I think that I like the last conjecture the best. Is there a way out?

It is trivially true that if you are too busy building stuff, you don’t have too much time to go around destroying things. Conversely, if you are fully invested in destroying stuff, you have little inclination to build things. Now if enough people in a society are busy breaking, not much stuff gets built. Lack of stuff leads to material deprivation and then if an evil ideology is handy, it leads to more destruction. Society is then locked into a low level equilibrium, or vicious cycle.

To nudge the system out of this trap of religious fanaticism and material poverty, there are three possible ways: 1) Get rid of intolerant religions; 2) Provide a way out of material poverty; 3) Get rid of both the intolerant religion and provide a way out of poverty.

You cannot get rid of intolerant religions. There are too many followers. So options 1 and 3 are ruled out. The middle option is the only one we have. I suspect that people who are comfortable at home rarely go out rioting in the streets. That option is also attractive because when people become rich, they have the means to fulfill the natural human desire to become educated, and when they are educated (in the broadest sense of the word), they naturally discard mindless ideologies. Another way to put it would be to say that people move up Maslow’s ladder.

I have an uncommon attachment to the notion that stuff matters. If you have stuff, you have the precondition for moving up the ladder. Given enough stuff, you can do whatever you want to do. If you don’t have stuff, you can’t do squat. Go read “The Importance of Producing Stuff” now. Go on do it; I will be here.

Fine, now that you are back, we can continue with this matter of religious fanaticism and poverty. I think that it is not surprising that they go hand in hand. The connection is well-understood by the “leaders,” whether they are called mullahs or politicians in a so-called “democracy.” In India, there is an unholy (sic) nexus between political power and the handing out of goodies to favored religious groups. Handouts are wonderful. They promote dependency and given sufficient time, impoverish the group so favored. Impoverished people are more easily manipulated. In neighboring Islamic republics of Pakistan and Bangladesh, they dispense with the pretense of democracy and go directly to guns and military dictatorships.

I began with “Hopeless ignorant masses need some sort of refuge.” What we need to do is to remove ignorance and promote hope among the masses. The key is education. Education inoculates the civilized person from the virus of fanaticism and despair. Education makes people productive and so stuff gets produced. When stuff gets produced, poverty is reduced. With material wealth, the necessary condition for development is satisfied. Educated people have a stake in the future and therefore have an interest in informing themselves about policies that are beneficial. They then make an informed choice among various leaders based on their policy prescriptions. This results in a peaceful and prosperous society.

Want to reduce the fanatical devotion to monotheistic religions, cricket, movie stars, and other mindless matters? Then educate the people.

My view is that the problem of rural development has to focus on the development of rural people, not the development of villages. Villages are not the proper object of analysis when it comes to economic growth, and hence economic development. 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. It seems to me that the answer to rural development lies in urban development. Paradoxical but true.

About 70 percent, or 700 million Indians, live in villages. Clearly, there is no possibility of urbanizing them by migrating them to the existing cities which are already bursting at the seams. All of the major cities are little more than mega-slums. 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 we cannot afford that. (Fires, earthquakes, carpet bombings have benefited many other cities in the past.) So there is clearly a need to have new urban centers to accommodate the hundreds of millions of people who need to be in cities for economic growth and development. And that is the greatest opportunity that India provides to everyone–people rural and urban, firms domestic and foreign, governments, NGOs, multinational entities . . . the list goes on.

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 now imagine doing that using the best urban planning known to humanity. Take whatever humanity knows about the best way to get things done, and use that to design and build cities that can develop and sustain the people for generations.

That is the greatest opportunity we have – of building from scratch – which is not available to any developed economy. Take for instance the US. US cities are the notoriously inefficient in terms of resource use and sustainability. Practically all Americans live in cities and if you were to build new, more efficient cities, you will have the greatest difficulty populating them because people will be reluctant to move from their home cities. Their legacy urban centers will burden the transition to living in more sustainable cities. Contrast that with India. Most Indians living in villages would love to have the chance of living in well-designed efficient cities.

Allow me to illustrate that last point with an analogy from a different sphere. 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.

What I am proposing is a similar “urbanization leap” for the majority of Indians. Instead of futzing around in the margins with trying to make the villages a little better, take a bold step and create the world’s most efficient cities. I know, it is more than slightly crazy to say that we can do something that others have struggled with for many decades. But I submit that it is not only possible but also possible in a surprisingly short time. What we need to do is to think differently.

What we in India need is not so much hard resources as we need a bold compelling vision. We need the vision to look beyond the here and now, and see the future. If we have a bold, coherent, inspiring and realistic vision of the future, it will serve as the guide to purposeful action. I bet you are justifiably skeptical of my claim that we can work miracles. But I will argue in a future post how it can be done, and done with ease. Stay tuned.

[Continued at "The Urbanization Leap."]

ISB at night [source]

Recently I was on a panel discussion titled “Business Strategies for Inclusive Economic Growth” held during the semi-final round of the Global Social Venture Competition at the Indian School of Business in Hyderabad on the 9th and 10th of March. The panel–moderated by my friend Dr Reuben Abraham–included Mr Varun Sahni of Acumen Fund, Mr K Krishan of Malavalli Power Plant Pvt Ltd, and Arjun Uppal of the IFMR Trust.

You and I—and those who were gathered at the GSVC event—are exceptional. We live in cities, engage in non-agricultural work, and earn far more than what the average Indian earns. The vast majority of Indians live in villages, and eek out a meager existence from agricultural related labor. We tend to forget the fact that our economic prosperity and our lives in urban India are correlated. Therefore if the goal is India’s economic prosperity, somehow the 700 million living in some 600,000 villages of India have to have the same option of living and working in urban India on jobs in non-agricultural sectors.

Do we want the reality of today’s India to persist into the future, a generation or two hence? Or do we want a future where the majority of Indians are urbanized and are engaged in highly productive non-agricultural sectors? We can choose, and having chosen, we can actually make that future happen.

I think it is fair to assume a broad consensus on that development is a good thing. Of course, development and economic growth are not the same thing. You can have one without the other. For a very materially rich society, development does not require economic growth. It is possible to appropriately channel resources towards development, an exercise in greater allocative efficiency if the resources are available in plenty. But in a materially poor society, merely changing the allocation of resources is not likely to be sufficient. There you have to have increased production, in addition to the problem of efficient allocation of what is produced. The US, for instance, has a per capita annual income of around $28,000. Extreme variance in incomes and wealth can be reduced with appropriate redistributive mechanisms. Contrast that with India. Yes, there are a lot of very poor people in India. Even perfectly distributing the national income leaves everyone pretty poor. The conclusion is hard to avoid: India needs economic growth for development.

Economic growth is both a cause and consequence of urbanization. The reason is simple. Cities are the engines of growth. The high population and population densities of cities reduce “transaction costs.” Services are cheaper (as compared to the same in rural areas) because infrastructure is less costly because of scale economies. That is, infrastructure have high fixed costs and investment in infrastructure is lumpy. The high aggregate demand and supply of infrastructure in urban areas makes lower prices possible.

So the logic so far: 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.

In my considered opinion, the problem with India’s rural development has been that the focus has been on the development of rural areas, not rural people. The policy makers have been focusing on the wrong goal, that of village development. It is silly to attempt to develop 600,000 villages because it cannot be done. The future is deserted villages because people vote with their feet when they get the chance to move to a city. Only in very rich economies do people have the resources to live comfortably in villages. India cannot afford to live in villages; it is not that rich.

[Continued at "India--the Land of Endless Opportunities".]

Here is a brief lesson in history from Brahma Chellaney, India, the lamb state, hauled from the archives of rediff (Jun 2004). An excerpt:

The India-China territorial dispute is another problem bequeathed by Nehru to future generations of Indians. Nehru’s first blunder was to shut his eyes to the impending fall of Tibet even when Sardar Patel had repeatedly cautioned him in 1949 that the Chinese Communists would annex that historical buffer as soon as they had installed themselves in power in Beijing. An overconfident Nehru, who ran foreign policy as if it were personal policy, went to the extent of telling Patel by letter that it would be a ‘foolish adventure’ for the Chinese Communists to try and gobble up Tibet — a possibility that ‘may not arise at all’ as it was, he claimed, geographically impracticable!

In 1962, Nehru, however, had to admit he had been living in a fool’s paradise. ‘We were getting out of touch with reality in the modern world and we were living in an artificial atmosphere of our creation,’ he said in a national address after the Chinese aggression. [Emphasis mine]

The “we” above is the royal we and refers to Nehru rather than the collective Indians.

We are not amused.

Why the government interferes in every aspect of the economy is an interesting study in itself and I will not go into it right now. Also, I will not rigorously argue my case that it is government involvement in actitivities that it should not be involved in is enormously harmful. Anecdotal evidence, though not conclusive, is suggestive of the general soundness of an argument. For instance, take the case of the telecommunications revolution in India. As long as the government was the sole provider of this service, the telecom system was one of the world’s worst. When the sector was unshackled from the clutches of the government, it boomed with an echo that is being heard round the world.

Talking of which, Shashi Tharoor wrote a very articulate piece on the matter in the Hindu called Mobile Miracle. (Hat tip: Vivek Sellappan.)

Bureaucratic statism committed a long list of sins against the Indian people, but communications was high up on the list; the woeful state of India’s telephones right up to the 1990s, with only eight million connections and a further 20 million on waiting lists, would have been a joke if it wasn’t also a tragedy — and a man-made one at that. We had possibly the worst telephone penetration rates in the world. The government’s indifferent attitude to the need to improve India’s communications infrastructure was epitomised by Prime Minister Indira Gandhi’s Communications Minister, C.M. Stephen, who declared in Parliament, in response to questions decrying the rampant telephone breakdowns in the country, that telephones were a luxury, not a right, and that any Indian who was not satisfied with his telephone service could return his phone — since there was an eight-year waiting list of people seeking this supposedly inadequate product.

Mr. Stephen’s statement captured perfectly everything that was wrong about the government’s attitude. It was ignorant (he clearly had no idea of the colossal socio-economic losses caused by poor communications), wrong-headed (he saw a practical problem only as an opportunity to score a political point), unconstructive (responding to complaints by seeking a solution apparently did not occur to him), self-righteous (the socialist cant about telephones being a luxury, not a right), complacent (taking pride in a waiting-list the existence of which should have been a source of shame, since it pointed to the poor performance of his own Ministry in putting up telephone lines and manufacturing equipment), unresponsive (feeling no obligation to provide a service in return for the patience, and the fees, of the country’s telephone subscribers) and insulting (asking long-suffering telephone subscribers to return their instruments instead of doing anything about their complaints). It was altogether typical of an approach to governance in the economic arena which assumed that the government knew what was good for the country, felt no obligation to prove it by actual performance and didn’t, in any case, care what anyone else thought.

Telecommunications is a critical infrastructure, of course. But it is not half as critical as education. It is absolutely imperative that the government get out of education. If the government does not, the education sector will continue to be as dysfunctional as the telecommunications infrastructure was during the days of government monopoly. That is something we cannot afford. India needs to have a vibrant educational system and the only way we will have it is if the government were to let go of the stranglehold that it has on education.

The more general point that I want to argue is that the government should get out of the business of dictating to people how they should behave, what they will read, what they will eat, who they will employ, who they will give charity to, etc. One of my greatest complaint against the government of India is that it should get out of the business of taking my money and funding charities. Charity is when I freely give of my resources to causes that I believe in. When the government does it, it is robbery, not charity.

That is why I believe that if your government is run along the lines of Cafe Baghdadi, you might be living in a Third World country.

Public service announcement: The government of Maharashtra has decreed that you will not consume alcohol on five specific dates between Jan 25th and Feb 3rd. For your own good of course. Because you cannot be trusted to behave yourself. So there.

How many Americans have ever lived? I would estimate that less than a billion Americans have every existed. After all, the nation is just a couple of hundred years old. How did such a small population – relative to the larger global population of humans – ever get to have such a disproportionate influence on the world by producing such a large number of amazing individuals? What is the secret of their success?

I believe that the answer is summed up in one word: FREEDOM. The Americans have enjoyed freedom and upon that fertile ground have grown up mighty oaks. The lesson is simple and striking: if a population enjoys freedom, it naturally produces phenomenally successful, amazingly creative individuals. The freedom to think, the freedom to speak, the freedom to write, the freedom to investigate the natural world, the freedom to act and create, and a large number of other freedoms — these form the environment which allows the human mind and spirit to flourish. America has truly been the home of the free. The country after all was founded on the fundamental urge to be politically and economically free.

I believe any collection of humans can produce the sort of super humans that America has done in its brief history if – and that is a big IF – the collection enjoys freedom.

Americans have created and lived in the land which Rabindranath Tagore prayed for when he wrote “Where the mind is without fear and the head is held high, Where knowledge is free. . .”

India too, I am sure, will produce fearless minds when India becomes free. The challenge is making India free. Will it be in my lifetime?

If the criterion for rejecting an idea was that it should be affordable to all and sundry, nothing of any value in the technology sphere would ever get created. Allow me an example. Behold the almost ubiquitous cell phone. The woman selling vegetables out of a push-cart from whom I bought potatoes the other day has one, just like the auto-rickshaw driver who ferried me to the station. The cell phone was developed not for them but for high-flying executives in the affluent industrialized societies. Ten years ago, only the rich and famous in the developed world could afford the handsets and the expensive airtime. Today, cell phone technology is mature and costs have come down sufficiently that even people of very modest means in developing economies can use it profitably.

I briefly surveyed all major areas of technological advancement, from transportation to medicine to entertainment to whathaveyou. In every single sphere, the conclusion was unavoidable, that though the advancement was made with an eye to benefit the rich, eventually the poor benefited as well. I could not come up with an instance of any technology that was developed successfully specifically for the poor. It appears to be an empirical law. How do I explain that?

A little pondering and I had what I consider the economic reasoning for that empirical fact. Briefly the story goes this way. Technology advancements have high fixed costs, the recovery of which require high initial prices. The rich are early adopters and pay for the privilege, thus underwriting the development costs. As the marginal costs are typically low, economies of scale kick in and average costs approach the low marginal costs. Note that there is a time element to the whole story. First, it takes a bit of time for the high fixed cost of development to be recovered. Second, as time goes by, there is “learning by doing.” Firms figure out how to do things more efficiently. Average costs come down further. Finally, marketplace competition forces prices to reflect low average costs.

I should highlight the fact that competition in the marketplace is an important aspect of the story. If competition were lacking for whatever reason (legally imposed monopoly, for instance), then even through average costs come down, the prices will not be driven down to the average costs. Therefore, lack of competition in the marketplace often restricts the poor from reaping the benefits of technological advances. Ironically, it is often the governments of poor economies which restrict competition. We will not go into the question of why they do that right now. We should note, however, that government policies are culpable when it comes to the economy being poor.

Which brings me to the other question: is there any instance of a “pro-poor” policy that actually ended up helping the intended beneficiaries? I cannot think of any pro-poor policy that was unequivocally beneficial to the poor. In fact, I am persuaded that the so-called pro-poor policies should be more accurately called “pro-poverty” policies, as they tend to promote poverty more effectively than policies that are “pro-rich.” Empirical evidence? The government of India has been consistent over decades in its pursuit of pro-poor policies, and the numbers of the poor have shown a monotonic upward trend. Of course, it could be argued that in the absence of these pro-poor policies, the numbers would have been much larger. But that argument can be countered by showing that countries which don’t adopt similar pro-poor policies actually do better overall. (This is a blog post, not an academic paper. Working out the details is left as an exercise for the interested reader.)

So what’s the conclusion? I think that if you really want to help the poor, prepare to develop some technology that will benefit the rich (so that they will pay for the development). That prescription is as paradoxical as the admonition that if you want peace, you should prepare for war. The Zen of Development.

It is all karma, neh?

“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.

Air travel: Horrified at the Air India trip from Hong Kong to New Delhi (“Do they really have to spend several minutes, first up, showing what not to push bottles down the toilet? Have they not heard of the power of negative suggestions? Possibly my worst flight since the Soviet Aeroflot slog from Moscow to Tokyo in 1970.”) But thrilled at the Jet Airways flight from Delhi to Pune (“Great airline; beaut service.”)

Roads: “What roads? Enough said.”

Airports: “Take a trip to Singapore, guys. And the prices for a drink inside Mumbai International Airport? Wow! In New Zealand I can buy a full bottle of Italian Pinot Gris wine for well under half the price of half a glass there. Took time out to fill in the questionnaire asking customers to specific anyone in the bar needing strong praise. Nominated the company accountant for “the Nobel Prize for profiteering”.

Hotels: The Intercontinental and The ITT Sheraton Towers in Mumbai. Sheraton great in almost every way. Intercontinental: “Hey, if you’re going to charge at the very top end of international prices, how about some international service? Half an hour to get a coffee in the lounge and twenty minutes for a beer in the housebar – when no other customers around? Not for my money.”

Surprises? “The incredible sophistication, efficiency and all-round competency of your big pharmaceutical companies: Cipla and Emcure. Outstanding plants by any world standard. And the very best of your herbal nutraceutical operatons: Nisarga Biotech in Satara . . . doing some very surprising things in distilling extracts from Ayurvedic herbs.” (Gordon’s writing a new book called The Health Revolution – hence the interest.)

Double surprises: “Some of the information in Niranjan Rajadhyaksha’s new book, ‘The Rise of India’, which I bought at the Hong Kong airport. Good background. Amazed that 70% of the Indian economy is ‘informal’. After driving around Mumbai, Satara and Pune, no longer surprised.”

Most amazing statistic: “That Singapore’s Changi airport handles more passengers and air cargo every day than all the airports in India.”

Sport? “Or is it religion? Every the cricket-mad Australians don’t devote as much press space to this game as do the Indian newspapers. Amazed at how many executives, on learning my nationality, commented on the sportsmanship of the New Zealand cricket team and captain Stephen Fleming – and New Zealand not supporting George W (for woeful?) Bush in his idiotic invasion of Iraq.”

The IT industry: “Not really surprised at this. Most western business papers are full of it. But still impressed to catch up again, in his own head office, with Rajesh Jain, founder of Novatium.”

Hopes: “1: as a television producer, hope to persuade someone to sponsor an international TV program or series on how India’s world-class, low-cost pharmaceutical industry might just help the world to slash HIV-AIDS and some other diseases. 2: How about throwing imports open to second-hand Japanese taxis?”

We set off bright and early in Nitin’s Mahindra Scorpio, a largish SUV-type car. The car is alright on a well-paved road but you get bounced around like crazy on badly paved pot-holed roads, especially if you elected to ride in the back seat like I did. For nearly 200 kms, we bounced along with only minor stretches of adequately-paved level road. Around half of the journey was on what is called the Pune-Mumbai “expressway.” You can maintain speeds of up to 120 kmph on that stretch, except for those bits that wind through the mountainous Western Ghats around Lonavla.

Most people seem to take horribly constructed and terribly patched roads for granted in India, just as they take the severely congested chokingly narrow streets with bumper to bumper traffic as totally normal and acceptable. The other day, when I was remarking on this fact, a friend responded, “India is an under-developed poor country. You should not expect to have good roads like they have in rich countries.” That, I realized, is a telling comment. My friend is an intelligent, educated person. Yet he missed what I consider a foundational fact about the world we live in.

He believed that because India was an underdeveloped economy that the roads were bad. He got the causality wrong. It is because the roads are bad (among other things) that India is a poor economy. That distinction is important. In fact, I think that being able to make that sort distinctions is one of the most important skills that our education system should impart, and which it consistently fails to do. Nearly everyone with normal intelligence would be able to figure out the flaw in the statement, “People are sick because they are in the hospital” and would correctly note that “People are in the hospital because they are sick.” But when it comes economic development, they accept all sorts of nonsense without a peep.

[Footnote: I have written in the past about the nonsense about PCs and development. Regular readers of this blog will see the connection.]

The important implication of this is that if you wait to become developed before you improve your roads, you are likely to wait a little longer than forever. In other words, development follows good roads (among other things), and not the other way around. So, first fix the roads if you want to develop. More generally, a good transportation system (roads, railways, ports, airports) is a necessary, although not sufficient, condition for development. While we are at it, we may as well note that a good educational system is also a necessary, but not sufficient, condition for development. It is silly to say that we will have a good educational system after we have become developed, because if you don’t have a good educational system, you will not develop, period.

Anyway, back to the Pune-Mumbai road. As we made our way through the winding roads near Lonavla, I noted a peculiar thing. The pavement seemed OK if you were not too finicky about it being too smooth. The bouncing around was not bone-jarring; it was merely a steady vibration somewhat like you were sitting on your washing machine as it was spinning with an unbalanced load of clothes in it. Just the sort of thing that induces a pleasant drowsiness. Tough luck if you are the driver, however. The peculiar thing I noted was that the winding road was not banked properly. As the road twisted and turned going up and down the hills, it was mostly level. At places there was a very minor degree of banking but not sufficient for the recommended speed, and worse still, at some places, the banking was contrary to what it should have been.

[Footnote: Banking a road means that seen at cross-section, when the road curves around a bend, its outer edge is higher than the inner edge. The degree of banking and the severity of the curvature of the bend determines the speed at which the bend can be safely negotiated.]

I am not a civil engineer with a specialization in highway construction. But anyone with the most basic understanding of mechanics can notice that banking of roads ensures stability of the vehicles as they negotiate a bend. It is not rocket science. All over the world, if one cares to notice, roads are banked so that it is safe to travel at the designated speed. The Mumbai-Pune expressway was the pride and joy of the state built at enormous cost. But the designers and builders had built something that was not just costly but also dangerous. They did not think.

They had not thought and clearly it was dangerous to drive on it at a reasonable speed. You had to slow down into a crawl if you did not wish your vehicle to slide to the outside of the curve, which you would not have to do if the road was properly banked. As we drove along at even moderate speeds, I found myself thrown around the car by centrifugal forces. I realized that many of the accidents we see around those bends were because the road was improperly designed.

So this morning I was not the least surprised to read in the papers the following item:

Traffic on the Mumbai-Pune expressway … was thrown out of gear for over 20 hours since late Tuesday night after a 100-tonne generator slipped off a trailer and fell on the road … [at] the Bhor Ghat section.

Consider millions of dollars of loss in terms of lost time and damaged equipment. That the generator has to be totally written off is a first-order loss. Then there is the loss of time and energy from the traffic jam and diversion of traffic, which is a second-order loss. There are higher order losses: the factory or power plant that was waiting for the generator will suffer a loss, for instance. In a modern economy, losses propagate and accumulate. If one did a rough estimate of the total losses incurred over the life-time of the badly designed Pune-Mumbai expressway, it could amount to tens of billions of rupees. All because of the utter and sheer stupidity of the people who designed it.

I have often argued that national poverty can be seen as the result of collective stupidity. It is a stark realization and it makes me very uncomfortable. It is outrageous and many people find my baldly asserting the possibility that Indians are collectively stupid very offensive. It is as if I have claimed that their mama was so fat that she fills the Gap when she goes shopping, and besides she wears combat boots. Ok, I agree that I am deliberately provocative when I make that claim. Truth is India is not alone in being poor as a result of collective stupidity; all the other poor third-world over-populated countries also suffer from collective stupidity induced poverty.

Poverty, as has been pointed out, is the result of two gaps: the objects gap and the ideas gap. The objects gap is when you don’t have sufficient stuff–the stuff that you eat, wear, live in, make things out of, and so on. The ideas gap is when you don’t know how to use the stuff you have very effectively. It is about not mixing what little you have properly and making a mess of the whole thing. The ideas gap arises from being too stupid to not even copy what others have figured out.

So which is primary: objects or ideas? I think ideas are primary. Even if you have little, you can do well if your ideas are good. Conversely, even if you are given a lot, if you don’t have good ideas, you end up achieving pathetically little.

Where do the ideas come from? Some from us, definitely, but mostly from others. No one is so smart that we can figure it all out by ourselves. What we need to have is the attitude which says, “I will seek out smart ideas, adapt them to my needs, and adopt them. I don’t care who it was who came up with the smart idea, I don’t care about how old or how recent the idea is, I don’t care whether is domestic or foreign. As long as it is a good idea, I will go for it.”

I think in the end, just as the success or failure of an individual is to a large extent dictated by his attitude, the collective attitude of the people matter. Being xenophobic is a dangerous attitude, as is the attitude of insisting on total and uncompromising self-reliance.

Did India at some point collectively forget the ancient Rig Vedic invocation, “Let Noble Thoughts Come to Us from All Universe”?

The sky was ominously dark this morning and now it is pouring so hard that visibility is reduced to less than 100 feet. The thunder and lightening is almost continuous. There is something deep inside which rejoices in beholding the awesome power of nature. There must be something atavistic in this reaction, a genetically programmed response to life-giving rain.

Last week at this time I was in northern California. Saturday morning saw me in Mumbai. And last night I was in Kolkata. Within the space of two weeks, I have been in northern California, Mexico city, Mumbai, Pune, Kolkata, and transited through Guadalajara and Seoul. The miracle of commercial air transportation is easy to take for granted. But it was impossible just a 100 years ago. And who can tell what will be possible 100 years hence: will we be moving about the planets as nonchalantly as we move about the earth today?

Indian (the airlines formerly known as “Indian Airlines”) brought me to Kolkata. The seating has been optimized for stunted dwarves. It is certainly not meant for people over six feet tall such as yours truly. The saving grace — and this applies to all non-discount airlines in India — is that the food is not inedible like it is on most American and European airlines.

Talking of Indian, here is something that puzzles me a bit. The airlines formerly known as “Indian Airlines” is now called “Indian.” Don’t know who the genius was who thought that it would be a brilliant idea to change “Indian Airlines” to merely “Indian.” So now you have to refer to that airline as “Indian (the airlines which was formerly known as “Indian Airlines.”)” The idiocy of this leaves one stunned. The mind staggers. Even boggles. It makes your head spin and strains credulity. Surely among stupid braindead moronic lobotomized ideas, renaming an airline “Indian” must take the cake. You may ask why. Here is why.

First, it was not as if the name “Indian Airlines” was biting someone in the butt. It was not as if a person was not very sure what that name meant. It was not that someone else claimed that domain name and the airline was forced to change its moniker. No sir, there was no problem with that name. But then, you may say that perhaps the name was getting old and somewhat generic. It could happen, you know. You say “Indian Airlines” and someone thinks you are talking of Indian air carriers in general and not about the specific carrier. I have found that about “American Airlines.” You have to be careful to distinguish between the specific and the general. So alright, “Indian Airlines” could have been changed to something else.

But removing the “airlines” and just retaining “Indian” is as astoundingly stupid as one can ever get. So now when you say “Indian” you don’t know whether you are talking about food, clothing, land, thought, behavior, or . . . an airline! Making a bad thing worse is not an improvement.

OK, so you would say, “what is the big deal anyway?” Renaming airlines is not the end of the world, you would remind me. No it is not the end of the world but it is stupifyingly costly. Have you ever gotten your car repainted? Set you back a few thousand bucks, if you did. Now painting a plane costs a few hundred thousand dollars. That is not all. It could take two weeks to paint a plane. And you cannot paint it when it is plying its routes. So there is the loss of revenues from painting a plane. I think a reasonable cost for painting a plane would be a million US dollars. Do that for about 30 or 40 planes and your total cost would be (I estimate) about US$50 million. There you have it: an extremely stupid idea which costs a bundle.

So who pays for this? Not the lobotomized idiot who came up with this idea. You and I pay for it. We pay high prices so that we can be packed in like stunted dwarves. And if not enough people wish to be treated such, the airline suffers a loss and the government (which owns the airlines) suffers a loss. But this just means that we — the taxpayers — ultimately pay for the totally needless waste of public resources in repainting an airline just for the heck of it. We cannot flog the chairman of the airline who wasted our money but we should really flog the idiot.

OK, so you say, “Atanu, calm down. Take a chill pill and consider this. It is a one time deal. $50 is not all that much.” I will say this. Painting the plane is not all that you have to do. You have to go and change all sorts of things when you change a name. You have to go and redo all stationery, for instance. You have to repaint all signs — in offices, at airports, in god alone knows how many places. In the end, it could cost you $100 million.

And this is the best part of the sheer idiocy of the name change of “Indian Airlines” to “Indian.” This year, 2006, Air India and Indian (the airlines formerly known as “Indian Airlines”) are going to merge. Just about the time that the idiot who approved the name change finishes spending $100 million, they will have to redo the whole thing. You see, that renaming will be good for only a few months. The combined airlines will most likely be called “Air India.” And they will then have to go and repaint all those planes “Air India” after having just finished repainting them “Indian” from “Indian Airlines.”

So here is my conspiracy theory: someone is making bucks painting and repainting airplanes. Some of those bucks are pocketed by someone in a position of making decisions that are clearly stupid and costly.

Why is India poor? Because of a lack of accountability. Accountability is missing in public sector enterprises. The bosses are not accountable to shareholders, only to their political bosses. The whole thing stinks to the high heavens. And most of us — especially those who vote for communists — are totally unaware that our public sector is just another ingredient in the poisonous mix that stunts India’s economic growth.

The thunderstorm is over. The sun is out. I am out of here.

I do believe that the world wide web is one of the greatest instruments ever for comprehending the world. What makes it so powerful? The tens of thousands of wonderful things you can find there. It should be called wwww — wonderful world wide web.

Visualizing Data

Wandering around the wwww, I came across Ola Rosling’s presentation at Google on March 7, 2006. It is a Google video and the presentation is nearly 70 minutes long. Although the entire presentation is worth watching, in a few minutes you get a pretty good idea of what it is all about. Then you could move on to the Gapminder.org site.

“Gapminder is a non-profit venture for development and provision of free software that visualise human development. This is done in collaboration with universities, UN organisations, public agencies and non-governmental organisations.”

When you get there, first thing to do is to check out the Human Development Trend 2005 presentation. Ola Rosling’s video uses this presentation. You can download the presentation. There is a truckload of interesting stuff on that page. For example, I downloaded the “World Education Chart 2003” It is fascinating to play the shockwave flash presentation and see the data dynamically presented.

For the last couple of hours I have been learning from that site and I am sure that you will not find it a waste of your time.

Don’t miss this Google tool for Gapminder. Guaranteed to fascinate.

[Hat tip: Jaya Kumar for the Gapminder link.]

Mukesh Ambani apparently gets it.

The 17th July edition of Newsweek International carries a must-read article on Mukesh “Mr Big” Ambani’s Makeover Plan for the Nation. The article says that Mukesh

has finalized plans to invest more than $11 billion over the next decade to build two new satellite cities outside creaking, overcrowded Mumbai and Delhi. He foresees these metropolises emerging within just four years, each with a population of 5 million people making $5,000 a year, on average (or seven times India’s norm), and hosting top multinational companies. And that is all pretty simple—a development on steroids—compared with the idea that really gets Ambani going.

Ambani’s favorite scheme aims to revolutionize in one swoop two of India’s largest but most backward sectors: farming and retail. . . . Ambani plans to invest $5 billion by 2011 to put both the farms and the stores on the road to modernity, connect them through a distribution system guided by the latest logistics technology, and create enough of a surplus to generate $20 billion in agricultural exports annually.

Further down in the article, it says

Ambani wants to build a chain of both small and supersize stores across India, creating 1 million jobs and reaching $25 billion in annual sales, all by 2011. If his plan succeeds, he says, consumers will get fresher food at lower prices, rural incomes will soar, farmers will become active consumers, and Reliance will become “a WalMart in India.”

And finally

To transform Indian farmers into quality suppliers for his new retail chain, Ambani plans to create 1,600 farm-supply hubs across India, providing technical know-how and credit, selling seeds, fertilizer and fuel, and buying produce. He also plans to build some 85 logistics centers to move food to retail outlets and to ports and airports for export.

See why I say that it appears as if the man gets it?

First, he talks about creating cities. Cities are the engines of growth since it is an urbanized population which has the productive capacity to create economic wealth and thus lead to development. India’s largely rural population has to be urbanized and since the existing cities are basically incapable of absorbing the population, new cities have to be developed.

Second, he talks about transforming agriculture by raising its productivity. Building a large number of farm-supply hubs will make the supply chain for agricultural inputs more efficient. Raising agricultural productivity will not only increase production but will also release farm labor which can then migrate to the cities and produce non-agricultural goods and services.

Third, the farm output will be more efficiently brought to the market. It is estimated that around 40 percent of farm produce never reaches the consumer. Introducing efficiencies in the supply chain of farm output and retailing it efficiently will translate into lower prices for consumers and higher realized prices for the farmers. This in turn will increase farm incomes so that the remaining rural population would be able to effectively demand more non-agricultural goods and services — the same stuff that is being produced by the labor released by the farms.

This is along the lines of Irma Adelman recommended long ago: Agricultural Demand Led Industrialization, or ADLI.

The important point to note is that the schemes that Mukeshbhai is concentrating on has, prima facie, nothing to do with development, leave alone development of rural India. But in effect that is precisely what will happen. The answer to India’s rural economic development lies in cities. It is the urbanization of the rural population which will help rural development, not the so-called “development of villages” as I have argued for a while.

To a large extent, the 1,600 farm-supply hubs are approximations of RISC. RISC are the seeds of a mini-city in the rural area. With about 5,000 of these, you can effectively aggregate the 600,000 villages into productive mini-cities.

The approach that Reliance is taking is commendable because it is private sector driven and does not involve the government directly. Indirectly, of course, the government has to acquiese to the plan. Not just that, it is possible that the government will give away quite a bit of the land needed for these new Reliance cities at below-market prices. Yes, Reliance has power and it will only grow. But the question we need to ask is this: is it better that the land gets utilized and wealth created, and even though some of that immense wealth will go to enhance the Ambani fortunes, than the alternative where the land sits around doing precisely nothing and millions of people don’t get to lead a better life? I think the answer is a no-brainer (unless of course the answer is from a no-brainer communist), “Yes, better that someone creates wealth and takes a chunk of it if it means that lots of people will also grow rich, than the alternative.”

[This blog has a lot of posts on cities and urbanization. You can see the whole category on "Cities and Urbanization", or you can see the following selected posts:

2. India Needs Cities.]

The meeting was chaired by Renuka Vishwanathan, Secretary, Mininstry of Rural Development. Largely the meeting was attended by secretaries from various state governments such as Chattisgarh and Orrisa. There were a couple of people from President Kalam’s office; Dr PV Indiresan, the architect of PURA; Dr PS Rana, Chairman and MD of HUDCO (Housing and Urban Development Corporation); a couple of people from the Council of Indian Industries (CII); and a few others.

The meeting began with an extended introduction by Ms Vishwanathan. She was interested in figuring out the cost of PURA and how she could justify that cost. She stressed that there are various governmental bureaucracies with their existing funding which are already working on all the various components of rural development. What is it that PURA proposes to do which is not being already done?

As the meeting progressed, I realized that what PURA was going to do was to add another complex bureaucratic organization to the already massive one. If bureaucracy was what helped development, India should have been the most developed economy in the history of the universe. If upliftment of villages was what is needed for rural development, surely the rural population would be thriving considering that for decades, village upliftment has been at the core of all public policy.

When after the introductory remarks Ms Vishwanathan requested my opinion, I made my usual point. I asked them to consider the question: Is rural development about the development of villages or is it about the development of the rural population? There is a distinction which we neglect with sad consequences.

A “developed village” is one which does not lack water, electricity, housing, sanitation, telecommunications, good road/rail connectivity, employment opportunities in agricultural and non-agricultural activities, schools, entertainment, medical and health care facilities, well-developed functioning markets, recreation facilities, government services, and a few other things.

To make a village “developed” you need, among other things, money. If money were no object, you can have a developed village in short order. And if you had sufficient money, it would be pretty easy to develop India’s 600,000 villages. Let’s remember that India has more than half a million villages with an average population of 1000 people. Each village can be developed (as defined above) at a conservative cost of Rs 100 crores (or about US$22 million). The per capita cost of developing a village is a modest Rs 10 laks (or US$ 22,000). For 600,000 villages to be developed, you need only about Rs 600,00,000 crores (or US$ 13,200,000,000,000, or $13.2 trillion).

India’s annual GDP is around $600 billion. So $13.2 trillion is about 20 years’ worth of India’s production would have to be fully invested in India’s villages for the villages to be developed. The resources required to do village level development at a modest Rs 100 crores per village is of the order of the annual gross national product of the US.

A bit of arithmetic is all it takes for us to realize that the idea of developing 600,000 villages is nonsense. (Those who refuse to do arithmetic are doomed to speak nonsense.)

Sure, one can quibble with the figures: use Rs 10 crores instead of Rs 100 crores per village. You still end up with US$ 1,300 billion as the cost of making the rural population developed through “village-level” development. When you are talking about trillions of dollars, we just don’t have it.

Why is village-level development so expensive? I call it the “too many, too little” problem. Villages are unable to take advantage of certain economies because they are too many of them and they are too little. They thus cannot gain from agglomeration economies, and economies of scale and scope.

Cities exist because of the density of aggregation is high and this reduces the cost of providing services and infrastructure and the cost of engaging in any economic activity (transaction costs). The presence of lower cost services and infrastruture in cities is made possible by economies of scale and scope. The availability of low cost infrastructure and services coupled with lowered transaction costs makes the population more productive. That is why economic development is both a cause and consequence of urbanization (the dense aggregation of people in cities): you cannot have one without the other.

For India to be developed, India has to be an urban economy. By that I mean, the majority of India’s population — say, 80 percent — has to be in cities and towns, instead of the current only 30 percent. In other words, if you were to look at a developed India somewhere in the future, you would see that India does not have 600,000 small villages any more. Aggregations of 1,000 people (which is what an average Indian village is) is just not consistent with a developed economy. What 600,000 tiny villages is consistent with is dire poverty and which is what we have.

If 600,000 villages is not what we will eventually have (if ever the 70 percent of the Indian population have to move out of poverty), then there is little point in doing village-level development. It makes no sense to behave as if forever rural India will continue to be 600,000 villages. And that is precisely what the government in its myopia is doing. It is attempting to take very very limited resources (orders of magnitude smaller than the required trillions of dollars) and spread it on the “development” of 600,000 villages.

The point I attempted to make at the meeting was that we should be focusing on the development of the rural population and NOT the development of villages. As long as one insists on keeping the rural population in tiny villages, one is dooming them to poverty.

The fatal flaw of PURA is that its object of interest is the village. My model — RISC — avoids developing villages like the plague.

Now back to the meeting. It is possible that resources will be allocated, another layer of bureaucracy will be added, more meetings and reports generated, and the same old cycle of useless spending undertaken. Or maybe the whole exercise will get entangled in bureaucratic red-tape and nothing much will happen and only a little bit of resources wasted.

In the meanwhile, I have hope that other people, working on their own initiative and with a vision of what the future can be, will take India forward. One such person is the chairman of HUDCO, Dr PS Rana. I met with him briefly the next day and I will write about it the next time.

Allocating quotas and reserving seats for economically backward classes (and for other historically discriminated and disadvantaged groups) in higher educational institutions is economically inefficient, morally wrong, strategically flawed, and tactically ineffective. The policy does not help the underclass and ends up victimizing both the underclass and the so-called privileged class. The policy epitomizes what is called a “lose-lose” solution, while foregoing a “win-win” situation.

A general observation is in order here. India is an extremely poor country of over one thousand million people. This state of poverty could not have come about without India following a consistent set of economically flawed policies over a substantially long time. Persistent and widespread poverty is a consequence of asinine policy choices, just as much as prosperity is a consequence of wise policy choices. Since the mindset which in the past consistently evolved and doggedly pursued illogical policies has not changed, it is reasonable to expect (after all, we are all Bayesians) that any proposed new policy is also going to be flawed. To move beyond the clichéd observation that a proposed policy is idiotic, one has to look inquire into the different ways in which it is so, and that is what I propose to do here. Later on in this series, after pointing out the specific ways in which the policy is flawed, I will outline the solution which will evolve naturally enough once we have understood the problem in detail.

Observing the Indian educational system brings to mind John Maynard Keynes’ skeptical definition of education as the inculcation of the incomprehensible into the indifferent by the incompetent. I would extend it by defining the Indian educational system as a structure created by the incompetent and uneducated to produce more of the same sort of people. It is a system which ensures its survival through self-replication.

