Lower capacity: RTE timetables the extinction of 25% of India’s 15 lakh schools that are ‘unrecognised’. These mostly low-cost schools have been an entrepreneurial response to parental choice – the antibiotic reaction to dysfunctional government schools chronicled in The Beautiful Tree by James Tooley.

Our demographic dividend – 10 lakh people will join the labour force every month for the next 20 years – would have been a bigger nightmare if these private schools had not substituted for the missing state in the last 20 years. And while it is a lie that all these schools deliver quality, it is true that a bad school is better than no school. To paraphrase a beheaded French queen, this provision of RTE effectively says “if you can’t have cake, don’t eat bread”.

Higher cost: RTE essentially mandates a huge rise in school fees. It micro-specifies salaries, qualifications and infrastructure. Delhi schools that don’t pay a minimum of 23,000 per month to teachers will not receive recognition and specifies that primary teachers must have a two-year education diploma; this means that 33% of teachers have to be fired. RTE specifies that every school must have a playground; Delhi specifies 900 sq yards but I know a state that is considering 1,500 sq yards.

The 25% children from disadvantaged groups will require massive cross-subsidisation because state governments propose to reimburse way below cost, e.g. Karnataka caps it at 7,000 per student per year. All this micromanaging of schools – to the delight of teachers and the real estate mafia – hits middle class parents with higher prices for essentially the same quality product.

Lower competition: A big driver of higher quality and lower costs in higher education has been competition. The 50% vacant seats of 1 lakh capacity UP Technical University are forcing engineering colleges to offer free hostels, English training, only MTech faculty, and much else. About 15,000 of the 45,000 Karnataka MBA seats are vacant; these colleges are reducing fees, guaranteeing internships and embedding soft skills in their curriculum.

RTE makes it impossible for education entrepreneurs to compete on price since many states propose to regulate fees and uncertainty has paused the Cambrian explosion of energy in school entrepreneurship. This means lower capacity and lower competition. And that means schools don’t have clients, but hostages.

Higher corruption: RTE mandates schools to take 25% students from ‘poor’ backgrounds. Some states are going overboard – Karnataka requires schools to conduct household surveys to create and maintain records of all children in a 1-3 km area from birth till 14 years of age to identify the poor. But who is poor? If the Indian government can’t decide whether 24% or 42% of India is poor, how will a BEO (block education officer)?

In reality, he or she won’t; they will auction their certification of poor to the highest bidder. What constitutes appropriate efforts to bring back dropouts? How will teacher student-ratios be calculated? The BEO, long a thorn in the flesh, now has powers to be a dagger in the heart. RTE provides the BEO’s the ability to convert every school into a personal ATM. Not all, but most will.

More confusion: Does changed evaluation mean no exams? What does immunity for government bureaucrats mean? Is incompetence good faith? How will mid-day meals be handled for the 25% in private schools? Where will these 25% go after Grade VIII? Will the 75% parent-populated government school management committees have the power to hire and fire teachers?

It is a Faustian bargain and the people of India have started to pay and will continue to pay for a few decades. They will pay because they will suffer the predictably adverse effects of electing self-serving venal politicians with the morals of pond scum and the ethical standards of bottom feeders.

A news item in today’s The Pioneer (via Sandeep) is titled “Only corruption is guaranteed in NREG, reveals study.” That report is about a Transparency International study. Wow! Really? NREG guarantees corruption? Who would have guessed!!

Here’s what I wrote in 2004 November:

Here, I will go out on a limb and predict that if ever this EGA is implemented, it will actually increase the level of poverty and the number of poor in India. It will drag those at the margins of poverty deeper into poverty. The only guaranteed effect will be an absolute increase in the amount of corruption and some politicians will make obscene amounts of money.

Take a look at the entire set of posts on NREGS and if you know the guy who is responsible, send him a copy with a yellow post-it attached saying, “I am disgusted with you, sir. Please quit.”

Creating productive assets such as forests and reservoirs is good for the economy, and should be done in any case. The goal of providing some income to people in financial distress in rural areas can have the valuable side-effect of the creation of productive assets. But when even that side-effect is forgotten and only employment is the goal, then there is a problem. It really becomes a total unmitigated waste when even that substandard goal of employment is subverted by corruption and theft of the financial resources.

Narain says that the details of the implementation of the scheme is missing and laments the failure of what she says was founded on a good idea. I think that NREGS is itself not a good idea to begin with because it puts the cart before the horse. I will go into the details later.

You may ask, why “Google for Missing Details” is the title of this post. The link to Narain’s article will take you to the BS article but only to a truncated version. The rest is behind a subscription wall. Here’s how you get the article if you aren’t a subscriber: google “sunita narain missing details” and you click on the version that is cached by Google.

