“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.

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.

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.

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.

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.]

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 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.

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.

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.

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.

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.

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.}

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.

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.

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.

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.

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?

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.

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?

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 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.

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!

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.

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.