The most visible of the problems plaguing the education system is that it is “supply-constrained.” In other words, the potential quantity demanded outstrips the capacity of the system to supply. Putting aside for the moment the question of why the supply does not increase to meet the demand, let’s look at the various ways in which the limited supply can be “rationed.” In a free market, price is a rationing mechanism: the price rises sufficiently to equate the quantity demanded and the quantity supplied. There are no shortages. Thus, for instance, there is no “shortage” of diamonds or of Microsoft shares: the price rises to equate supply and demand. (Diamonds are a special case because the supply is monopolistic and limited by the cartel to maintain a certain price level. Microsoft shares, on the other hand, will be bid up if the demand goes up and the price will rise in the stock market till all those who want to hold them have as much as they want.)

There are no shortages in free markets. Shortages arise only when the price is not allowed to rise to what is called the “equilibrium” or “free market” levels for whatever reasons. It is a valid generalization to note that prices are not allowed to rise for a number of reasons, ranging from ignorance of basic economic principles to plain old-fashioned “rent seeking behavior.” Ignorance leads policy makers to believe that by imposing a price-ceiling, a more equitable distribution of resources will be obtained. In fact the opposite occurs as can be seen from the classic case of rent control: the poor are hurt differentially more than the rich. Rent seeking behavior, on the other hand, is not motivated by ignorance; it is motivated by greed and is informed by knowledge of how the system works. Here is the strategy. First, limit the supply. Then impose a price ceiling so that at that price, demand outstrips the supply. Having thus done away with rationing through the price mechanism, rationing is done through non-price mechanisms such as licenses, quota, and permits. These are handed out as favors to particular constituencies as a quid pro quo. This, in short, is the situation in higher education in India.

Now on to the specifics of why quotas in higher education for disadvantaged groups is bad policy. First, the economic efficiency argument. All economic policies create gainers and losers. If the gainers gain more than the losers lose, then it is theoretically possible for the gainers to compensate the losers for their loss so that after the compensation, the losers are not any worse off than before and the gainers are better off than before. Such a policy effects what is a called a “Pareto improvement” and is therefore an economically efficient policy. Conversely, if the losers lose more than the gainers gain, then the policy is economically inefficient and there is an overall welfare loss.

Quotas, if they have any effect on the system, effectively replace qualified candidates with otherwise unqualified candidates. Unqualified candidates who enter the system are by definition unable to benefit from the opportunity to the extent that a qualified candidate would have done. The quota candidates are unable to compete within the system. Aside from the welfare loss in terms of wastage of real resources, the quota students suffer psychologically as they fall behind their colleagues who are better prepared for the academic rigors. They are looked down upon by those who “earned” their place in the school. (I say “earned” because it is strictly not so, as I will explain later.) This reinforces the perception—within both groups—that the group which enjoys the quota is intrinsically inferior. This is perhaps the most pernicious of all the unfortunate effects of a quota system in higher education.

This brings us to the point why quotas in higher education for disadvantaged groups is morally repugnant policy. It penalizes certain people based on their group membership. Discrimination based on caste, creed, origin, color, etc, is morally wrong. So is reverse discrimination. The right thing to do is to remove discrimination, not impose it from up on high. If, for instance, a person from a certain caste is not being allowed to enroll because of his caste, then the right policy is to remove that barrier. If students from economically backward classes were being denied admission despite being qualified, then the policy response should be to remove such discriminatory practices. Since it is not the case that qualified candidates of economically backward groups are being discriminated against, imposing quotas for them is not the solution.

So then, what is the solution? Pardon me for repeating my mantra (precisely why it is called a mantra—it is repeated) that before one can propose a solution, one should understand the problem. Here are two facets of the problem:

1. Seats are limited. If they were unlimited, you would not need a quota for anyone. They are limited because the government does not allow free entry into the higher education business.
2. Students from certain groups are unable to gain entry into the supply constrained system, and once inside they are ill prepared to compete within the system. If they were qualified, they would not need quota protection in the first place, and would be able to compete once there.

Both aspects of the problem need to be addressed by any proposed solution. The quota system addresses neither. The real solution has two main thrusts. First, get the government out of the business of controlling the supply of higher education. There are real opportunities for commercial establishments which will eagerly enter the business of education if allowed to do so. I use the phrase “business of education” advisedly since higher education should be a business like any other supplying a service which is essential for the larger economy and should yield a profit.

The second thrust is has to do with sequencing. It is undeniable that certain segments of the population are ill prepared to compete for seats in higher education. They are not intrinsically inferior in any sense; they are not naturally stupid. The fact is that they have not had the opportunity to prepare themselves for higher education. The solution therefore is that they have to be provided help in preparing for higher education, which basically means that they have to be given assistance at levels that precede higher education. They are handicapped at the level of higher education because they are handicapped at the earlier stages of education. If their handicap in the school level were addressed, you would not have to make special provisions for them in the post-school levels. This should be evident to the meanest intelligence, it would appear, but then perhaps our policy makers don’t make even the meanest intelligence grade. This is the most charitable explanation of why the minister in charge of education has not figured out this elementary point. The less charitable explanation is that the minister is a cynical opportunist out to ensure his re-election by giving out worthless gifts to unsuspecting victims of his own ambition.

This brings me to the point of whether those who compete on their merit have “earned” their place to enter these institutions of higher education. Sure, they have had to work hard at school and learn their lessons instead of goofing off. But they were lucky enough to have had the opportunity of going to good schools because their parents were rich enough to afford them. While commending them on their hard work (to the extent they had to work hard), it is important to keep in mind that they were privileged in having the opportunity which are not available to those who come from the backward classes. Much of the outcome rests on the luck of the draw which dictates which socio-economic class one is born into, and that fact should induce some degree of humility in those who protest that their merit is not being recognized as a result of the quota system.

The disadvantaged segments of the population are not disadvantaged only in their ability to gain admission to higher education, they are disadvantaged in all levels of education. The solution then is to help them with providing them opportunities in the lower levels first. Equality of opportunity at the lower levels (primary, secondary, and high school levels) is a necessary and sufficient condition for the disadvantaged segments to have a shot at competing with the others. Equality of opportunity is to be desired and can be engineered, but of course that does not guarantee equality of outcome. The policy makers need to understand the distinction between the equality of opportunity and the equality of outcome: the former is a necessity for social justice and can be obtained, while the latter is neither possible nor desirable.

At this point you would forgive me for repeating my other mantra: distinguish between the causes and symptoms (or consequences), and address the causes, not the symptoms if you want to solve the problem. The inability of backward classes not being able to compete in gaining admission to higher education is a consequence, not a cause of their backwardness. The cause of their backwardness lies elsewhere (which I will not go into now) and so by forcing them into higher education will not magically remove their backwardness.

Quotas, as I claimed earlier, are economically inefficient. Assume that the full cost of, say, a 4-year IIT education is $50,000 (or about Rs 22 lakhs). Further assume that a quota student ends up benefiting less than the full cost, say, $10,000, while a non-quota student gets at least $50,000 of benefits. The net loss is then at least $40,000. Instead of wasting $40,000 on one backward class student at the IIT, if the money were spent school education, 20 students could have been educated (with an average spend of $2,000) and out of which perhaps one would have been sufficiently bright enough to gain admission in the IIT on merit and subsequently compete within the system as well. This is the tactical flaw with the quota system: they have the sequencing wrong, and instead of creating more opportunities at the school level, it tries to equate outcomes at the college level.

To summarize: the fact that IITs and IIMs don’t have sufficient representation from some economically and socially disadvantaged groups is a symptom of a deeper problem. Therefore merely increasing the numbers from these groups by fiat will do no good, and indeed may end up harming the groups. I will outline the solution of the underlying problem in a subsequent post.

It takes nearly two hours by road to get from the Lucknow airport (Kanpur does not have an airport) to the IIT campus in Kalyanpur outside Kanpur city limits. The road is fairly good by Indian standards and just before entering Kanpur city, it crosses the wide expanse of the river Ganga.

It was just a little before midnight when the car turned towards the IIT main gate. I felt a sense of nostalgia and sadness.

The IITK campus main gate is a not imposing. Off the highway, it is nestled among a bunch of ramshackle shops. It is hard to imagine a less dignified entrance to one of the most premier engineering and technology schools of India. The campus is not as shabby as the entrance would make one expect, however. Built in the late 1960’s with American collaboration, it does bear a passing resemblance to some American campuses. The halls of residence, and the academic and administrative buildings are of various vintages, and the dominant theme is exposed-brick and concrete architecture. Situated in the dusty semi-arid plains of the state of Uttar Pradesh (UP), the campus is huge compared to the student population it serves.

It is surprising to note that IITK serves only 2,000 undergraduates and about 1,600 graduate students currently. A couple of decades ago, during my time, it had half that many students. The well-known American campuses, in comparison, serve around 25,000 students. UC Berkeley, the most recent of my various alma maters, has 35,000 students. The UC system with ten campuses has a student enrollment of over 200,000. All the IITs combined do not add up to even one campus of the University of California. Of course, IITs are mainly engineering schools and a fairer comparison would be between the sizes of the engineering schools.

All told, the IITs combined take in less than five thousand students a year. The competition is something fierce. More than 300,000 students take the “Joint Entrance Exam” (JEE) and depending on one’s rank in that test, one gets to choose the campus and the branch of engineering one enters. The test rejects more than 98 out of every 100 who appear for it.

Vistor’s Hostel

I checked into the Visitor’s Hostel (VH, as it is called). It is a sprawling complex of buildings connected with covered walkways enclosing well-kept lawns and housing about 200 visitors. The rooms are big and wasteful of space. Though late into the night, the heat of the day was still trapped inside the room and the window air-conditioner struggled mightily to make the temperature bearable. Like most living quarters in India, the VH was not designed with usability in mind. I find that most Indian construction is ill-suited for India’s climate.

Rural Infrastructure

I was at IITK to participate in a roundtable discussion of sorts on India’s rural infrastructure. There were about 30 participants, mostly from academia and from the government. How do we provide for roads, power, telecommunications, water, sanitation, and other infrastructural elements was the question.

My take on the whole issue boils down to these points:

* First, we must understand why rural infrastructure is the way it is—practically non-existent despite numerous plans and pretty large amounts of spending over the decades
* Second, what are we doing about rural infrastructure? Should we be building for the rural landscape as it exists today or should we be focusing our energies on what rural India should be (and would be) in the future?
* Finally, the model for rural infrastructure growth must include as one of its components the RISC concept outlined by yours truly

One of the participants, Prof PV Indiresan, presented his model of rural development called PURA–“Providing Urban Amenities in Rural Areas” (which you may know is promoted by President APJ Kalam.) The problem I have with PURA is simple: the numbers don’t add up. Per rural resident, the capital investment required is around Rs 100,000. If we had that kind of money to spend on rural development, we would not be a poor country in the first place. And even if we had that kind of resources, it would still be ill-advised since the model is economically wasteful. I argued why in my brief presentation which followed Prof Indiresan’s.

Scattered Economy

India is a dual sector economy: a large rural population (around 70 percent) and a much smaller urban population. The rural population is scattered over 600,000 villages, and the urban population in towns and cities that are severely overcrowded. Development and urbanization of the population are causally linked: each is a cause and consequence of the other. Therefore India’s development depends on the urbanization of India’s rural population.

We need to keep the distinction between the “development of rural people” as opposed to the “development of rural areas” in mind because they have divergent implications.

The existing towns of cities in India are bursting at the seams and cannot handle any more rural-urban migration. The only recourse is to urbanize the rural population in situ. Now urbanization has many facets, one of the most important being that of the density of aggregation of the population. Agglomeration economies arise when lots of people live very close to each other, as in Mumbai, NY City, or Tokyo. That is the reason that cities exist and why living in a city is economically more efficient and more attractive to the average person. You cannot obtain the same benefits if you are living in a village of 1000 people.

The average population of an Indian village is 1,000 or so, and there are 600,000 villages. Can all these 600,000 places be “urbanized”? Yes, if you had a nearly infinite supply of resources, which in our case we have not got. Now ask another question: Do we really want our population to be living in 600,000 little villages, say, 40 years from now? The answer is clearly no because the fragmentation of such a large population is inefficient and a recipe for poverty. What India needs is the transformation of these 600,000 villages (with about 1,000 people on average) to 600 cities (with about one million population each.) It will be a distributed economy but not a scattered one.

RISC

If we should be moving away from 600,000 villages, then we should not be spending scarce resources in trying to keep the status quo as PURA appears to aim to do. The vision should be seed a sufficiently small number of places with adequate infrastructural investments so that the surrounding rural population would be able to benefit from it and which in time will become the core of the new cities we must have in rural areas. That is what my RISC model does and does it without invoking neither the heavy hand of state planning and government spending (and its attendant corruption.)

As I am wont to do, at some point in the discussion I was provocative and basically said that the reason government intervention has failed for so long was simply because the government is ridden with people who are immoral, corrupt, short-sighted, and stupid. Besides that, I noted the practical and theoretical impossibility of the success of any command and control economy. This did not go down too well with one high-ranking government bureaucrat. In his defense of the government, he made the incredible claim that the public sector incumbent firms (BSNL, MTNL) were responsible for the amazing telecommunications revolution and that too against all the attempts by the private sector entrants to not play by the rules. As they say, ulta chor kotwal ko daatey.

Later that day, many participants told me that they agreed with my position. One lady, who was full of praise for PURA, after my presentation said that she is going to re-examine her conviction.

My official visit to IITK ended with the end of the workshop. The next day I was there as an ex-student wandering the campus recalling those days when I was much younger, much stupider, and much less cynical.

[Continue?]

If you observe there is a relationship between the shoe size of a person and the size of his vocabulary – and note that there is a positive correlation in that the larger the shoe size, the larger the vocabulary – then you could falsely reason that having big feet causes larger vocabulary. The two are correlated but not causally related. There are other variables: older children have bigger feet and also bigger vocabularies.

There are lots of correlated variables in the world. Some of these correlations have causal connections as well. In some cases the direction of causation is evident, and in some cases it is difficult to figure out. In some other cases, the causation could be bi-directional.

For instance, number of forest fires in a month and average temperatures of the month are positively correlated. It is easy to see that hot weather causes forest fires, and not the other way around–forest fires do not raise the average temperature of the month.

Now suppose we note the positive correlation between the presense of riot police and riots. Again the direction is easy to spot: clearly, riot police do not cause riots; riots cause riot police to appear. Or the presense of firemen and fires: fires cause firemen to appear, rather than the other way around.

Now bidirectional causal links: chicken and eggs. Chickens causes eggs; but eggs cause chickens as well. So which is the cause and which the effect? That is the most famous chicken and egg problem: which came first?

The vicious cycle is similar. If you are poor, you cannot good education; if you are not well educated, you cannot get a good job and hence you are poor, and so on. Or if you are poor, you cannot afford nutritious food and therefore your health is poor and so you cannot hold on to a good job and therefore you are poor, etc.

Now cell phones and growth in GDP is positively correlated. For every 1 percent increase in teledensity, the GDP growth rate goes up 0.6 percent. (Figures for illustration only.) It is not easy to tease out which direction the causal relationship is, if at all there is a causal relationship.

There need not be a causal relationship, merely a correlation. For instance, more cell phones and more GDP could be both due to the underlying factor that the country has suddenly become very very successful in BPO services.

Even if cell phones adoption and GDP growth rates are causally related, it is not at all evident which way the causality holds: it could be that GDP growth increased per capita incomes so that people could afford phones; or it could be the other way around, that more people having phones made them more productive and this pushed up the GDP. Or both.

The Iran Pipe-bomb is on its way.

If you pay for the cost of the instrument that will be used to screw you over, you might be a third world country.

[Bush's] visit to India comes at a time of the triumph of capitalism over socialism, long the operative ideology in most of the world’s 135 Third World, or developing, countries. It pays homage to the fact that this ancient culture once was among the most robust adherents of the free market – well before Adam Smith invented its modern form. That it veered sharply from homespun capitalism was because of one man, Jawaharlal Nehru, the scion of an aristocratic family who studied at Cambridge University and who eventually came under the influence of Britain’s Fabian socialists and injected an alien ideology into India’s struggle for independence.

Nehru managed, through charisma and oratory, to mesmerize the Indian National Congress, which led the fight against the occupiers of a land that novelist Paul Scott memorably called the “Jewel in the Crown.” And because Nehru was the favored politician of Mohandas Gandhi, the Mahatma, his prescription for a post-independent India’s economic path – socialism – was generally accepted as dogma. But Nehru had a rival, both politically and for the Mahatma’s affections, named Vallabhbhai Patel, the man who, more than anyone, was responsible for lining up India’s 535 maharajahs in support of aligning their territories with secular India, and not theocratic Pakistan, after the Subcontinent was partitioned capriciously by the departing British.

It was Patel who said that India needed to fully open the floodgates of free enterprise in order to sustain economic growth. Under Nehru’s stewardship, and later that of his daughter, the haughty Indira Gandhi – no relation to the Mahatma – India became a case study in bad governance and, even while ostensibly in the non-aligned camp, a fellow traveler of the Soviet Union. The federal bureaucracy mushroomed to more than 10 million (at any given time, no more than 2,500 Britons had administered the vast Subcontinent, which is geographically half the size of continental America). An India that should have become one of the world’s most dynamic economies was instead transformed into a basket case. Vallabhbhai Patel died a broken man, convinced that India would implode on account of Nehru’s errors. {Emphasis added.}

Isn’t it a marvel that India actually has roads, airports, ports, parks, colleges and universities, hospitals, research labs, theatres, governmental programs, non-governmental institutions, monuments, etc etc, all named after those who were primarily responsible for the disaster that is India? It is something that I often find myself puzzling about. Why are Indians so slavish in elevating those who were arguably bad for India? Here is what I mean. Have you heard of Aurangzeb Road in New Delhi? When they named the road, did they even bother with the fact that Aurangzeb was a tyrant and butchered the people of the land? Do you think that the Jews will ever name streets after Adolf Hitler?

Actually, the Indian subcontinent has that amazing ability to elevate as heroes those who screwed them over. See Pakistan, for instance. They actually name their weapons after those whose armies raped their women and their lands centuries ago. Those plunderers are worshipped in the land of the Pure (Pakistan) as their liberators. Take Bangadesh, for another example. The Pakistani army slaughtered anywhere between three and six million East Pakistanis and yet Bangladesh today considers Pakistanis to be their heroes. What is the matter with these idiots?

Deva! Deva!

The man, Madhu Yaskhi, moonlights as an MP for the Congress Party and his day job is being an immigration lawyer in Manhattan.

It is an interesting story. It all began when he was moved by the plight of the families of the farmers who had committed suicide in Andhra Pradesh in 2003. He donated some money to those families. He became famous and the Congress party decided to cash in on his popularity and gave him a ticket to contest the elections and he won handily against the Telegu Desam Party candidate.

So here is my unsolicited advice to anyone who wants to become a member of the parliament of the largest democracy on earth: get yourself noticed by one of the major parties by making a splash. Fortunately (or unfortunately, depending upon your point of view) it is not all that difficult to make a splash given the rather desperate situation in rural areas. Give out handouts to those highlighted by the press and it is a rare enough event that fame is guaranteed. The fortunes will follow.

Indian democracy is a stunning spectacle. Every election is won or lost on how successful a party is in bribing the voters. Giving handouts is the norm. Of course, this is true of any democracy, rich or poor. The astonishing thing about India is how little it takes to bribe the voters — a quarter bottle, or a sari perhaps. On second thought, perhaps it is not all that astonishing. After all, we are a poor country and even small handouts is rather significant in relative terms.

Small lump-sum transfers are not detrimental to the economy. In fact, it is positively good to give to the poor. However, the pernicious effect of winning elections based on handouts is that it is a perversion of whatever virtue there is in the idea of a democracy. It distorts the whole objective of figuring out which party is most worthy of one’s vote. Instead of voting for the party that is most likely to implement the most welfare improving policies, people vote for parties that are most likely to pander to their specific narrow interests.

The NRI MP inadvertantly but successfully bribed the voters. This caught the attention of the Congress party which being a past master at bribing voters, decided it was a gift horse and could win the race with ease. The Congress party routinely bribes voting blocks with handouts that are far more damaging to the society at large than just small handouts. Reservations is a favored tactic: reserve a certain percentage of jobs for minorities, or reserve seats for them in schools. Another tactic: give away free electricity to “poor” farmers.

The corruption of the idea of democracy — informed choice by a people who can be trusted to exercise due diligence in choosing a government which will best protect and advance the larger long-term interests of the society — through bribery and corruption has the lamentable effect that the society becomes increasingly poor, both materially and morally. How to extricate the country from this vicious cycle of poverty and corruption is a challenge that cannot be met with mere rhetoric from the leaders of how India is shining or how India is an information superpower.

I think — and this is my dangerous idea — that “democracy” as implemented in India must be discarded and replaced with a modified version of universal adult franchise.

I suspect that these learned folks are just passing the buck by blaming democracy for the ills of this economy. They have a vested interest in not just passing the buck, but also not recommending the removal of the admitted cause (democracy) because they personally profit from perpetuation of this dysfunctional system (whether or not democracy is to blame). The “licence control permit quota control” raj is good for those who are in control of the licences, permits, and quotas. They erected the barriers so that they can act as gate-keepers and only allow those who were willing to pay the entry-price.

Education system reform, for instance, can be undertaken irrespective of whether we live in a totalitarian state or a democracy. What sort of reform does education require? The release of the fundamental choke-hold that the state has on the education sector. It is outdated, inefficient, ineffective, ridden with mindless regulations, costly and supply-constrained. No one except the tiny minority who currently dictate the rules would be against reform of the education sector. Yet, we carry on with our lives as if we are perfectly content with an education system which fails so miserably that by the age of 10, half of the children have dropped out of the system.

The required reform of the education system is possible whether or not we have a system in which an illiterate bunch of people vote for a corrupt bunch of politicians.

I should note in passing that there is a constituency of … how shall I put it diplomatically … idiots who believe that the internet and laptops will fix the educational system. You may call them graduates of “The Marie Antoinette School of Economics.” (Just for the record, it is reasonably certain that Marie Antoinette did not say what she is reputed to have said. But we will not tamper with a good story merely for the sake of accuracy.)

So when she was informed that the peasants had no bread to eat, she replied, “Well, let them eat cake.”

“Sir, our children are growing up illiterate.”

“Is that so?”

“Yes, sir, the schools are strained for resources. Most of the million or so schools do not have even the basic of facilities related to education. Many don’t even have blackboards, leave alone furniture. Some schools don’t even have teachers regularly. Girls especially are deterred from attending schools because of lack of proper toilet facilities. We just don’t have the financial and institutional resources to provide for the hundreds of millions of children we need to educate. We don’t have the money to pay teachers who will actually teach, we don’t have blackboards, books, note books, etc.”

“I see. The solution is simple, isn’t it? Give them laptops connected to the Internet. Let them use IT since we are an IT superpower.”

Now on to solutions. I have pondered the matter of education on these pages (see education related posts). In the next couple of weeks I will outline a proposal which I would like to implement. I want to transform the way education is funded and provided. If I can sufficient people to “vote” for it, I am sure that even the learned folks will have to admit that since we are a “democracy,” the system will have to be implemented.

Give me six hours to chop down a tree and I will spend the first four sharpening the axe, said Abe Lincoln. Astonishing how much profoundly practical wisdom is packaged into that simple declaration. Time spent in sharpening the tool is time well-spent; so is time spent in thinking through a problem and thoroughly understanding the problem before rushing off to solve it. And in most cases, since there is almost nothing new under the sun, there are already known solutions to many problem. So the most efficient method to solve a problem is to first seek the solution that someone may have figured out already.

The problem of economic development is multifaceted and complex, taken as a whole. But the problem can be effectively partitioned into simpler subunits that are more tractable. Then solutions for these can be sought—right out of the grab-bag of existing solutions or if needed, solved for the first time.

There are important lessons in Singapore’s development experience, if one cares to but observe very carefully. To learn from the person who engineered Singapore’s transformation from a backward poor city-state to a vibrant developed economy is a blessing. It fills my heart with hope that transformation is indeed possible, and it restores my faith in the conviction that powerful individuals are the only agents of deep transformation—both for good as well as ill—of society.

I read Lee Kuan Yew’s address to the 37th Jawaharlal Memorial Lecture on 21st Nov 2005 in New Delhi very carefully and with deep interest. I found that his wide ranging analysis of India’s economy incisively accurate. I annotated his speech in parts (parts one, two, and three) and this one is the concluding summary of what I gather from his talk.

In a sense, I did not find anything that he said even remotely surprising. I had pretty much reached the same conclusions independently. Why, one may wonder, don’t the leaders of India see what LKY so easily sees? Are they merely incapable of clear thought, or is it that they think but are prevented from acting due to circumstances, or is it a combination of both? Surely, one would think, that if the Indian leaders are not competent thinkers, they would at least have the intelligence to hire intelligent advisors to figure out the problems. So what is the problem?

I think the answer lies in what economists call the objective function. Individuals have a certain goal which can be stated as the maximization of a function given a set of constraints. For instance, for someone maximizing the amount of money given the constraints of time and effort may be the objective function; for another it could be to maximize leisure given the constraint of a reasonable income and time; for another, it could be to do social work subject to leisure, time and money constraints.

LKY’s objective function, I believe, was to rapidly develop Singapore. He was not looking to win elections, or to maximize his personal wealth, or to be a mahatma, etc. Given that he is a man of amazing practical genius, he figured out the sequence of interventions and implemented them. Under his autocratic rule, he did what India’s autocrats have been either unwilling or unable to do.

India’s autocrats have had different objective functions. I suspect that to a first approximation, their objective function have been to maximize personal wealth, not the development of the economy, through corruption, nepotism and bribery. Of course there was the matter of elections every so often and funding this costly farce required even more corruption.

Different objective functions lead to different perceptions which in turn lead to different understandings, and so on to different actions and ultimately to different outcomes.

My objective function is to figure out what exactly is wrong and how to solve the problem of India’s economic growth and development. I am not trying to win elections and therefore am not forced to bribe some voting block or the other with hare-brained schemes that ultimately harm not just the economy but even harm those vote blocks. I am not trying to fatten my numbered Swiss bank account and so I don’t have to implement any asinine license-control-quota-permit industrial policy. I am not trying to promote the members of my family as the only enlightened beings on the planet capable of ruling India, and so I don’t have to ruthlessly eliminate any opposition. I am not wedded to any ideology such as monotheism or communism, and so I can advocate the use of any idea as long as it makes sense.

The reason I arrive at similar conclusions as does LKY is that our objective functions are similar, we are sufficiently intelligent, have learnt from others’ experiences, and we have thought sufficiently long about the problem. I am sure that LKY has spent a lot of time polishing the ax before he struck the first blow.

There are differences, of course, between a LKY and me. For instance, I am as lazy as they come and he is a hard-working achiever. But the most significant is this: he is a dispassionate observer of India’s development while I am not. I sincerely care about what happens to India personally; LKY cares to the extent that India’s economic performance has a bearing on Singapore’s welfare, but he does not have a personal stake in India’s successes or failures. If what LKY tells India is just a lot of water off a duck’s back, he would sleep soundly. And that is why I believe that what he says should be taken very seriously. He has no reasons to sugar-coat his conclusions or misrepresent his recommendations.

Dispassionate observers must be trusted more than those who have a stake in the game. I would trust LKY more than I would trust someone like Dr Manmohan Singh when it comes to an honest assessment of India’s strengths, weaknesses, prospects and possibilities. Dr Singh has a boss and various constituencies that he has to please; LKY has to please no one. (The same holds for me: I don’t have to please anyone. I don’t have to please an editor and if the reader does not like what I scribble, it just takes one click and I am history.)

So with that preamble, let me try to summarize what LKY said.

1. India has missed the bus too many times and this time around, it should look sharp and get on the bus.

It could not jump on the bus because it was tied hand and foot by those with different objective functions than economic growth and development. Now we need to unshackle the economy. They call it liberalization. Of course, you can only liberalize a shackled economy. I think it is time to enquire why the economy was chained in the first place. Will this be done? No, because it may turn out the holy cows being worshipped were in fact asses. Best to keep quite and move on. But then of course we run the risk of chanting the same old mantra in worship of the old “holy cows” and end up precisely where we are. Insanity, it is said, is doing the same thing and expecting different results. Let’s stop this insanity.

2. Production precedes distribution. If you don’t produce, even after equitable distribution, you would still be dirt poor.

LKY put is thus: Before distributing a pie, I had to first bake it.

Simple isn’t it? But this simple truth eludes the communists and socialists. They want to distribute first and then perhaps maybe produce some stuff if they feel like it. They have not figured out that poverty is lack of what I call “stuff.” If you don’t have stuff, you are poor. Producing sufficient amounts of stuff is a necessary condition; the sufficient condition is to distribute it equitably.

When production is insufficient, then there is a mad scramble for the limited production. The powerful get hold of this stuff, and the majority of the people have to eat dirt. That is, a very lop-sided economy develops when there is insufficient production of stuff: a few very rich people lording it over hoards of abjectly poor people.

So the lesson is simple: make the production of stuff the first priority. Therefore

3. Manufacturing has to be the base upon which India’s growth must be based.

Which means that all this talk about a service economy is a lot of stuff and nonsense. India is a large economy (in terms of population numbers) and like any other large economy, it has to be largely self-sufficient in that what is consumes, it has to produce itself. Small economies can specialize and import the other stuff they need, but India cannot. In other words, India has to grow its own food (and therefore must have a large agricultural sector), must manufacture its own stuff (and therefore have large manufacturing sector), and provide its own services. “Large” here means production capacity, not necessarily employment capacity.

I am not in favor of employment; I am in favor of producing stuff. If you produce enough stuff, you can give stuff away to “unemployed” people. On the other hand, if the obsession is with employment, and if this employed population produces zilch, then all can be employed and yet all can be dirt poor.

4. To produce stuff, you have to have infrastructure. Build infrastructure first.

You cannot produce much with your bare hands. So you need factories, You need power to run those factories. You have to have roads and ports and airports to bring inputs to the factory and take the output out. Invest in infrastructure.

And you don’t need to bring out the excuse that the government does not have the capacity to fund the infrastructure. The private sector at home and abroad is more than eager to build them, provided the asinine policies blocking this investment were discarded.

5. Learn from you mistakes.

Of course, to do so, one has to admit that one has made mistakes. Flatly denying that would not accomplish much. China learnt from its mistakes and has changed course.

I have my doubts whether we can learn from our mistakes because it is not politically correct to point out that mistakes were made. Goring of holy cows is not taken very lightly by the worshippers of holy cows.

Thank you, Mr Lee Kuan Yew, for speaking to the Indian leaders. I am not sure that you have not wasted your time.

The recent performance of India’s private sector has underlined an important economics lesson, that competitive markets work where too often the command and control system founders. Within your arm’s reach is a device which is a miracle of modern technology—the cell phone. It took the government telecom monopoly 45 years—from 1951 to 1996—to install around 14 million land lines. Between 1996 and 2000, with the liberalization of the telecom sector, India’s installed capacity doubled to around 30 million lines. In the next five years, India’s telephone companies added another 90 million lines (of which 70 million were cell phone lines.)

Imagine if the government had continued to monopolize the sector and had continued the installation of capacity at the pre-1996 rate. It would have taken about 300 years—or till 2300—to reach today’s installed capacity. Astonishing things happen when the government gets out of the business of business, or at least allows the private sector to do its thing without trying to cripple it. Take another sector where the government allowed private firms to compete—the airlines. I recall those days where one was often reduced to begging a government employee at the airlines office for the privilege of being treated rudely by the airline staff on flights that more often than not delayed. Those were the days my friend, we thought would never end.

The license quota permit control regime was instituted with the express purpose of making sure that essential goods and services were affordable and available to the people and thus was the sole prerogative of the government. An admirable socialist goal of reaching the commanding heights of the economy. The outcome should not come as a surprise: shoddy goods and services, affordable and available to only those who had the clout and could bribe the officials. Bajaj scooters had a waiting time of 7 to 10 years! They were prized as dowry; want your homely daughter married soon, promise a scooter to sweeten the deal.

While the Indian economy has done better since the government has started relaxing its chokehold on it, there is much that is left undone. Until the bureaucrats and the politicians let go entirely, the Indian economy has a hard row to hoe. It is imperative that we ask and clearly understand what motivated the policy-makers to hobble the economy for so many decades. Without that frank enquiry, we may never fully understand which mistakes were made and therefore continue to stumble into the same traps.

By now, even the minimally awake observer may conclude that the private sector can do business better than the public sector can. For instance, India’s private sector uses capital very efficiently. Lee Kuan Yew points it out in his lecture (see part 1 here and part 2 here of my commentary):

A factor worth noting: India gets a much better economic return for the investment it makes in its economy because India’s private sector capital efficiency is high. If India opens up fully to FDIs, the results will be profitable for the investor and add considerable employment and added GDP growth for India. With jobs there will be a trickle down of wealth to millions of Indian workers, as there has been in East Asia.

Globally, there is a savings glut which is looking for investment opportunities. India would be the destination of this massive investment but the economy needs liberalization. If I am asked what I thought of the liberalization of the Indian economy, I would echo Gandhi (the home-grown one) and say, “I think it would be a good idea.”

The liberalization so far is too little but I sincerely hope it is not too late. LKY points to some stellar examples—they are miniscule in the context of the Indian economy but they are indicative of what is possible.

What India has achieved since 1991 should not be underrated. There have been many successes. The Delhi Metro is one. Bharat Forge, the largest Indian exporter of auto components and the leading global chassis component manufacturer, is another example in the manufacturing sector. There are others. The question is why there are not many more of them?

Why indeed. The Indian private sector can do much better but can’t. Why? Here is my conjecture on what LKY thinks is the reason: the mendacity, greed and ignorance of Indian politicians. LKY is a shrewd observer, of course. But even dim-witted people have realized that when it comes to greed Indian politicians are a class apart. Exposing that greed, mendacity and ignorance is fast becoming a thriving cottage industry as evidenced by Tehelka and Cobrapost.

Being a scholar and a gentleman, he really could not come right out and tell the politicians to their face that they are the problem. So he used a well-worn technique of deflecting the blow by saying that it is politics that is to blame. More over, he did not present it as his own conclusion but let other well-known Indians speak:

There is no dearth of excellent analyses by Indians about this problem. An entire library could be assembled on the subject. I consulted two books: The Future of India by Bimal Jalan, who was Governor of the Reserve Bank of India from 1997 to 2003, Chairman of the Economic Advisory Council to the Prime Minister and has represented India at the IMF and World Bank; one other book, Governance by Arun Shourie who has held several government portfolios and is a well-known writer. To sum up their arguments for the failings of the system in a single word: politics.

There you have it. The failing of the system are centered around politics. And who engage in politics? Therefore politicians. He said it to their face, however a bit more politely than I would have. He quotes Dr Singh’s interview in which Dr Singh pleads that his inability to govern arises from the coalition that he has clubbed together to do the job. But LKY does not let him off the hook.

Earlier this year, Prime Minister Manmohan Singh gave a wide-ranging interview to the McKinsey Quarterly. He rated his own government’s achievement as 6 out of 10, a performance he said was unsatisfactory. He acknowledged the need for better infrastructure, for more FDI, and also the need to move ahead in manufacturing. When asked whether the pace of implementation was fast enough, he replied:

” … economic policy and decision making do not function in a political vacuum. It takes a lot of time for us to take basic decisions. And furthermore, because we are a federal set-up, there are a lot of things that the central government does, but there are many things, like getting land, getting water, getting electricity – in all these matters the state government comes in, the local authority comes in ….. …. I do recognise that at times it gives our system the label that it is slow moving. In a world in which technology is changing at such a fast pace, where demand conditions change very fast, we need to look at a more innovative mechanism to cut down on this rigmarole of many tiers of decision-making processes.”

Prime Minister Singh added, “We are a coalition government and that limits our options in some ways.”

It is a sad sight: the Prime Minister of the country making excuses. Straight talk would be appreciated, instead of the mealy-mouthed equivocation emphasized above. Say, “our system is slow moving” instead of “at times it gives our system the label that it is slow moving.”

LKY responds to that excuse by rejecting it. He also rejects the notion that because India is a “democracy,” it is slow.

Politics is a fact of life in any country. And coalition politics is a fact of Indian political life.

It has been suggested that India’s slow growth is the consequence of its democratic system of government. Almost 40 years ago, Professor Jagdish Bhagwati wrote that India may face a “cruel choice between rapid expansion and democratic processes”.

But democracy should not be made an alibi for inertia. There are many examples of authoritarian governments whose economies have failed. There are as many examples of democratic governments who have achieved superior economic performance. The real issue is whether any country’s political system, irrespective of whether it is democratic or authoritarian, can forge a consensus on the policies needed for the economy to grow and create jobs for all, and can ensure that these basic policies are implemented consistently without large leakage. India’s elite in politics, the media, the academia and think tanks can re-define the issues and recast the political debate. They should, for instance, insist on the provision of a much higher standard of municipal services.

I agree with LKY. Fundamentally, what we finally achieve is what we are willing to settle for. This true at all levels of organization. As individuals, we pretty much end up where we have set our goals. Our achievements reflect to an unusually large extent what we set out to do. At the aggregate level, the society we end up having is determined by what type of society we desire. It is a cultural thing: the obtained level of corruption, poverty, filth etc is determined by how our culture accepts, tolerates, and takes as normal certain levels of corruption, poverty, filth, etc. It is the tolerance of corruption, poverty, filth that allow them to exist to the extent that they do.

So he says that politicians cannot hide behind the excuse that politics is what explains the poor performance.

By way of example, Chinese politics have always been plagued by factionalism. China also has great regional diversity. Like India, China also has powerful vested bureaucratic interests. But Deng Xiaoping forged a basic consensus among all political factions and the bureaucracy on the economic development and the necessary opening up to the outside world to succeed. A similar consensus can be achieved in India.

Next he goes on to point out that we have some great opportunities which must be taken to their logical conclusion instead of half-hearted implementation.

The passage of the Special Economic Zone (SEZ) Bill by the Lok Sabha (Lower House of the Indian Parliament) in May this year was an important move. SEZs can finesse some difficult internal issues blocking liberalisation. Singapore has some experience with SEZs in China. If India thinks it useful, we are willing to share our experiences with you, building upon what we have done in the Bangalore International Technology Park. I must conclude with a word of caution. SEZs, once embarked upon, must be made to succeed, which means total and sustained commitment from politicians and bureaucrats at national, state and local levels.

When they succeed, they will have a powerful effect on the whole economy, give a boost of confidence and spark off a healthy competitive dynamic between different states and regions. Successful SEZs also will erode opposition to reforms because their benefits become self-evident, as has happened in China.

He concludes this part of his talk with a wonderful example of the mendacity of the communists. West Bengal, once upon a time the most valuable jewel in the Crown, is a basket case, now more known around the world as the “Gutter” (thanks to the tireless working of the “Saint of the Gutters” who enriched her own organization by show-casing the poverty of Bengal). How did this remarkably sorry transformation take place, you may ask. The secret sauce: communists.

A few months ago, in August, the communist Chief Minister of West Bengal was in Singapore to drum up investments for his state offering market incentives to attract investors. He said: “The lesson from the collapse of the Soviet Union and from China is that [India] must reform, perform or perish.” That very same month, members of his own party in Lok Sabha in New Delhi forced a retreat on India’s privatisation programme. This is India’s party politics.

Pondering the imponderables is next on LKY’s mind. He lets Prof Pranab Bardhan speak about the important distinctions which lie at the base of the differential performance of China and India.

There are some imponderables. American commentators believe that China’s political system is too rigid, that it does not have the flexibility of pluralistic politics and democracy with freedom of speech, the media, assembly and respect for human rights. So China will encounter severe problems and setbacks. Professor Pranab Bardhan of University of California, Berkeley, has explained the problem this way:

“China’s authoritarian system of government will likely be a major economic liability in the long run, regardless of its immediate implications for short-run policy decisions.