I am clever like that

So what is the NREGS? It is an “employment scheme.” It basically transfers a bit of money to people who have not had an income.

Generally (but not in all cases) people who have an income are employed in come activity that produces something. Part of that production is paid as wages. That is income. In general, aggregate income and aggregate production have to be the same. Of course, a person working in a shoe factory does not get paid in shoes. The usual accounting method used is called “money.” He gets paid in money which he can then exchange for other stuff. The money income he gets is not real income. The real income is what he can buy with the money he gets paid.

Let’s take a simple economy producing widgets. 100 people producing 1,000 widgets. Average real income: 10 widgets. If each worker is paid Rs 1,000, then that is the nominal income. The price of a widget in this simple economy is Rs 100 per widget (divide the total amount of nominal income — 100,000 — by the total number of widgets — 1,000). If you don’t change the production of widgets but double the nominal wages, each worker gets Rs 2,000 but the real income does not change as the total production does not change. The price level goes up, though. From Rs 100 per widget, it goes up to Rs 200 per widget. That is inflation but in this simple model, it does not matter as the real income remains the same. Money is nominal. It is a method of accounting. It is not a “real” variable. The real variable is “the number of widgets.”

Now suppose you find that there are 10 additional people in the economy who you did not know of. They are not employed and so you decide to give them an income. OK, so you decide that each of these 10 people will be employed in digging holes in the ground (as there are no more widget making jobs) and filling them up. For this totally pointless exercise, you will give them each Rs 200 a month.

So here’s the new arithmetic.

100 people producing 1,000 widgets.
Each widget worker paid Rs 1,000
10 people digging and filling holes producing nothing
Each hole-digger paid Rs 500
Total nominal income: Rs 105,000
Price of a widget: 105,000 divided by 1000 = Rs 105.

So there you have it. You have inflation of 5 percent because now a widget worker with his Rs 1,000 income can buy less than 10 widgets. His real income has dropped. But the real income of the hole-digger has gone up. The scheme transferred some of the income from the widget workers. This may be good or bad — it all depends on what the objectives of the economy is. But the fact is that if you transfer incomes from one group to another, there will be winners and losers.

Inflation happens when the total amount of money increases relative to the total amount of goods that are produced in the economy. If a scheme merely adds more money to the pot without increasing production, it will cause inflation. If you increase production and at the same time increase the total amount of money appropriately, there is not inflation.

If you do a pure income transfer, without raising the total amount of money, you do not have inflation.

So what is the NREGS doing? If it is merely printing money and handing it to unemployed people (who are not producing anything), then it leads to inflation. This inflation reduces the real incomes of people who are producing something. So in this case, it is a pure income redistribution scheme. Drèze knows this as he knows basic economics. But he cannot admit the truth because his job depends on being economical with the truth.

[Related Post:

Nov 2007 -- The National Rural Corruption Guarantee Scheme.]

The NEGS is not novel. Maharashtra has had an employment guarantee scheme for decades. According to Sharad Joshi, it “has produced few permanent assets. And the EGS in Maharashtra is synonymous with corruption. Government officials concoct false registers of attendance.”

Corruption is not unexpected when money is involved and the transaction is between officials who have the power and control over the money, and the poor unemployed labor who would be willing to take only a share of whatever is due to him or her. It has been variously estimated that only about 25 percent of any relief money actually reaches the intended beneficiary. Politicians and bureaucrats steal the majority of funds.

Now reports are surfacing that the damned scheme is beset with corruption. That news would surprise you if you are in the habit of being surprised to learn that bears shit in the woods, or that astrologers prey on the gullible.

Any competent economist could have foretold the likelihood of such a scheme actually delivering what its proponents claimed. But then, one may recall that among the promoters was Dr Manmohan Singh, who I believe is a fairly high-ranking official in the Indian government and reportedly has some influence on Indian policy matters. I further believe that the “Dr” in front of his name has something to do with a formal degree in economics. So how does one explain his apparent support of such a wrong-headed policy, a policy that guaranteed corruption? One may be inclined to be kind and generously explain that by saying that perhaps Manmohan Singh does not understand basic economics and should go back to school.

Or one can be a realist and say that Dr Singh does understand economics but even more acutely he understands what is likely to brighten the political fortunes of his bosses. Dr Singh should have known from his years as an economist and an observer of Indian reality that the thousands of crores of rupees will simply be siphoned off by the intermediaries. But he cynically promoted the scheme for political reasons. It is not the first time that he has done so and is unlikely to be the last.

If the leadership is corrupt, is it any wonder that the schemes that they cook up are riddled with corruption? Now at least they should rename the scheme as “The National Rural Corruption Guarantee Scheme” and be done with it.