“But inequalities (particularly rural-urban) have been increasing in China, and those left behind are getting restive.

”With massive layoffs in the rust-belt provinces, arbitrary local levies on farmers, pervasive official corruption, and toxic industrial dumping, many in the countryside are highly agitated.

“China is far behind India in the ability to politically manage conflicts, and this may prove to be China’s Achilles’ Heel.

”Over the last fifty years, India’s extremely heterogeneous society has been riddled with various kinds of conflicts, but the system has by and large managed these conflicts and kept them within moderate bounds. For many centuries, the homogenizing tradition of Chinese high culture, language, and bureaucracy has not given much scope to pluralism and diversity, and a centralizing, authoritarian Communist Party has carried on with this tradition”.

Prof Bardhan’s assessment is that India’s ability to politically manage conflict better than China could be a reason to believe that India holds at least one good card in its hand.

LKY diplomatically states that he believes that China will learn how to manage conflict in time and that it is not realistic to imagine an unchanging Chinese political system. As he says in the conditional below, India will draw ahead in the longer term only if the Chinese make the mistake of not transforming their political structure.

If they are right, India will draw ahead in the longer term.

Such analyses assume that the Chinese political system will remain static. If China’s political structures do not adjust to accommodate the changes in its society resulting from high rates of growth, India will have an advantage because of its more flexible political system in the longer term.

But Bardhan also cautions: “India’s reform has been halting and hesitant. India’s heterogeneous society has been riddled with conflicts, but the system has by and large managed these. There are many severe pitfalls and roadblocks which India and China have to overcome.”

Both India and China are huge countries with vast populations and long histories. They have to evolve standards of governance that is consonant with their cultures and the spirit of their civilisations.

The implicit assumption of that last statement is that Indian and Chinese cultures are different. To me, cultural distinctions explain the varying performance of different groups of people. In some sense, it is a dismal conclusion because it means that to succeed, ultimately one must change a dysfunctional culture, and success is not going to be easy.

At stake is the future of one billion Indians. India must make up for much time lost. There is in fact already a strong political consensus between India’s two major parties that India needs to liberalise its economy and engage with the dynamic economies of the world. The BJP led coalition government of former PM Atal Behari Vajpayee continued and indeed extended the economic liberalisation policies of Manmohan Singh when he was Finance Minister in PM Narashima Rao’s government. India now has a strong, able and experienced team with Manmohan Singh as PM. The time has come for India’s next tryst with destiny.

The first tryst with destiny did not work out as planned, if you pardon the pun. Too much planning can lead to failure of plans. Indian leaders and policymakers have a seemingly hypocritical attitude towards the people. The people are assumed sophisticated enough to figure out who should rule the nation, but they are not smart enough to make simple day to day market decisions; for the latter, they have to have a patronizing government official in charge.

If I were the one making pretty speeches for the next tryst with destiny, I would recommend a few things such as trusting the people a bit more, and trusting the bureaucrats and politicians a bit less.

In the next and final bit I will summarize what I learnt from LKY’s speech.

Reading Lee Kuan Yew’s lecture is edifying at various levels. As an observer, he is incomparable. But he did not merely observe; he hinted at solutions and did so without being rude. You know the Hindi saying, samajhdar ko eshara kafi hota hai (to the intelligent, a mere gesture suffices). Unfortunately, his talk to the Congress and other assorted disciples of Nehru must have been as useful as a bicycle to a fish. Nothing that LKY prescribed for India is surprising or counter-intuitive. Yet it is good to hear it from one who has not only talked the talk but actually walked the walk.

LKY transformed a third-world mosquito infested swamp into a rich developed city state within one generation. An autocrat to the core, he sequenced the changes and orchestrated the development of his city without apologizing for what he had to do. Singapore is one of the least corrupt economies of the world. He made Singaporeans clean up their act, both figuratively and literally. No other dictator has been able to achieve that sort of transformation. It is a random draw from which dictators are drawn. India drew a lousy hand and got saddled with dictators that were incompetent to the core. And staggering from one calamity to another, the country got rid of the dictators and with only a brief break, got a government that is headed by a foreign-born rather reluctantly naturalized citizen of India and supported by a bunch of treasonous communists.

There is sweet irony in LKY delivering the Nehru Memorial Lecture: a successful dictator lecturing the family members of a failed dictator who made a mess of the economy that was so full of promise. Just in case it is not entirely clear, Nehru was a dictator, never mind the fact that there may have been an election. The laws of the universe do not preclude the democratic election of dictators. Adolf Hitler was also elected, and he enjoyed the confidence of the majority just as much as Nehru enjoyed the confidence of the people of the newly minted republic of India. There was no opposition worth its name and Nehru did precisely what he willed.

Based on Nehru’s policy prescriptions, the Indian economy grew at a sorry 2 or 3 percent a year—the aptly named “Nehru rate of growth.” Per capita figures were even more dismal than that because the population grew rapidly. The Nehru dynasty continued to favor policies that kept India locked into the Nehru rate of growth until about 1991. Then economy grew at a more respectable rate but only compared to the Nehru rate of growth. In absolute terms, the “post-reform” growth rate was nothing to write home about. China had been growing for over a decade and at a much faster rate.

Compared to the dismal performance of the Nehruvian socialistic system, anything would look good. But that is not enough. LKY warns that today’s India should stop comparing itself to Nehru’s India. LKY put it thus:

India should benchmark itself not just against its own past, but against the best in Asia. And India can take heart from the achievements and performance of Non-Resident Indians (NRI) in free market economies such as the US, UK and even Singapore, where large numbers of NRIs have assumed high corporate positions in multi-national corporations. {Emphasis added.}

It is important to acknowledge precisely what makes NRIs tick whereas RIs don’t tick. It is a combination of nature (internal) and nurture (external) factors. The successful NRI in the US, for instance, are largely those who are innately intelligent, hardworking, ambitious, well-educated and driven to excel. They were born lucky, worked hard in school, and then ended up in a fine environment which allows and encourages people to do their best and move up. The external – environmental – factors that goes with a market economy is missing in India.

Considered as any large group of humans, Indians are no better or worse than others. There is genetic diversity and variation within the group. A specially selected subset could be constructed with arbitrarily extreme characteristics such as “very successful NRIs.” But the fact that the large group does poorly compared to other large groups is then entirely due to the environment. The environment can be changed but with great determination and foresight, as LKY did to Singapore.

One of the commonest objections I come across is, “Don’t compare Singapore to India. India is very large while Singapore is very small.” First of all, I am not comparing Singapore to India. I am comparing the culture and quality of the governance of Singapore to that of India. The values that are expressed by the leaders of a society are independent of the physical size of the society. Values and standards are thus not like physical goods. The value of not tolerating corruption applies with equal force whether the field is large or small. Just because India is a few hundred times larger than Singapore does not mean that the determination to not tolerate corruption has to be a few hundred times the determination required in Singapore’s case.

LKY then quotes growth statistics which should make Indians hang their head in shame. China is a very large country. So comparing China and India cannot evoke the standard response that is given when Singapore is mentioned in any way with regard to India. Of course, the objection raised is then that India is a democracy while China is not. I have not yet figured out why being a democracy should be a valid explanation for a dysfunctional economic system.

The US, if I have my facts correct, is also a democracy, as are the Western European nations. Their populations do not subsist at the edge of starvation. Of course, all rebuttals to India’s dismal economy cleanly sidesteps the fundamental problem which is that India’s economic policies suck chrome off the bumper of a truck parked a hundred yards away. Open up any newspaper if you dare on any day of the week, and you will see the next asinine brain-dead scheme being proposed by the heirs of Nehru. Yesterday, for example, the government proposes to impose reservations and quotas for private sector jobs. No, not merit or competency—what will matter is if the applicant has the right caste, the appropriate religious affiliation, belongs to the correct vote bank.

Here is a stark demonstration that economic policies matter. LKY reports the differential growth rates of China and India. Were his audience, the honorable head of the Indian government and the Prime Minister Dr Manmohan Singh, paying attention?

Both India and China have both done much better than most of the world. In the decade from 1994 to 2004, India’s GDP grew two-fold from US$310 billion to US$661 billion. But during the same period, China’s GDP grew three-fold from US$542 billion to US$1,649 billion. In 1984, India’s GDP was about 30% smaller than China’s. A decade later, it was more than 40% smaller and by 2004 it was about 60% smaller. Such a wide disparity is unnecessary. India can and should narrow the gap by embarking on a new round of reforms.

Wide disparity unnecessary? Almost nothing that the various governments of India have done have been necessary. Futility has been writ large on each hare-brained scheme that the illiterate narrow-minded bigoted bunch of psychopaths have imposed on the economy.

I have been following the shenanigans of the government of India for a few decades. To quote Groucho Marx, “He talks like an idiot, and behaves like an idiot. But don’t let that fool you. He really is an idiot.” The Indian policymakers behave like idiots, and talk like idiots. Don’t let that fool you. They are actually a bunch of idiots.

Anyway, enough of this rant. Let us go back to LKY. He asks, “Can India keep pace with China’s growth?” and responds, “Yes, if India does more in those sectors where China has done better.”

That statement, ladies and gentlemen, is worth drumming into the heads of India’s movers and shakers. Are you paying attention, Dr Singh?

Where did China do better? Manufacturing. That is where the foundation of a large economy lies. That is where it makes sense to distinguish between a small state like Singapore and a large ones such as India or China. A small economy of only a few million people can get by with only a services sector. But a large country with a billion people needs to have a correspondingly large manufacturing sector. When I say large, I do not mean that it should employ a large percentage of the people. I mean that the value of the production of the sector should be large. Why? Because manufacturing produces goods and it is the availability of goods that make people non-poor. Here’s LKY—

… But India cannot grow into a major economy on services alone . Since the industrial revolution, no country has become a major economy without becoming an industrial power.

Just as China is learning from India to improve its performance in the IT sector, so India must emulate China’s success in attracting FDIs and the jobs they create in manufacturing. It can do this by building infrastructure and educating and raising the skill levels of its workers.

Infrastructure and education. Actually, education is also part of the infrastructure—the supporting foundation upon which one can build an economy. Neglect of primary education rivals the neglect of other infrastructure such as roads, ports, power generation, railways, etc. Many decades have passed since India’s constitution was adopted in which primary education was given priority. Like pretty speeches, it is a non-starter. A very large percentage of Indians cannot read the constitution of India.

Yet—and this is the most baffling puzzle to me—I hear the claim that India is an information superpower endlessly touted by journalists, writers, and even the President of India. Cognitive dissonance on a social level or is it just plain stupidity?

LKY is right in his assessment that a country cannot leap-frog the agriculture and manufacturing stage and go directly to a services economy. He says:

Arvind Panagariya, a professor of Indian political economy at Columbia University, USA, puts the issue clearly. He noted that some have argued that India can focus on IT, grow rapidly in services, skip industrialization, and yet transform itself from a primarily rural and agricultural country into a modern economy. He dismissed such ideas as “hopelessly flawed” and “far-fetched”.

IT is less than 2% of India’s GDP. While services have grown rapidly, the bulk of the growth is from service sectors where wages and productivity are low. Business services, which include software and IT-enabled services, account for only 0.3% of GDP. Only manufacturing can mop up India’s vast pool of unemployed, narrow the urban-rural divide and reduce poverty.

Professor Panagariya concluded:

“The right strategy for India is to walk on two legs: traditional labour intensive industry and modern IT. Both legs need strengthening through further reforms ….”

LKY comes back to the mantra—education and production of stuff. In the manufacturing sector, he notes that reform in labor laws is critical.

India’s relatively young population can be an asset if they are universally well educated. UN forecasts that India’s population will outstrip China’s by 2030. Job creation through faster GDP growth is therefore an urgent necessity. Growth in IT and other services will not create enough jobs. IT-related jobs make up only one quarter of one percent of India’s labour force.

To create jobs the main thrust of reforms must be in manufacturing. That requires a change in labour laws to allow employers to retrench workers when business demand is down , streamlining the judicial processes, reducing the fiscal deficit, loosening up the bureaucracy, and most of all improving infrastructure. Let me focus on the last two as I believe they are crucial and inter-connected.

Industrialisation cannot take off without adequate infrastructure: better roads, and a reliable supply of power and clean water, better ports and airports. By one estimate, economic losses from congestion and poor roads alone are as high as US$4 to 6 billion a year. Another estimate is that the cost of most infrastructure services in India is about 50% to 100% higher than in China. The average cost of electricity for manufacturing in India is about double that in China; railway transport costs in India are three times those in China. China has spent over eight times as much as India on its infrastructure. Three years ago, China’s total capital spending on electricity, construction, transportation, telecommunications and real estate was US$260 billion or more than 20 percent of its GDP as compared to US$31 billion or 8 percent of India’s GDP.

Why do I think that India’s policy makers are incompetent? Because it should be clear to the meanest intelligence that industrialization depends on infrastructure and that that should be a priority. Which part of this simple statement don’t they understand. And if they do, why are they preventing the building of infrastructure? No money to finance the infrastructure? LKY says let the private sector do it.

If there are budgetary constraints , the answer is to privatise these infrastructure projects. There are well established construction companies, Japanese, Korean and others, that have done many such infrastructure projects on franchise terms.

One area where India has done well is its telecommunications infrastructure. This has been a critical factor for India’s IT success. India needs to aggressively privatise infrastructure development and open it to foreign investment. Then FDI flows will increase. And the bureaucracy must not impose onerous conditions that will hamper this privatisation.

Good luck Mr Lee Kuan Yew. Bureaucracy not impose onerous burdens? That is their raison d’etre.

The Political and Economic Risk Consultancy (PERC) based in Hong Kong, recently surveyed expatriate businessmen on bureaucracy and red tape in Asia. India was rated worst out of the 12 countries covered. PERC’s conclusion was that:

“The Government would like to liberalise many sectors, and there are plenty of announcements of new initiatives to do so. But when push comes to shove, bureaucratic inertia has been extremely difficult to overcome.”

Asking bureaucrats to stop throwing spanners into the works is like trying to teach a pig to sing: it cannot be done and it annoys the pig.

The World Bank has also done its own study. It found that in India it can take a decade to close a business through insolvency proceedings. It also found, among other things, that official fees amount to almost 13 percent of a property transaction in India as against just over 3 percent in China.

My secretaries asked Singapore businessmen with investments in India what, apart from infrastructure, they found as major constraints. To a man, they replied it was the bureaucracy.

I am sure that there must have been senior bureaucrats in the audience. Did they feel uncomfortable? Or are they too thick-skinned to understand how much damage they inflict on the nation.

Last year I was at a policy makers’ roundtable in Chennai. The topic under consideration was how ICT can enable development. Lots of hot air was generated by impassioned speeches on how the Internet and the PC would enable rural India to leap-frog development. When it was my turn to speak, I started off with, “First we kill all the bureaucrats.” The bureaucrats at the round table were not amused. Perhaps it was because they did not recognize that it was Shakespeare localized for Indian conditions (“First we kill all the lawyers.”) I continued that bureaucracy ruthlessly strangles with hands of gold the Indian economy and no amount of ICT will change India’s fortunes unless the bureaucracy is fixed first.

OK, maybe I was a bit too blunt. LKY is polite and says it like it is:

They believe it is a mindset problem. The average Indian civil servant still sees himself primarily as a regulator and not as a facilitator. The average Indian bureaucrat has not yet accepted that it is not a sin to make profits and become rich . The average Indian bureaucrat has little trust in India’s business community. They view Indian businessmen as money grabbing opportunists who do not have the welfare of the country at heart; and all the more so if they are foreign businessmen. Deng Xiaoping said at the start of China’s open door policy, it was glorious to be rich. The sequel is reported in Forbes Asia, November 14 2005, where it listed over 300 China’s richest, 40 of them with thumbnail CVs in a centre -fold. All are new entrepreneurs creating jobs and spreading wealth. Now, after private enterprise and the free market have generated wealth in the coastal provinces, China’s leaders have concentrated on spreading growth to the inland provinces by building infrastructure and offering generous economic incentives for investments.

One Singapore businessman told me this story. He entertained a former senior Indian civil servant to lunch in Singapore. Some months later when he was in India, the former civil servant reciprocated by hosting a dinner at which several other guests were present. His host made this surprising comment that he was amazed to see that in Singapore, a business could be successful without being dishonest.

India must find some way to reward bureaucrats who facilitate, not hinder investments and enterprise whether Indian or foreign.

India needs reform in various areas. The most critical area is the bureaucracy. Why India got saddled with a dysfunctional bureaucracy is easy to understand: the British were in India to exploit and extract wealth and created the bureaucracy with that objective. When the British left, the bureaucratic infrastructure was not jettisoned because it was the perfect tool for the “command control license permit quota” Raj which began with Nehru and still impedes India’s progress.

I think I will take a break and get back to the rest of LKY’s speech tomorrow. Au revoir until the next time and the case is sol-ved.

[Continue on to Part 3 of LKY on India.]

He starts off with quoting from Nehru’s famous “tryst with destiny” speech of 14th Aug 1947 which he heard as a young student at Cambridge. I suppose it is de rigueur to quote those lines about “Long years ago we made a tryst with destiny, and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially. At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom. A moment comes, which comes but rarely in history, when we step out from the old to the new, when an age ends, and when the soul of a nation, long suppressed, finds utterance.”

I must hand it to Nehru—he did make pretty speeches. The problem was not lack of flowery language; it was all about lack of substance behind the form. All talk about stepping out of the old into the new is meaningless if the same structure of bureaucratic control and a meddlesome government is imposed with a vengeance that even the British could not match.

LKY said

The destiny Nehru envisaged was of a modern, industrialised, democratic and secular India that would take its place in the larger historic flows of the second half of the 20th Century.

Nehru never doubted India’s place in the world.

Certainly not. There is little point in doubting the greatness of the country that you feel is your birthright to rule.

LKY

…Nehru’s speeches resonated with me. I shared intellectual and emotional roots with Nehru because I had also experienced discrimination and subjugation under the British Raj and admired Nehru for his vision of a secular multiracial India, a country that does not discriminate between citizens because of their race, language, religion or culture.

Again, Nehru’s vision of a secular country not discriminating among its citizens based on religion conflicts with the reality that he imposed on the country. It was he who set the country on a path where the laws that apply to a person are based on a person’s professed religion, where the privileges you enjoy depends on what your religion is. Want admission in an educational institution? Well, depending on what religion you are, you may or may not get in. If this is non-discrimination, then we are using Orwellian-speech from his novel 1984.

I know that LKY is not ignorant of the real state of discrimination in India. I conclude that he was making a point by highlighting the blatant discrimination in India.

As prime minister, LKY met Nehru twice in India – in 1962 and in 1964. He must have regarded Nehru’s attempt at “scaling the commanding heights of the economy” with bemused contempt. Of course, in his speech he put it rather diplomatically, thus:

Like Nehru, I had been influenced by the ideas of the British Fabian society. But I soon realised that before distributing the pie I had first to bake it. So I departed from welfarism because it sapped a people’s self-reliance and their desire to excel and succeed. I also abandoned the model of industrialisation through import substitution. When most of the Third World was deeply suspicious of exploitation by western MNCs (multinational corporations), Singapore invited them in. They helped us grow, brought in technology and know-how, and raised productivity levels faster than any alternative strategy could.

Import substitution industrialization was stupid and even in those times it was known to be an impractical idea. Many people defend Nehru’s blunder by making the trite observation that he was product of his times and therefore cannot be held accountable for his mistakes. I don’t see what that defense has to do with the price of tea in China. Well, LKY was also a product of his time; he did not give in to the insanity of ISI. I have a theory about why Nehru blundered the way he did, which I have outlined before elsewhere (reference given later.)

LKY then goes on to sugar-coat the pill he administered. He admits that Nehru was all pretty speeches and no substance.

Nehru had a great vision for India and for Asia and his elegant style of writing and speech captivated many young minds in the British empire. He had insights into the causes of India’s problems, but, burdened by too many issues, he left the implementation of his ideas and policies to his ministers and secretaries. Sadly they did not achieve the results India deserved.

Nehru’s ideal of democratic socialism was bureaucratised by Indian officials who were influenced by the Soviet model of central planning . That eventually led to the “Licence Raj”, corruption and slow growth.

Then LKY notes that change was forced on India and that the Congress was dragged kicking and screaming from the clutches of Nehruvian socialism. As a guest, he did his diplomatic best in noting that the first term of Rajiv Gandhi accomplished little.

The end of the Cold War and the collapse of the Soviet Union undercut the strategic premises of India’s external and economic policies. By 1991, with the country on the verge of bankruptcy, India had no choice but to change. Some Indians believe that, had Rajiv Gandhi lived to serve a second term as India’s Prime Minister, he would have pushed for major reform. But he was cut down before he was able to.

Ah, if only Rajiv had another term, surely he would have transformed India. LKY is devastating with faint praise. I bow deep in recognition of the maestro’s skill.

LKY then proceed to list the numerous postponement of India’s “tryst with destiny.”

… In January 1996, I visited New Delhi and spoke to civil servants and businessmen on the changes that Prime Minister Rao and his team were putting into place. I said that India’s ’tryst with destiny’ had been repeatedly postponed.

And the reason for the delay is not hard to figure out. The bureaucrats and the politicians had a wonderful time with the “license control permit quota” raj. With the machinery that Nehru had engineered, they could continue to rob the country with impunity. The racket they had going was –and it still continues to be– too lucrative to give up.

LKY—

When I published the second volume of my Memoirs in 2000, I wrote “India is a nation of unfulfilled greatness. Its potential has lain fallow, under-used.”

I am happy to now revise my view. Nehru’s view of India’s place in the world and of India as a global player is within India’s grasp.

Yes, it is. But the dead hand of Nehru’s socialism has still not released its grip on the economy.

To put the best spin on the numbers about India, LKY as the gracious guest, presents aggregate figures for India and China, not India’s figures alone. For instance he says

… The rise of India and China is changing the global balance. Together they account for about 40 percent of the world’s working age population and 19 percent of the global economy in PPP (purchasing power parity) terms. On present trends, in 20 years, their collective share of the global economy will match their percentage of the global population, which is roughly where they were in the 18th Century, before European colonialism engulfed them.

Reading between the lines, it is clear that India’s figures alone would be too dismal to mention. Then with a caveat, he adds:

… If there are no mishaps by 2050 the US, China, India and Japan will be economic heavyweights , as will Russia if it converts its revenue from oil and gas into long term value in infrastructure and non-oil industries.

India is an intrinsic part of this unfolding new world order. India can no longer be dismissed as a “wounded civilisation”, in the hurtful phrase of a westernised non-resident Indian author (V.S. Naipal). Instead, the western media, market analysts, and the International Financial Institutions now show-case India as a success story and the next big opportunity.

This is a comforting development for the US and the West, that a multi-party India is able to take off and keep pace with single-party China.

I am sure it is comforting the US and the West because India can be a useful counterbalance to China. Being used as an instrument is a relief only in comparison to the alternative of being an inconsequential bit-player in the greater global drama. Again, LKY puts the brightest spin he could manage quoting media reports:

Forbes Asia recently reported that US venture firms will raise US$1 billion for India by the end of this year. India has emerged as a power in IT sector. It is the largest call-centre in the world. Almost half of the largest global corporates now do at least some of their back office work in India. Indian R&D centers of American technology firms are reported to file more patents than Bell Labs. This year, India announced more than 1,300 applications for drug patents, second only to the US and 25 percent more than Germany, way ahead of the UK and Japan.

The US is now courting a nuclear India as a strategic partner. The EU has also launched a strategic partnership with India, and Japan wants a global partnership with India. These are indices of India’s growing weight in the world. Many countries, including Singapore, supported India’s bid to be a Permanent Member of the UN Security Council. Nehru’s vision is within grasp and India’s leaders must realise it in the next few decades.

Sweet vision that Nehru had. I cannot pass on this one without mentioning that India would not have had grovel and be repeatedly humiliated in trying to become a permanent member of the UNSC if way back when Nehru had not in his infinite wisdom turned down the offer when India was asked to join in the first place.

Back to the speech. He compares China and India:

I have always taken a keen interest in both China and India. Like all democratic socialists of the 1950s, I tried to forecast which giant would make the higher grade. I had rather hoped it would be a democratic India. By the 1980s, however, I accepted that each had its strengths and weaknesses and that the final outcome would depend on their economic policies, the execution of those policies, the responsiveness of the government is to the needs of the people, and most of all the nature of the culture of the two civilisations.

… At independence in 1947, two years before the Chinese Communist Party liberated China, India was ahead in many sectors. Both lost steam by adopting the planned economy. But because of its “great leap forward” and “Cultural Revolution”, China suffered more. However Deng Xiaoping was able to acknowledge China’s mistakes and China’s course dramatically change when he returned to power in 1978.

Subtext: China’s leaders learnt from their mistakes and took corrective action. India is still hung up on Nehruvian socialism to make real progress. One should read LKY’s statements very very slowly. They are the words of a person who is not only immensely bright but amazingly perceptive of the nature of the world. Of course I am sure, to the illiterate bunch of corrupt politicians and bureaucrats listening to the man in person, the words carry no meaning. I should mention that the ruling dynasty of India does not have a single university degree among the whole lot of them, starting with the celebrated Nehru whose name graces scores of universities and colleges around the country.

But let’s get on with the China/India comparisons. I read the comparison and wish he would sugar-coat it a bit more; it hurts to be reminded how poorly my country fares compared to China – and recall that China was poorer than India in 1980.

India has a superior private sector companies. China has the more efficient and decisive administrative system.

China has invested heavily in infrastructure. India’s underinvested infrastructure is woefully inadequate. India has a stronger banking system and capital markets than China. India has stronger institutions, in particular, a well developed legal system which should provide a better environment for the creation and protection of Intellectual Property. But a judicial backlog of an estimated 26 million cases drags down the system. One former Indian Chief Justice of India’s Supreme Court has given a legal opinion in a foreign court that India’s judicial system was practically non-functional in settling commercial disputes.

There you have it. Straight from the master’s mouth. A non-functioning judicial system is worthless. It is one of the major reasons for India’s pathetic economy. Economic production and growth depends on the ability to establish and enforce contracts. If contracts cannot be enforced, the cost of trades goes up, welfare losses accumulate, and finally in about 50 years, you have a country with about 300 million people at the edge or below starvation levels.

A poor economy then leads a hand to mouth existence and cannot invest in education. About 400 million Indians cannot even read; about half of Indian children drop out before completing primary school. Here is the comparison:

Both India and China have excellent universities, at the peak of their systems. India’s institutes of technology and management are world class. China is determined to upgrade its top 10 universities to world class status. Overall China’s education system is more comprehensive. China’s illiteracy rate is below 10%, India’s about 40%. India’s narrower band of educated people will be a weakness in the longer term. And although top quality Indian manpower is in high demand, large numbers of engineers and graduates lack the skills required in a changing economy and remain unemployed. However India has a larger English speaking elite than China. But only over half of each Indian cohort completes primary school, a big loss.

After liberalisation, China and India have followed different models of development, maximising their respective strengths. China adopted the standard East Asian model, emphasising export-oriented manufacturing. China has been immensely more successful in attracting FDI. India has focused on IT and knowledge-based services. Job creation is much slower in India and will continue to remain so until India’s infrastructure is brought up to date to attract the many manufacturers who will come to use India’s low cost workers and efficient services.

India’s “low cost workers” is a euphemism for very low average productivity in India. Wage levels reflect average productivity because aggregate wages and aggregate production must approximately balance. Average income therefore reflects average production levels. I shudder every time I hear India’s “low cost workers” trotted out as a badge of honor.

Well it’s time to do the numbers:

China’s GDP for manufacturing is 52%, India’s 27%; in agriculture China’s is 15%, India’s 22%; for services China’s 33%, India’s 51%. Over the last decade, in the service sector India has averaged 7.6% annual growth, China 8.8%, in manufacturing India’s growth is 5.7%, China’s 12.8%.

I see that I have only about half way through the lecture. I think I will stop here and put the rest in a follow up post.

{Go to Lee Kuan Yew on India — Part II.}

Poverty and hunger are the world’s greatest challenges

• 1.2 billion people–one out of five–live on less than $1 a day.
• More than 800 million people are hungry, including 31 million in the United States.
• Every day, 24,000 people die from hunger and other preventable causes. One billion people do not have adequate shelter, and 2.4 billion people do not have access to proper sanitation. More than 1 billion people in developing countries lack access to safe water.
• Yet enough food is produced in the world to feed everyone.
• Overpopulation is not the main cause of hunger. In Japan, a densely populated country with 125 million people, hunger is rare compared to other countries. Many larger countries with fewer people, like Peru and Sudan, have much higher rates of hunger.
• The problem is inequality in access to education, resources, and power.

I have a slightly different take on the question of poverty and hunger. I think that ultimately, without the active participation of the world’s poor, poverty cannot be sustained. I believe that we have been looking for the solution to poverty everywhere else except at the source of poverty. The source of poverty is the poor. The poor sustain poverty.

I am not absolving anyone of blame by locating the source of sustained poverty among the poor. On the contrary, the non-poor also actively participate in helping the poor sustain poverty. But in the ultimate analysis, the poor have the power to kill poverty. How to awaken them to that realization is the challenge that those who wish to see poverty eradicated face.

I was on the phone with CJ, discussing a series of columns that the Indian Express newspaper has been running called “India Empowered” which as the newspaper puts it, “if there’s one engine that’s today driving a changing India, it’s empowerment. Empowerment of the individual, the family, the neighborhood, the community – and, hence, the nation.”

The series has seen the usual suspects such as President “Dr” APJ Kalam, Dr. Manmohan Singh, Mr LK Advani, etc. and a few unusual ones as well.

“Empowerment seems to be the most critical ingredient that has been missing from the development recipe. Empower everybody and we will be the greatest developed nation in the world,” I said having read all those wise and wonderful people.

I am especially inspired by Bollywood super star Shah Rukh Khan’s way to making Indian empowered which is “Making people wear a smile, giving them what they want.” As long as I get what I want, I am sure that you will not have to make me wear a smile, though. I will smile all by myself.

I told CJ, “You should read what the great Khan has to say. I am sure he is not as ugly has he looks, considering that he is a super mega star. But his pronouncements are stupider than they sound. Malls appear to be at the crux of his evaluation of India. Let me read you a few lines from his column. Quote:

The other day I was talking to my friend Juhi Chawla and she told me that the malls are just as good or bad as in any other country. That’s great.

Things are wonderful in India. The economic structure is rising, technological advancements are making headlines and the social consciousness is also pretty encouraging. We’ve made progress in all spheres. Be it malls in Gurgaon, irrigation in Punjab or computer advancement in Hyderabad: greatness is happening every day.

If there is one column you must read from that series, make it Shah Rukh Khan’s. The least the newspaper could have done is to pay a two-bit journalist to ghostwrite that column. Perhaps the editor thinks that Mr Khan’s pronouncements are utterly profound. Would not surprise me in the least. Mr Khan (or should that be “Dr.” Khan because by now I am sure that some university or the other has granted him an honorary doctorate?) again:

Personally, I’ve a problem with the power of information. I’m not an authority on it but I think somewhere down the line, information has been a huge downside. We can access information anytime but we don’t know what to do with it. So, information creates bottlenecks. We create a flyover to Nehru Place but forget to connect it to Surya Hotel. Likewise, information as a tool is good but its utility is still unclear. Give a person what he wants but don’t bore him.

CJ interrupted me just as I was getting into it.

“Actually what he says is not any different from what the others have said but in more sophisticated language. He says, give people what they want. The newspaper is giving its readers what they want. They want to hear nice empty content-free feel good stories about how wonderful it all is and how even more wonderful it is all going to be. No real inquiry or reason needed. It has no operational content. Let’s just empower everybody, whatever that means, and we are done,” CJ said.

“Well, what do you recommend?”

“I say what India needs is an ownership society. The rest of this talk about empowering this that or the other is meaningless without the fundamental notion of ownership. Empowering villagers with knowledge, as the good “Dr” prescribes, will not have any effect until there is ownership. Remarkable results follow once you identify the problem as not one that is centered on power but on ownership.”

Then CJ proceeded to explain what he meant by the ownership society, how to bring it about, and what will be the effects of that transformation if we are ever able to achieve it.

Power without accountability is at the core of many of India’s problems. In a feudal society, the feudal lord has power but is not accountable to the serfs. He can arbitrarily make laws and do what he pleases. At a higher level of organization, in a kingdom, the king has all the power and again no accountability. At its peak, it is imperialism when the entire country is ruled by colonial decree but the rulers are not accountable. After centuries of feudal rule, followed by centuries of foreign invasions, and culminating in the British colonial rule of about 90 years, the habit of power without accountability has been firmly ingrained in the Indian governing psyche.

History matters. It is all karma, neh?

It is not power that is a problem by itself. You have to have power to accomplish anything. It is power divorced from and bereft of accountability that is a problem. Accountability arises from the idea of responsibility. And in turn, responsibility is a correlate of ownership.

What does it mean to “own” something? Here is a concrete example. I “owned” a product line when I worked in a corporation. I was responsible for its performance and I was accountable when things went wrong. I had the power to influence what happened to the product line and knew that if it performed well, I stood to benefit, and if not, I stood to lose.

That is what economists call incentives. I had the incentive to do the right thing because I owned the product and had all the rights and responsibilities that flow from that notion of ownership.

When the notion of ownership is missing, neglect is the outcome. Public enterprises generally fare worse than private firms because they don’t own what they manage.

This idea of ownership is not fully appreciated and so I will belabor the point a bit. I am sure you have said to yourself, “This gizmo is not mine. I better take very good care of it,” when you borrowed a gizmo from your friend. And you have also perhaps said at other occasions, “This gizmo isn’t mine. I don’t have to be too careful about it” when you were using a gizmo available for public use.

Contradictory? Not at all. It fits in clearly with the notion of ownership. When you borrowed, you got temporary ownership of the gizmo and therefore acquired the right to use and control it but also inherited the responsibility to be held accountable if something went wrong with it. The temporary ownership was as powerful as if you actually owned it. Note that someone has to own it in the first place before another can acquire temporary ownership. If no one owns it, then no one can acquire temporary ownership and thus not acquire the responsibility of accountability with it.

How the process of ownership is acquired in the first place is a matter that we will go into later. It has to do with the other (other than the market, that is) great institution called the Law. What I am attempting to do is to determine where exactly the holes are and how we can go about fixing them. My contention is that ownership is what is missing from the Indian economy. We need to focus on ownership, and go a little easy on the empowerment idea—whatever “empowerment” means.

There are two very important institutions which are quite critical to the functioning of a society. One is the market and the other the law. These are abstract concepts, of course, but the quality of their instantiation in a particular society determines to a very large extent how well the society functions.

Markets essentially provide the discipline that holds economic agents accountable for their actions. What you bring to the market is a bundle of ownership rights and the basic function of a market is to trade those rights with other market participants. The law actually establishes those ownership rights in the first place and protects them. To the degree the legal institution in a society is unable to do that, markets cannot function and thus trades cannot take place. Consequently, gains from trade do not occur and thus the economy does not function sufficiently well.

What exactly is an economy? Just a bunch of people producing stuff and consuming stuff. Since different people are better at doing different things, it is better for us if we exchange stuff that we are good at producing for stuff we are not so good at producing. That is voluntary trade. Voluntary trade makes both parties better off; it is a win-win situation. When due to some reason, a particular trade does not occur, the gains from trade are foregone and we have less stuff produced than otherwise.

For instance, if I know that I will be protected from my apartment being usurped by the renter, only then will I rent it out. If I find that renting my apartment could mean that the renter would refuse to move out after a certain period, and the courts would take about 200 years to hear my case, and even after getting a favorable decision, my descendents will not be able to evict the usurper, I will just not rent the apartment.

Note that you could be the most honest of renters but I have no way of figuring out that before I rent it out. So otherwise honest trades of renting will not occur and the economy suffers. This leads to the sorry state of thousands of vacant apartments and houses lying locked up in otherwise extremely crowded cities around India.

Trade cannot happen unless contracts are enforceable. That is what the laws and courts do. Furthermore, contracts cannot be signed unless it is clear as to who the owner is so that rights can be transferred, as that is what trade is—the transfer of rights. If the property is under dispute, i.e., if it is unclear as to who owns the property, trade cannot take place.

The law makes trade possible. The invisible hand of the market requires the powerful arm of the law to give it the power it has to transform and coordinate the self-interested actions of the many into overall social welfare.

The quality of the law in an economy fundamentally and essentially determines the nature of the economy. That is the bottom line that we have to focus our attention on. It is the law that assigns ownership and it is an ownership society that is a good society. That is what is missing in India. The rest of this essay is an exploration of the basic notion of an ownership society. Remarkable results follow from it and the operational details of how to implement an ownership society—both in the private and public spheres—will naturally evolve.

If we follow the simple logic of what an ownership society is, we will avoid all sorts of dead-end rhetoric of how malls are wonderful and how great India is because shiny malls dot the landscape, or how “empowering” villagers with “knowledge” will solve our problems, or how internet kiosks will transform India, or how yet another employment guarantee scheme will perform the magic of lifting millions out of poverty that many similar schemes that have merely shifted rubble so far failed to perform.

So what exactly does an “ownership” society mean? It means that for every bit of the economy, there is someone who is identified as the owner. I stress the word someone. It has to be a person, not an abstract entity such as a corporation or a government department. There has to be an identifiable person at whose desk is the sign “The buck stops here.” He or she owns that bit, albeit temporarily, and that means two things. First, the person has total control of that bit and, second, that person is accountable for the consequences of exercising his or her control over that bit.

For this to happen, rules have to be agreed upon regarding who will be the owner of a particular bit and what rights that are attached to the ownership, and what will be the consequences of exercise of those rights by the owner. The set of rules form the Law.

Now it is time to get down to brass tacks. Let us distinguish between the private and the public sectors. The private sector first. By its very definition, the ownership issue is clear. You own something, starting with self-ownership. Then you own other bits that are legally yours, whether it be a car or a factory. You have control over it and you are responsible for it totally and unambiguously, and you enjoy the benefits of the control you exercise over it and are liable for any damage you inflict on others as a result of that control. You run over a pedestrian in your car, you pay for the damage. Your factory blows up, you pay for the harm.

Note that the legal system is intimately involved. If the same legal system which grants you the ownership rights and assigns you the benefits of that ownership does not also simultaneously guarantee penalties for the harm arising from that ownership, it is incomplete and will not be effective.

The Law, in short, has to not only grant ownership to you, but also has to provide the appropriate incentives for you to properly exercise those rights. Incentives matter. In most cases involving the private sector, markets impose the discipline that keeps things in check. In the absence of that discipline, we suffer from what in economics is called “moral hazard”—people do not exercise due caution.

Question: should the CEO of a private firm manufacturing hazardous chemicals be a foreigner? No, if the law of the land cannot reach the CEO if the factory could potentially blow up and kill 20,000 people. It happened in Bhopal.

In the normal course of events, the market imposes some degree of discipline on the private sector. For instance, the managers of a private firm, if they are the owners, know that if the firm does not perform, they lose in the marketplace. In the case of firms which have shareholders, the managers of the firm are agents which work on behalf of principals who are the shareholders. The shareholders can reward or punish the managers on their performance. People can get fired for screwing up, and in the extreme case go to jail for misbehavior.

It is the threat of punishment that keeps the agents which manage a private sector firm in check. That punishment must be fully understood by the managers of the firm before they take “ownership” of the firm, and the law should be sufficiently efficient to credibly commit to carrying out the punishment.

Now in the public sector, the same logic applies. Every enterprise must have at every level someone who is held accountable, and the level of accountability should be commensurate with the degree of control the person has over the enterprise.

So here are the rules:

1. The Law should clearly state what rights and responsibilities are associated with the ownership of very bit.
2. Every bit of the economy—private or public—must be owned by someone.

Here is an example I can play with to illustrate what I would do if I were in charge of making the laws. The example comes to mind easily as I sit here in Pune without the benefit of power supply for about four hours every day.

Supplying adequate reliable power is neither an art impossible to master nor is it rocket science. The science and technology of power generation and distribution is fairly generally known and accessible. It is easy enough to figure out using very simple forecasting tools how much power is likely to be required in any particular region sufficiently in advance to account for the long lead times required for installing capacity. Yet, India continues to suffer chronic power shortage and has done so for decades. Before we go into the why of it, let us briefly recall some of the entirely avoidable costs of this failure.

It is economically wasteful. Real resources are diverted to deal with the power shortfall. Every household which can afford it puts in a diesel generator, or at least a “power inverter.” Businesses have to buy expensive generator and UPS systems to keep themselves running and their costs go up. Instead of centrally generating say 100 megawatts of power, it is generated inefficiently by tens of thousands of small generators at many times the cost.

Who is at fault? Clearly it is the fault of the state electricity board which has failed to adequately plan and provide power. Somebody screwed up and they did so at least to a large degree because the rules did not state the consequences of failure. Someone was in control of a huge firm and that someone did not have the right incentives to exercise due diligence and plan for the energy needs.

Imagine for a moment the following rules. The CEO of the state electricity board is given the ownership of that entity. The job description: “provide power now and build capacity so that there is sufficient capacity for the next 5 years” (assuming that it takes 5 years to build capacity.) If the CEO fails to do that, the entire salary paid to the CEO will have to be repaid and the person—who may have left the job by the time the shortfall is detected—will be publicly flogged in the town square.

Now this rule should be made fully clear to the prospective candidates and anyone who takes up the job must know the consequences of failure. It is because people know up front that they are shielded from the consequences of their failures that they fail in the first place.

I really don’t care whether the power I use in Pune is provided by a public firm or a private firm. As long as I know that if I suffer, those who are responsible for my suffering also suffer, I would be quite content. More importantly, I believe that if the penalties are made sufficiently appropriate, these failures will not happen very frequently.

I don’t really care if there is a Ministry for Power in India or not. What I would care about is if there is one, the man or woman who wants to have the power and the glory of being the minister, would also be flogged publicly for any problems that arise as a result of their tenure.

I don’t really care whether the railways are run by the government or not. But if there is a train accident, the rule should be that the railway minister will be flogged publicly and given as many lashes as there are deaths due to that accident.

Public flogging of public officials is the answer to the problem of public officials not taking their charges seriously. Not just corporations. Take politicians. Any election promises they make about how they will change the economy must be taken seriously. And then if they fail to deliver, hold their feet to the fire. Candidate A claims that he will make something happen, then as elected leader A, he becomes the owner of that something. If he does not deliver—you guessed it—public flogging.

Want to be the prime minister of India? No problem. Take ownership of the country and set goals that you say you will achieve. If the goals are not achieved as promised by you, public flogging over an extended period of time. What this will do is to bring the right sort of people into public life. People who know what they are capable of doing and who will not mess with the fate of millions knowing that their behinds —literally— will be on the line.

Flogging is a simple enough measure to implement. It does not require high tech equipment. What it does require is a judiciary that can impose the punishment and carry it out.

Corruption in an organization? Here is my solution which will fix it pretty fast. Suppose Mr A has been involved in corruption. Don’t just flog Mr A, get his boss (Mr B) and his boss’s boss (Mr C) and flog them as well. Why so? Because Mr C will be extra vigilant and keep on Mr B’s case and tell him to be on the lookout that no one under him is into corruption.

What this multi-level flogging does is this. It makes managers liable for corruption in institutions that they control. That is, it give the managers ownership of the organization they control. Irrespective of how deep the organization is, if a person at a certain level is corrupt, include the two higher levels and flog those two individuals as well.

You may think that I am not really serious. But I am. I am dead serious about this. You want to make India the least corrupt economy on earth, get serious about dealing with the problem for just a few years. After a few dozen high level officials have been publicly flogged, corruption will be a thing of the past which children will read about in their history books.

You may say that instead of flogging, why not just impose a fine on them. That would not hit where it hurts. Merely fining someone who has lots of money is not pain enough. The penalty has to have a sting. Here is what I mean. In Finland, the penalty for a moving traffic violation such as speeding is monetary but it is indexed on the income of the person. A dotcom millionaire was fined $93,000 for speeding.

So flogging should do very well in India. Those in high positions value their pride. They depend on their image. If they penalty is public flogging, they would cease and desist from doing what exacts that penalty.

Public flogging of public officials is a proposal which can transform Indian society more than all this talk about empowering the citizens that we are getting dizzy from reading in the newspapers. Everyone and his brother is advancing all sorts of wooly ideas about how to transform India. Here is an idea that will not see the light of the day of course, but it has the real power to transform.

Where did I get this idea from, you might ask. I think it has to do with what John Muir once said. He said that when he was a wee little kid in Ireland, leather was one of the best aids for memory. The prospect of a good belting sufficiently focused the mind to learn his lessons. If little children could be given the proper incentive via a belting, why not give the right incentives to managers with a good public flogging?

I must stress though that you would not really have to spend all your Sundays visiting public floggings. Merely including a credible threat of a public flogging in the rule book will take care of the problem and you will not have to actually carry out many expect the first few.

I am nearing the end of my piece. Some years ago, I had heard a song—A Cowboy Needs a Horse—which parodies the idea of superfluous possessions. It starts off simply enough with what a cowboy needs but then it veers off into never-never land of quadraphonic sound systems and helicopters and Xerox machines. I was reminded of that song when I was half way through reading the series India Empowered written by all those very famous people. I thought to myself, that yes, a cowboy does need a microwave oven and all sorts of gizmos but not essentially. Nice to have but definitely not strictly required. So I asked myself, what are the equivalent in the Indian economy to the horse, hat, and a rope that the cowboy really needs. I realized that it was the market, the law, and the credible thread of public floggings.

The market is slowly coming into being in India. The law has flaws. We need to get the “f” out to get good laws. What that means is we need to get the courts to move. Many trades don’t occur because contracts cannot be enforced by a court system which has a reported backlog of about 300-odd years. Finally, we need to make people owners so that they can properly care for their charge and this they will do only if they have an incentive to perform their duty, which they will do if credible commitments can be made about public flogging.

So why do these famous people talk about empowerment of this that or the other? Because they have power. That is what CJ said right in the beginning. It is all about power. They have power and they are doing pretty well and so they think that all citizens must have power. And hence empowerment.

Power without accountability and responsibility has gotten us where we are. We got here because government officials have power over things that they don’t own. What we need is the precise understanding of who owns what so that we know who to go after for when things don’t turn out as they should.

Will it happen? No, it will not. The last thing they who have power want is accountability and responsibility which comes from ownership. They makes the rules, and they will continue to rule.

It is all karma, neh?

In brief, REGS does not increase the aggregate production of the economy, nor does it increase productive capacity; it merely redistributes incomes by giving money to those in the rural areas. The first order effect of this diversion of resources is that other projects which have the potential to increase production and increase productive capacity do not get done; that is, the opportunity cost of the REGS is very high. The second order effects are increased public corruption, making the population much more dependent, increasing population, etc. This means in the future, the economy will produce much less than it would have otherwise produced and thus more people would face poverty as a result of the REGS .The rest of this essay is an elaboration of this argument.

Reasoning from the basics, first we must understand what the words poverty, income, employment, and production mean and how they are related to each other. Given the widespread confusion of these basic words, it is not surprising that the reasoning comes out all warped and some rather silly notions are entertained by supposedly sane people.

Poverty is lack of income, fundamentally and essentially. Income is real and is not to be confused with money which is nominal. The confusion between income and money happens because income is denominated in money terms. One can have income without having money. For instance in a Robinson Crusoe economy, Robinson’s income is what he gathers from the forest and the sea, farms and manufactures through his labor. Income is the real stuff that he can eat, and wear, and save. The seeds he saves for the next season’s plantings are his investments. Whether Robinson is poverty stricken or not depends entirely upon how much stuff he produces through his labor, and what he gets without having to exert any labor such as coconuts falling of their own on his head.

A Robinson Crusoe economy is a simplified model of a real economy. In the RC economy, there are natural resources such as the ocean and forests (land), Robinson’s ability to do work (labor), a few tools (capital), and Robinson’s knowledge of how to do things such as making a fire, planting corn, making bread (technology). Robinson is the capitalist who owns the means of production. He supplies the labor, and he gets paid wages which are his income. Depending upon how good his technology is – such as knowing when to plant what, or how to make a fishing net; and how much labor he supplies – or how much leisure he enjoys; and how much of his income he consumes and how much he saves for future investment; and how good his tools are, all add up to a steady stream of stuff that is available to him and that is his income. If the amount of stuff he produces plus what nature gives to him without his exertions is below a certain level, he is poverty stricken.

Robinson could be fabulously wealthy without ever lifting a finger if nature provided all the goods he needed. That is, he would be totally unemployed and still not be poor because he would have an income without so much as moving out of his hammock. On the other hand, he could be toiling day and night and be fully employed 24/7 and yet produce so little stuff that he lives in dire poverty. You could be unemployed and rich if you get gifts, or you could be employed and yet be poor if you produce too little. To conclude this bit, poverty is lack of income, and income is stuff that you get to consume – whether it was produced by your labor or not.

Now getting back to the real economy, you have one major difference with the RC economy: the real economy has more people. All other bits remain the same. Income to a person then is that person’s share of the total amount of stuff produced in the economy. How he is apportioned his share of the total production of the economy – that is his income – is a matter that is determined by various factors. For example, he could own machines, which other people use to produce stuff and in exchange they give him some of the stuff produced. He then is a capitalist and enjoys an income without working. He is “unemployed” but not poor. Or he could be a laborer who works in a farm and gets to keep what he produces, or he could be a programmer and gets paid money which he uses to buy stuff. Or he could be just a bum and the government gives him a handout every month.

So here is absolute bottom line: people are poor when their incomes are below a certain level, irrespective of whether they are employed or not, whether they have money or not. Now the reason that a person’s income is low could be because the economy as a whole produces too little relative to the number of people among whom the production has to be distributed (the production-population imbalance), or it could be that the economy produces a huge amount of stuff but the person for some reason is unable to receive his fair share of the production (the production-distribution imbalance.) Of course, you could have combinations of the above two to get inadequate production coupled with poor distribution.

Just to underline one point that we need to keep in mind: no one, including me, wants employment; we want an income. Employment is a means to the end—the income—and not an end in itself. If we did not have to be employed but received an income, we would be free to enjoy leisure in which we could do what we pleased, from programming computers to raising corn or digging ditches. I would be happy to let robots create all the stuff that I need so that I can spend the entire time eating with nice people, drinking with nice people, and sleeping with nice people with a contented mind.

So far we have been trying to get the vocabulary straight. Now that I am done with the vocabulary bit, we can start to reason about the problem with REGS.

India has a poverty problem because some people have incomes far below what is considered adequate for a decent human existence. It is not an employment problem, it is an income problem. Guaranteeing employment when the actual guarantee should be income is asininity of degree one.

How one goes about solving a problem depends on the nature of the problem. Is the enormous poverty in India due to the production-population imbalance (too many people, too little stuff produced) or is it due to the production-distribution imbalance (enough stuff but badly distributed)? Let’s do some arithmetic.

India’s per capita production per year of stuff denominated in money terms is US$500 or so; that is, between a dollar and two dollars a day per head. (Let’s not go into the PPP measure of income which needlessly muddies the matter; it requires a separate chapter to fix that confusion.) Clearly India suffers inadequate aggregate production because even if that was distributed perfectly evenly, each one of the more than billion people of India would be desperately poor. While maldistribution of this inadequate aggregate production seriously compounds the problem that the poorest face, clearly the more fundamental problem is that India just does not produce enough for the population that it has to support.

Indians are poor because India’s aggregate production is inadequate and therefore the solution has to begin with increasing production. Let me repeat that: we don’t need increased employment; we need increased production. And only after having produced more, we need to distribute that production better so that those who have little income can get more. Any policy which increases employment and which decreases aggregate income is therefore the most insane policy that an economy can have. It is my contention that the REGS increases employment and decreases aggregate income. And that will lead to increased poverty, as I argue below.

The REGS aims to increase employment alone and is not aimed at increasing either production or production capacity. The REGS terms state that laborers cannot use any labor saving devices if they are being paid under the scheme. Basically, if a large hole needs to be dug, you could employ one person to use a mechanical shovel and do the job. Or you could have 100 people use hand-held shovels and do it. Or you could employ 1000 with tablespoons, or 10,000 people with toothpicks to do the job. In the end only one hole gets dug but you employ more people. If by digging the hole we increase our aggregate production of stuff by Rs 1000, then the income from the employment per capita is Rs 10 per shovel-wielding worker, Rs 1 per person with a tablespoon, etc.

If the REGS does not increase the amount of stuff produced, then it essentially is an income transfer scheme. If the economy was already producing what it needed to produce, and all it needed was proper distribution of the production, then an income transfer scheme is great. Otherwise, it is better to use the labor to increase production and use the increased production to raise the incomes of those who are poor.

If there are projects that are worthwhile – that is, they increase the production of stuff or increase the capital stock – then these should be undertaken and the labor needed employed. I take it for granted that India has such projects, from building the infrastructure to educating its masses. Resources are required for these projects. The opportunity cost of diverting resources (around Rs 50,000 crores, or $10 billion a year) to schemes that essentially produce nothing nor add capacity is the value of projects that will not get done as a result.

For $10 billion, for instance, you could educate the hundreds of millions who need basic literacy and numeracy. There are enormous benefits to doing this which otherwise don’t arise when you are merely using labor to dig holes in the ground using bare hands.

There are other insidious effects of the REGS. First, it makes the people dependent on the government. Everyone cannot live on handouts – someone has to produce stuff. Handouts depress initiative and drive. Second, it increases the opportunities for bureaucratic and political corruption. Third, sets a precedent for political parties to continue to make irresponsible promises to people to win elections. Fourth, it will compound the population problem because increased incomes at the subsistence level increases fertility.

In conclusion, the economy needs to produce more stuff if it has to lift people out of poverty. Stuff gets produced by intelligently combining land, labor, and capital on projects that are efficient and have strong backward and forward linkages. Digging holes in the ground bare handed does not make any real difference. The REGS guarantees further poverty.

My claim is that this pro-poor policy is not mere rhetoric. The policy works and how. I argue that all other policies have not yielded their expected results but the pro-poor policies have delivered as could be reasonably expected.

Pro-industrialization policies are expected to lead to an increase in industrialization. If India ever had such policies, they have had only marginal success because India is arguably not an industrial economy. Pro-poor policies are expected to promote the number of the poor, and there has been a monotonic increase in the number of poor in India.

The percentage of people below the poverty line is estimated to be around 25. That is, India has about 250 million people who are so unimaginably poor that they can’t cross the poverty line that is set way below what can be considered necessary for a human existence. Around 33 million were added to that role in 2001-02 alone For comparison, that is more than the entire population of Canada in 2001 (30 million).

Let’s put the number of the abjectly poor in perspective. Consider the number of people below the poverty line at the time of India’s independence. We had about 350 million people then. Assuming that 50 percent of them were below the poverty line then, there were 175 million abjectly poor people then. Now, about 57 years later, we have 250 million abjectly poor people. There has been an increase of 75 million in the ranks of the abjectly poor in the nearly six decades of pro-poor policies..

India’s pro-poor policies have succeeded in increasing the number of poor in the past and while past performance is not a guarantee of future results, the most probable outcome of current pro-poor policies can be expected to lead to increase in the number of the poor. The “Employment Guarantee Scheme” (introduced by the National Rural Employment Guarantee Bill) is pro-poor and the result will be as before.

National Rural Employment Guarantee Scheme (NREGS)

It promises Rs 60 per day for 100 days of employment a year to one member of every rural unemployed family. The Central government funds this scheme, with the State expected to contribute 10 percent of the cost. The cost in the first year alone is expected to be around Rs 15000 crores (or approximately $3.3 billion.)

The NEGS is not novel. Maharashtra has had an employment guarantee scheme for decades. According to Sharad Joshi, it “has produced few permanent assets. And the EGS in Maharashtra is synonymous with corruption. Government officials concoct false registers of attendance.”

Corruption is not unexpected when money is involved and the transaction is between officials who have the power and control over the money, and the poor unemployed labor who would be willing to take only a share of whatever is due to him or her. It has been variously estimated that only about 25 percent of any relief money actually reaches the intended beneficiary. Politicians and bureaucrats steal the majority of funds.

As a matter of equity and fairness, the rural poor do need some kind of safety net. The design of exact mechanism of a safety net is not easy considering the scope of the problem. But a number of questions that arise in connection of the NREGS and needs to be investigated. Even if the NREGS is not beset with corruption and fraud, is it the best mechanism?

Is the scheme consistent with the reforms required in the economy? Will the secondary effects drown out whatever primary benefits that accrue to the rural people?

The basic objection I have to the scheme is that is in effect it is a purely income redistribute scheme. A purely redistributive scheme is not objectionable in and of itself provided there is sufficient production but the production suffers from mal-distribution. However, the basic fact is that the production itself is insufficient. So in this case the all effort should be made to increase production and simultaneously seek a more equitable distribution.

The money spent on the NREGS has an opportunity cost. What is lost is the government’s ability to fund production enhancing projects. Suppose the money was spent for a massive drive to provide primary education and health services to rural areas coupled with a reduced family size drive. Or it was used to improve the infrastructure of the country such as building a modern rail transportation system. Any of a large number of public works projects would generate large employment opportunities and lead to capacity building and thus to an increase in the total national income. In this case, it would not be just an “employment generation” but “income generation”.

The problem is that the focus of the proposal is flawed. It focuses on employment instead of focusing on increasing incomes. The distinction is important. Income, to an individual, is a share of the total production that the economy produces. By focusing on the employment and not on the production, the scheme merely redistributes the proceeds of a limited production.

In summary, the NREGS will have the expected effect of deeping poverty and enriching the bureaucratic and political intermediaries. That the Left support this misguided scheme should have been sufficient proof of its effects. But I guess we will have to go through with this despiriting exercise once again before we learn the lesson that increasing employment is not the same as increasing production.

[Also see the importance of producing stuff and "Sir, won't you buy this employment guarantee act?"]

I believe that the choices that society makes depends on the cultural and institutional capital of the society. As much as land, labor, capital, and technology matter, the social capital — that is the cultural norms and values and institutions — matter fundamentally.

This line of thought was prompted by a report in the New York Times. It was the story of Shazia Khalid who was raped and then persecuted by all and sundry for her “sin.” This happened in Pakistan. The culture of that place is such that the victim is blamed. Rape is seen as a insult to the family honor which can only be restored by killing the woman who was violated.

The values of the society matter more than the availability of PCs and the ability to surf the internet and get neat stuff off the world wide web. Third world under-developed societies need a change of values desperately if they are to get out of the cycle of poverty. Unfortunately, values are endogenous and they can only change with great difficulty. They cannot be imposed externally any more than “democracy” be imposed externally as the US is ostensibly attempting to do in Iraq.

The sense of fairness and justice is, in my opinion, the major determinant of how developed a society is. And in some sense, development is the basis for economic development. Until a society has justice and fairness as its core values, it cannot get beyond a Hobbesian existence.

Years later Sam, writing as Mark Twain, included that in the story of Tom Sawyer’s adventures.

What brought that story to mind was the recent jubilation amongst some commentators and political observers of the US-India partnership in defense, trade, and other matters international highlighted by Prime Minister Manmohan Singh’s visit to the US. The US will — among other deals — sell arms to India.

I am delighted whenever barriers to trade — political, physical, philosophical, ideological, or merely idiotic — come down because in general there are gains from voluntary trade of goods and services. The gains from trade are well understood enough that there is little point in flogging that horse. Except for the corner cases, of course. Does trade in “bads,” in contradistinction to “goods,” such a great idea? The natural instincts of an economist is to reply “it depends.” It depends on what the “bad” is I suppose and on what sort of externalities arise from such trade.

Take, for instance, trade in weapons of mass destruction. Is it welfare enhancing? The seller of these weapons clearly profits from the trade. What about the buyer? Does it really promote the security of the buyer? These questions bear investigation. While the answers may all be very trivially obvious for some, it is not at all clear to me. Though the perception may be widely shared that buying weapons is good use of scarce resources, it could also be wildly incorrect.

The reluctance of the US when it comes to selling arms to developing countries is like Sam’s reluctance to let his gullible friends paint the fence for him. When he finally relents, the friends are happy and suitably grateful to him for his magnanimity. Only in few trades are all the gains one-sided but trade such as these are exemplars of that set.

My concern here is development and the factors that lead to development. In an interdependent world, India’s development is connected with the state of development (or underdevelopment) of other parts of the world. The state of development of the global economy is of course geographically diverse, but it also has a temporal component to it. Some countries developed earlier than others. And this has some interesting implications.

One of the implications of being a late-comer in economic development is that one has the advantage of being able to adopt advanced technologies from developed economies. By judicious adoption of imported technology related to economic goods, development can be accelerated.

Information and communications technologies (ICT) developed by the US is available to India at a much earlier stage of its development than was the case for the US. Catching up is quicker. That is the happy part of the story. But when it comes to economic “bads,” the story is equally depressing. Adopting advanced weapon technology is extremely costly for developing nations and can hobble development immensely.

The US had passed its age of being a subsistence economy for a long time before it started on its path to developing weapons of mass destruction. Its agriculture was booming, it had a huge manufacturing base, its people were literate and educated, it had a massive stock of housing, its institutions were mature, and so on. Given that foundation, it could afford the luxury of going into the research and development of weapons, and built the most advanced and expensive military hardware in world. The unfortunate part is that there are countries like India which have hundreds of millions of people stuck in the subsistence phase of development. And the leaders of these under-developed countries eye the expensive military hardware and salivate. They are forced to attempt to keep up with their neighbors in their competition to get as many shiny nuclear-tipped missiles as possible.

If I was made the global dictator temporarily, and was given the power to make only one absolutely binding and enforceable global law, it would be to ban weapons trade altogether. If neither India nor Pakistan could buy nuclear subs and missiles, fighter jets and bombers, the ordinary people of these countries might have a better shot at a human existence.

From this point of view, the tragedy of the world is not so much that there are so many poor countries, but that there are those rich countries that have surplus resources to devote to developing weapons that ultimately starve the poor. And the leaders of these poor countries fall all over themselves in praising the foresight and the wisdom of the leaders of the rich countries for giving them the opportunity to buy these weapons.

Mark Twain had unusually praiseworthy words for India. He would have been pleased by the increased tries between India and the US. But I am sure that he would have been saddened by the irony in the celebration of some in India at the chance to buy American weapons.

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, Chicago architect. (1864-1912)

Story goes that there lived a man who was of modest means. He had banana trees in his backyard which provided him with a supply of broad leaves. He would harvest them to use as disposable plates to have his meals on, as is the custom in many coastal regions of India. Attempting to save the green leaves for use at a later date, he would carefully choose the yellow decaying leaves to have his dinner on. Forever trying to save the green leaves, he spent his entire life eating on yellow leaves. A foolish prudence, born out of not recognizing that green leaves cannot be saved from turning yellow, resulted in a self-imposed needlessly impoverished life.

Savings are important as a means but not as an end. They have to be invested in endeavors that increase productive capacity so as to increase future stream of goods available for consumption. Of course, lending one’s savings for others to consume or invest in their productive enterprises is not as bad as letting the saving rot in your backyard. But it is best to save and invest those savings in your own home where it will do you the most good, especially if those savings are for projects that have an “inevitability” about them. Indeed, when it comes to “inevitable projects,” it may even be wise to even borrow if needed than to put off implementing them with the notion that you would do them tomorrow. There are two reasons: first, putting them off may reduce your present productive capacity and therefore your present income will be lower (and so will the future stream of income.) Second, in the future the cost of implementing the project will be higher.

There are many “inevitable projects” that the Indian economy needs. Three critical ones are (1) universal primary literacy and education, (2) solar energy, and (3) an integrated transportation system. They are all critical for number of reasons which I will go into later. For the moment, I will focus on the last because it will illustrate what I mean by “inevitability.” This is a continuation of my piece on the Intergated Rail Transportation System.

Inevitability

We cannot get away from confronting these facts. India is a very large country of over a billion people, soon to be the most populous country. India is also extremely poor. When we say poor, we mean that compared to the number of people, the amount of goods and services the people produce is on average very low. We produce too little. Most of what we produce, we have to consume just to keep body and soul together. And in that too we fail miserably evidenced by the fact that half of our children below five are malnourished.

This suggests that we should either increase our production, or reduce our population, or both. Increasing our production implies either using more productive resources, or using our productive resources more efficiently, or both. To achieve greater production and productive efficiency, an efficient transportation system is not optional but mandatory. Without one, the economy cannot achieve productive efficiency.

The transportation system of an economy as geographically large, as densely populated, and as resource constrained as India’s, has to have as its backbone a rail transportation system.

Roads transportation is not an option for India for a number of obvious reasons. Cars and fossil fuels are expensive. Very efficient alternative fuel cars are even more expensive. With 17 percent of the world’s population and 2 percent of the world’s land area, we cannot afford the luxury of high speed expressways the way that the US can. We have to be more fuel efficient than the US because it is not even theoretically possible to emulate the US with its automobile/airlines system. The US appropriates approximately a quarter of the world’s total energy use with only about five percent of the world’s population. To reach US standards of energy use per capita, India would have to increase its energy consumption 25-fold. (NOTE: all figures in this piece are approximate. The exact figures will not substantially alter the argument.)

To put it another way, India would have to use four times the total amount of energy currently consumed by the entire world. At present, India has to import over half of its fossil fuel needs and pays an unaffordable amount for it. India’s economy cannot be sustained on imported fuel. From here flows the case for solar energy, which we will not dwell on right now.

The same argument as above applies with even greater force when air transport is considered as the backbone of a national transportation system. Only a very insignificant percentage of Indians can afford to fly. By afford I do not merely mean individual capacity to pay. The system itself cannot accomodate it. You cannot have 75,000 daily flights serving India’s billion people, which is what you would need to match the US’s air transportation system around daily 30,000 flights serving around 0.3 billion Americans.

A bit of arithmetic is all that is needed to expose the underlying reality that we don’t have the option of having road or air as the backbone of India’s transportation system. We not only cannot afford the fuel (source constraint), but we cannot also afford the pollution (sink constraint) of 700 million cars and 20,000 airliners spewing exhaust — as would be required to match the US on a per capita basis.

I should add that I am making a comparison with the US for a very specific reason. It lies at the other extreme end of the spectrum of per capita resource use. We cannot go there even if we wanted to. So all arguments that I have heard about air transportation becoming more affordable in India do not amount to a hill of beans because simple arithmetic puts them out of the running.

India has a rail transportation system. It is the third largest. Or something like that. It is very large. Actually, when you talk about India, you encounter large numbers. By themselves they don’t mean much, of course. You have to put the number in perspective. India is the largest producer of milk, goes the boast. Impressive until you normalize the figure by dividing by the total population. True, India produces 30 times the milk that Denmark produces but then it has 300 times the population of Denmark. True, that India has a large rail network (40,000 miles) but then India has 1,103,048,634 people.

(Aside: If only, lord, if only people will learn how to use normalized numbers instead of raw numbers — it will save us from a lot of foolish bluster.)

India’s rail is not only large but it is also very old. It creaks along at an impressive 25 kms an hour on average. About the same speed as an average cyclist on a level road. (I have seen estimates that put the average Indian road speeds to be about 12 kms an hour.) Not just creaks along but the trains are bursting at the seams. And I am not talking of the Mumbai locals, impressive though they are in their own right as the silent killing machines.

India has to have a modern rail network which will move people and goods faster and cheaper. Yes, cheaper. The cost of moving from Mumbai to Kolkata is not merely the cost of the ticket. There is the cost of spending the 40 hours on even the fastest train. There is the cost of the heavy cross-subsidy that goods traffic pays for passenger travel. This makes shipping goods by rail artificially more expensive than road transport. This makes shipping goods more expensive and thus we consumers end up paying more. The roads get clogged with trucks and we spend umpteen hours driving short distances. We end up breathing diesel exhaust from these trucks. Well, it is best not to go into too much details about the dysfunctional system — it is too depressing.

Now here come the objections.

This new rail transportation you propose is too expensive. Of course, it is expensive. But compared to what? Reminds me of the line: “If you think education is expensive, try ignorance.” The alternative system that we have is really more expensive — it hobbles our economy. We have to upgrade it one day. Doing so now before it is too late is a better strategy.

Douglas Adams’ story “Sifting through the embers” is a cautionary tale that should be understood by all. You will eventually have to pay. It is better to recognize that and pay a bit right now or else you will have to pay a lot more later and you will get a lot less in return when you pay later.

Our people cannot afford it. Not doing something that will have overall beneficial effects just because every one and his brother won’t be able to afford it immediately is flawed socialist thinking. It means that we should we content with a dysfunctional system even though putting a better system in place will make the economy more efficient which will raise our productivity and increase our aggregate production which in turn will increase the incomes of people enough so that they will eventually get out of poverty. Not to put too fine a point on it, but I think that it is idiotic thinking to not consider the dynamic effects of a change.

It will take too long. Again flawed thinking. Man wanted to learn a foreign language. Teacher says you will have to invest 2 years of your time. Man says, that is too long. So teacher says, “Well, you can put off learning and two years hence, you will still not have learnt the language and it will still take you two more years to learn. It’s your choice.”

As I have argued, it is inevitable. So the sooner we get started, the better off we will be in the present and in the future. Indeed, the future will be much better if we get the thing now, rather than later.

Yabbut what about the poor. I think that the communists should continue to nurse the poor since they derive their living out of sucking the blood of the poor. Not very PC but that is the truth. The reason we have so many poor is because of socialism. But let’s not talk of that evil right now.

The current system does (or does not, depending on your point of view) deliver whatever it can to the poor. The new system does not have to immediately displace the existing rail system. In fact, it will gradually replace the old system. The new system should be built next to the current lines on the same land owned by the railways.

Vision

Like the man who eat all his meals on yellow banana leaves, India always uses outdated ancient technology. For once, India should aim to use the best. And using the best — even if initially imported — will help us learn how to make the best. We need to have the humility to say that we need to import stuff that we can’t make today. We need to have the pride which makes us want to take the imported stuff and improve upon it so that others will look to us when it comes to the technology. We need to have the courage to make big plans.

We need to move beyond the myopia of the politicians and the idiocy of the generals wanting to arm themselves with nuclear subs and missiles and the greed of the peddlers weapons of mass destruction.

We need vision more than we need resources.

Next time I will continue on this topic and propose that the free market can deliver what I am talking about and how the transition from a dysfunctional state-owned rail system, we can transit to a truly modern efficient integrated (that is, rail, bus, car, and air) transportation system.

By persistently going against the popular illusions of the age, one risks the possibility of being branded a crank. I expose myself to that fate because it is my desperate hope that I may be able to change a few minds and perhaps influence policy however indirectly.

ICT as the Nervous System

The crux of my argument is that information and communications technology (ICT) plays a supportive role in an economy. Not unlike in a body, where the nervous system though critical is worthless unless the musculo-skeletal is robust, the digital network is worthless unless there is an underlying non-digital economy of stuff such as manufacturing, agriculture, and services. You need to have factories and farms, roads and railways, schools and shops, houses and hospitals — not just broadband digital 3.5G MP3 camera phones for surfing the web.

Not paying attention to the fact that the “digital economy” has as its foundation the “stuff economy” has perverse consequences of providing the illusion of progress while the system insistently regresses. For instance, unlike in those bad old Pre-internet days, today you can visit the web site for the railways in India and make your train reservation in about a half hour. You no longer have to stand in line for hours on end to get to the ticket counter and find out that there are no seats available for weeks on end. The website will tell you that the trains are full after half an hour.

The illusion of progress — at least to those lucky few who have web access — is short-lived when you realize that though you can attempt to book the seats online, the underlying system has not changed much, if at all. The so-labeled “super fast express” trains make their way at a stately 70 kms an hour average, pretty much what they were capable of doing forty years ago. Thirty years ago, the Shinkansens were doing 200 kms an hour and today they exceed 300 kmph. But in India, we maintain a dignified traditional 70 kms an hour for decades on end.

What India needs to pay attention to is the underlying hard economy which is the infrastructure upon which the soft economy of internet and services can ride. In this one, I will briefly focus on one bit of the hard economy: the railroad transportation system.

The Railroad Transportation System

The big picture shows India to be a very large country with a massive population. To feed, clothe, and house this billion plus population requires lots of stuff. For obvious reasons very large number of people and goods have to be moved efficiently over long distances. There are three primary methods for this: roads, railways, and air.

Let’s take air first. Air transportation is relatively simple and for long distances it is expedient. It is also grossly expensive for a poor economy such as India. Besides, it is totally dependent on fossil fuels and this makes it seriously polluting. Air transportation is OK for moving rich people over long distances but for bulk transportation of goods, and for bulk transportation of not-rich people, it is not a good solution. Thus, for moving about 300 million really affluent people over long distances, air transportation makes sense, as in the US. Even in the US, bulk transportation does not use air. They use the roads and rails.

Next consider roads. Roads are expensive to build and extremely expensive to operate. For moving people, the best roads can at most do an average of 80 kms per hour over long distances under ideal conditions such as can be found in the advanced industrialized economies. Private cars are expensive to own and they use polluting fossil fuel. Indians cannot afford cars because we are too poor and there are too many of us. Besides we are seriously dependent on external supplies for fuel. Finally, roads are notoriously unsafe as compared to air or rail.

Common carriers such as buses are also not the right solution for India over long distances. A recent journey of 500 kms by a “luxury” bus took 15 hours. The bus was luxurious but the road was pitiable and the overall experience put the fear of travel in me. I would have preferred to take a slow train but severe capacity limitations of the railways ruled out that option.

The best solution for India’s transportation needs is what I call an “Intergated Rail Transportation System” (IRTS) which I will outline in this piece.

Intergated Rail Transportation System

First, the “R”. Steel wheel over steel rails is the most efficient method of transporting goods and people, especially when both volumes and distances are large. It is super efficient and clean because of a number of reasons. First, because steel wheels over steel rails have very low friction and with aerodynamically designed trains, you can have the least transportation cost per ton per mile. Next, you don’t have to use fossil fuels. You can generate electricity using whatever technology is most efficient and available to power the trains. Third, you can use the same system — the tracks and the signaling and switching system — for both passengers as well as goods.

Next, trains can be very fast compared to roads and can be compared favorably to planes over short and intermediate distances. Mumbai to Pune (a distance of about 120 kms) takes 3 hours by road, city center to city center. By a fast train, with a modest top speed of 200 kms an hour, the journey should not take more than an hour. Currently the trains take over 3 hours. And by air Pune-Mumbai takes about 4 hours. You drive to the airport, proceed through security, then take a flight that spends more time taxiing than flying, and arrive and then go from the airport to the city center (which can easily take over an hour at peak traffic time.)

Over long distances such as between Delhi and Bangalore, planes have an evident advantage for people but not for goods. But that advantage is restricted to only the very rich in India. The average person cannot afford the round-trip fare which approximates the average annual income of about $400. Imagine how many people would fly between NY and SF if the price was about $23,000 instead of the $400 it is.

So the core of the IRTS is a very fast rail network connecting the major population centers. The backbone of the system is high speed trains that move between metros such as Mumbai and Kolkata (via Nagpur), between Delhi and Bangalore/Chennai (again via Nagpur.) These I call the “Cross Links” which are different from the “Diagonal Links” which go between Mumbai and Delhi (via Ahmedabad), Delhi and Kolkata (via Kanpur), Kolkata and Bangalore/Chennai (via Hyderabad), and Bangalore to Mumbai.

The backbone of the system is therefore the diagonal and cross links. Trains travel at an average 250 kms an hour and make at most one stop. Mumbai-Delhi is done in 6 hours (instead of the 18 hours currently by the fastest train.) Mumbai-Kolkata is done in 8 hours. If you want to go from a town close to Mumbai to a town close to Delhi, you do the journey in three bits: two short distance segments (relatively slow) and one fast long distance train. The short distance segments will be served by the “integrated” part of IRTS.

For short distances, the road system and the existing rail system would suffice. For instance, a journey from Pune to Chandigarh would involve a bus or train from Pune to Mumbai, a train from Mumbai to Delhi, and then a train from Delhi to Chandigarh.

This is really a hub-and-spoke model with multiple hubs (Mumbai, Nagpur, Delhi, Kolkata, Chennai, Bangalore), each serving a bunch of spokes that terminate in towns close to the hub.

Without going into details, I would like to outline some advantages of the IRTS. The obvious hurdles will also be dealt with simultaneously.

Costs

The most obvious point is that it is massively expensive to build a rail system. Even conservatively it will cost $50 billion. Here is the way out. Let it be private/public partnership. The government owns the land on which the existing rail system operates. So that could be the contribution of the public sector. The rails can be farmed out to the private sector on a “build and operate” scheme. And the rolling stock can be owned by private sector firms. These private sector firms can operate trains just as they operate airlines today. They can import the best available train technology from Japan and France just as airlines import planes from Airbus and Boeing.

The involvement of the private sector will not only free up public resources, but the increased efficiencies will propel economic growth which will increase government tax revenues.

The world is awash with liquidity these days. India needs to come up with projects which will attract these savings. Building a modern railways for India is one such project.

Employment

The IRTS will have to be built from scratch. Doing so will involve the labor of millions. Just like the interstate highway system did for the US, it will give a permanent boost the growth of the economy. Spending $50 billion will generate direct employment.

Economic Linkages

Then there are secondary effects which arise from backward and forward linkages. Forward linkages such as the development of a more efficient agricultural and manufacturing sector.

A significant portion of agriculture production is wasted as it cannot be moved efficiently enough. Manufacturing for domestic consumption and for exports is stunted because of the slow movement of goods. Both sectors will obtain efficiency gains.

Technology

India does not have state of the art railroad technology which has been developed by countries such as France and Japan. To begin with, India will have to import these and build up domestic manufacturing capacity. Since the requirements for India will be large, India has the bargaining power to insist on technology transfer. Then given that engineering and design talent is not lacking in India, it is possible that India can improve on the technology and be a leader in the field.

Vision

What we have in India is a creaky dilapidated outmoded transportation system. More than roads and airports, India needs a great rail transportation system which will form the bedrock upon which a modern Indian economy can move. It is a great challenge and if articulated well, it can galvanize the entire population. It will not be easy but then easy things are not worth doing and are rarely transformational in their impact. The movers and shakers of India should look for projects that transform, hard though they may be.

The beauty and elegance of a modern transportation system beckons. Are we up to the task?

[This post is continued at "The IRTS - Revisited".]
{Related links: See these pictures of Shinkansen (the Bullet Trains of Japan). Wouldn’t it be amazing to have trains like these in India? Reuben at Zoostation had a bit about the new Shinkansens.}

While opening a pack of Haldiram’s Bikaneri bhujia last evening, I noticed the packet proclaimed “Export Quality!” I suppose they meant “Best Quality” or “First Quality” because it could not have meant “Basically Inferior Stuff”. The label implied very clearly that this stuff was good enough to be exported. That implication arose from a shared assumption that is very disturbing if one thinks about it.

The shared assumption essentially was that the domestic market is not discriminating enough and can be sold sub-standard stuff; that export markets demand and deserve quality better than the domestic market. Was the assumption justified? If so, is the Indian consumer inherently incapable of recognizing quality? Or is the Indian consumer not “deserving” of quality? Or is it that the Indian consumer cannot afford quality? What are the reasons why the market delivers poor quality shoddy goods and services in India?

It is undeniable that the Indian market does deliver very poor quality goods and services in general. The explanation for that is really very simple: it is a sellers’ market. The essential characteristics of sellers’ market are that there is insufficient competition on the supply side, and the supply is severely constrained which leads to intense competition for goods on the demand side. The sellers don’t have to compete for customers, while the buyers have to compete for the goods.

Why the supply constraint? In some cases it is due to public sector monopoly, such as the railways (and until recently, telecommunications.) In some other cases, license restrictions on the private sector coupled with import restrictions. I recall a time when being able to get a two-wheeler was an achievement because the waiting time was of the order of a few years.