My claim is that this pro-poor policy is not mere rhetoric. The policy works and how. I argue that all other policies have not yielded their expected results but the pro-poor policies have delivered as could be reasonably expected.

Pro-industrialization policies are expected to lead to an increase in industrialization. If India ever had such policies, they have had only marginal success because India is arguably not an industrial economy. Pro-poor policies are expected to promote the number of the poor, and there has been a monotonic increase in the number of poor in India.

The percentage of people below the poverty line is estimated to be around 25. That is, India has about 250 million people who are so unimaginably poor that they can’t cross the poverty line that is set way below what can be considered necessary for a human existence. Around 33 million were added to that role in 2001-02 alone For comparison, that is more than the entire population of Canada in 2001 (30 million).

Let’s put the number of the abjectly poor in perspective. Consider the number of people below the poverty line at the time of India’s independence. We had about 350 million people then. Assuming that 50 percent of them were below the poverty line then, there were 175 million abjectly poor people then. Now, about 57 years later, we have 250 million abjectly poor people. There has been an increase of 75 million in the ranks of the abjectly poor in the nearly six decades of pro-poor policies..

India’s pro-poor policies have succeeded in increasing the number of poor in the past and while past performance is not a guarantee of future results, the most probable outcome of current pro-poor policies can be expected to lead to increase in the number of the poor. The “Employment Guarantee Scheme” (introduced by the National Rural Employment Guarantee Bill) is pro-poor and the result will be as before.

National Rural Employment Guarantee Scheme (NREGS)

It promises Rs 60 per day for 100 days of employment a year to one member of every rural unemployed family. The Central government funds this scheme, with the State expected to contribute 10 percent of the cost. The cost in the first year alone is expected to be around Rs 15000 crores (or approximately $3.3 billion.)

The NEGS is not novel. Maharashtra has had an employment guarantee scheme for decades. According to Sharad Joshi, it “has produced few permanent assets. And the EGS in Maharashtra is synonymous with corruption. Government officials concoct false registers of attendance.”

Corruption is not unexpected when money is involved and the transaction is between officials who have the power and control over the money, and the poor unemployed labor who would be willing to take only a share of whatever is due to him or her. It has been variously estimated that only about 25 percent of any relief money actually reaches the intended beneficiary. Politicians and bureaucrats steal the majority of funds.

As a matter of equity and fairness, the rural poor do need some kind of safety net. The design of exact mechanism of a safety net is not easy considering the scope of the problem. But a number of questions that arise in connection of the NREGS and needs to be investigated. Even if the NREGS is not beset with corruption and fraud, is it the best mechanism?

Is the scheme consistent with the reforms required in the economy? Will the secondary effects drown out whatever primary benefits that accrue to the rural people?

The basic objection I have to the scheme is that is in effect it is a purely income redistribute scheme. A purely redistributive scheme is not objectionable in and of itself provided there is sufficient production but the production suffers from mal-distribution. However, the basic fact is that the production itself is insufficient. So in this case the all effort should be made to increase production and simultaneously seek a more equitable distribution.

The money spent on the NREGS has an opportunity cost. What is lost is the government’s ability to fund production enhancing projects. Suppose the money was spent for a massive drive to provide primary education and health services to rural areas coupled with a reduced family size drive. Or it was used to improve the infrastructure of the country such as building a modern rail transportation system. Any of a large number of public works projects would generate large employment opportunities and lead to capacity building and thus to an increase in the total national income. In this case, it would not be just an “employment generation” but “income generation”.

The problem is that the focus of the proposal is flawed. It focuses on employment instead of focusing on increasing incomes. The distinction is important. Income, to an individual, is a share of the total production that the economy produces. By focusing on the employment and not on the production, the scheme merely redistributes the proceeds of a limited production.

In summary, the NREGS will have the expected effect of deeping poverty and enriching the bureaucratic and political intermediaries. That the Left support this misguided scheme should have been sufficient proof of its effects. But I guess we will have to go through with this despiriting exercise once again before we learn the lesson that increasing employment is not the same as increasing production.

[Also see the importance of producing stuff and "Sir, won't you buy this employment guarantee act?"]

A moment’s reflection should convince us that the world around us is definitely complex and we cannot really fathom what the consequences of our actions will be. The best we can do is to try to learn from our previous bouts of “bounded rational” actions and try to avoid being unboundedly stupid.

Here is where one starts wondering what is it that I am going on about. I was coming to that.

It all began when recently my friend Dr Malpani emailed me about the Employment Guarantee Act, the details of which you can find here.