Monopolies, public and private, do not fear competition and behave exactly as the textbooks say: high prices, shoddy quality, and super-normal profits (economic rents.) Also, as any economics textbook analysis would demonstrate, deadweight social losses.

Somewhat similar outcomes obtain from putting license restrictions on private sector suppliers of anything from two-wheelers to cement. By limiting the number of firms allowed to operate within a certain sector, the policy makers essentially limit competition within the market. With limited competition in the market comes supra-normal profits (economic rents) and this rent can be captured by the policy makers. How? By handing out licenses to those firms which are willing to pay the most to service the market. Essentially, the competition for the market replaces competition in the market. Sometimes the licenses are auctioned off publicly (as in the case for telecom firms), and sometimes it is pure and simple corruption. It is well-known that Indian government officials and politicians in charge of various commodities such as cement, steel, etc., make hundreds of millions of dollars (which they stash away in Swiss banks) from handing out licenses. In either case, supply is limited, competition is curbed, prices are high, quality is poor, and leads to deadweight losses.

Add a few thousand billion rupees of deadweight loss here and a few thousand billion rupees of dwl there, and soon you will be talking real poverty. The combined effect of these losses aggregated over many years and you have the prescription for an emaciated impoverished economy. The Nehruvian socialistic system of controlling the economy to extract as much rent as possible is at the root of India’s eye-popping poverty.

When we say India is poor, we mean that the people of India are poor. The poor have little and therefore they ask for more, never mind the quality; the rich have a lot and demand better. The poor are willing to take what they can get their hands on to, by hook or by crook. The rich have the luxury of rejecting stuff that don’t meet their standards. You can get “Export Rejects” in shops in India and these are sold as better stuff than the stuff available for the domestic markets.

Export quality for a poor nation means it is better than the stuff that domestic consumers can get or even afford. Export quality for rich nations could mean something entirely different. The US, for instance, sometimes exports stuff that it considers below par (such as food and military equipment to third world countries). In some cases, it exports stuff that they are legally barred from consuming in the domestic market because of health and safety issues.

So back to the question of whether the Indian consumer “deserves” quality? Well everyone deserves good stuff as much as the next guy. But Indian consumers cannot afford quality because the quantity is restricted. Quantity limitation is a comparative characteristic, not an absolute characteristic. It is only in comparison to some quantity is it meaningful to talk of another quantity being limited. In the Indian context, the quantity restriction arise primarily in comparison between the quantity of goods and services produced to the quantity of people.

India has over a 1,000,000,000 people and every year about 20,000,000 are added remorselessly. Does not matter what you goods or services you produce, someone is there to take it, sub-standard or not because there are few alternatives. Beggars cannot be choosers and Nehruvian socialism has reduced the majority of us to beggary.

The relationship between quantity supplied and demanded, and quality is absolutely clear and rigid. High demand and relatively inelastic supply invariably results in poor quality in goods and services. This means for the domestic market to produce high quality, the supply has to increase, which implies increased competition. We have already seen it in various sectors, such as telecommunications, air travel, passenger cars, etc.

Coming back to Haldiram’s. In the snack and sweets market in India, it is a buyers’ market mostly. Haldiram’s competed in that market with higher quality. They brought in world-class packaging and marketing. This allowed Haldiram’s to expand its operations outside India as well.

The lesson is really very clear. For India to produce world class goods, firms in the domestic market have to be exposed to competition at home. Firms then grow up and learn how to produce quality. Then they can take on enter global markets. By limiting competition at home, the Nehruvian socialist policies crippled Indian industry and guaranteed dismal economic performance of about 2 to 3 percent annual GDP growth which we shall call the “Nehruvian Growth Rate.”

In my considered opinion, the worst effect of Nehruvian policies have been in the education sector. That is what I will turn my attention to the next time. Until then, enjoy the dismal quality if you are in India and raise a glass to the one responsible for it.

I will be back soon.

Leapfrogging is possible but mostly it is restricted to technologies. For instance, areas of India which had absolutely no telecommunications infrastructure don’t have to go through the sequence of first getting telegraph and then wired telephones and then move on to wireless: they can leapfrog the now obsolete technologies and go directly to wireless. It is always possible – indeed necessary – to leapfrog technologies because advanced technologies are cheaper.

Advances in technologies provide the same functionality at a lower cost and reduced complexity for the user. Consider the VCR. When it was first introduced, they used to have little tuning wheels which needed to be fiddled with before they worked. Later models became plug-and-play.

Unlike technology, you cannot leapfrog the various stages of development. A century ago, to be educated, one had to be literate and numerate. Same holds for today even though we have digital gizmos and computers. Indeed, to be able to effectively use the products of high-technology, literacy is an absolute necessity. Functional skills required for using high-tech all involve the ability to read and reason. I grant that illiterate idiots can use a cell phone, but that is not what I would call the effective use of high technology.

The so-called “digital divide” cannot be bridged by simply installing lots of PCs in areas where they don’t exist and connecting them up to the internet. If the people are unable to use them, they serve no purpose other than to enrich the peddlers of hardware and software. Furthermore, there is the opportunity cost of spending limited resources on useless high-tech gizmos.

You cannot leapfrog development. It cannot be done at an individual level. And it cannot be done at a societal level. Although development paths may differ, the sequencing within a path cannot be radically altered because there are strict dependencies. Basic functional literacy is a pre-requisite to pretty much anything that one does. The use of high-tech depends on literacy and therefore if the population is illiterate, even gifting them with free hardware will not make a difference. The pre-condition for bridging the digital divide is therefore the bridging of the literacy divide.

Of course, there are those who will argue that high tech be used for bridging the literacy divide. In a conference that I had attended some time ago, the question “Can ICTs be useful for rural and remote areas of developing countries, especially the poverty-stricken regions?” was seriously asked. I wrote:

We need to examine that question for a moment. At one level of analysis, it is hard to not answer that question in the affirmative. At another level, it is a meaningless question. Merely because it is syntactically correct does not imply that it has any content. Consider the question:

Can magnetic levitation superfast monorail transportation systems be useful for rural and remote areas of developing countries, especially the poverty-stricken regions?

Clearly, yes. Not just magnetic levitation superfast monorail transportation systems, but an almost unending variety of things would be useful for the development of poverty-stricken remote areas. Not merely for those areas, all of those unending variety of things would be useful for the development of not so remote and not so poverty-stricken areas of any developing country. Thus that question is actually content-free.

I think that the fundamental problem of development is one of sequencing, of prioritizing. It is the same question that one has to ask in one’s own personal development: what is the important next step?

Rajesh Jain’s blog, Emergic, is an extended memory of all kinds of emerging technologies and markets. His “Tech Talks” summarize his learnings and ruminations on various subjects. I use his blog to better understand what is going on in various areas. And paradoxically I use his blog to better understand what I wrote myself because he is able to edit the stuff that I write and put things into context.
So I recently visited a category on his blog called As India Develops. I think it is worth bookmarking because it is something that one cannot read in one go. I should disclose that the category has extended excerpts from my writings and therefore this could be construed as shameless self-promotion.

“Forgive him Theodotus: he is a barbarian and thinks that the customs of his tribe and island are the laws of nature”

–Caesar and Cleopatra, George Bernard Shaw

In a sense, we are all barbarians believing that our personal experiences are universally applicable. This tendency is all too evident in those who intervene, often with the most noble of motives, in economic development. It appears to me that this unfortunate barbarism approaches its extreme in the context of information and communications technologies (ICT) and development of poor rural economies. The thinking goes something like this: PCs and internet are wonderfully powerful inventions which empower those who use them; the poor don’t have access to PCs and internet; that is why they are poor; therefore, if they were given PCs and internet, the poor in rural areas will become rich.

So what is wrong with the above reasoning? Lots, actually. First, there is the matter of sequencing. Then, there is the conflating of causes and effects. (For more on this problem, see myths, misconceptions, etc: you may have to scroll down a bit.) Finally, there is the problem of limited resources. All sorts of grand plans fail when one does not pay attention to sequencing. It may be terribly trivial to say that one has to build the foundation of a building before building the 10th floor, but often people do attempt something analogous when approaching development challenges.

Examples of mis-sequencing are distressingly common. For a very poor illiterate population, the foundational step has to be making them literate as fast as possible before resources are spent on making high-technology equipment available to them. Then why do they take the cart-before-the-horse approach? Perhaps because the advocates of hi-tech devices themselves have a personal agenda or for commercial gain. Or perhaps because they forget that they themselves were literate before they started using high tech tools effectively. Or perhaps because it is easier to just buy a lot of hardware and stick them into rural kiosks than to figure out the much harder problem of how to effectively make the population literate.

The undeniable fact is that literacy is the basis for all development. Literacy (and numeracy) is absolutely positively acutely necessary. You have to have a literate population for there to be any hope of any advancement—social, economic, physical, whatever. Given a literate population, even in the absence of new-fangled high tech equipment, you can have wonderful outcomes; absent a literate population, no amount of high-tech gizmos will amount to a hill of beans.

Every notable invention, every innovation, every advancement made by humans have been made by humans who have been literate and they did it without PCs and internet. That statement is obviously true until about 30 years ago. PCs and the internet have arguably enhanced the power of humans to innovate more rapidly but the preconditions are that of literacy and resources to afford those tools. The lesson for the development of India is straightforward. If you want the rural populations to benefit from the use of high technology, then you have to make them literate first. If you don’t make them literate, then you can forget about bridging the so-called “digital divide”.
(See Everybody Loves a Good Digital Divide.)

Here is my prescription: First, make the people literate. How? See my modest proposal to make India literate within a few years.) Second, figure out which of the problems admit a least cost solution which involves PCs and internet. Finally invest in PCs and internet.

{To be continued.}

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This one is too good to pass up. Myke sent me Jim Kunstler’s column about Pentecostals and evangelicals. The post is worth reading, including the many comments. For the record, here are the first and the last paragraphs of the post.

Last month media elder statesman Bill Moyers made a speech after receiving an award at Harvard in which he said that “born again” members of the Bush regime couldn’t possibly believe in the future if they truly subscribed to the doctrines of Pentecostal Christianity — since its theology includes the notion that the world has entered an “end times” scenario as described in the the Book of Revelations. Moyers went further, implying that people who explicitly and programmatically don’t believe in the future have no business running a government, the chief task of which is safeguarding the future.

…

Soon, the problems this nation faces will be so obvious and grave that George W. Bush and the Republicans and the WalMartians, and all the moneygrubbing TV preachers, and the people who can’t imagine an hour of leisure without engines ringing in their ears, and the offspring of all the bug-eyed lynch-mob cretins of yore will stand naked in discredit. The rest of the nation, the non-stupid, non-selfish, non-childish, non-believers in the idea that it is possible to get something for nothing will take a stand. It won’t be the end of the world, but it will be a political convulsion against a background of fire, proving that the future belongs to those who believe in the future.

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Nobody expects the Spanish Inquisition. Our chief weapons are surprise and fear …

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The Seattle Times of Feb 20th, 2005 reports that Indians see Bush as good for peace.

In the poll, 62 percent of 1,005 Indians described Bush’s re-election as positive for peace and security. Only 27 percent said it was negative.

In France, 75 percent viewed Bush’s re-election as negative for peace and security, as did 77 percent in Germany.

Bush is good for peace? Hmm. That’s a new one. I used to think that the average Indian was better informed than that. But I guess I am wrong. Why do they like Bush?

Chief among the reasons Indians cited for liking Bush is his stance against terrorism. Indians, who have long faced terrorist attacks from separatists in Kashmir and other regions, welcome Bush’s pressure on India’s longtime nemesis, Pakistan, to crack down on Islamic militants trying to cross to the Indian side of Kashmir.

Good grief! Which planet do these morons live on? Bush considers the military dictator General Musharraf a frontline ally against global terrorism. It is like calling the fox who feasts in the hen-house every night as the greatest protector of chicken. Bush has his reasons to trust the General because the General asks how high when Bush says jump. But these Indian cretins should know that Musharraf is the butcher who masterminded Kargil and has been funding the terrorists in Kashmir and the rest of India. And much of that terrorism is funded from the military aid that Bush sends the General. At last count the aid was of the order of a billion and a half dollars. That buys a lot of jihadis in Kashmir and in the rest of India.

Why do some like Bush? Because he did not say that he was against outsourcing and therefore he is better for business, never mind that we have to live in a bloody dangerous world because of Bush.

The booming outsourcing industry also appreciates Bush’s pro-business, hands-off policy toward the shift of U.S. software, back-office and call-center jobs to India.

Ajay Lavakare, co-founder and head of a company that provides computerized mapping services, is a self-described liberal who abhors Bush’s stance on abortion, gun control and the death penalty.

Yet from his perch in Noida, a corporate center outside Delhi, he worried last fall about Democratic presidential candidate John Kerry’s rhetoric against the offshoring of U.S. jobs.

“We all sort of heaved a bit of a sigh of relief when Bush won, at least from the individual business perspective,” said Lavakare, who developed the business plan for his company while he was a Stanford University graduate student in 1991.

“From a purely selfish Indian point of view, Bush’s re-election was good for India,” he said. The Indian results in the BBC survey may have been skewed somewhat in favor of Bush because the poll was conducted in urban centers, where most of the beneficiaries of offshoring live. Polling in rural India remains difficult because of limited telephone service and resources.

Damn right it is a selfish attitude. Not just that, it is ignorant, short-sighted and morally abhorrant.

I have this cynical attitude that Indians are stupid. I am sorry but they are friggin’ lobotomized retarded myopic money-grubbing semi-literate slobbering morons who deserve all the shit they get if that gobal survey is an indication of their analytical skills and moral sense.

I am seriously disgusted.

The raison d’etre of Pakistan appears to be the destruction of India. It tries but cannot quite seem to manage it. Terrorism in various parts of India is a favored tactic. Bomb blasts in Mumbai, attempting to bomb the parliament building in New Delhi, routine terrorism in Kashmir… the list goes on. India limps along but refuses to die. The US helps Pakistan with lots of free weapons. Yet Pakistan loses wars decisively. So it is very grateful for any help that it can get, whether from sources outside India or inside.

India is a large country, as we have noted before. Just by the law of large numbers, there have to be some people who are disaffected enough that they will actively seek the destruction of India. They are a fringe and do not amount to much more than an irritation. They help the cause of Pakistan but not to any great extent that Pakistan has to felicitate them. Pakistan merely sends them some money but does not invite them over as state guests. They are a bunch of disorganized cretins that you would not want to associate yourself with however much they irritate your mortal enemy.

But there is another bunch in India which Pakistan dearly loves and which is not disorganized at all. They have been organized for a long time. Indeed, their organization existed before the present day political state of India came into existence. Not just that, if they had had their own way, independent India would not have come into existence at all. I am speaking of the communist parties of India. They advance the cause of Pakistan without any monetary help from Pakistan. But they work assiduously to drag India down economically. One statement by one of their leaders and the Mumbai stock market loses its nerves — the same stock market which does not even flinch when Pakistan promises to vaporize Indian cities with Islamic nuclear bombs.

Gurcharan Das writing in the Feb 12th The Times of India noted that the communists have been consistently wrong for the last fifty years and wrote:

It [the communist parties] opposed computers in our offices. It banned English from primary schools. It supported the Licence Raj, which created the present culture of corruption. It advocated a foreign policy that landed us on the losing side of the Cold War. It backed inefficient government monopolies in preference to competitive markets.

It protected 8% organised labour at the expense of the 92% unorganised workers, while feeding the myth that it stood for the poor. As for the Communists, why should we heed the party which sided with the British during the Quit India movement, which did not condemn the Chinese invasion in 1962, and which was silent during the Emergency when the entire opposition was in jail?

Das notes that the communists have blocked electricity sector reforms, hike in gas prices, opposed foreign investment. I am sitting in Nagpur writing this and I have to thank the communists in no small measure that the power I am using is coming out of a diesel generator and not the power grid. Besides power, the generator is also generating noise and pollution and I thank the communists (in part) for that. Das again:

… The Left foisted on us an Education Cess just when the Kremer/Murlidharan report brought scandalous but solid data proving that one out of four teachers across India are absent from government schools and half the teachers present are not teaching.

It is imposing a leaky, corrupt Employment Guarantee program, instead of allowing labour reform, which will create genuine, self-sustaining employment. Instead of finding better ways to improve delivery of services to the poor, it prefers to bankrupt the treasury and undermine the Fiscal Responsibility law. Finally, it will not allow NTPC to revive the orphaned Enron plant, which could solve Maharashtra’s severe power shortage.

The commies have been doing Pakistan a favor for many years. It is high time Pakistan recognized their contribution. Only a week of being a state guest? Hell, I say, have them as your guests for a few years. And only two? Heck, take the whole lot to Pakistan and host them there till we ask you to send them back. And that day will be the day after hell freezes over.

One of the greatest challenge that India faces is that of rural development. Successfully solving any problem requires a proper formulation of the problem. Fundamental questions arise when the matter of rural underdevelopment is considered in depth. Is rural development the development of rural areas, or is it about development of rural populations? They are not the same thing and require entirely different approaches. Is it possible that the antidote to rural under-development lies in urban development?

Those questions allows us to consider the possibility of addressing the problem of rural under-development by allowing a migration path for the rural populations to areas which have the same characteristics as urban areas. That is, we have 600 million people dispersed over 600,000 villages. Clearly, developing 600,000 locations to become urbanized is not feasible. Transferring the current rural populations into a much smaller number of larger aggregation of people – in effect, urbanizing them – must be the goal because urbanization is both a cause and consequence of development. The problem is then not of developing 600,000 small villages but rather catalyzing the growth of say 6,000 mini-towns of about 100,000 populations each. These mini-towns can then obtain the aggregation and scale economies normally associated with urban areas.

From Development of Areas to Development of People

The contention is that the focus has to change from the development of rural areas to the development of rural people. The development of rural people can be broadly considered as urbanizing them. Since migration of 600 million people into the present set of cities and towns is unfeasible, new aggregations have to be “seeded.” This is the primary role of the government because the seeding implies coordinating the building of infrastructure which will support the rural people.

The problem of rural under-development is then formulated as one which involves the development of urban areas[1]. In other words, for the development of rural people to occur, the focus has to shift from development of rural areas to the development of urban areas. The solution to the development of rural people then is not developed rural areas, but rather developed urban areas.

That is paradoxical at first glance. But the alternative of developing 600,000 villages is an impossibility, as evidenced by the fact that despite enormous resources, rural areas continue to be under-developed. Urban development is a well-understood process and is less costly to the public purse[2] than the alternative of rural development.

There is an instructive example in the development of the US. The US was largely an agricultural – and therefore rural – economy in the turn of the last century. Providing higher education to the children of the rural families was the need. So did they start very little colleges in the tens of thousands of little rural communities? No. They started large universities for the children of farmers to go to. The idea was that these trained people would then go back to the farms and increase the farm productivity. But what was the actual outcome? The children of the farmers got urbanized and did not want to go back to the rural areas. As luck would have it, technologies developed in urban areas were successful in raising farm productivity which meant that so many were not needed in the farms anyway. And who developed the technologies and labored in all those urban areas? Those children of rural farmers who went to the colleges were the people who supplied all the necessary bits that the rural farmers required.

The point is that it was not rural development that made the difference in the rural areas. It was what happened in the urban areas that changed the rural areas.

Role of the Government: Infrastructure Investment

The role of the government is critical in rural people development through urbanization. Public investment in infrastructure “crowds-in” private investment in infrastructure and other services. The government has to play the role of the “lead investor” that signals to the market that investment in the projects will be profitable.

Infrastructure services require high fixed costs and have long pay-back periods. The role of the government is then one of financing the infrastructure, and leaving their provisioning to the private sector.

NOTES:

1. RISC (Rural Infrastructure and Services Commons) is a model which achieves rural development through urbanization. In the RISC model we call it “in-situ” urbanization. Sure, these “urban centers” are located in the rural area. But it does not transform villages at all directly. It creates a mini-city. It is not kiosks in every village but rather villagers in cities that will transform the people. The focus is on the services available to the people rather than attempting to locate the services in villages.
2. It is less costly to the public purse because private sector firms would invest in the infrastructure to serve a dense concentration of people (as in any urban area) more readily than they would in sparsely populated rural areas.

Bringing the benefits of ICT to rural populations is
a commendable goal. The use of kiosks with connected
PCs for bringing services to villages is a model worth
considering among various means. The advantages of
kiosks are many. Primary advantage is that of proximity.
Villagers do not have to incur any travel cost to obtain
the services delivered. Next, the investment required
is relatively small and so a start can be made with
limited resources. Finally, rural entrepreneurship can
be motivated by giving over the management of the kiosk
to a person from the village itself.

Disadvantages of Kiosks

The primary disadvantage of kioks is that they are
not economically viable. Economic viability is related
to economies of scale, both on the supply side and
the demand side. Scale economies depend on the quantity
of services supplied and demanded. Rural populations
have a low ability to pay for services. Given the average
village population of about 1,000, the aggregate demand
for services is low. The quantity of services that need
to be supplied is commensurately low. This makes the
average cost of per unit of any service delivered high
and the break-even price is therefore high. Sometimes
the price is sufficiently high that the service cannot
be provided at all at full cost.

The High Cost of Providing Services at the Village Level

Rural India is highly fragmented with around 600,000
villages with an aggregate 600 million people. The lack
of basic infrastructure such as power, roads, and
connectivity increase the cost of providing services
to villages. For instance, while the cost of a PC in
a village is the same as that in an urban area (around
Rs 20,000), the total cost of ownership of a PC in
rural areas is far higher compared to that in an urban
area because providing for uninterrupted power for the
PC is about Rs 30,000.

The essential point is that high technology sophisticated
equipment require deep back-end infrastructure and
creating this deep back-end infrastructure at the 600,000
villages is prohibitively expensive.

Subsidies are one way around the problem of pricing at
full cost. If a kiosk requires only a modest subsidy of
Rs 10,000 per year for it to be economically viable, the
aggregate annual subsidy required for kiosks in 600,000
villages is around Rs 6 billion (about US$ 136 million).
Clearly, this level of annual subsidy is not sustainable.

Obtaining Scale Economies

To bring down the average cost of delivering services,
and consequently reduce the full-cost price of the services,
economies of scale have to be obtained. That is, a much
smaller number — something of the order of 10,000 rather
than 600,000 — of significantly large-sized kiosks have
to be considered. Let’s call these “Super Kiosks”. If a
typical village-level kiosk has two PCs, a Super Kiosk would
have 10 PCs and deliver a much wider range of services and
to a greater aggregate population. Imagine that a Super
Kiosk (SK) is located in a largish village and serves the
populations of the neighboring 10 villages for an aggregate
population of about 10,000.

To fully saturate rural India, only 70,000 Super Kiosks would
be required instead of 600,000 kiosks. Further, it can be
argued that the economics of SKs will eliminate the need for
subsidies because of aggregation economies on the supply side
and the demand side.

Disadvantages of Super Kiosks

The primary disadvantage of a SK is that it is not available
at each village. The majority of the villages will not have
an SK. Some travel cost will have to be incurred by the majority
of villagers to obtain the services of an SK. However, this cost
is relatively minor because the average distance to an SK will
be about 2 kilometers which can be easily covered within a half
hour by foot.

Advantage of Super Kiosks

It can be argued that Super Kiosks have the advantage of scale
economies and that is why they are better than kiosks in
villages. But there is an even more fundamental reason for
them. Rural India is dispersed among 600,000 villages. No
economy can develop with such a large number of very small
aggregation of people. For India to develop, the dispersal
of rural populations has to reduce to something like 60,000
“Super Village” (SV) with an average of 10,000 population.
SV must be in the future of rural India in the medium term
of five to 10 years. I see the progression of rural India
from 600,000 villages of 1,000 population average, to
60,000 SV of 10,000 population, to 6,000 “Mini Towns” (MT) of
100,000 average population in the long term.

The transition of rural India from villages to SVs to MTs
has to be helped along. The introduction of SKs in specific
villages will be the first step. That is where the game
will be in the future and that is where we must aim to be.
(When asked what was the secret of his success, Wayne
Gretsky, the hockey legend said that he plays for not where
the puck is, but where the puck is going to be.)

RISC: Rural Infrastructure and Services Commons

I proposed a model for rural economic development which
some have described as a kiosk on steroids.
The concept paper for RISC (which is co-authored with
Vinod Khosla) is available
here. You can consider RISC to be a Mega Kiosk
and I hope that one of these days it will be implemented.

Like they say, one lives on hope and dies of despair.

‘Living Within Limits’ by Garrett Hardin – Prof Emeritus UCSB.

Take the matter of poverty, for instance. If one were to think about it for a moment, one immediately realizes that the simple division operation throws much light upon the issue. Here is what I mean. You aggregate the stuff available in a specific period and divide by the number of people. If the result is a small number as opposed to a large number, you have poor people as opposed to rich people. Stuff matters. What is stuff? Things that you find, things that grow, things that you produce, and so on. At the very bottom of the structure of any economic system is stuff. Economists call it “goods”.

This does not appear to be quantum mechanics. But it might as well have been quantum mechanics given the widespread ignorance of that fact that goods – or stuff, as I like to call it – lie at the foundation of the economy. Sure there is “services”. Haircuts, dentistry, advertising, computer programming, and so on are services. But underlying any service you can imagine, there is stuff. If there wasn’t stuff, there would be no services. For instance, I sing you a song (hypothetically that is, because my singing is nothing to write home about) and you pay me for it. That payment is just a simple transfer of claim to resources that finally end up in stuff. I take the money and buy stuff to eat or to wear or some such. That transaction we can call ”transfer”, since we have not produced any more stuff, only you have transferred your claim to stuff to me.

Stuff matters. The aggregate amount of stuff available to a population matters. Like I said, you could just find it (oil in the ground, fish in the oceans), or you could grow it (in farms and orchards), or produce it (factories). Only when you have stuff can you indulge in transfer (via services rendered) or exchange (trade). Pure exchange does not increase the aggregate amount of stuff available. Taking from Peter to pay Paul does not make more stuff available.

Stuff is produced using land, labor, and capital – the factors of production. Advanced industrialized economies use relatively more land and capital (and use them more efficiently given that they have advanced technologies) and relatively less labor and produce a lot of stuff. The average amount of stuff available is therefore high because they have fewer people to divide the stuff among. So they are rich. They are rich not because they have more money, but because they have more stuff per capita. Since they can produce a lot of stuff using less labor, all of the labor is not employed in producing stuff and so the surplus labor can produce services. and the labor involved in services can be given a share of the aggregate production of goods. That share is called “income”. And this income is denominated in monetary terms. Money, in this case, is for facilitating accounting of the stuff produced and who gets how much. If you don’t have stuff backing the money, it is useless. That is, handing out money to people does no good unless there is some stuff behind it all.

Production of stuff matters. That labor is required to produce the stuff is an unfortunate fact of life – so far at least. In a perfect world, robots would produce stuff and people would be unemployed, free to compose music or watch the grass grow or whatever. In the imperfect world we live in, we have to use labor to produce stuff. But the less labor we use to produce stuff, the better off we all are – with the obvious caution that we have to distribute the stuff equitably, of course. But the problem of distribution only arises after we have produced stuff. If little is produced, little can be distributed on average and therefore on average we will be poor. Distribution is a less taxing problem than production.

Now here is the point that I am building up to. If an economy produces a heck of a lot, and yet a significant percentage of the population is poor, then we know that there is a problem of distribution. In that case, we can improve the situation by a better distribution through transfer of stuff to those who are poor. But if the aggregate production of stuff divided by the total population is a small number, the economy will be a poor one irrespective of the distribution. Merely taking from Peter to give to Paul makes no difference to the aggregate amount of stuff available.

So here is the basic question we need to ask: Will a proposed scheme or policy produce more stuff or not? If the answer is no, then we have not solved any problem. Take internet kiosks in rural areas. From what I gather, they are being mainly used for astrological charts, internet chat, e-governance services such as the printing of caste certificates (whatever that is supposed to be good for), “learning computers” and other such services. If internet kiosks in rural areas does not directly, or indirectly, lead to the production of more stuff, it is pointless. Or take the “Employment Guarantee Scheme.” Merely giving people employment does no good if in the end more stuff is not produced. Might as well get people to dig holes in the ground and then fill them up again for all the good it does to the overall economy.

We need to distinguish between employment and production, between money and income, between aggregate production and distribution. India’s economic policies have stressed employment and not production. That, in no small measure, is why India is poor. Until India’s economic policies shift away from employment and towards production, India’s fortunes are unlikely to change.

Why has not India developed during the last 60-odd years when other economies have during the same period? What have been the impediments? Those sort of questions need to be asked and seriously answered. These scribblings of mine essentially focus on exploring issues that touch upon India’s economic growth and development. Here I will continue where I left off the last time.

India’s development is predicated on rural economic development because over 70 percent of Indians live in rural areas. Rural development is not the same as the development of rural areas. Rural area development is a sufficient condition for rural development but it is not a necessary condition at all. For India, rural development has to focus on the development of rural people rather than development of rural areas.

The distinction between the development of the people of rural areas and the development of the rural area is important. Case in point: the development of rural America.

At the turn of the 20th century, the US population was largely rural. Agriculture and related occupations employed the vast majority of Americans. The government saw the need to make higher education available to the rural populations. That was the birth of the so-called land-grant universities. (The University of California, which I attended for several wonderful years, is one such.)

Providing higher education to the children of the rural families was the need. So did they start very little colleges in the tens of thousands of little rural communities? No. They started large universities for the children of farmers to go to. The idea was that these trained people would then go back to the farms and increase the farm productivity. But what was the actual outcome? The children of the farmers got urbanized and did not want to go back to the rural areas. As luck would have it, technologies developed in urban areas were successful in raising farm productivity which meant that so many were not needed in the farms anyway. And who developed the technologies and labored in all those urban areas? Those children of rural farmers who went to the colleges were the people who supplied all the necessary bits that the rural farmers required.

The point I am trying to make is that it was not rural development that made the difference in the rural areas. It was what happened in the urban areas that changed the rural areas.

The problem with rural development, in my considered opinion, is that the focus has been the village. Nothing wrong with focusing on a village, of course. But you do have a problem if you have to focus on 600,000 villages. The moment you try to focus on 600,000 thousand of anything — villages, songs, books, cars, you name it — you become unfocused and unhinged. That is what happened with rural development.

Where did it all start? I think it was MK Gandhi’s insistence on a village-based economy that started this unhinged process. Indians take very easily to hero-worship. It is easy to just worship someone and then leave all the thinking to them. All the netas (leaders) of India then took up the mantra of village development. Self-reliance was the corner-stone of this grand edifice of the village economy. And therein lay the trap.

{to be continued.}

Simple story but has a great deal of wisdom. The body is a unity and when one bit hurts, it is a signal that there is something wrong with the system. The pain may be localized but that does not necessarily mean that the cause of the pain is in the same location. In fact, it may even be that treating the pain will merely mask the symptom and not address the deeper cause. Superficial treatments could make things a lot worse because resources may be misdirected and precious time would be lost. In any sufficiently complex system, a holistic approach is a must for diagnosing and treatment of problems.

A personal anecdote. A friend’s wife who was in her late 20’s suddenly started having severe backache. They spent several months going to doctors who concentrated on the muscular-skeletal system and various chiropractors treated her. But unfortunately the back-pain was in fact just a symptom of kidney cancer. By the time they diagnosed that, it was rather too late.

An economy, much like the human body, is a complex system with various interconnected bits and dependencies, both internal and external. A holistic approach to the diagnosis and treatment of underdevelopment of economies is absolutely essential. Any competent development economist realizes the above of course. The catch is that to operationalize that insight is a non-trivial task. Furthermore, while the basic diagnosis and the treatment can be articulated by economists, the implementation (at least in a major part) involves politics, culture, and other such areas that are even more messy than economics.

The point to remember is that the problem we are addressing is not simple and simplistic solutions, however politically feasible, may be inadequate. One of the greatest dangers is posed by an incomplete understanding of the real problem. I call it the “Spurious Pain” problem. The so-called “Digital Divide” is one such. Among the more brain-damaged solutions to that spurious pain: PCs in every village. (I have written about this elsewhere in this blog.) Another example: farmers cannot pay for electricity. Solution to that spurious pain: free electricity for farmers.

The matter with spurious pain solutions is that instead of solving the problem, it actually accentuates the causes of the problem and one is faced with a bigger problem down the road than the one that one started off with.

Now on to the larger matter at hand. India’s development engages a lot of attention. India’s development is predicated—correctly, in my considered opinion—on rural development because around 70 percent of Indians live in rural areas. The first impulse, therefore, is to conclude that for India to develop, rural areas must be developed. For the moment, let us set aside the issue as to what exactly do we mean by “development.” Let us assume that meaning of “development” is common knowledge, knowing full well that it needs to be rigorously defined if we are serious about solving the problem of development.

The question I would like to explore here is this: Is rural development the same as development of rural areas, or is it development of the people who live in rural areas? My contention first is that the two are not the same. The solution to rural underdevelopment (and consequently to the development of the entire economy) would depend on that distinction. Second, I contend that, under certain conditions which exist in India, development of the rural areas may not be feasible at all. I argue that we should be addressing ourselves to the development of rural people, and not rural areas. In fact, I submit that it is the misplaced emphasis on the development of rural areas which is posing an impediment to India’s economic growth.
{Continued here.}

What do we want in India? If foreigners want these things, we want them twenty times more. Because…in spite of our boasted ancestry of sages, compared to many other races, I must tell you that we are weak, very weak. First of all is our physical weakness. That physical weakness is the cause of at least one-third of our miseries. We are lazy, we cannot work; we cannot combine, we do not love each other; we are intensely selfish, not three of us can come together without hating each other, without being jealous of each other. That is the state in which we are — hopelessly disorganized mobs, immensely selfish, fighting each other for centuries as to whether a certain mark is to be put on our forehead this way or that way, writing volumes and volumes upon such momentous questions as to whether the look of a man spoils my food or not! This we have been doing for the past few centuries. We cannot expect anything high from a race whose whole brain energy has been occupied in such wonderfully beautiful problems and researches!

First of all, our young men must be strong… You will understand the Gita better with your biceps, your muscles, a little stronger. You will understand the mighty genius and the mighty strength of Krishna better with a little strong blood in you. You will understand the Upanishads better and the glory of the Atman when your body stands firm upon your feet, and you feel yourselves as men.

I am deliberately leaving the quote above anonymous. Who is this guy who speaks of Indians being weaklings, physically and mentally? This passage was pointed out to me by a visiting friend. (The book is in my library and like scores of others sitting there, I have all sorts of good intentions about reading them but never seem to find the time.)

Gratuitous fault-finding is silly. Looking unflinchingly at reality, on the other hand, is absolutely required if you want to have any hope of solving the problem. This I believe is the first mistake that we make in India. The Mera Bharat Mahan attitude will ensure continued poverty and irrelevancy.

We are an underdeveloped poverty-ridden over-populated nation of over a billion people. Does anyone ever ask the question: Why is India the way it is? No. If we cannot ask this question because the answers may be unpleasant, I don’t see much hope for India. If we do not ask this question and answer it honestly, we may continue to blunder as we have done at least since independence 57 years ago under the flawed policies of the Nehruvian socialism and cargo-cult democracy.

When was the last time you ever heard of a conference where serious people with lots of knowledge and understanding got together to examine that question? Here is a suggestion for the movers and shakers of the great nation of India: commission a series of lectures by accomplished sociologists, economists, historians, philosophers, etc, which will examine the causes of India’s failures and what can be done to fix them. That lecture series can form a good counterpoint to the over-optimistic, rose-colored glasses-wearing, rocket-weilding India-superpower shouting, pyramid-power cult-worshipping, internet-surfing digital village hyping craziness so much in vogue.

PS: So who do you think is the author of the opening extended quote? Fabulous prizes for the correct answer. Please don’t cheat by using google.

Remarkable results follow from exploring the idea of opportunity costs. The whole theory of comparative advantage — the fundamental reason why trade is a win-win game — pivots around the idea. One could do worse than to sit and consider opportunity costs whenever one contemplates doing something.

In fact, I would go so far as to claim that economics at its most fundamental is the careful systematic study of opportunity costs. Opportunity costs implies choices and tradeoffs, and is itself the consequence of a fundamental physical characteristic of the universe that we live in. That fundamental fact is that this universe has limits. Each one of us has a limited amount of time and other derivative resources at our disposal.

Economics is about making choices and economic policy is about policy choices. How an economy performs depends on the economic policy choices made by whoever is in charge of making choices. All this should be glaringly obvious and you may have started wondering where all this is leading to. I was coming to that.

The last time I wrote about the craziness of the ICT for development brigade. ICT tools are of course relevant for development in certain cases. But mindlessly applying ICT in each and every place is worse than doing nothing. If you spend scarce resources buying PCs for rural areas, you neglect other more relevant areas where those resources would have helped.

Adult education, for instance, is a crying need in rural India. You can, of course, use a variety of means of achieve that, ranging from blackboard and chalk, to radio and TV, to PCs with literacy software. Examining the economics of the situation could well reveal that blackboard and chalk is the most appropriate means. For a total capital expenditure of Rs 500 and an operating expenditure of Rs 1000 per month, you could make 20 adults literate in 6 months. Per capita cost would then be about Rs 325 (about $7.) Let’s do the numbers if you were to use a PC. Cost of hardware and software Rs. 20,000; power supply for the PC: Rs. 20,000; trained manpower and maintenance per month: Rs 3,000. Total cost: Rs 58,000. Per capita cost: Rs 2,900 (about $65.)

Of course, one could always use the PC for a number of uses, not just adult education. Instead of just educating 20 people, one could use it more intensively by say using it 12 hours a day and thus train 5 batches for a total of 100 people. Still, the PC method would cost Rs 70,000 and the blackboard method will cost Rs 25,000. By using the low-tech method, you save Rs 45,000. Here is an idea. Give Rs 450 as an incentive to the people: become literate for free and when you complete the course, you take home Rs 450. Total cost to the state: Rs 70,000, the same as the high-tech solution. Same expenditure but guaranteed different outcomes.

In the low-tech scheme, you give money to the rural adults. This is an incentive to them and better still, they in turn, spend the money locally which stimulates the local village economy. They buy food perhaps which helps out the farmers. Compare that to the high-tech scheme. The money goes to the manufacturers of hardware and software, which basically means Intel, Microsoft, HP and so on.

I hasten to add that rural India has a wide range of problems. Saying that not all of them are amenable to a high-tech solution also means that there are some problems that are the properly addressed by high-tech solutions. Point to point communcations of all sorts — voice, text, video — are best done using high-tech methods. Compared to carrier pigeons and even POTS (plain old telephone system), wireless WiFi and VOIP (voice over IP) will be cheaper.

Here is the point that I am laboring to make. Here is a simple prescription on how to solve problems.

1. First, identify the problem as precisely as you can. For instance, too many illiterate people in rural areas, for example.
2. Diagnose the problem. This step is most often glossed over. What is the cause of illiteracy? Is it because they do not have PCs? Or is it because they don’t have teachers? Or maybe because they don’t have time to go sit in a class because they have to earn a living by toiling in the fields? Or is it because the upper caste people prevent the lower caste people from going to class?
3. Apply the appropriate remedy that fits the diagnosis of the problem. If it was really a lack of PCs in that village that led to illiteracy, then by all means get those PCs Fedexed immediately. But the vast majority (about 99.99recurring percentage) of humanity has become literate without the aid of PCs. So it is unlikely that the lack of PCs is the cause of the illiteracy. It is more likely something else.

There is nothing wrong with very good headache medicine. But very good headache medicine would do fancy little for you if you have an upset stomach. Psychological counseling is great but will not help a broken car. Administrative problems cannot be solved by technological means any more than casting spells fix a balance of payment deficit.

I am delighted that so many NGOs, pundits, and governments are so gung-ho about the use of ICT for development. More power to them. But if their spending on ICT diverts scarce resources to unproductive silly ill-conceived wasteful exercises, it is a pity that the same sort of idiotcracy still exists that brought the country to the sorry state that we find it in today.

Yesterday I claimed that

http://www.deeshaa.org/archives/2004/11/23/index.html#006359>

India is the world’s largest kleptocracy somewhat along
the lines of the claim usually made about India being the
world’s largest democracy (if you use a really flexible
definition of democracy, of course.) One reader, Sudhar, wanted
to know exactly how is it that corruption retards economic
growth. It is a very important question. I could spend a whole
day writing about that but being bone lazy, I am taking the
easy way out of giving you a reference. Why re-invent the wheel,
eh?

So the article you may wish to read is
from the Whirled World Bank
by Paulo Mauro:

http://www.worldbank.org/fandd/english/0398/articles/010398.htm>

Corruption: Causes, Consequences, and Agenda for Further Research.
To quote just a couple of paragraphs:

From economic theory, one would expect corruption to reduce economic growth by lowering incentives to invest (for both domestic and foreign entrepreneurs). In cases where entrepreneurs are asked for bribes before enterprises can be started, or corrupt officials later request shares in the proceeds of their investments, corruption acts as a tax, though one of a particularly pernicious nature, given the need for secrecy and the uncertainty as to whether bribe takers will live up to their part of the bargain. Corruption could also be expected to reduce growth by lowering the quality of public infrastructure and services, decreasing tax revenue, causing talented people to engage in rent-seeking rather than productive activities, and distorting the composition of government expenditure (discussed below). At the same time, there are some theoretical counterarguments. For example, it has been suggested that government employees who are allowed to exact bribes might work harder and that corruption might help entrepreneurs get around bureaucratic impediments.

One specific channel through which corruption may harm economic performance is by distorting the composition of government expenditure. Corrupt politicians may be expected to spend more public resources on those items on which it is easier to exact large bribes and keep them secret–for example, items produced in markets where the degree of competition is low and items whose value is difficult to monitor. Corrupt politicians might therefore be more inclined to spend on fighter aircraft and large-scale investment projects than on textbooks and teachers’ salaries, even though the latter may promote economic growth to a greater extent than the former.

It is a very accessible article and one does not have to be a
genuine economist to gain considerable insight from it.

The chief engineer of XYZ makes about $2 million a year in kick-backs from suppliers because the going rate is about 10% of the budget that the chief engineer controls. Just to put that figure in perspective, that is about 500 times the per capita GDP of India. When promoted to “technical director” from the rank of a chief engineer, the annual take of the person goes up to $5 million. Which is why the going rate for the promotion is about $3 million. Merely having one’s tenure as the technical director extended by six months costs about $1 million.

The private sector suppliers of these public-sector monopoly enterprises compete amongst themselves and the competition is primarily based on how much they are willing and able to give back in kick-backs to just be awarded the contracts that often range from a low $5 million to upwards of a $100 million. Merely being awarded contracts is not the end of the game. Getting paid for work done and material supplied is also a huge challenge. Without regular kick-backs, payments can take years and could easily doom the private sector supplier.

As I said, my brother is a small-time distributor for a bunch of suppliers. To get business from these public-sector enterprises, he has to deal with chief engineers and other such people in charge of making purchasing decisions. What he is compelled to do to run his business, I don’t really know and even if I did, I would leave it unsaid here.

The question that I persistently seek the answer to is this: Why is India so abjectly poor? There is no single factor, of course. But pervasive corruption has to be one of the most important factor among the mix of factors such as a poor culture, questionable ethical standards, a cargo-cult democracy, widespread illiteracy, stupid economic policies, and so on.

India is rated as one of the most corrupt countries with a “corruption perception index” (CPI) of 2.8 and is tied in the 90th place (out of 145 surveyed) with countries such as Gambia, Malawi, Mozambique, Russia, Nepal, and Tanzania according to Transparency International Corruption Perceptions Index 2004 which notes that “corruption is rampant in 60 countries, and the public sector is plagued by bribery”. Finland, New Zealand, Denmark, Iceland, Singapore, Sweden, Switzerland, Norway, Australia, and the Netherlands hold the first ten positions as the least corrupt countries. Haiti and Bangladesh are tied at rank 145 as the most corrupt countries. One cannot fail to appreciate the correlation between how corrupt a country is and how poor it is. Correlation hints at possible causation but in itself does not imply causation and definitely cannot tell in which direction the causation holds. Are corrupt countries corrupt because they are poor or is it that they are poor because they are corrupt? Perhaps there is some circularity in the causal chain and poverty and corruption are mutually cause and consequence.

Corruption leads to economic waste because it is an inefficient way of doing business. If 10% of capital expenditure that a public sector enterprise is paying for ends up in the pockets of its office-holders, it means that capital equipment does not get replaced or maintained as it should. If the supplier has to pay kick-backs to get business, it will have to cut corners in the quality or quantity of material supplied. Economic rent seeking behavior is not productive and in India millions of man-years must be wasted in unproductive rent-seeking. Public sector monopolies represent a resource sink precisely because they a ridden with corruption from top (the bureaucrats and politicians who appoint the high-ranking public sector officials) to the bottom (the clerk who will not push your file to the next desk without being paid his Rs 100).

So what is to be done? Surely lecturing school-children about the evils of corruption is not sufficient. First we need to be aware of what is going on and who is beind the going-ons. Investigative journalism comes to mind. Where are the watch-dogs and what are they doing? An informed citizenry is the best defense against the kleptocracy that exists today. Next, when investigation reveals corruption, the matter should be rigorously prosecuted to its logical end. And one must get one’s priorities clear when doing so, and not hound a poor milkman for diluting milk and believe that justice has been served.

Here is my proposition. Let it be known that any corruption above a certain figure (say, $1 million) is an offense that will attract the death penality. Between half a million to a quarter million, it will be mandatory 20 year rigorous imprisonment. Then every month, take the harsh step of convicting about 10 and hang them. In a year, the number of people who find corruption in the millions of dollars attractive will fall. This is simple economics: when the price goes up (death), the demand for the thing (getting one more million dollar in one’s Swiss bank account) goes down.

I argue that the large pool of poor people serve as a reservoir of extremely cheap labor which helps the rich. The rich have control and are powerful. They could choose to bring about the end of poverty. But they don’t because absent grinding poverty, the cheap labor will dry up and lead to less favorable outcomes for the rich and powerful. I hasten to add that the rich and the powerful cannot be distinguished by the color of their skin, racial origin, or nationality. The rich and the powerful exist in rich and poor countries alike. Their interests are aligned irrespective of which part of the world they live in.

Thus the rich in India would advocate policies that will ensure that the reservoir of poor Indians never run dry. Empirical evidence is plenty. There were only about 150 million abjectly poor people in India around 1950. Today, about 50 years later, India has about 300 million abjectly poor people. Mind you, this is after implementing every conceivable form of “pro-poor” policies. Not a single policy maker would ever claim that their policies were anti-poor. They all are for the benefit of the poor. And yet, the numbers of the poor continually increase. I claim that the policies are “more-poor” rather than “pro-poor”.

One such policy now making the rounds is the so-called “Employment Guarantee Scheme” which I mentioned here last time. In my considered opinion, this would raise the level of poverty in India and increase the number of poor. How this will come about, I will address later. For now, I will move to the utility of the poor. They are good for slave labor.

Slavery is an ancient institution. Mention slavery and you conjure up images of Africa. In the past, Africa paid the price and the benefits went to Europeans, both in the Old World as well as the New World. The rich and powerful, both in Africa and in Europe (and their American colonies), gained immensely. Let’s not forget that African slavery was not an entirely European-driven phenomenon. Africans were involved in it as much as anyone else. Africans managed the supply-side while Europeans the demand-side.

For guns and other European manufactures, powerful Africans would conduct raiding parties with guns and cavalry. Here is a heart-breaking account by James Richardson writing about it around 1850:

A cry was raised early this morning: “The Sarkee is coming!” … It turned out that a string of captives, fruits of the razzia, was coming in. There cannot be in the world … a more appalling spectacle than this. My head swam as I gazed. A single horseman rode first … and the wretched captives followed him as if they had been used to this condition all their lives. Here were naked little boys, running alone, perhaps thinking themselves upon a holiday; near at hand dragged mothers with babes at their breasts; girls of various ages, some almost ripened into womanhood, others still infantile; old men bent two-double with age, their trembling chins verging towards the ground, their poor old heads covered with white wool; aged women tottering along, leaning upon long staffs, mere living skeletons … then followed the stout young men, ironed neck to neck! This was the first installment of the black bullion of Central Africa; and as the wretched procession huddled through the gateways … the creditors of the Sarkee looked gloatingly on through lazy eyes, and calculated on speedy payment.

Only humans are capable of inhumanity. It is part of human nature and I don’t think that it can be eradicated. It takes different forms and shapes depending on the fashion of the era and the compulsions of the age. The compulsions range from monotheistic madness (the Crusades, the Islamic hordes destroying peaceful non-Muslims) to nationalism (the Nazis slaughtering Jews, the Americans carpet-bombing countries, the Belgians killing millions in the Congo, the Pakistani army slaughtering between 3 and 6 million other Pakistanis, … the list goes on) to natural resources (too many to mention but Iraq is the lastest example.)

{To be concluded tomorrow.}

When the degree of ignorance and stupidity exceeds a certain threshold, it slides into madness. And as Euripides warned long ago, whom the gods wish to destroy, they first make mad. Whether or not Indian leaders have gone mad is a question that I leave for you to decide. The future of India pivots on that point. My conclusion is that madness has taken a firm hold on the leadership of India and the consequences are foretold.

Tim Worstall took the trouble of pointing me to yet another sign that the future of India is in peril. Read and weep for the beloved country.

To weigh in the mind; to view with deliberation; to examine carefully; to consider attentively.

Syn: To Ponder, Consider, Muse.

Usage: To consider means to view or contemplate with fixed thought. To ponder is to dwell upon with long and anxious attention, with a view to some practical result or decision. To muse is simply to think upon continuously with no definite object, or for the pleasure it gives. We consider any subject which is fairly brought before us; we ponder a concern involving great interests; we muse on the events of childhood.

End of digression.}

First one point of clarification. Yesterday I wrote

Fun fact #2: Trade occurs only among two dissimilar entities. If I have an excess of peanut butter and you have an excess of bread, then we can trade and both end up enjoying peanut butter sandwiches. But if both of us have exactly the same ratio of peanut butter to bread to start off with, then we could not trade.

The point was that the two trading entities have to be dissimilar. That dissimilarity could be intrinsic or extrinsic. If they are intrinsically dissimilar, then even if their endowments are the same, trade can still take place. For instance, we may start off with the same ratio of peanut butter and bread, but you may have a strong preference for only bread and I may have a strong preference for only peanut butter. In that case, we can trade and end up happier. If we are instrinsically similar — our preferences match — then we cannot trade unless our endowments are different. End of digression number two.

Continuing with the list of fun facts, here is another. Fun fact #5: The world is moving towards increasing specialization since the stone age. Speciation is what happens in the natural world where life evolved in some primal soup and since then from the earliest protozoan to the present day different species have emerged. Evolution is a fact. The theory which explains the mechanism of evolution was given credence through the diligent and brilliant work of Charles Darwin (1809-1882). Darwin got the germ of his idea upon reading Thomas Malthus’ (1766-1834) Essay on the Principle of Population. No doubt Darwin pondered that issue long and hard and then it struck him that speciation occurs through competition for resources and those that are less fit are doomed and this process he called “natural selection”. Darwin explained the mechanism that underlies the question how did all the diversity of life originate.

It is easy to see that specialization in the economic world is a close analog of speciation in the natural world. Once upon a time you used to have people who were jacks of all trades and masters of none. Now you have programmers and playwrites, prostitutes and politicians (ok, I repeat myself), pharmacists and paleontologists. The more advanced the society, the more specialization of its work force.

Hand in hand with the specialization of the work force, we have the specialization of the firms that operate in the society. Firms that used to do all things in a particular sphere (vertically integrated firms) no longer do so. They ‘outsource’. For instance, take a car manufacterer. Once upon a time, at one end steel, rubber, and glass would go in and at the other end of the factory you would have cars rolling out of the assembly lines. All the raw materials would be transformed inside that one plant into cars. That was then. Now a car manufacturer assembles cars from components that are manufactured by other firms. So a firm that manufactures engines will supply these intermediate goods to a host of firms.

{Advanced industrialized countries (or developed countries) trade a lot amongst themselves. Much of that trade is in intermediate goods. Given that, it is hard to tell where something is really manufactured these days. For instance, ponder a complex creature such as a Boeing 777. Engines could come from Europe, parts of the fuselage from Japan, avionics from the US, … by the time you are done enumerating, you would find that practically the whole world was somehow involved in the manufacture of the plane. End of aside #18.}

That is what outsourcing is all about. You don’t do all the stuff that needs to be done. Get someone else to do it because they have a comparative advantage in doing that bit. I outsource ‘jhadu-pocha-bartan’. American firms outsource much of what they need done and a part of that outsourcing happens to be done abroad and of that work done abroad, India has a small share.

So now let’s ponder outsourcing and India. I will ponder outsourcing and the US later because I am fast running out of pondering time.

India appears to be a destination for a specific kind of outsourcing. Business processes and software development. The sort of work that does not require hard infrastructure such as roads and ports and water and power. You just need some kind of connectivity, a bunch of English-speaking graduates who can be easily trained, and a bunch of entreprenuers who would start BPO and software firms to do the ‘jhadu-pocha-bartan’ equivalent for the US firms.

From all indications, the whole business works quite well. India has a huge population. Out of that billion+ population, India graduates around a million every year. Some of these graduates can speak English and of them some are trainable. Firms that initially went into the BPO and software business had an easy time. Lots of unemployed and underemployed graduates to choose from and they had a party. Will the party continue? As more and more firms get into the game, it will become increasingly difficult to find graduates that are trainable and can speak English. Given increase in demand without significant changes in the supply, prices will get bid up. That will drive up the costs of BPO and software in India. India’s competitive advantage in the sector will deteriorate.

So how does one go about avoiding the fate that I just outlined? Simple: increase the supply. India should see that more of the million graduates it produces are capable of being trained and speak English.

For the record, I should state that while I feel happy for the people who get the BPO and software jobs, I do not feel very happy about the fact that India has to be the preferred provider of ‘jhadu-pocha-bartan’ to the Americans.

The issue of outsourcing appears to be a very hot topic. Here is how I think about it. I go back to the basic facts.

Fun fact #1: Trade is good. Whether between two people on eBay or between two countries across an ocean, trade increases welfare. While that is true in general, there are well-known conditions under which trade can be harmful and decreases welfare. If any of those conditions exist, then you need to take corrective measures which may include the extreme measure of banning the trade.

Fun fact #2: Trade occurs only among two dissimilar entities. If I have an excess of peanut butter and you have an excess of bread, then we can trade and both end up enjoying peanut butter sandwiches. But if both of us have exactly the same ratio of peanut butter to bread to start off with, then we could not trade.

Fun fact #3: Increasing the supply of any good or service (all other things being equal) reduces its price. This is not rocket science but the ignorance of this fact is as widespread as the ignorance of rocket science.

Fun fact #4: Most change gives rise to winners and losers. Walmart in your neighborhood helps you and hurts the little stores in your neighborhood. Imported Chinese junk helps the consumers of junk but hurts the domestic manufacturers of junk. Basically, lower prices help those who consume the good or service but hurt those who produce it.

OK, so here is the story about outsourcing, the US, and India. India and US are dissimilar. Wages are lower in India as compared to the US. Why? Because wages depend on the average productivity of the country. India is a low productivity country. Why that is so is another story that we will not go into right now. Because Indian labor is cheap, producers who can use Indian labor will have an incentive to use them. If you are producing goods, you can get the goods produced abroad and sell them in the home country. Winner: the domestic consumers. Losers: the domestic workers who were replaced by cheaper labor. While labor is immobile internationally (immigration laws and all that), labor is said to be embodied in the goods that are produced abroad. Think of it as if the worker is virtually present in the US and is working for a wage much lower than the domestic worker would demand.

In the past, India supplied some goods to the US, mostly commodities. Then when communications technology improved, services could be exported. It was as if a couple of million Indians moved to the US. Increased supply immediately translates into lower prices. Basic economic logic, not rocket science at all. Lower prices help the consumers and hurt those who worked in that sector before the supply of labor increased. Globally, that movement of labor (virtual movement, of course) is welfare improving. It is undoubtedly good for India because the average wage of those workers increases and since Indians are in general not consumers of the stuff these workers produce, Indian consumers are not hurt. But is it good for the US?

What is good for GM is good for America is only true if all Americans work for GM, otherwise it is an open question. So also, if the US workers displaced by the virtual migration of Indian labor move on to more productive jobs, then the change is an unmitigated good for the US. Then of course, one has to consider the question from the temporal angle as well and distinguish between the short- and long-term impact of the change.

In the long-term (not the real long term, of course, in which we are all dead as Keynes astutely observed), Heckscher-Ohlin’s factor price equalization theorem takes effect. Here is a definition from About.com:

Factor price equalization is an effect observed in models of international trade — that the prices of inputs to (“factors of”) production in different countries, like wages, are driven towards equality in the absence of barriers to trade. This happens among other reasons because price incentives cause countries to choose to specialize in the production of goods whose factors of production are abundant there, which raises the prices of the factors towards equality with the prices in countries where those factors are not abundant. Shocks to factor availability in a country would cause only a temporary departure from factor price equality.

The basic theorem of this kind is attributed to Samuelson (1948) by Hanson and Slaughter (1999) who also cite Blackorby, Schworm, and Venables (1993). The context of the theorem is a Heckscher-Ohlin model.

Programmers and call center operators are a factor in the production of many goods and services in today’s global economy. Since barriers to trade have come down both due to free trade agreements and to technological advances in telecommunications, it has led to a “mobile” labor market for those workers. Increased supply implies lower prices for that sort of labor. Lower prices implies winners and losers, as argued earlier.

So is it good for the US and if not, could the US do something about it and if it could, should the US do something about it? Good question. The answer is forthcoming. What we have to remember when it comes to change is the good old theory of the second best which Bhagwati had written about years ago and which I believe throws light on the present debate.

For those who have not heard the momentous news, let me clue you in. The arch villian I am refering to is none other than Daya Nand of Narnaul (Harayana). Sixteen years ago, this enemy of humanity, committed an atrocity so immense that all the forces of the good and the holy had to be arrayed against him. But truth eventually triumphs. The Supreme Court of India prevailed and sentenced him to a life in prison and imposed a fine on this criminal as well for his unspeakable crime.

July 6th, 1988 will be long remembered as that infamous day when Daya Nand of Narnaul attempted to subvert the fundamental functioning of our way of life. On that day, forever to be recalled as 6/7/88, a crime was commited that engaged the attention of a trial court, then moved to the High Court, and finally ended up in the Supreme Court of India where the Hon’ble Justices heard the evidence, debated the issue with extreme gravity, spent days on end balancing the interests of the society and the rights of the accused, pondered long and hard and eventually delivered a verdict that forever assured the triumph of good over evil, of order over chaos, of right over wrong, of satya over asatya, of light over darkness, of immortality over death, of knowledge over ignorance … you get the idea.

For the record, the bench of the Supreme Court of the Republic of India which passed this momentous judgement comprised of Justices Hegde, Sinha and Mathur. Truly Daniels. The punishment: six months in prison and Rs 1000 fine. The crime as report by PTI: Daya Nand of Narnaul had diluted 20 litres of milk with water. He was caught by the Deputy Chief Medical Officer who took 750 ml of the sample and sent it to Public Analyst. “The Analyst in his detailed report found the sample to be deficient in milk solid to the extent of five percent of the prescribed mininum standard and also to be deficient in solid fat as required by law.”

The trial court sentenced Daya Nand leniently considering that he had three small children to support and had no previous criminal record. The High Court overturned that decision but finally it reached the Supreme Court which upheld the trial court’s decision.

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It has been estimated that even if no fresh cases were to enter the Indian judicial system, the backlog of cases would occupy the current legal machinery for about 350 years.

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According to a study done by the Election Commission, 40 sitting members of the Lok Sabha (the Lower House of the Parliament) and around 700 of the 4,072 members in the various state assemblies had criminal records. The crimes do not include adulteration of milk; they are usually rape, murder, extortion, embezzlement of public funds to the tune of hundreds of millions of dollars.

I am very happy that the Supreme Court of India has understood the priorities correctly and spends its time deliberating the crimes of milkmen and happily ignores the crimes that people in high places commit.

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When I ponder the question of why India is a poor, over populated, inconsequential, “third-world” country, I keep returning to one central conviction of mine. Indians, as a collective, seem to lack a moral sense, a sense of balance, a sense of what is right and wrong. From that deficiency arises the collective will of the people. That will is translated into policies. Those policies create the conditions within which the economy evolves.

Watch your thoughts, they become words;
Watch your words, they become actions;
Watch your actions, they become habits;
Watch your habits, they become character;
Watch your character, It becomes your destiny.

It is time to take an unflinching look at the very root causes of our poverty, both material and spiritual. Until we can identify the causes, we will spend a lot of time and effort doing worthless things and never achieve the goal of economic development, leave alone real human development.

It is all Karma, neh?

The question takes on an unparalled urgency and importance when applied to the rural Indian economy because it presents an enormous challenge, and, consequently, presents an equally great opportunity for making a difference in the lives of hundreds of millions of people. India’s economic development is predicated upon India’s rural development because around 700 million Indians live in rural India. An astonishing one out of every ten living humans lives in rural India.

Rapid progress in GDP growth and globalization in the last decade has primarily impacted the urban economy. While software exports, business process outsourcing, etc, have helped urban economic growth, it has done relatively little for the rural economy.

Without rural economic development, India has little chance of achieving growth rates required to become a developed nation. Furthermore, economic development is both a cause and a consequence of urbanization. Clearly, in the Indian context, urbanization through further rural to urban migration is both unsustainable and socially disruptive. Therefore urbanization of the rural population will have to be achieved in the rural areas.

Rural India is caught in what is called a development trap. Because of lack of economic opportunities, incomes are low. Therefore they are unable to pay for goods and services that would enable them to increase their incomes. This leads to low demand for goods and services. Consequently, firms don’t find it profitable to do business in rural India. This leads to the inadequate provision of infrastructure, which in turn leads to lack of economic opportunities, and so on.

It is important to recognize that human capital is the scarce resource globally. Fortunately India is lavishly endowed with immense human capital. However, physical capital is in relatively short supply in India. The challenge therefore is to use the limited capital most efficiently to break out of the poverty trap by integrating the rural economy with the urban Indian economy and indeed the global economy.

Various models for rural economic growth have been proposed and implemented. Vinod Khosla and I have proposed a model which harnesses the power of the information and communications technology (ICT) revolution to accelerate rural economic growth. The model called Rural Infrastructure & Services Commons (RISC) has the potential for achieving the multi-faceted goals of sustainable development. It uses limited resources efficiently by focusing them in specific locations that are accessible to a sufficiently large rural population, such as that of 100 villages.

RISC provides the benefits of urbanization by making available to rural populations the full set of services and amenities that are normally available in urban areas. It brings the benefits of ICT and the increased access to global markets that globalization promises.

The model recognizes that rural populations face a number of inter-related gaps, not just the celebrated digital divide. Bridging them simultaneously with a holistic solution is more likely to succeed than any partial intervention can.

The model facilitates the coordination of the investment decisions of the private sector, the public sector, NGOs, and multilateral lending institutions. To achieve its goal, the model strikes a number of balances — between the local and the global, between planned infrastructure investment and market-driven service provision, between specialization and standardization. It does not require government subsidies for its continued operation, although the government does have a role in providing some critical functions such as risk alleviation, loan assistance, and enacting enabling legislation.

A typical RISC installation would provide services for about 100,000 rural people. These services, mostly but not all provided competitively by a large number of for-profit firms, will range from education, health, market making, financial intermediation, entertainment to government services, social services, etc. Since all services themselves require the infrastructural services such as power, telecommunications, water, physical plant, etc., large specialized firms will provide the infrastructure.

RISC obtains urbanization economies, which arise from the agglomeration of populations and infrastructure facilities. By installing RISCs to serve the rural populations of an entire state, economies of scale and scope are also obtained. Scale economies would be significant at each level of the model. At the infrastructure level, there are transaction costs associated with the necessary coordination between the firms providing the core infrastructural services. At the services level, the cost of the services will be inversely proportional to the quantity demanded and supplied.

A RISC provides a complete set of services and functions. Each service provider itself is a customer of other services co-located on the RISC. The banker uses the internet and postal services, and the internet service provider uses the banking and postal services, and so on. They make each other mutually viable and even possible. All these economies essentially lower the cost of service provision and, in a competitive market, makes them more affordable.

At a certain level of abstraction, the proximate causes of poverty can be seen as two gaps: the ideas gap and the objects gap. The objects gap is the lack of physical resources – too little land, too little capital stock, etc – that contribute to persistent poverty. The ideas gap is the lack of knowledge about how to make the best use of the resources available. Fortunately, the cost of knowledge goods has dropped precipitously due to the revolution in information and communications technologies. Bridging the ideas gap is a much easier task than ever before. RISC uses ICT intensively towards that end.

The transition from the concept to the actual implementation of the RISC model requires co-ordination of investment decision of the government and the large firms that provide the infrastructural elements. It is a non-trivial but surmountable challenge provided the political will and the vision exists among policy makers, private sector leaders, leading investors, and opinion makers.

But with inefficiency and local mismanagement plaguing distribution, it couldn’t move the grain fast enough through the system. Some even spoiled in warehouses. A 2002 government survey concluded that 48% of children under five years old are malnourished. That’s an improvement from three decades ago and even today, given rapid population growth, the proportion of chronically hungry Indians continues to fall. But in a sign that there are limits to the Green Revolution, the absolute number of hungry people in India began to rise again in the late 1990s, according to the U.N.

The paradox is easy to resolve if one understands one basic principle: that economic policies matter. The Indian economy has been chronically mismanaged by the Congress ever since India’s independence. And now the new Congress government could continue on the same failed path of socialism that led us to this sorry state. Vote-bank politics and the command and control license-permit-quota raj is responsible. Paul Samuelson could have been speaking about India when he wrote in April 2002 (HOW TO PROSPER IN THE TWENTY-FIRST CENTURY):

The good life does not come from dramatic speeches or boisterous parades. Where economics is concerned, so far, there is nothing in sight more promising than the limited welfare democracy where public laws harness and monitor the energies and efficiencies of the somewhat free marketplace.

It is a good time to review Amartya Sen’s book of 1982, Poverty and Famines: An Essay on Entitlement and Deprivation. Here is an excerpt from Ken Arrow’s review of the book:

In a free-enterprise economy every good or service has a price, and each economic agent starts out by owning some goods or services. The rice farmer owns some land, used for producing rice, which can then be sold on the market at the going price or reserved for use by the farmer and his family. The receipts from sales can be spent on other goods—different foods, spices, clothing, and so forth. The agricultural laborer has only his or her labor to sell; the proceeds can be spent on rice or other goods. Similarly the cities contain workers who sell labor for money to buy food, shelter, and clothing, and entrepreneurs who buy goods and labor, produce other goods, sell them, and have the proceeds for personal consumption and investment in business expansion.

People will starve, then, when their entitlement is not sufficient to buy the food necessary to keep them alive. The food available to them, in short, is a question of income distribution and, more fundamentally, of their ability to provide services that others in the economy are willing to pay for.

This, of course, does not mean that the supply of food is irrelevant. A decrease in the supply of food will usually increase its price, as people compete for the scarcer quantity. This will in turn decrease their ability to buy food by using their entitlement and, if they start close enough to the margin of hunger, may drive them to the point of starvation. Further, the entitlement approach, simple as it is, enables the analyst to say something about the distribution of the burden of starvation. Farm owners and, to a lesser extent, sharecroppers, should be less affected than others because the reduction in the amount they sell is at least partly offset by the higher prices. If the reduction in supply is caused by some factor, like flood, that reduces the amount to be harvested, farm laborers are thereby more likely to be seriously affected.

I am reminded of Oliver Goldsmith’s words from his poem The Deserted Village:

Ill fares the land, to hastening ills a prey
Where wealth accumulates and men decay

There is something rotten about India that so many people are so unconcerned about the true state of affairs. The communists are solely concerned with protecting a handful of jobs, the larger interests of the nation be damned. The government is concerned with blocking the liberalization of the economy and dragging it back to its insular autarkic pre-reform paralysis. The idiotic hype about India Shining and IT superpower crap has addled the brains of the already marginally stupid. One wonders where this is all going to lead to.

It is all karma, neh?

In economic activities the greatest of virtues is tolerance. All societies flourish mightily when tolerance is the norm, and our age furnishes many examples of this. China began its astounding commercial and industrial takeoff only when Mao Zedong’s odiously intolerant form of communism was scrapped in favor of what might be called totalitarian laissez-faire.

India is another example. It is the nature of the Hindu religion to be tolerant and, in its own curious way, permissive. Under the socialist regime of Jawaharlal Nehru and his family successors the state was intolerant, restrictive and grotesquely bureaucratic. That has largely changed (though much bureaucracy remains), and the natural tolerance of the Hindu mind-set has replaced quasi-Marxist rigidity.

The emphasis above is mine. I have always marveled at how India’s disasterous economic growth under Nehru’s (who was almost rabidly anti-Hindu) insane socialism is tagged as the Hindu rate of growth when it was anything but Hindu. Back to the Forbes article of June 25th, 2004.

In the last fiscal year India’s GDP grew an estimated 8%, and in the third quarter, 10%. India’s economy for the first time is expanding faster than China’s. For years India was the tortoise, China the hare. The race is on, and my money’s on India, because freedom–of movement, speech, the media–is always an economic asset.

When left to themselves, Indians (like the Chinese) always prosper as a community. Take the case of Uganda’s Indian population, which was expelled by the horrific dictator Idi Amin and received into the tolerant society of Britain. There are now more millionaires in this group than in any other recent immigrant community in Britain. They are a striking example of how far hard work, strong family bonds and a devotion to education can carry a people who have been stripped of all their worldly assets.

Common Denominator

The contrast between China and India–both moving steadily to join the advanced countries of the world–and those countries where Islam is dominant is marked. Whatever its merits may be, Islam is not famed for tolerance. Indeed, of the major world religions it is the least broad-minded and open to argument. With the rise of a new form of fundamentalism in recent decades, its intolerance has been growing–as has the concomitant poverty.

The article is worth a read.

Rural India needs affordable services – from education to market access, from telecom to healthcare, from financial intermediation to entertainment. The key issue in rural India is the non-availability of services at affordable prices. Linked to this is the lack of perceived opportunities in rural areas. These twin factors create a situation in which few want to do business in rural India.

It also leads to the exodus of people from rural areas to urban slums, which stretch the resources in the cities and towns even further. In other words, rural India is caught in a trap that it seems difficult to get out of.

… What Dey and Khosla propose is the creation of 5,000 rural hubs across India, each catering to a population of about 100,000 or about 100 villages, such that the hub is no more than a “bicycle-commute” distance away for people in the villages. These hubs will have about 10,000 square feet, built at a cost of about Rs 2 crore each. They will have state-of-the-art infrastructure – including 24×7 electricity, broadband connectivity, security and sanitation.

This standardised infrastructure reduces the costs of operation for service providers in rural India. From the point of view of the rural populace, there is one place where it can get multiple services – services which were hitherto not available or too expensive.

Loosely defined, an objective function embodies the goal of an economic agent and which the economic agent attempts to optimize in some sense. So for a commercial enterprise, the objective function could be to maximize market share, or it could be to maximize profits. For a consumer, it could be to maximize utility. For a government, it could be to maximize social welfare, or to minimize unemployment, etc. The objective function for a central bank could be to keep inflation below a specified value while maintaining adequate liquidity in the money markets, etc.

The thing about optimization in general is that there are constraints imposed by conflicting interests that define the boundaries of what is possible. In other words, there are choices that have to be made. You can have very little of one thing provided you have a lot of the other. Depending upon how much weight you assign to various constituents of the objective function, the optimization yeilds different results.

I admire the practical wisdom contained in the admonition Good, fast, cheap: choose two. That is an example of a constraint. You can either have good and fast, but it will not be cheap. Or you could choose fast and cheap, but it will not be good. Cheap fast food is not good. Think McDonalds. Food cooked at home is good and cheap but is not fast. Cars: good and fast cars are not cheap. You get the idea.

So now, given a set of constraints, one can optimize one’s objective function and the result pops out.

Back to the government. I believe that the government’s objective is to maximize short-run profits. I will use an example to lend support to that hypothesis. One can in one’s spare time construct hundreds of other examples for one’s edification and amusement (to use a phrase). The example comes from the telecommunications sector.

Which industrial organizational structure maximizes profits? Monopoly. Which maximizes social welfare? A competitive marketplace, in general, subject to some well-understood restrictions such as the absense of externalities, no public goods, etc. What did the government choose for the telecommunications sector? Monopoly. What does a monopoly do maximize its profits? Restrict supply to support high prices and thus realize monopoly rents. What was the outcome of the government monopoly in telecommunications? Years of waiting time to get a telephone connection, shoddy service, prices way above world prices.

It is really very instructive to study the Indian telecommunications sector. How the government milked it for all it was worth when it was the monopoly supplier. Around early 1990s, things began to change slowly. In 1994, a telecom policy was announced. It was flawed to its very core but it was a beginning. The flawed 1994 policy was replaced by an equally flawed 1999 telecom policy. I don’t believe that anyone other than yours truly has read the New Telecom Policy 1999. (In case you have read it, please let me know because I would like to expand the club of people who have read the NTP99.)

Now, your hopes may go up at this point. You start thinking that now at long last the government has become slowly wise and is opening up the sector for private sector investments and now we will have the benefits of a competitive marketplace and now we will enjoy telephone services at prices more aligned with world prices. Your hopes, I am sorry to say, are not justified. For the government did not give up its objective of maximizing profits. It merely decided to extract its monopoly rents in a less direct way. Instead of allowing competition in the market, it decided that it will have competition for the market. That is, will let firms compete against each other to have the license to serve the market. Firms, naturally, would be willing to pay for the license only what they could recover from operating in the marketplace (subject to a reasonable accounting profit). So the government in effect extracted at least a part of monopoly rents from the sector by instituting very high license fees. The firms in turn hope to extract that from the hapless users. Some firms will fail of course in their attempts to do that and this will lead to consolidation. In short, the consumer will be back to paying high prices, firms will have very little left over to expand capacity which would lead to high average costs (telecommunications has low marginal costs) and high prices, and so on.

I think this needs more space and I am running out of space for this column. I will continue this tomorrow.

One in every three people in the world will live in slums within 30 years unless governments control unprecedented urban growth, according to a UN report. The largest study ever made of global urban conditions has found that 940 million people – almost one-sixth of the world’s population – already live in squalid, unhealthy areas, mostly without water, sanitation, public services or legal security.

The report, from the UN human settlements programme, UN-habitat, based in Nairobi, found that urban slums were growing faster than expected, and that the balance of global poverty was shifting rapidly from the countryside to cities.

Africa now has 20% of the world’s slum dwellers and Latin America 14%, but the worst urban conditions are in Asia, where more than 550 million people live in what the UN calls unacceptable conditions.

The emphasis on the word ‘unacceptable’ is mine. The UN in labeling something unacceptable is making a normative statement, not a positive statement. Meaning, the UN is saying that so many people living in slums should be unacceptable. Normative statements arise only in cases where the normative and the positive diverge. That is, when what is is not what should be. Here I argue that the reason that the reason so many people do live in squalid conditions is precisely because it is acceptable by all parties concerned.

Before you reject this seemingly idiotic stance, consider what it means for something to be unacceptable. If I accept something, I clearly cannot find it unacceptable. If I don’t totally and unconditionally reject it and somehow reluctantly accept it, it means that I don’t find it unacceptable. It is not ideal but it is not unacceptable either. If something were truly unacceptable, I would not accept it. So now consider the statement “550 million people living in unacceptable conditions.” They not only find it not unacceptable, but given that their numbers grow, they thrive in there. So slum dwellers find the slums acceptable in the strict sense of the word. So also, the rest of world which does not live in slums finds the existence of slums acceptable as well. If it were not acceptable, then they would have done something about it. There are ample resources in the world which if it were equitabley distributed would have resulted in a different outcome. The fact that this alternative distribution is feasible but not chosen reveals that the world as a whole prefers the unequal distribution. Therefore it is acceptable in the strict sense of the word.

I have just used what is called a revealed preference argument. If you really want to know what the preferences of an economic agent is, just note what they do rather than what they say. I don’t need to ask you whether you prefer tea or coffee at a particular time if I can simply observe you choosing tea over coffee when both were available to you. You would have revealed that you prefer tea over coffee by your choosing tea. The world has a billion people living in slums. The people of the world could choose an alternate state of being in which no one is forced to live in slums. The world chooses the former over the latter and therefore reveals its preference for the current setup.

The point I would like to stress is this: if poverty were truly unacceptable, then it would not exist given the technology and resources at the disposal of the global community. Both the poor and the rich are implied in this global community. The poor tolerate poverty as much as the rich do. I think I can explain why the poor accept poverty. I believe it has something to do with biology. The urge is for survival and therefore we adjust to unimaginably difficult conditions. People in concentration camps survive horrible deprivation. Slums are economic concentration camps. People survive. Life is Hobbesian (nasty, petty, mean, brutal, and short) but sufficiently large numbers survive so as to produce the next generation of slum dwellers. The poor breed poverty.

The rich and the powerful also tolerate poverty. If they did not, they would have mobilized against it and eradicated it. Poverty is not seen as unacceptable the way terrorism is seen as unacceptable. The US moves rapidly to spend hundreds of billions of dollars at real or imagined areas of terrorism. But it does fancy little for eradicating global poverty. A few hundred billion dollars every year would totally eradicate global poverty. But the US does not choose to wage a war against global poverty like it does against global terrorism. The rich are apparently quite comfortable with the idea of poverty. How else would one explain the persistence of poverty?

From the Acorn:

It did not happen when India went overtly nuclear in 1999. It did not happen when India massed forces on the border with Pakistan in response to terrorist attacks in Srinagar and New Delhi. It happened when the loony left exposed its ignorance of modern economics in the form of a monumentally stupid statement which seemed to confirm the markets worst fears. This was the deepest stock market plunge in 129 years! Line up Ketan Parekh, Harshad Mehta and all assorted scamsters of the 199os and all together they still cannot hold a candle to Comrade Bardhan’s achievement.

Yesterday, Shekhar Gupta asked international investors to come to appreciate the fine nuances of the geriatric gentry. Unfortunately, markets are global and they operate round-the-clock. India is just one of several economies competing for investment. If India is not able to signal that its house is in order, the ‘electronic herd’ will move its funds to competing economies in seconds. It is our geriatric gentry which has to wake up to the 21st century; else the 21st century will leave India behind.

From the Indian Express,

Attributing the crash to the spread of uncertainty and lack of confidence, [Jaswant] Singh said: ‘‘If a responsible leader who aspires to join the government makes statement, it will have an effect on market sentiments.’’ On whether FIIs deliberately manipulated the market, Singh said ‘‘I would be extremely cautious in commenting on this issue. We have a healthy market and our economic fundamentals continue to remain strong.’’

Great going, Mr Communists! Aside to Pakistan: Don’t you regret having invested in nukes for destroying India? Who needs nukes if the other side has communists?

I will further argue that it is possible to bootstrap the process of development but only if resources are used efficiently and if problems are solved by addressing causes rather than by alleviating superficial effects.

The point I was making is that energy, credit, and knowledge are the basic ingredients for economic production. Economic production is a pre-requisite for development. Efficient use of the three basic ingredients is important. I had also taken a more generalized view of credit where I considered the stock of capital available to an economy as form of credit. It is intergenerational credit because the present generation can use the capital stock created by the previous generations. The capital stock is represented by the machines, buildings, transportation systems, etc. The source of the capital stock is investment which itself the flip side of a flow of savings. Savings in any period is the difference between production and consumption of that period. Finally, efficient use of savings translates into capital stock via through the investment route.