There seems to have been some sort of convention (details) where they adopted a resolution outlining the “non-negotiable” features of an acceptable EGA. These include–

a permanent and universal work guarantee, extension to the whole of India within three years, payment of minimum wages in all circumstances, central government funding, safeguards for the interests of women, decentralised implementation, and full transparency at all levels, among other features.

More about this later. But now, let’s go to Niger, the second largest country in Africa. Extremely poor and definitely overcrowded. Soil erosion, desertification, frequent famines, flash floods, lack of water — the usual laundry list of mini-disasters. So what did they do? They decided to dig trenches and wells to stop the flash floods and thus prevent further soil erosion which was causing desertification. Then they realized that it was actually leading to more desertification, instead of less. They had to cut back on their policy of digging wells for farmers to water their cattle.

A Niger government official explains:

Wells attract animals. Animals eat the vegetation. Because the wells attract so many animals, the vegetation never gets a chance to grow back. Which is the beginning of desertification, the very process that the wells were designed to prevent.

[Source: Peter Biddlecombe, "I came, I saw, I lost my luggage" pg 210.]

Considered in isolation, having wells for increased vegetation is a good thing if you want to prevent soil erosion. The problem occurs when there are other confounding factors such as too many animals. If the system has multiple distortions, trying to address one of those distortions without regard to the others, could lead to unintended undesirable outcomes and make the system worse off than before.

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Here is another one from a different part of the world. A world with cars and computers, and roads and highways. And often heavy traffic congestion. It would be clear to the meanest intelligence that to ease traffic congestion, you have to build new roads and highways and widen existing ones. Except that sometimes doing so only worsens the congestion. Totally counterintuitive.

Why building new roads does not ease traffic congestion:

There is no shortage of hard data. A recent University of California at Berkeley study covering thirty California counties between 1973 and 1990 found that, for every 10 percent increase in roadway capacity, traffic increased 9 percent within four years’ time…This phenomenon, which is now well known to those members of the transportation industry who wish to acknowledge it, has come to be called induced traffic…

The mechanism at work behind induced traffic is elegantly explained by an aphorism gaining popularity among traffic engineers: “Trying to cure traffic congestion by adding more capacity is like trying to cure obesity by loosening your belt.”

Here the confounding factor is that there is supressed demand for more road transportation and as the supply of the road network expands, the demand is expressed to the point where the roads are once again as congested as before and therefore the private cost of using the road once again exceeds the benefit and people stop using the road.

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One more case in point. This time from the development literature. Urban unemployment is a common feature in underdeveloped economies. Both in the organized (or formal) sector and in the informal sector, urban unemployment leads to a whole host of symptoms such as gigantic slums, urban crime, etc.

Once again, the no-brainer solution is simple: increase employment opportunity in urban areas so that the unemployment rate goes down and thus cure the associated problems. Unfortunately, it is not that simple. By stimulating job creation in the urban sector, one can make the unemployment levels actually increase. How does that come about?

The confounding factor is that there is a vast pool of labor in the rural sector and the average wages in the rural (agricultural, mainly) sector is lower than the wages in the urban (modern) sector. This leads to rural-urban migration. By raising the probability of finding employment in the urban sector through policies that create more urban jobs, it accelerates rural-urban migration and perversely raises urban unemployment. (For details, see the Todaro model.)

The Todaro model has strong policy implications regarding development strategies. For example, efforts to reduce urban unemployment by stimulating job creation in the urban modern sector are likely to be stymied eventually, in that they will raise the likelihood of finding a good job and hence induce a greater flow of rural migrants. Todaro has argued far and wide that the best strategy to reduce urban problems in developing nations is to seriously promote rural development (economic opportunities plus amenities like health care and education).

Which brings us back to the Employment Guarantee Act.

It is a no-brainer that the EGA will make the poor better off all across the length and breadth of India. It will raise hundreds of millions out of poverty. India will finally become a wonderful developed economy. Oh why didn’t we think of this before?

If you believe that, I have a red-colored bridge across the Golden Gate which I would dearly like to sell to you for a throw-away price of only $10,000. Send me a check and I will Fedex you the title to the bridge. It is a very nice bridge. The view is totally incredible. People come from all over the world and take tons of pictures. You will not regret your purchase. Money back guarantee if you are not fully satisfied with your purchase. To the first 100 people who send in their checks, I will throw in the Bay Bridge as a free bonus in the whole deal.

Here, I will go out on a limb and predict that if ever this EGA is implemented, it will actually increase the level of poverty and the number of poor in India. It will drag those at the margins of poverty deeper into poverty. The only guaranteed effect will be an absolute increase in the amount of corruption and some politicians will make obscene amounts of money.

As they say on TV, stay tuned. Details at 11.

[See "The National Rural Employment Guarantee Scheme" and "The Importance of Producing Stuff".]