Does efficiency in the use of savings matter? The chairman of the US Federal Reserve Board Mr Alan Greenspan believes it does. At a conference in Chicago on May 6th, in his speech Globalization and Innovation, Greenspan said:

Although saving is a necessary condition for financing the capital investment required to engender productivity, it is not a sufficient condition. The very high saving rates of the Soviet Union, of China, and of India in earlier decades, often did not foster significant productivity growth in those countries. Saving squandered in financing inefficient technologies does not advance living standards.

Volumes can be written in merely outlining how inefficiently India uses its savings. There has to be a reason for why an economy which has a high savings rate cannot translate those savings into higher production through the intermediate steps of investment, capital stock growth, and higher productivity. One of the primary reasons could be the missing complementary ingredient which is knowledge or know-how. Our savings rate is high but savings are low because our incomes are so low. A poor person with a Rs 1000 income and 20% savings rate will only be able to save Rs 200. Compare that to a rich person with a savings rate of 5% but an income of Rs 10,000, saving Rs 500. Furthermore, the rich person is likely to have better investment advice and therefore be able to mobilize his savings better than the poor person.

In other words, when it comes to savings and what to do with them, we are caught in a classic bind which is exemplified by the lament garibi mein aataa geelaa. I cannot quite translate it accurately but it goes like this: Too much water in the dough has made it unusable; but one is so poor that one cannot afford any more flour to correct the imbalance; thus whatever little one had is also wasted. The caution therefore is that when one is poor, one cannot afford not to be careful about how to use the resources one has. How much water to add to a given amount of flour is a decision taken by policy makers who may or may not be sufficiently knowledgeable about cooking. If at the end of the day, all you have is a lump of useless runny dough, you know that the policy makers have messed up. That is what has happened in the case of India. For decades, absolute morons ruled the country whose idiotic economic policy led to the disaster we see around us today.

The economy is being freed after decades of mismanagement and misrule. But even now, we are definitely not out of the woods. Whether it is telecommunications policy or education policy: the idiots continue to pour too much water in the too little flour we have. I would like to look into the telecommunications policy tomorrow.

Since I am at it, I may as well outline the The Second Law of Liberation: Credit liberates, and absolute credit liberates absolutely. The corollary to that is naturally the conclusion that Microcredit liberates microscopically. The Third Law of Liberation states that knowledge liberates and absolute knowledge liberates absolutely and leads to Enlightenment. Enlightenment is outside the scope of the present discussion since it drags nirvana into the picture and since for now we are stuck in samsara, I will not insist on absolute knowledge; only the relative knowledge which is our lot in our everyday lives.

So there you have it: power, credit, and knowledge are the basic ingredients for the recipe that liberates. The utility of liberation is expressed in the Zeroth Law of Development which is that liberation is a pre-condition for development. Without freedom of thought and action, nothing of value can be accomplished. At its core, development is about freedom — economic, political, religious, … ad infinitum. Casual empiricism bears out that law: where these freedoms are missing, development is absent. If you really insist on it, check out the human development indicies of countries and you would notice that countries that are in economic, political, and religious shackles are not developed.

Now let us discuss the first of the Trinity: Power. (Just for the heck of it, I like to represent it by Shiva, the Mahadeva in the Hindu pantheon.) Power is another word for energy and it is energy that acts on matter to transform it. The reason that energy can do so is simply because matter is condensed energy. The fundamental point to consider is that it was energy that transformed matter into all the stuff that you see around yourself (not to mention the stuff that is yourself.) Everything without exception. I am writing this on a laptop while flying at 33,000 feet in a plane. Everything that I can see around me has been mined from the earth and transformed through thousands of processes involving technology to create machines that would astound us constantly if were not so jaded by their pervasiveness. Inside this laptop, for instance, there is a chip which processes signals. The chip is made of simple stuff — silicon, a few metals including gold, plastic (carbon, hydrogen, nitrogen, oxygen, etc.) — the kind of stuff that you can grab in any handful of earth. What transformed that earth into a chip is energy which powered the machines that embody knowledge as technology. The conclusion therefore is that power, or energy, is what you basically need, and if you have sufficient amounts of power, you can do anything that your heart desires.

Power is the fundamental irreducible basic natural resource and all other resources can be derived using it, albeit indirectly. For instance, using power, you can mine any mineral you need from sea water of which there is a practically inexhaustible supply. You can get fresh water as well from it. All you need is power. So the conclusion is that if you have a shortage of power, all other shortages derive from that. Every poor country is one that does not have access to power and every rich country has access to power. Whether the rich country’s access to power is endogenously determined or not, is a different matter. If one has any doubts about how important power is to countries, one just has to remember that in all the wars that the US fights around the world, energy holds center stage.

Next on our list of librating elements is credit. What do I mean by credit? I mean any capital that is available to one for use without having earned it before using it. This is a broader concept than just the money credit that you can access using credit cards, banks, loan sharks, etc. I am referring to capital that has been accumulated for generations which includes machines, buildings, roads, libraries, technology, and so on. If one thinks about it for a bit, one uses stuff that one has not paid for all the time. The current generation has access to and uses capital that it has not paid for. Therefore it can be said that the current generation is using credit. And the more credit that is available to any entity, the more productive it is going to be. To understand this bit, one has to merely look at the credit available to the population of a rich nation and compare that to that which is available to the people of a poor nation. People are born pretty much with equal capabilities on the average. What distinguishes them later in life is whether they had access to credit or not. A surgeon’s son grows up to a professional, while a peasant’s son grows up to be a manual laborer. On a higher level of aggregation, the people of a technologically advanced country have access to greater credit — more machines and more know-how — and therefore they are more productive.

For a glimpse of where I am going with this, I would like to now outline my argument here:

1. Energy, credit, and knowledge are the basic ingredients for liberation.
2. Liberation is a precondition for development.
3. So if one wishes to bring about development, one has to assure the availability of energy, credit, and knowledge.

I will argue that underdeveloped countries have to struggle so hard to become developed because they are deficient in some or all of the three essential ingredients of liberation. I will further argue that it is possible to bootstrap the process of development but only if resources are used efficiently and if problems are solved by addressing causes rather than by alleviating superficial effects. Finally, I would address the question of the use of information and communications technologies for development. The point that I would discuss is that knowledge is the active agent of transformation. ICT, as the name implies, is technology that is concerned with information, and not knowledge directly. Not keeping the distinction between knowledge and information leads to confused thinking and ultimately immense waste of resources.

{Read the next article in the series Of Liberation and Development-II here.}

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.

John Laxmi epitomizes what Martin Luther King Jr called a “house nigger.” Flogging the field niggers – slaves who work in the fields – mercilessly and mostly for imagined transgressions, the house nigger gets the kitchen scraps and gets to listen in on the conversations of the masters. The house nigger feels that the harder he flogs the field niggers, the more loyalty he demonstrates towards the master.

John Laxmi’s piece is priceless. I stand in awe of the mastery he has displayed in demonstrating that house niggers still exit even though slavery has long been abolished in the US.

Here is just a few lashes of the recent flogging by chief house nigger John Laxmi, for the record:

But, you say, India is not Saudi Arabia or China. India is a democracy. Indians speak English; they eat pizza and wear jeans. Once we get past these superficialities, however, we find that India is not a country we would readily pick as our strategic business partner.

Although India has been coddling up to the West in recent years, Indians have long been inimical to Western ideas, technology, liberal principles and modernity. Allying itself with the Soviet Union, India labeled itself the leader of the so-called nonaligned movement, and habitually hectored the US at the United Nations.

India continues to tolerate large-scale piracy of intellectual property, from books to movies to high technology products.

India is praised for its English-style laws, but the Indian government blatantly reneged on its contract with the largest power plant built by American investors. The Indian government has failed to distribute equitably among its own citizens the large extortive penalty collected from Union Carbide for the Bhopal accident. In the 1970s, India drove IBM and Coke out of the country for refusing to pay political ransom.

If you dismiss all this as irrelevant baggage from India’s past, the current Indian government shows no clear principles either. The leading party in India’s governing NDA coalition is the Bharatiya Janata Party, which rose to power by blatantly exploiting and advocating virulent and fanatical Hindu-first sentiments. The people of India are poised to give this party a larger mandate at national elections scheduled this month.

An attitude to life which seeks fulfillment in the single-minded pursuit of wealth –in short, materialism– does not fit into this world, because it contains within itself no limiting principle, while the environment in which it is placed is strictly limited.
E. F. Schumacher in Small is Beautiful

THE ETHICS OF POLICY

Economist Thomas Schelling defined the ethics of policy ‘as what we try to bring to bear on those issues in which we do not have a personal stake.’ It can be convincingly argued that there are no issues in which we do not have a personal stake. Every action in an interdependent global system has far-reaching consequences. My desire for cheap hamburgers could translate however indirectly to rainforest destruction.

One has to grapple with the notion of social obligations and what we owe to the poor and the disadvantaged who have legitimate claim to the resources that are required for a decent human existence.

THE POLITICS OF POWER

Over the basic subsystem of population, environment and resources, is the supersystem of another triad: the political system, economy, and the technological system. The political system, according to Lester Milbrath of Univ of NY Buffalo, is that its central focus is on power and domination. He writes: “Our civilization is a dominator civilization; that means it is oriented toward allowing some people to subjugate others. We no longer condone outright slavery, but the many forces of domination have the effect of bending the will of weak creatures to serve the desires of the powerful. Power is ingrained in our thinking that most humans believe they have a right, even an obligation, to dominate nature.”

The question of sustainable human activity is a very complex problem which needs to be examined very carefully. The temptation to assign blame should be firmly resisted for it will only be a useless exercise which can only hinder consensus building which is the only way to creating a solution acceptable to all.

A SUSTAINABILITY PARADIGM

Natural ecosystems are models of sustainability and it would be pleasantly ironical that we could learn from a system that we would otherwise in our ignorance destroy. Wider identification with the diversity of life on earth can mitigate against technological hubris implicit in the faith that human technological ingenuity is sufficient to solve all problems.

Natural ecosystems characteristically:

1. Avoid pollution and resource depletion by recycling.
2. Use a renewable source of energy.
3. Maintain stable populations.
4. Maintain biodiversity.

It is important to note that all the above desired characteristics correlate positively. The study of natural ecosystems corresponds to studying healthy systems. The study of ecosystems disrupted by human activity would constitute the pathological side of investigation. Both the study of health and pathology would contribute to the formulation of a computer simulation model. This model can be used to study the evolution of the system under varying circumstances and predictions made which can guide policy.

{To be continued}

In these set of articles, he traverses a wide range of topics and lays out a road map for India’s development. (Disclaimer: I am necessarily biased in favor of his point of view because of two reasons. First, he quotes from my writings. And, second, he is my business partner.)

Also of interest is his series he calls Tutorials on Development. There are four of them, the first of which is here.

If the U.S. had insisted on making all its own cars, watches, TVs, radios, or shoes, resources wouldn’t have been available to channel into creating the jobs of the last 50 years in telecommunications, software, and biotech. People wouldn’t have been available to work in those industries, and the American standard of living would be dramatically lower.

PROTECTED BUT POORER. But what if India gets all the software jobs? I doubt that will happen. I suspect that for most information-technology jobs, Americans will still be more effective than foreign workers. But suppose Indians decided to work for free and give away the software, the ultimate competitive threat. If outsourcing work to low-wage Indians is bad, surely free software from zero-wage Indians is even worse.

Free software would be hard for the U.S. workers in the software industry to compete with. But it would be a boon for America — plenty of U.S. outfits would expand. Having free software would let a lot of new companies come into existence that couldn’t have been profitable before. Programs at no cost would mean lower prices across the board. That would liberate resources to do new things all over the economy. Many of those out-of-work American programmers would find new jobs. The same effect occurs when the software is merely cheaper, rather than free.

The hardship that results from economic change always tempts politicians to limit individuals’ freedom to buy what they want and businesses to hire whom they desire. Such political restraints will make life more secure — but poorer and less dynamic. Ultimately, it will have no effect on the number of jobs in the U.S. but only make the ones that survive pay less.

I think people tend to assume today that the American capitalistic route is the right way to go. I am not so sure. I think we can continue to remain a significantly agricultural country (40% of the population), and I think we should. (Not that we may have a choice on that). That still leaves a mammoth 600 million in manufacturing and services.

What we need to do though is make sure we are 100% literate. Even the BIMARU states. Understand how to continue to attract and retain non-speculative long term FII and other inflows and invest hugely in primary and secondary education. And continue to improve agricultural productivity.

Arun appears to imply that there is a dichotomy between capitalism and agriculture. An economy can be agricultural and the economy could capitalistic, socialistic, or communist. For now, India is an agricultural economy if the criterion is the fraction of its labor force is in agriculture and related activities. The structure of the Indian economy is a hybrid capitalistic-socialistic type. It is not a very good system that we have today if one were to examine what this structure has achieved. Perhaps we have picked up the worst from both systems to arrive at this unhealthy hybrid. Whether American-style capitalism is the right way to go or not will take us too far afield from the question of whether India can continue to have a significant percentage of its labor force in agriculture and still become a developed country.

As I have argued before (see Agriculture and Development), we cannot have large number of people in agriculture and still hope to become a developed country. To reiterate: agriculture alone cannot provide the massive income required to raise the per capita incomes of a billion people. The market for the required amount of agricultural production simply does not exist. The demand for food is fairly inelastic at the relevant level of consumption and it is easy to arrive at a saturation point.

One additional point that we should be careful about is the distinction between the labor force and the population. They are not the same. So saying that 600 million people will be available for services and manufacturing sectors is not correct.

Moving on, Bob Wyman has made a very important observation about the appropriateness of using TV for educating the umpteen millions of Indians who need affordable education. I got my basic education from traditional schools. The education was expensive and it was good. However, for the majority of Indians, this route is not an option because of resource limitations. Here is an excerpt from what Bob wrote:

…something that amazes me about India is how little there is in the way of “educational television” at the same time that I see massive penetration of television itself throughout even the poorest quarters of the cities and country side. It seems to me that an exceptionally cost effective program could be created to present 24/7 constantly streaming educational television on one or more channels. There is undoubtedly much content already available in India and much more can be obtained from foreign sources. (although much of it would be in English).

Such a service could be run for little more than the cost of a tape machine at the head-end and someone to swap tapes every half hour or so… Most of the content should be available free already. There *are* spare channels available on at least the Indian cable TV services so you don’t even have to go to the expense of transmitters to reach the city based populations. (Note: Before you complain that cable is expensive and won’t reach the people who need it, remember that even in the worst slums of India, cable TV is common either because people are pirating the hookups or because they’ve gotten them as “gifts” during election campaigns… Sometimes corruption can be useful…)

You can’t get a larger non-agricultural workforce without getting a more educated workforce. Exploit TV and Cable TV for something other than access to old Bollywood movies and MTV broadcasts… There is no more effective and efficient way to deliver learning and skills to the millions who crave a better chance.

Great points. Much of what I know, I learnt from TV myself. I had the great fortune of having lived in the US for a couple of decades and made great use of public TV and radio. The Public Broadcasting System (PBS) is one of the greatest sources of quality TV. Then there is public radio such as NPR (National Public Radio), MPR (Minnesota Public Radio), AR (Alternative Radio), and so on. These radio sources carry programs such as “Press Club” and “Commonwealth Club” speeches, “Fresh Air” (one of the greatest living interviewers Terry Gross is the host), and on and on.

Thus, not just TV, radio can be one of the most accessible tools for delivering education to the masses. In this regard, for India, the constraint is not resources but a lack of enlightened leadership, of imagination, of political will, of empathy and compassion.

Outsourcing is good for India – but it will only provide a few million jobs at best. What’s also needed is for Indians to come up with innovations to raise the incomes of the rest of India – the 700 million in rural India. Only then will India will start to make the transition from an agricultural economy.

I agree that outsourcing is of limited value to the vast majority of Indians who cannot participate in it for obvious reasons. I also agree with Rajesh about the need for the transition from an agricultural economy. One reader, Nitin, commented on Rajesh’s blog and said:

I do not think moving away from an agricultural economy is necessary for economic development. With the huge natural & human resources agriculture gives India a comparative advantage. …

Though Nitin’s entire comment is worth commenting on, I will restrict myself to only the above for now. What does “moving away from an agricultural economy” mean? If by ‘agricultural economy’ one means an economy that is mainly agricultural, then clearly India’s being an agricultural economy is problematic. The reason is that India is a very large country population wise, compared to a country such as New Zealand. NZ can be an agricultural country and yet be developed because its production and consequent exports are sufficient to earn it a decent national income. India cannot be a developed nation and continue to be agricultural because it can never earn enough from agricultural exports to make a decent living. To illustrate this point, let’s do some arithmetic.

Let us assume that for a country to be developed, its per capita income must be $10,000 per year. Currently, India’s per capita annual income is about 5% of that, or about a 20th of the income required to be a developed nation. Our agricultural production accounts for about a quarter of our GDP. So for agriculture alone to raise India’s GDP to that of a developed country level, Indian agricultural production will have to increase 80-fold at least. Now of this 80-fold increase, we can only consume perhaps twice as much food as we currently produce and consume. So the rest of the humongous output will have to be exported. If one tries to export even a 10th of that amount, the world prices will crash close enough to zero that it will not be worth even picking the produce from the fields.

This is not the case with NZ because a couple of million people have to export only so much to get a decent income. Their exports do not affect their terms of trade so adversely that they become impoverished. A 1,000 million people who wish to depend solely on their agricultural incomes to become developed cannot ever hope to do so because there is a limit to how much food humans can consume.

For India to develop, there is no way other than moving away from agriculture. By that I don’t mean that we give up agriculture or reduce our production. I only mean that instead of 66 percent of our labor force being in agriculture, we have to steadily reduce that to something like 10 or 20 percent at most in the medium term, and to single digit percentages in the long term. When labor does make that transition, then the released labor has to be absorbed in manufacturing and services sectors. This is a natural progression, come to think of it.

Natural because first we need food. Then we need non-food stuff such as clothes and shelter and vehicles and roads and books and computers and shoes and ships and sealing wax etc. All that stuff has to be manufactured. Once we have food and manufactured stuff, we need services such as education and dentistry and dancing and musicals and movies and psychiatry and what nots. This entire edifice is built upon the agricultural sector because without it producing food, no manufacturing nor services would occur. Of course, if we got super good in manufacturing, we could export that and buy food. Or if we got super good in services (BPO or what have you), we could export that and buy food and manufactures. The trouble is that India has a very huge population. And therefore if we ever specialize (that is, do only one thing), then we would be forced to produce in such great quantities to export the stuff that the world price of that (food, manufactures, services) will crash and we will not be able to survive.

The bottom line is this: A large economy has to be largely self-sufficient. It has to produce food, manufactures, and services domestically and it has to consume most of what it produces domestically as well. Only small economies can afford to specialize and survive through trade.

Coming to that bit of Nitin’s comment about India’s huge natural and human resources. Yes, India has huge natural resources. Unfortunately, India has huge population as well. So with around 2 percent of the world’s land area and 17 percent of the world’s population, the natural resource base does not seem all that rosy. Couple that with the fact that India does not have sufficient fossil fuel resources (we import a lot of that stuff) and one is not all that sanguine about India’s natural resources. How about human resources then? The story there is also not that pretty. We do have a thousand million people. But they are mostly illiterate. Literacy is a basic prerequisite for any sort of human capital. Illiterate people can at best be engaged in subsistence farming, not working on rocket science or cardiac surgery or even BPO.

So then, do we have comparative advantage in agriculture? Perhaps we do or perhaps we don’t. The problem with comparative advantage (as opposed to absolute advantage) is that it is not always entirely clear whether one has comparative advantage because one is good at something or whether it is due to the fact that one is not good at it but one is worse in everything else one does. For instance, I may have a comparative advantage in ballet dancing and yet really suck at it. My comparative advantage in ballet dancing could arise from the fact that I did everything else even worse than I performed ballets.

Now Rajesh wrote that one has to come up with some sort of innovation to raise the incomes of the 700 million rural people. I don’t really think that we need any ‘innovation’. The only way to increase incomes is the old-fashioned way as my grandfather used to say: by producing stuff. Income, just to remind ourselves, is just another word for production. We produce a lot of stuff, so we get to have lots of stuff and that is what it means to have a high income. Therefore for rural incomes to rise, rural production has to rise. Agricultural productivity has to increase (and perhaps some increase in agricultural production as well) of course and then the labor released from agriculture has to produce manufactured stuff and then move on to producing services.

There is very little by way of innovation that is required for rural incomes to increase, looked upon that way. But there may be innovations required for getting the productivity to increase. For instance, for raising human capital (a precondition for raising productivity), we may need innovative solutions to India’s literacy and education problems. For educating India’s umpteen millions of youth, we may need to use modern technology innovatively. Perhaps we can use the information and communications technologies to impart quality education efficiently.

Well, that is all for now from Saratoga California. Be well, do good work, and keep in touch.

{Continue reading Part 2 of Agriculture and Development.}

Washington also sees India becoming a big buyer of U.S.-made arms. In the past two years, India has purchased roughly $200 million of American arms and is in negotiations to purchase P3 Orion maritime-patrol aircraft from the U.S. The deal, valued at about $1 billion, could be the biggest arms deal ever between the two nations.

There you have it. The rich sell arms to the poor and the poor pay for it through the blood, sweat, and tears of its starving millions. To be sure, it is not the starving millions who are interested in fighting the poor of the neighboring countries. These millions of poor unfortunates are merely the slave labor that supply through their toil goods that the rich buy in exchange for the arms they ship to the armies of the poor nations.

It is interesting to ask who exactly wants war. Speaking personally, I am against aggression and don’t wish to be the victim nor the perpetrator of aggression. I also believe that the vast majority of people would happily live and let live. So how does it happen that nations arm themselves to the teeth and more often than not beggar their neighbors and themselves in doing so.

I believe it is so because nations are not monolithic entities. People have different stations in a country. The generals who wage wars and the politicians who direct the ship of state do not have to pay for the wars themselves. The poor have to die on the battle fields and those who are not paid to die, starve on the streets so that their meager production can be shipped out to pay for the weapons of mass destruction that the leaders of the nation buy for their own amusement.

The leaders who make the decisions do not feel the pain that the ordinary citizen feels. The leaders are shielded from the effects of their own folly. And so it goes. Now in the Indian subcontinent we have two desperately poor heavily armed hugely overpopulated countries. In time to come it would be hard for people to imagine what was the reason behind this sort of stockpiling of nuclear weapons by such impoverished people. I think that it ceases to be a puzzle when one considers that those who do the stockpiling of nuclear weapons and those who are poor constitute entirely disjoint sets.

The unfortunate thing is that as weapons become more sophisticated and hence more expensive, the poorer the poor of the poor countries become. And at the same time, and understandably so, the rich of the rich nations and the rich of the poor nations become wealthier.

Look carefully at the military-industrial complex of a rich nation such as the US. General Dynamics GD (or some such company which makes, say, figher jets) invests a couple of billion dollars to build F15s (Note: all names are made up.) Let’s say that F15s are the last word in the world of fighter planes. So the US military buys 200 of these killing machines for $50 million a pop. So will GD now have to retire their assembly line and stop making a killing? Not really likely. so they sell a few hundred of these to the allies of the US. Now will they stop? Not bloody likely.

Here is what they do. Now that they are done with selling to the US military and to the militaries of friendly countries, they tell the US government, “Look, everyone has F15s. We need F16s if we have to maintain air superiority.” So they start working on developing the next generation. So the US now has F16s, which are better than the F15s. What about selling the F15s to those third world countries that keep fighting amongst themselves? Sweet deal.

Enter India and Pakistan. India buys F15s from the US or its equivalent from say the French; Pakistan goes for the other. So now both India and Pakistan are forced to keep up with the expensive sophisticated weapons that the US and other weapon manufacturing states create, only one generation behind. The weapons manufacturers in the rich countries systematically upgrade their technology and create even more lethal weapons which cost unimaginable amounts. Poor third world overpopulated impoverished nations around the world — who cannot afford to feed their starving millions — buy weapons of mass destruction from rich nations who can afford to replace their weapon systems as frequently as a rich man replaces his cars.

The poor overpopulated misgoverned third rate countries follow the simple policy of beggar-thy-neighbor and end up achieving destitution all round. India and Pakistan are prime example of this. Within India, Pakistan and Bangladesh, nearly a billion highly impoverished malnourished illiterate people scratch out a Hobbesian existence. Yet, these countries spend billions in acquiring ever more sophisticated arms from abroad. The sheer insanity of this is so incomprehensible that it is surreal. Consider this report from The Times of India of Jan 21st, 2004: Gorshkov is launch pad for nuke deal

… while India’s $1.5 billion purchase of the Gorshkov [an aircraft carrier] from Russia may seem like a big deal, the fact is it’s just a sweetener for the main course. On the anvil: a major beefing up of India’s nuclear delivery capability, with Russia likely to lease at least two nuclear submarines and several N-capable bombers to India.

I will spare you the rest of this front-page article. It is dismal reading for anyone who is even remotely aware of the hunger and deprivation of the people of this region of the world.

Can you imagine how much human suffering can be avoided by merely spending a few billion dollars in say bringing pure drinking water, schools for all children, food for the malnourished kids, contraceptive services for women, and so on …?

These are the weapons of mass destruction — these weapons destroy whether they are actually used in conflict or not. Merely buying them condemns hundreds of millions to lives of such misery that one wonders whether it would not be better for the weapons to be used so as to put an end to the misery.

Is there a way out? I think that the leaders of impoverished countries should be required to feel the pain that the poor routinely feel. I think that anyone who wishes to be a leader has to spend a month every year living the life of an average person in the bottom decile of the population. For instance, they should have no access to clean drinking water for that month, have no heating or airconditioning, no toilets, inadequate food, have to live in filth, and no medical services. Clearly these worthies lack imagination and so they should have to live the life for just one month every year that they wish to be leaders of poor overpopulated impoverished countries.

Perhaps then, maybe then, they would be not so gung-ho about buying nuclear aircraft carriers and submarines.

The house that I lived in is called Cloyne Court. It used to be a hotel and is even listed as a national historical monument. Cloyne Court housed about 150 students in about 80 single-, double-, and triple-occupancy rooms.

All household tasks such as cooking, cleaning, washing, and maintenance was done by the residents. In addition to our rent, we had to do five hours of ‘workshift’ every week. Like all other houses of the USCA, Cloyne Court had one common kitchen and one dinning hall for the 150 residents. Food was stocked in a huge pantry and in a walk-in freezer the size of a small apartment.

Under the best of circumstances, cooking is not an easy job. But for college students who can barely cook for themselves, the task of cooking for 150 people is well-near impossible. So dinner time was a real challenge. Around 6 pm, the dining hall would be crowded with students waiting for the food to show up from the kitchen.

The word may go around that there wasn’t much food that got cooked on some day. Perhaps the cooks weren’t very good and burnt half the stuff. Suddenly, there would be rush for the food as it was being brought out. All pretense of waiting for your turn would be dropped and pushing and shoving to get at the food would be so violent that half the food would end up on the floor.

If you were not quick, you were dead. If not dead, at least you’d have to order pizza to avoid starving.

During my one year at Cloyne Court, I learnt more economics than I could have imagined. I saw the tragedy of the commons revealed in all its stark reality. I understood why the Soviet Union collapsed. I learnt the common property problem and the problem of free-ridership.

I moved to a smaller house the next year. It was called the Convent because it used to be one before the USCA bought it. The Convent had 20 people and was restricted to graduate students. It was pretty well organized. Those who volunteered to cook were really into cooking. For 20 people, it was easy to cook enough that there was little chance of food running out. We all sat very calmly at the table while the food was passed around very politely. We had intelligent stimulating conversation at dinner. We had self-imposed rules: not taking any more than what we could eat, and cleaning up after ourselves.

The contrast between Cloyne Court and the Convent was stark and revealing.

War is a judgement that overtakes societies when they have been living upon ideas that conflict too violently with the laws governing the universe…Never think that wars are irrational catastrophes: they happen when wrong ways of thinking and living bring about intolerable situations.

It is important to understand the nature of war — that it is a rational response to intolerable situations which have been brought about by wrong ways of thinking and living. Please bear with me for dwelling on that quote.

Wrong ways of thinking and living are the cause of intolerable situations, and the natural response is war. So if we wish to avoid war, we have to change the way we live and the way we think.

We are not talking about war here. We are primarily interested in development of economies. To understand development, we have to ask what prevents development from occuring spontaneously. Let’s call that the prime hurdle. Then we have to investigate further to determine what in our behavior creates that prime hurdle. Let’s call that the prime dysfunctional behavior. Finally, we need to understand the fault in our thinking which leads us to the dysfunctional behavior. Let’s call that the prime irrationality.

So at the root of it all — whether it is wars or poverty — I argue that there is irrationality. If we are dissatisfied with something and we wish to change that, we need to understand the thinking and find out what is wrong with that thinking and why. This is important because it is the most efficient way of solving the problem — going to the root and addressing the root.

One will have to wake up pretty early in the morning if one had to tackle a problem by painfully addressing each of its symptoms. Instead one could efficiently solve the problem by obliterating the root cause and be done with it.

Let’s go back yet again to Sayers: War is a judgement that overtakes societies when they have been living upon ideas that conflict too violently with the laws governing the universe. One cannot but come to grief if disregards reality for a sufficently long time. Underdevelopment, and its child — poverty — are the result of a prolonged disregard for the laws governing the universe. What we see around us are the children of poverty — the grandchildren of underdevelopment — hatred, ignorance, illiteracy, malnutrition, disease, and so on.

On Tuesday I wrote about the evils fairly common in rural areas. People treat other people (the concept of the ‘other’ changes with the context) with such inhumanity that one is left speechless. My belief is that behavior is a rational response to an intolerable situation. If one wishes to see an end to that sort of thing, one has to change the situation. To change the situation, we need to understand what causes it.

The RDLC could do for rural India what the institution of Land Grant Colleges and Universities, the Morrill Act of 1862, did for rural US. (Incidentally the act was signed by my favorite American president — Lincoln.) The act donated public lands to the states to provide colleges for the benefit of rural US.

The idea was to remove education from being the sole preserve of the privileged and fortunate elite and ‘democratize’ it by bringing it to the children of farmers, mechanics, and laborers. The goal was the application of knowledge to issues relevant to farms, households, and factories. (I am an alumnus of the University of California system which is also a land-grant school, incidentally.)

Thus the land-grant universities were formed with the charter to teach, conduct agricultural research, and most importantly to provide extension services. The sons and daughters of rural America had access to education. Though it was initially thought that the kids would go back to the farm, farm productivity increases precluded that. But that was no tragedy: the urbanization of America was achieved by these educated sons and daughters of rural US — they provided the human resource needed for the US to move from an agrarian society to an industrial society.

Now consider the Indian situation. The urbanization of India is not taking place because the rural population does not have access to education. Thus when forced to move, they migrate to urban India to be employed at menial jobs and live in mega slums. This has got to change if India is to develop. No amount of BPO and ITES is going to cut it: the only hope is to educate the rural population and do so efficiently and with no loss of time. IT has the potential to do just that: bring education to the hundreds of millions in rural India.

The story was about panchayats in rural India, specifically about women being ‘fined, humiliated, and sold to the highest bidder.’ It is chilling reading and here are some lines from that article.

… Devaki Bai, 30, had been sold to another man for Rs 5,000 … Women were auctioned during Panchganga, a panchayat held to hear matters of dispute … Women were asked to lower their saris and stand with stones on their heads.

… Young Basanta was sold for Rs 8,000. … More than 20 women were brought to the Panchganga to settle disputes and to be auctioned. Those with no bidders were slapped with a fine and made to stand for six hours with a huge stone on their heads.

Sushila was sold … for Rs 7,000. Basanta did not want to go back to her husband… Her father was fined Rs 10,000 and then she was put on sale.

… her head was uncovered and her sari lowered suggestively by the Panchganga members. … Basanta said police were present at the auction.

Basanta was sold for Rs 8,000 and when she objected she was made to hold up one hand and stand on one leg. She was left to starve while others feasted…

“The money collected as fine and sale of women was used for the feast and allied expenses of Panchganga,” said tahsildar Jayant Joshi. …

Warms the cockles of your heart, doesn’t it, reading about the wonderful warm honest upright citizens of rural India? I was reminded of another article that I had come across last year. It was by Amrit Dhillon, a British citizen based in Delhi who wrote an article titled “Malicious, Petty and Unimaginably Cruel” which I include in the extended entry to this post.

What are we to make of this? Panchayat raj was to be the bedrock upon which India’s democracy was to be grounded according to Gandhi. I am sure that he did know rural India. Did he know that rural India was stupifyingly superstitious, ignorant, uneducated, poor and petty-minded, misogynistic, and myopic? Those aren’t the best grounds upon which the tree of democracy can flower, are they?

There is a lesson here for the cautious. But first I include the article by Dhillon below. Read and weep for the poor unfortunates, mostly women, who have to endure panchayat democracy of rural India.

Malicious, Petty and Unimaginably Cruel

It sounds idyllic. Village councils. Grassroots democracy. The words evoke a pastoral vision: handsome men with impressive handlebar moustaches wearing smocks and turbans surrounded by country belles in richly coloured saris, all seated under the shade of an ancient banyan tree. Bells tinkle as cows amble home after grazing, a pleasing smokiness from wood fires being lit for cooking the evening meal fills the air, and the sun sets on the flaming-yellow mustard fields as the village meets to discuss important matters in tones of sweet reasonableness.

What could be better? This is direct democracy at work. Power where it should be: on the ground, in the hands of men and women so that they can determine their destiny rather than having it determined for them in faraway Delhi. But hey, what’s that strange fruit hanging from the eucalyptus tree near the pond? A bunch of oversized papayas? A tangled mass of coconuts? Why, it’s the rotting corpse of a young woman, strung up by the village council for daring to defy convention by wanting to marry — quel horreur — a man of her own choice who also happens to be — quelle honte — from a different caste.

Every other week stories emerge from the interior of the Indian countryside of village councils, known as panchayats, handing out gruesome judgments on anyone whose behaviour diverges from mediaeval conventions. Most panchayat members are pig-ignorant peasants; men whose minds are darker than the bottom of the village well and replete with feudal beliefs that haven’t been re-examined for centuries. These are men who believe their honour resides not in their own exemplary conduct but in their wife’s crotch; that women should walk a few paces behind a man, display the obedience of a bullock even if beaten, and never challenge the status quo.

The same yardstick applies to the lower castes. If they get ‘uppity’, hell hath no fury like an upper-caste Hindu villager who believes that it is an immutable law of nature for the lower castes to be treated as less than human. A low-caste woman in south India who moved to a town, got herself an education and then became a social worker, returned to her village one day to see her folks. The high-caste members of the panchayat, incensed that she was wearing shoes, threw chilli powder in her eyes, thrashed her for impertinence with — a nice touch — her own shoes, and threw her out.

The only thing wrong with village democracy is the village. The only idyllic thing about an Indian village is the landscape. The villagers themselves are usually barbarous misogynists. Give them power and this is what you get:

• A young woman bludgeoned to death on the orders of a panchayat because the village concocted stories about her having an affair and giving birth to an illegitimate child.
• Two teenagers dragged into a shack, hacked to death and burnt by their families with the enthusiastic approval of the panchayat because the boy was a Brahmin and his inamorata belonged to a lower caste.
• A married woman, accused of sexual misconduct, is given the choice by the village council of being fined, or raped by five men. The woman, a teacher, told a television news channel that schoolchildren had been forced to say that she was guilty of illicit sexual relations.
• A couple stoned to death for wanting to marry. They belonged to different castes but their families had no objection. The village council disagreed. The families were also driven out for being so ‘liberal’.
• A young girl denounced for “immorality” and accused of being pregnant is told to leave her home along with her family. The large belly turns out to be a tumour, but the village council refuses to allow her or her family back.

The more humane punishments for anyone who dares to be different involve humiliation such as being paraded naked in public or having one’s head shaved. A woman was dragged naked through the streets with bells tied around her neck and her face blackened with shoe polish. A man was paraded naked on a donkey with a garland of shoes around his neck and a bell around the donkey’s neck so that people would hear and come running out to join the fun.

Welcome to village India. Only metropolitan liberals with a preposterously romantic view of rural life could imagine these villages as being Arcadian. It was presumably such naive notions that inspired India’s ruling elite to establish panchayats all over the country in the years after independence so that local communities could govern their own affairs. Spend just five minutes in a village and you will know that you’ve stepped into an eddy of intrigue, cunning, malice, pettiness and unimaginable cruelty.

My father, who grew up in a Punjab village, remembers to this day the envy that corroded the souls of his neighbours when my mother began using soap detergent for the laundry in the early 1930s instead of the traditional plant that was used for lathering clothes. The local crones would walk past my mother’s kitchen, glancing spitefully at the foam in the gutter. ‘How can she afford it when we can’t?’ Villages are heartless places populated by heartless people who never do any heart-searching. The atmosphere is polluted by bigotry, because in villages no belief or custom is ever doubted, much less re-examined.

Add to this poisonous brew a high level of ignorance, illiteracy and irrationality and you’ve got yourself a rollicking dystopia. This is not to say that only those acquainted with John Stuart Mill should exercise power, but how can it be a good idea to give absolute power to men who use it to enforce cruel, ignorant and intolerant attitudes?

The strangest anomalies arise from superimposing power on a bedrock of ignorant minds. Apart from anything else, the verdicts of panchayats on unconventional social behaviour contradict Indian laws. A court in Rajasthan, for example, ruled recently that an illegitimate child should enjoy the same inheritance rights as the child born in wedlock. Try telling that to a panchayat itching to lynch anyone who feels amorous outside marriage.

Earlier this month, India’s supreme court decreed that any Hindu well-versed in the scriptures could become a priest in a temple, not just Brahmins. Try getting high-caste villagers to follow the ruling when they won’t even let the low castes set foot inside a temple or go near the village pond for fear of ‘contamination’.

You see, it’s one thing when India’s uneducated masses vote in a general election. This is people power, but via the ballot box: it is diffuse, operates at many removes and ultimately ends up being exercised by MPs, who themselves are hemmed in by laws, party policies, restraints and rules.

But it’s another thing altogether when you give power to a panchayat. It’s direct, naked, immediate power; a bit like walking into Sainsbury’s for the weekly shop and finding your neighbours arrayed in front of the poultry section, waiting to judge you for flirting with your rather nice married neighbour. If found guilty, they drag you into the stock room and push your teeth down your throat. No mediation here, no dilution, no appeals, no layers of bureaucracy or procedures to soften the encounter between victim and assailant.

Giving power to panchayats is a disaster. As it is, the lack of privacy in a village is scary. Your buffalo is constipated? People know. Possess only three pairs of undies? They know. In debt? They know. In this context, to push the private into the public domain is to invite tyranny because villagers in India are clueless about notions of individual freedom, tolerance, the right to dissent, or even the basic concept of the separation of public and private. Bottom-up democracy is an appalling idea: it caters to the lowest common denominator, and in some villages it’s so low that it’s underground.

This is not to say that all village councils should be abolished. By all means, let them decide if the sewers need repairing, when to fix the leaking school roof and the most desirable spot for storing cow dung. Just keep them out of anything personal and private. In matters of the heart, distant rule by an indifferent and uncaring Delhi is just fine.

Amrit Dhillon is a British Asian currently based in New Delhi.

Do I dare
Disturb the universe?

The Law of Unintended Consequences is pretty well known, I suppose. It is part of a more general law which I call the Zeroth Law of Ecology which says that you can never really do only one thing. That is, you want to do only A and instead you find that you have also done B and C, both of which you had no inclination to do. This is because the universe is complex and all its parts are interlinked and so when you do something to one bit of the universe, you end up disturbing the whole universe.

There must be many reasons why we cannot see all the connections. There may be ignorance, willful or otherwise, for instance. Or it could be that we are not omniscient. But, I believe, it is mostly due to what is called our bounded rationality, that is we are not clever enough to think through all the complexities of the universe.

I find paradoxical stuff fascinating. A paradox is puzzling only as long as you have not figured out the full story. Counter-intuitive stuff also give me thrills. Take, for instance, the observation that many people who win lotteries end up being not lucky after all. A good many of these lucky winners end up broke and sometimes worse off than they were before they got the windfall. It is like a winner’s curse with vengeance.

These unlucky lottery winners seem to be having a sort of their own personal DUTCH DISEASE. What is the Dutch disease and how can I avoid catching it? you ask. I will tell you. Here is what I found on the web (I have lost the link, unfortunately):

In 1959 a large reservoir of natural gas was discovered in the Netherlands, which by 1976 earned that country revenues of some $2 billion in addition to an estimated $3.5 billion of savings in imports. By the mid 1970s, gross corporate investment had fallen by 15% since the start of the decade, while employment in manufacturing had declined by 16%. The total level of unemployment had risen from a modest 1.1% to 5.1%, while the share of profits in national income which had averaged 16.8% in the 1960s had fallen to 3.5% in the first half of the 1970s. While the first oil crisis had a devastating effect on most of the western industrial base, why did The Netherlands, with its new-found fortune in natural gas, fare worse than most?

This process of de-industrialisation of the existing manufacturing base was attributed to the upward pressure that the energy discovery placed on the Guilder and the wage rate, and was dubbed the Dutch Disease. Since then, the term’s use has widened considerably to encompass any situation whereby a country’s apparent good economic fortune ultimately proves to have a net detrimental effect.

So where am I going with all this, you ask. Is there a Dutch disease lurking in India’s future? That question has been bothering me. Here is what I mean. I will present only the outlines of my concern and if there is sufficient interest, I will expand on the issue.

India is a two-sector economy: the urban educated sector and the rural uneducated sector. The latter forms the base of the huge pyramid and toils away at a subsistence existence. The urban sector is seeing a boom what with BPO and ITES and all sorts of stuff. Policy makers, politicians, journalists, management gurus, TV reporters, and everyone and his brother are totally wrapped up in this incredible phenomenon. India, they all scream, has arrived. Having convinced themselves of that, they focus entirely on that part of the urban sector that is involved in the boom. This leads to a shocking neglect of the larger rural sector. Then when the boom runs out of steam, the country is worse off than what it would have been without the boom at all.

This is Dr. Atanu “Dooms” Dey signing off for now.

Liberalization

After independence, even under the growth-retarding effects of Nehruvian socialism and central planning, India’s performance improved. In a study of cross-country growth experience of 85 countries from 1960 to 1992, India’s performance is almost precisely average. This is poor in relation to the potential that India has given the degree of human, institutional, and natural capital at its command. Economists such as Jagdish Bhagwati have attributed that failure to the “nearly three decades of illiberal and autarkic policies” before the reforms of the early 1990s.

It is easy to see the effect of the mid 1980s change in the dominant ideology of economic development from state intervention to decentralized economic liberalization. Before 1990, the economy had a productivity doubling time of fifty years and the expected time to reach America’s current GDP per capita was 250 years. With the post 1990 growth rates, India’s doubling time is only 16 years and only 66 years for reaching the current US per capita GDP.

Indian Growth Miracle

Some observers have called the change from an inward-looking autarkic economy to an open, market-driven one since 1990 as the Indian Growth Miracle. The neo-liberal economic reforms propelled India to become one of the fastest-growing economies in the world. Yet India should have been one of the fastest growing economies in the decades before 1990, and not just in the post 1990 period. It did not because its planners chose to insulate the economy from the global economy. That conferred some benefits in terms of shielding India from external shocks, but it paid a very high price in terms of foregone growth.

A more serious concern is regarding the slowing down of India’s growth after reaching a peak of 7.8% in 1996-97. As T.N. Srinivasan points out, since 1997, the growth rate fluctuated between 4.8% and 6.6%. He writes that “the constraints on achieving a more rapid growth are mostly self-inflicted domestic ones, largely of political economy.” The Economist in an informative survey of the Indian economy referred to “India’s boundless potential” and compared India to a caged tiger. Amartya Sen believes that “the cage that keeps the Indian economy so well tamed is not only that of bureaucracy and governmental over-activity, but also that of illiteracy, undernourishment, ill health, and social inequalities, and their causal antecedents: governmental neglect and public apathy.”

The growth rates mentioned above are averages and conceal within them a more disturbing fact that must be addressed to better understand the causes of India’s poor performance and subsequently frame the correct response to the problem.

Actions recommended and taken on the basis of pious hopes are par for the course. Let’s be nice and in turn they too will be nice, that is the pious hope. Let’s take a bus yatra and shake hands and recite some neighborly poetry and they too will respond in kind. Yeah, really. Never mind the fact that a thousand of our miserably equipped soldiers had to die at Kargil.

Let’s have a rail link for people to people contact. Never mind that it also gets terrorists in by the trainloads. And not just terrorists, it also makes it easier to transport the truckloads of fake Indian currency from there.

Common currency? Surely, it already exists: Pakistan prints them already and ships them to India without any prompting.

Pious hopes. Deja vu all over again. Panchasheel and Chacha Nehru and the Chini-Hindi Bhai Bhai. Next thing you know scores of thousands of poorly equipped Indian soldiers are being slaughtered by the Chinese.

The problem is that the leaders don’t have to pay for their folly: only the poor soldiers die in the frozen wastes of the Himalayas.

Forward he cried from the rear
And the front rank died
The generals sat and the lines on the map
Moved from side to side

So sang Pink Floyd. The politicians and netas make the decisions that doom the foot soldiers. And not just them, the costly weapons that the country has to constantly buy condemns millions to a miserable existence.

Cognitive dissonance.

That is what I believe is the primary cause of all this craziness. Disconnect with reality. Not being totally clued in to the real nature of the world, interventions are suggested based on some idealized rosy view of the world.

It is a second best world out there. There are multipledistortions and divides. In such a world, attempting partial solutions can often transfer one from the frying pan into the fire.

Let me save you from drowning, said the monkey to the fish, as he put the fish up on a tree. Good intentions are not sufficient for achieving any utopian vision. More often than not, good intentions without a correspondence with reality, pave a path to hell.

Time for a reality check. Pakistan is precariously close to lobbing nukes at India. At the drop of a hat, there is talk of 1000-year jehads against infidel India. And in this salubrious enviroment, common currencies are being proposed.

Deva! Deva!

Let’s step back a bit and look at an economy from a macro viewpoint. Economies are usually subdivided into three sectors: agricultural, manufacturing, and services. At the earliest stages of an economy’s development, agriculture is the dominant sector. It is low productivity initially and therefore low wages prevail. Since most of the population is engaged in low wage agriculture, income inequality is low.

Then manufacturing starts to grow, which is high productivity relative to agriculture. Manufacturing wages are therefore high relative to agricultural wages. Income inequality grows in the economy. The mechanism for this income inequality was first explained by Kuznets in 1955 in his paper Economic growth and income inequality. Here is an introduction to the paper from a World Bank site:

The process of industrialization engenders increasing income inequality as the labor force shifts from low-income agriculture to the high income sectors. On more advanced levels of development inequality starts decreasing and industrialized countries are again characterized by low inequality due to the smaller weight of agriculture in production (and income generation).

In other words, there is an “inverted-U” relationship between income inequality and per capita income. At the two extremes of very low and very high per capita incomes, income inequality is low; at intermediate per capita incomes, income inequality peaks.

There is a fractal nature to this “inverted-U” phenomenon in that this relationship holds at different scales of organization. It is definitely true for the rural and urban regions of an economy. The income inequality exists not just at level of an economy, it exists at the global level as well. Early on in the history of the world economy, various parts of the globe had similar income levels, since all were pretty much in subsistence agriculture. Then, as some regions industrialized before others, income inequality grew. In some future time, all regions will become industrialized and once again income inequality will fall. So also, urban regions of a country will initially have higher incomes relative to rural regions. But in time, rural areas will become urbanized and income inequality will fall.

In the long run, income inequality will eventually decrease to zero. But, as John Maynard Keynes observed, in the long run we are all dead. What I understand from that is that the ‘long run’ is really very uninteresting. Interesting things happen in the short- and medium-run time frames. And that’s where we are today — in the intermediate stages where income inequality is high in the global arena.

I will not go into the reason for the differential emergence of industrialization in some regions of the globe. For now, I will take that as a given and thus also take as given the income inequality. It is interesting to ask what accounts for the maintenance of that inequality. Primarily it is the cost of population migration from low income regions to high income regions. By ‘cost’ we mean barriers both natural such as distance, and man-made such as laws against migration. The natural barriers can be lumped together as ‘transportation costs.’ With technological advances, transportation costs come down. However, man-made barriers continue to exist and therefore labor migration is still not possible.

However, since transportation costs have come down, it makes possible what I would call virtual labor migration which is achieved through trade between the various regions. Virtual migration takes place because labor is embodied in the goods that are traded. A Chinese laborer virtually migrates when the goods produced in China are sold in the US. This virtual migration of labor is a factor that puts pressure on wages so as to equalize them across the two regions. To use a mechanical analogy, if the income levels in the two regions were seen as two containers with different levels of liquid in them, then the lowering of transportation costs can be seen as a pipe connecting the two containers: the pipe allows equalization of the fluid levels.

The trade in goods is just a way for labor in the manufacturing and agricultural sectors of low income countries to be available to high income countries. What about the services sector? Services are categorised as tradeable and non-tradeables. In the latter category is included services such as haircuts and house-cleaning and transportation: the production and consumption of which is local. For these, transportation costs are so high that they can almost never be ‘traded’: the cost of haircut in NY is $20 but the cost of a trip to Mumbai is $1000 where a haircut is only $1. Unless transportation costs (and times) come down to $5 (and half hour), haircuts will continue to retain their price differentials.

For those services whose transportation costs have dramatically reduced, trade becomes possible. With the advances in information and communications technologies (ICT), certain services have become tradeable and thus the phenomenon of business process outsourcing. Income inequality between regions is what drives the BPO phenomenon and one can no more wish away the BPO phenomenon than wish away the income inequality underlying it.

Just like the trade in goods, trade in services will tend to equilibrate wage levels across the trading regions. Programmers in the US are paid multiples of wages earned by Indian programmers. With fewer H1-B visas and lower costs of transporting bits, instead of physical movement of Indian programmers to the US, you will have Indian programmers doing work for US firms off-site for lower wages. With perfect substitutability between American and Indian programming skills, the wages will tend to “equalize” after adjusting for average wage levels in the two countries. This adjustment will always keep Indian programming wages lower than American wages and therefore at least in the medium run, programming will continue to get done in India, just as manufacturing will be done in China.

Time to conclude this one. BPO is a consequence of income inequality just as much as off-shore manufacturing is. Both are here to stay until the other end of the Kuznet’s curve is reached.

Who are these bureaucrats that make such brain-dead decisions? How can we bring about a change in their thinking? How can we persuade these cretins about the need to be somewhat intelligent in their policy making? Is there any hope for India if we continue to make idiotic policy choices at every level of our economy?

India is poor not because of some divine decree but due to the combined weight of thousands of totally insane, abjectly stupid, stunningly mind-numbing, grossly mistaken choices made by anonymous semi-literate ignorant bunch of retarded self-seeking morons who hold the reins in this license-control-quota-permit raj that the British left behind.

It is enough to make a body despair.

We are poor by choice. Look carefully at the face of a hungry child begging on the streets of Mumbai and you will see reflected in those desperate innocent eyes the accumulated karma of the actions of a government whose objective is to maximize short-term revenues by instituting an extractive and exploitative system.

I have studied the Indian telecom sector in some depth because it was the focus of my doctoral thesis. The policy in that sector is so wrong-headed that it is difficult to imagine a system that is more detrimental to the goal of economic development. Indeed, I would find it more believable if someone were to reveal that the policy was actually made by an enemy government to sabotage any chances of India becoming a developed nation.

Why does India have the misfortune of being saddled with malevolent policy? My conjecture is that the context in which the government framework was built was one where the goal was not economic and social development but rather the exploitation of the economy. The government objective should have changed once it was a government of the people. But it did not because the administrative structure found it too hard to give up its control. Power corrupts and absolute power corrupts absolutely, as Lord Acton observed. The British government was the dispenser of India’s destiny — bharat bhagya vidhaataa — and it was not easy for those who replaced the British to not take on that mantle.

So what is the answer to India’s millions of woes? I believe that the government of India has to be re-invented. We need a “government of the people, for the people, and by the people.” We need a government whose objective is human development and economic growth. We need a government that is accountable to the people. We need a government that delivers on its promises. We need a government that values freedom and which does not chain the citizens of the country simply because it is easier to extract and exploit the system.

We need freedom from this whole sorry system even more than we needed political freedom from colonial rule.

For the record, here are the MDG:

1. Eradicate extreme poverty and hunger.
2. Achieve universal primary education.
3. Promote gender equality and empower women.
4. Reduce child mortality.
5. Improve maternal health.
6. Combat HIV/AIDS, malaria and other diseases.
7. Ensure environmental sustainability.
8. Develop a global partnership for development.

Poverty is manifested as an interrelated set of problems such as hunger, disease, child mortality, gender bias, and environmental degradation. All of the factors that the MDG seeks to address are causally related.

For instance, hunger is a consequence of poverty because even when the food supply is adequate, the poor suffer from hunger and malnutrition. Hunger and malnutrition is in part responsible for low productivity and low incomes. Low or even negative savings coupled with credit constraints do not allow investment in education. Lack of education leads to poor understanding of hygeine and health care, high birth rate and child mortality, and poor maternal health. Eliminating poverty therefore is a necessary condition for the eradication of the whole set of inter-related effects.

A Typology of Poverty

Poverty is the most common characteristic that defines the populations of developing countries. It can be broadly classified as income poverty and non-income poverty. Non-income poverty in terms of education, health-care, access to markets, etc., directly produce the income poverty that traps the average citizen of developing countries.

Thus, income poverty and non-income poverty are closely related. The problem appears almost intractable because the two kinds of poverty are mutually reinforcing. Any solution that does not address both kinds of poverty is unlikely to be successful in poverty alleviation. The question of how to raise huge populations out of this poverty trap is a formidable challenge that governments, multilateral organizations and policy makers face.

Another way of classifying poverty is to distinguish between urban and rural poverty. Urban poverty, to a certain degree, is the result of rural poverty. Often, lacking economic opportunities, rural populations are forced to migrate to urban areas. An excess rural migrant population which cannot be gainfully employed in the urban areas leads to urbanpoverty. Therefore, alleviating rural poverty is a precondition to solving a large part of the urban poverty.

The focus of the first Millennium Development Goal — Eradicate extreme poverty and hunger — therefore has to be rural poverty.

How much to allocate to investment and how much to consumption depends on the objective function of the policymakers. The private objective function of the policymakers may be quite different from the publicly stated objective function, however. After all, the Indian Government did not declare sometime after independence that their objective function was to strangle the economy and retard growth so as to extract as much rent as they could from a small set of large business houses by instituting a licence-permit-quota regime. What they said was that their objective function was to maximize growth, the eradication of poverty, the development of rural areas, the emancipation of women, the removal of caste barriers, et cetera. In short, their stated goal was little short of unleashing peace and prosperity for all and sundry, all done through the benevolence of the babus that were at the helm of affairs intent on climbing the commanding heights of the economy.

I get a feeling of impending doom every time I see yet another utopian objective function being declared and mega billions of rupees allocated for reaching that stated objective. Yet once more we will be spending huge amounts of public money. How much of it will actually be investment and how much of it will be consumption is the question. How much of it will be effectively used by the intended receipients and how much will leak out, is another question. Development is the stated goal but whose development is the critical question.

It is easy to spend $2.7 billion. Here is a break-up:

500,000 PCs (with power supplies etc.) at $1500 for a total of $750 million
MS Windows for 500,000 PCs at $300 for a total of $150 million
1 million Voice based information technology device at $500 for total of $500 million
Infrastructure for 500,000 kiosks at $2000 for a total of $1 billion
For high flying executives, for McKinsey to write fancy reports, for government kickbacks for the awarding of contracts, for old fashioned bribery, etc only $300,000,000 ($300 million).

There you have it. $2.7 already “invested” in IT to bridge the digital divide. I put invested in quote because I don’t believe that it does anything for the 700 million people it is supposed to benefit. The actual beneficiaries are Microsoft (software), HP (Hardware), some local companies making the “voice based technology device” (which probably will be as useful as the mythical Simputer), McKinsey with their highly paid consultants, government bureaucrats, and politicians. It will be a party. All, except the poor, will be invited.

About 10 years P. Sainath wrote a book with the catchy title “Everybody Loves a Good Drought”. He was traveling with poor migrant farm labor for some time trying to understand how they live and wrote dispatches for the Times of India. These migrant labor are the poorest of the poor. Government programs exist to help these people out — on paper of course. Monies are spent when a district is declared hit with drought. Everybody loves it — because the whole administrative structure can feed at the public trough. Everybody, that is, with the exception of the poor migrant laborers. They starve.

I think it is time to write one with the title “Everybody Loves a Good Digital Divide”. I don’t believe that there is a digital divide in India. Then why is it such a big hit in India? Perhaps if there is no digital divide, it is necessary to invent one so that resources can be mobilized to bridge it.

Individually people all over the world have approximately the same natural endowments. What makes a difference is the nurture provided by the environment. And that environment is exogenous to an individual but endogenous to the entire collection of individuals which is called the society or the economy.

The assembly-line is an advance in technology which once invented was available to whoever wanted to use it. Its adoptin, however, is dependent upon the institutions and consequently the economic policies of the economy. The US has been lucky to be endowed with vast natural resources, a very motivated labor force, and enlightened leaders who created the institutions that create wealth (and to some extent distribute that wealth.) It is not possible for India to duplicate the trajectory that the US took because times and technology have changed. India cannot enslave about 100 million people, for example, to work on its cotton fields. The present day alternative is sweat shops. India could have had the option of going that route if its economic policies were not so inimical to foreign direct investment. The ethics of sweatshop are complex but the economics are fairly well-understood.

India could have leap-frogged the manufacturing stage and gone straight from the agricultural stage to the information/service stage. The snag was that we neglected universal primary education and therefore hobbled ourselves. Even now it is not too late provided that instead of the inefficient subsidies that bleed the public purse, we start concentrating on educating the hundreds of millions. Fortunately the technology is available to do so inexpensively. Whether the economic policies of the government allows this miracle to happen or not depends on the telecommunications policies.

I am afraid that the indications are that the government’s objective in the telecommunications sector is short-term revenue maximization instead of public welfare maximization. On the one hand it talks loudly about the need for affordable telephones for all, and on the other hand it imposes unsustainably heavy burdens of license fees, revenue sharing and taxes on entrants to the sector. This suppresses the investment and consequent expansion of the sector.

The most succinct definition of the economic problem is therefore a constrained maximization problem.

(Random Digression: Succinct definitions are fun. For instance, a computer programs can be succinctly described as a state to state mapping where a state is defined as a name to value mapping. So also, the Tao is negatively defined by The Tao That Can Be Named Is Not The Eternal Tao.)

Constraints are all over the place. Physical resources are limited. It is interesting to ask if there is one single physical resource which if not constrained would release all other constraints. There are some basic limited resources such as land, labor, energy, water, etc. Of these, energy is that resource which if it were unconstrained, all the other basic resources constraints will be released.

If you had sufficient energy, you could transform whatever you had into whatever you wanted and recycle old stuff into new stuff. For instance, water. Using energy, clean the water; use the water; and then clean and reuse the water. You can use energy to desalinate sea water (lots of that around) and grow food hydroponically (don’t need too much land). You need basic minerals and metals? Use energy to get it by the millions of tons from the sea. Bottom line: if you had unlimited energy, you don’t have any real scarcity.

Consider the problem of economic development. There are constraints that bind an economy and keep it from developing. I asked myself if there is one fundamental constraint that if released, will free an underdeveloped economy. The answer I arrive at is yes, it is the credit constraint.

Let’s discuss the credit constraint tomorrow.

If you are planning for a year, sow rice; if you are planning for a decade, plant trees; if you are planning for a lifetime, educate people.

In the context of development, I think the last bit should be “if you are planning for a nation, educate people.” Especially, primary education. For among all the factors that are necessary for economic development, none is so basic as primary education for a nation. Primary education is the essential basic public good engredient without which there is no known receipe for development.

Everything else, all institutions required for development — from markets to democratic government to legal systems to law enforcement — require an educated populace for their functioning. In the absence of widespread literacy, a nation has little hope of achieving anything at all. Education is not just an instrumental good (for achieving development) but it is also a final good, an end in itself for it allows humans to be more fully human.

It is India’s misfortune that its leaders have neglected that fundamental truth. So we have the largest number of illiterate people of any nation in the world. Literacy, though distinct from education, is closely related to it. Without a literate citizenry, the so-called freedom of the press is an absurd notion. Without an educated population, our so-called democracy is a mockery of the ideal.

To explain the dismal state of the Indian economy, one would be well advised to look closely how the Indian government addresses the question of education. To understand why the government takes the position it does regarding education, one would have to look at the history of India. I would like to present the bare outline of my argument about the Indian education system, why it is elitist, and what that implies for the development of the economy.

First the history. India used to be a very rich nation a few hundred years ago relative to the other nations. That is why India got plundered repeatedly. The latest to arrive were the Europeans and finally, the last to establish their colony were the British. Their goal was to extract the wealth and do so efficiently. They were not in India for India’s development, and understandably so. Why bother with development of brown-skinned heathens?

The British therefore were interested in extractive systems, not developmental systems. Development requires universal primary education. During the course of the British Raj, the level of literacy dropped. From a largely literate and educated population, India became largely illiterate.

However, the British were few in number and a vanishingly small number of them were in India. So they had to delegate the massive task of administering this vast land with the primary purpose of extracting wealth. That delegation required an efficient bureaucratic machine that would control every aspect of the Indian economy from the top down. That bureaucracy would have to prohibit the natives from ever being economically free. By design, the machinery was meant to make the natives dependent upon it for favors. That is the genesis of the administrative bureaucratic machine that India got from the British.

The bureaucracy was in effect a straitjacket that held the Indian population immobile while the British plundered the land. But since the British were few in number, they needed to have surrogates to run the bureaucracy. They therefore trained a very very small number of natives and created an elite core that worked the bureaucracy for the benefit of their pay-masters, the British.

Thus you had a divide — that yet persists, and how. But I am getting ahead of myself. The divide was a literacy and education divide. An elite few were educated so that they could run the machinery and the rest were deliberately kept uneducated so that the country could be more effectively and efficiently exploited.

The extraction party went on for a while. The land yielded its wealth but nothing is inexhaustible. The land was becoming barren. It was getting harder to extract wealth, as the country slid into poverty. For the first half of the twentieth century, the GDP of India grew at a negative rate. Every year from 1900 to about 1950, the economy actually contracted.

Not just that, colonialism was going fast out of fashion. So the British decided to leave. They could read the writing on the wall, and they were not dumb. samajhdar ko ishara kafi hota hai. They left the building on August 15th, 1947 and on their way out handed over the keys to the Congress Party. The Congress were delighted. They decided that the British were really nice folks. They missed the British. So they said Nehru is close enough.

The important point is this. The British left the building but the building continued to be exactly what it was and the inhabitants of that building continued to be exactly the same as when the British were there. The bureaucratic machinery, the command-control-extractive bureaucracy persisted just as before. It was an institution that the Congress — the faux British — were only too eager to take control of. The directive to the bureaucracy was the same: Don’t allow the filthy natives any freedom to do anything without getting permission for every little thing.

Every little freedom that we are denied in India, just look a little closely. It is the dead hand of some Britisher reaching through the Indian bureaucracy to prevent you from doing something or the other. I was in a two-bit town in Bihar visiting a little shrine where the Buddha supposedly died. I was told that I could not take a photo graph of the crumbling little temple. Totally mind-boggingly astonishing.

Want to listen to the radio? Sure, go ahead, the government will provide you the programming. It will tell you what you should hear. It will tell you which books you can read (if you are among the chosen few who can read, that is.) The free press? Means precious little for the larger proportion of the country that is illiterate.

Every avenue of production — the government will have control. From power to railways to steel mills to telephones to grain silos. And of course education. But that last bit (and I am coming to the point that I had started off to make) has an interesting twist: education only for the elite. Educate the elite alone so that the unwashed masses will be more easily controlled. The masses will continue to vote for the corrupt political parties only if they don’t have access to information. Control their access to information and you have control over their destiny.

It is the information divide that was instituted by the British and it persist under the able stewardship of the subsequent government (largely the Congress) though the efficient bureaucratic machinery that control every aspect of the Indian economy. (Liberalization is a recent phenomenon and that is another story.)

If we were to posit that the objective of the educational system in India is for the elite alone so that they can control the rest of the country, a number of features of the system can be easily explained. For instance, the emphasis on higher education (IITs, etc) and the neglect of primary education.

The middle class and upper classes spend their own money to give their children fine primary and secondary educations. Then these children out-compete the children of the poor people and enter institutions of higher learning where they study at the expense of the toiling masses. Higher education (until recently) was largely free.

And then there is the so-called brain drain. I say so-called because it is a total misunderstanding of the fact. India is not deficient in brains. Even if 200 million brains were to magically vanish from India, we would still have more number of brains than the combined brains in the US and Western Europe. What India lacks is resources for education. And when 10,000 educated doctors, engineers, scientist, teachers, etc, leave, they represent a resource drain. That is a capital drain that India can ill afford. It is embodied capital which required resources to produce.

Economists measure cost of doing something as the opportunity cost : what is the cost of foregoing the best alternative use of the resources employed. Say, you could spend Rs 10 lakhs of public money to educate one engineer at an IIT. Suppose the best alternate use of that money was providing education up to the secondary level to 100 rural children. The opportunity cost of educating one IIT engineer is then 100 rural children’s secondary level education. What are the effects of this?

I believe that over all effect of educating an IIT engineer at the cost of 100 rural children is bad. I will defend that claim in the next few articles. I will address questions such as IIT engineers who go abroad repatriate dollars and technology and other such pitiful objections. I must hasten to add that I am not advocating abolishing higher education; that would be the last thing on my mind. I am arguing that public funds must not be used for higher education at the cost of neglect of primary education.

He answered, “Well, growing corn in my field requires pollen from the neighboring fields. If they don’t have good corn in their fields, I will never be able to grow good corn myself. So I distribute the good corn seeds.”

The benefits of positive externalities (or the harm from negative externalities) lead to social benefits (or social costs) that eventually benefit (or cost) all. What goes around, comes around, as the saying goes. In Indian terms, it is all karma, neh?

Rajesh Jain recognized the positive externality of his Emergic Blog intuitively. He therefore puts his best ideas there. Each day that blog has around a thousand visitors. They all gain from his fine presentation. But eventually, in ways completely unforeseen, he reaps an even richer harvest of new ideas that develop through his interactions with other minds on the web.

Ideas matter. Ideas are primary. Ideas are the ultimate public good in that they are totally non-rival: my use of an idea does not diminish your capacity to use it as well. Ideas can pass from one human mind to another and set up a chain reaction that has the power to transform the world. Everything that you see around you — the good, the bad, the ugly — everything was just an idea in some mind. (Some Hindus claim that this universe is just an idea in the mind of God.)

How to harness the power of ideas for the social good is the challenge that we have to undertake.

“The neglect, indeed the rejection, of wisdom has gone so far that most of our intellectuals have not even the faintest idea what the term could mean. As a result, they always tend to try and cure a disease by intensifying its causes.”

Korten writes:

“The (Brundtland Commission) report’s key recommendation – a call for world’s economic growth to rise to a level five to 10 times the current output and for accelerated growth in the industrial countries to stimulate demand for the products of poor countries – fundamentally contradicted its own analysis that growth and overconsumption are the root causes of the problem.”

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Those who refuse to do arithmetic are doomed to speak nonsense.

Over the years I have seen too many instances of errant nonsense that a little bit of arithmetic would have prevented. I think that the power of arithmetic is not fully appreciated. Even people in very powerful positions utter complete nonsense when they refuse to do simple calculations.

In the recent workshop that I was at, I had presented our model we call RISC (Rural Infrastructure & Services Commons). The model is based on the recognition that the provision of infrastructure is a necessary precondition for services that are necessary for rural development. Infrastructure investment is ‘lumpy.’ You have to have at least a certain minimum amount of investment before it is of any use to anybody.

Since there is a minimum scale below which infrastructural investment is not viable, and since total investment is limited, providing infrastructure to every of the 600,000 Indian villages is not an efficient option. Therefore, RISC recommends that infrastructure investments be made in locations that are accessible by a large number of villages to start off with. Later, as economic conditions improve, village level development of infrastructure would make more sense. This, of course, implies that the facilities will not be immediately accessible to everyone. Some will incur a travel cost. Moreover, the travel cost will be relatively greater on women than on men considering that men are more inclined to travel the 10 kms or so the average facility may be located.

One participant objected to the model based on the differential travel cost. She held that the solution is that every village should have all facilities. Here is where we need to do some arithmetic. Add up all resources for infrastructure investemnt at our disposal. Divide that by 600,000 and you have quantity x, the available resource per village. Find out the investment cost of the minimum viable unit of infrastructure and call it y. Now compute the ratio y over x and call that number z. If z is equal to or less than 1, we can provide every village with the required infrastructure base. Otherwise, we need to invest y resources in a central location that z villages will have to share.

It is true that women would be at a disadvantage relative to men when it comes to travel. But then the answer is not that infrastructure resources should be squandered based on gender equity considerations but rather that women should be assisted in some way so that they overcome their mobility issues. (It is always more practical for Mohammed to go to the mountain than for the mountain to come to Mohammed.)

Let’s do arithmetic and persuade others to do some arithmetic as well.

Can ICTs be useful for rural and remote areas of developing countries, especially the poverty-stricken regions?

We need to examine that question for a moment. At one level of analysis, it is hard to not answer that question in the affirmative. At another level, it is a meaningless question. Merely because it is syntactically correct does not imply that it has any content. Consider the question:

Can magnetic levitation superfast monorail transportation systems be useful for rural and remote areas of developing countries, especially the poverty-stricken regions?

Clearly, yes. Not just magnetic levitation superfast monorail transportation systems, but an almost unending variety of things would be useful for the development of poverty-stricken remote areas. Not merely for those areas, all of those unending variety of things would be useful for the development of not so remote and not so poverty-stricken areas of any developing country. Thus that question is actually content-free.

It is hard to argue that ICT, or anything else for that matter, cannot be useful in development. There are only two problems:

Our resources are limited. Anyone who does not keep that in mind is clearly out of touch with reality.

Prioritizing the needs and sequencing the required intervention is an impossible task unless considerable thinking goes into the analysis of the problem.

Therefore a meaningful question would be: How appropriate is ICT for rural and remote areas of developing countries, especially the poverty-stricken regions? Or, how should we sequence the use of ICT, both temporally as well as spatially, for economic development? That is, should we take our resources and thinly distribute it all across the country or should we focus on some areas first and then move to other areas? Should we use our limited resources to bring ICT tools to the most remote and the poverty-stricken areas of the country and neglect other areas? Should we concentrate on ICT for remote and poverty-stricken areas before we concentrate on other needs of those areas?

These are important questions and need to be debated and discussed before we waste any more resources than we already do with the gazillions of ICT for development conferences and initatives.

The rich are not only fewer in number, but their numbers are projected to increase much slower than the increase in the number of poor. In the next 25 years, the rich nations would add only 50 million people more; thirty times that number, or 1.5 billion, would be added to the population of the world’s poor nations. That would only go to increase the poverty figures. Especially in sub-Saharan Africa, the absolute number of poor will actually grow. They are not going to meet the Millennium Development Goals for sure.

Development assistance from the the rich nations to the poor is an impressive $56 billion a year. That figure is no longer impressive when you learn that agricultural subsidies that rich farmers receive worldwide is $300 billion. That subsidy is at least a major factor in the impoverishment of the farmers in developing countries. In a globalized world, there is a strong link between agricultural subsidies in rich nations and the farmer suicides that are periodically reported in some developing nations.

Whatever be the dismal state of affairs, what is more disturbing is the trend. Development assistance fell from 0.5% of GDP of rich nations in the early 1960s to a mere 0.22% today. Compared to $56 billion of assistance, the world spends $600 billion on ‘defense’. Weapons’ spending dwarfs development spending worldwide.

It is important to recognize that one of the leading factors of the persistent and ubiquitous misery globally is the ‘defense’ expenditure of nations both rich and poor. All the futzing around with bridging the so called digital divide is pointless unless we also simultaneoulsy deal with the fact that we are awash in an ocean of weapons.

The fact that manufacturing accounts for such a small percentage of India’s GDP is not a minus but a plus. All the industrialized nations have seen manufacturing as a percentage of GDP shrink.

There is much misunderstanding about the process of development and it may be worthwhile to start thinking about development. (What follows is partly from another article I had written some time ago.)

Countries, especially large countries such as the US and India, follow a very predictable development path: from agriculture, to manufacturing, to service, and finally to information technology. Large countries cannot jump any of these intermediate stages any more than an elephant can leap across a creek. Small countries are more nimble on their feet and can skip across sometimes.

So India with 70% of its population in rural areas (largely agricultural) cannot become an information technology superpower however pretty a song you sing about the internet and the world wide web. India has to have a nuts-and-bolt manufacturing base which can only exist if labor moves from agriculture to industry. Then with increased productivity of manufacturing, incomes rise and therefore consumption of services rise relative to basic consumption and so the economy moves to a service economy.

Why do countries have to go through the manufacturing stage before getting to the service economy?

Consider a large economy such as the US. Without going into the numbers, we can safely say that international trade forms a very small part of it, something of the order of single-digit percentage points. That means that most of what the economy consumes is produced within the economy— agricultural, manufactures, services—nearly all of it is domestically produced and consumed.

Any large economy when it starts off on its developmental trajectory, it is largely agricultural. Say 80% of the labor force is engaged in producing food and only 20% in manufacture and services. (It helps to consider the whole world as a large economy.)

This economy has little surplus food and therefore can only support a small service sector. Services, after all, are a sort of a luxury good. When you are poor, you don’t get fancy haircuts, don’t go to too many concerts, you don’t produce too many plays, or write too many novels, or consume too much education and art.

As agricultural productivity increases, labor moves to produce manufactures that go to increase the quality of life, which in turn produces capital goods that are invested that further increase agricultural productivity which in turn leaves more labor free to produce investment goods.

A virtuous cycle begins.

The investment in capital goods makes manufacturing more productive. Eventually you have something like 2% of the labor producing food, about 20% producing manufactures, and the rest providing services. Afterall, if 2% of the population can produce food for the rest, and if only 20% of the labor produce all the manufactures due to automation, then the rest have to produce concerts, novels, movies, provide dentistry, education, insurance, banking, and pornography.

A modern efficient large economy is a service economy only because it is also a very efficient agricultural and manufacturing economy too. Its sustainability derives from the productivity of the two older activities.

(To be continued in Part 2)

With the telecom bandwidth in excess of deand, the focus would be towards creating high quality office space with amenities like high-speed telecommunication links, uninterrupted power supply etc which are critical to attract the ITES companies.

Towards this, the State government is holding talks with leading real estate developers including Rahejas of Mumbai, DLF of Delhi apart from Larsen and Tubro Infocity for high-quality office spaces in and around Hyderabad.

So what AP is trying to do is to create the environment so that businesses — ITES — would locate themselves there because of the lower cost of doing business. In a sense, it is a no-brainer: if you have the proper environment, business will develop. However, this environment will not emerge automatically on its own. That is, the market will not supply it spontaneously. Why the market fails to do this? It requires collective action. Or in other words, it is a coordination problem.

RISC is motivated by similar concerns in the rural arena. For doing business in rural India, you need to have adequate infrastructure. Given the immense investment needs, every village cannot be transformed. So a core-peripheri approach is required. Further, RISC also stresses the same coordination failure in the provisioning of infrastructure in rural India.

Mark Twain had once remarked that there are fundamentally only three archetypical jokes. (I forget what those archetypes are, but one of them was the ‘mother-in-law’ joke.) So also, there are a small set of basic problems. These show up repeatedly in various theaters in different guises. Once you recognize them, the solution is pretty much the same. Why people don’t get this is a question that I have not fully been able to fathom.

In the Tenth Five Year Plan the Planning Commission has outlined India’s human development goals and targets for the next five to 10 years. Most of these are related to and are more ambitious than the Millennium Development Goals.

Human development is a multifaceted and complex process. There are many dimensions along which development occurs and there are complex interdependencies and linkages between these dimensions. (In mathematical terms, you may say that these dimensions are not mutually orthogonal.) Due to these dependencies and linkages, attaining goals is not a simple process of randomly enumerating them and then arbitrarily attempting to work on each subgoal. The enumeration of the goals itself should reveal some of the dependencies. Care must be taken to distinguish between causes and effects, between underlying causes and their symptoms.

India’s Human Development goals (listed in its entirety in the extended part of this entry) enumerates them randomly. Indeed, the first “goal” is Reduction of poverty ratio by 5 percentage points by 2007 and by 15 percentage points by 2012. I disagree. Poverty cannot be reduced by declaring it as a goal. If indeed it were that easy, we should reduce poverty by 100 percent, and not pussy-foot around the place with goals of reducing it by only five percentage points.

Poverty reduction is the combined effect of a number of other ‘goals’ that one may have. For instance, poverty will be reduced if these were to happen.

1. Control population growth.
2. Increase access to education.
3. Provide access to credit.
4. Have a rational labor and industrial policy.

If you do all the above (and more, perhaps) successfully, the outcome will be reduction in poverty. Whether that is a 5 percentage points reduction or a 50 percentage points only time will tell.

Similarly the item about ‘Maternal Mortality Ratio’. The reduction in MMR is a result of other factors such as maternal nutrition, gaps between pregnancies, availability of pre-natal medical care, and so on.

To me, the goals ring hollow. Expect for the change in the dates (the 10th Five Year Plan runs between 2003 and 2007), something like this has always existed. Making up the plans occupy some bureaucrats and I don’t think anyone takes them seriously.

If there was an incentive for people to state realistic goals and achieve them, then we could have a honest goal setting exercise. For instance, suppose if the goals were not achieved, those setting the goals were to lose their jobs, they would not set these goals at all. They would then think very clearly and figure out what the factors are that, if obtained, would lead to certain results. These bureaucrats would then list out the factors and say in the end, “Don’t know by how many points exactly will poverty be reduced but it will be reduced if the factors are obtained.”

My (incomplete) list of factors need to be targeted for achieving development

MONITORABLE TARGETS FOR THE TENTH PLAN AND BEYOND

* Reduction of poverty ratio by 5 percentage points by 2007 and by 15 percentage points by 2012;

* Providing gainful and high-quality employment at least to the addition to the labour force over the Tenth Plan period;

* All children in school by 2003; all children to complete 5 years of schooling by 2007;

* Reduction in gender gaps in literacy and wage rates by at least 50 per cent by 2007;

* Reduction in the decadal rate of population growth between 2001 and 2011 to 16.2 per cent;

* Increase in Literacy Rates to 75 per cent within the Tenth Plan period (2002-3 to 2006-7);

* Reduction of Infant mortality rate (IMR) to 45 per 1000 live births by 2007 and to 28 by 2012;

* Reduction of Maternal Mortality Ratio (MMR) to 2 per 1000 live births by 2007 and to 1 by 2012;

* Increase in forest and tree cover to 25 per cent by 2007 and 33 per cent by 2012;

* All villages to have sustained access to potable drinking water within the Plan period;

* Cleaning of all major polluted rivers by 2007 and other notified stretches by 2012.

HIV/AIDS targets within the Tenth Plan period:

80% coverage of high risk groups through targeted interventions;
90% coverage of schools and colleges through education programmes;
80% awareness among the general population in rural areas;
reducing transmission through blood to less than 1%;
establishing of at least one voluntary testing and counselling centre in every district;
scaling up of prevention of mother-to-child transmission activities up to the district level;
achieving zero level increase of HIV /AIDS prevalue by 2007)

Malaria targets within the Tenth Plan period

ABER (Annual Blood Examination Rate) over 10 per cent
API (Annual Parasite Incidence) 1.3 or less
25% reduction in morbidity and mortality due to malaria by 2007 and 50% by 2010 (NHP 2002)