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

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

The Good Vote Banks

Atanu Dey. Nov 2010. For Pragati.

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

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

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

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

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

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

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

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

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

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

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

India’s economic growth and development poses challenges that are clear but fortunately are solvable. The hard part is not in the figuring out the solutions but in the implementation, and more specifically in the prioritizing and sequencing of the implementation. The elements that require immediate and sustained effort relate to “infrastructural elements” which are few in number but form the absolutely necessary foundation upon which any functioning economy is based. These elements are interrelated in complex ways and if present simultaneously, they enable that emergent multi-dimensional phenomenon we call development. The elements are:

1. Education. Physical capital-both natural and man-made-combined with human capital produces wealth in all its form, from agricultural to manufactures to services. The quality and quantity of educated people strictly determine the economic prosperity of an economy. India needs a radically different education system as the current one is dysfunctional and largely irrelevant in the modern context. Fortunately, this radical re-engineering is possible through the use of powerful tools presented by the revolution in information and communications technologies. To achieve this, institutional reform of the type that encourages private sector participation in education is necessary.

2. Energy. Any economic activity, like all processes in the universe, depends on energy. Today’s developed nations achieved their level of prosperity on cheap fossil fuels, an opportunity not available to India’s billion plus people. Fortunately, India is large enough to be able to leapfrog the fossil fuel stage and invest in renewable energy sources such as solar and wind. Becoming a world leader in the development and use of these energy sources requires a national will that can be articulated by visionary leadership.

3. Urbanization. Urbanization is both a cause and a consequence of economic development. No country has developed without being also largely urban. India’s economic future depends on India’s success at urbanizing its immense rural population. Therefore in the matter of rural development, there is a distinction between the development of rural areas as opposed to the development of rural people. The former is neither necessary nor sufficient for development; the latter is indispensible and can be achieved most effectively by urbanizing them. This requires the development of liveable cities that would absorb hundreds of millions of people who would be engaged in non-agricultural sectors.

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

Note that each of the four elements has dependencies with the others. For instance, the creation of the human capital (education) requires urbanization, which in turn depends on the availability of energy and a good transportation system.

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

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

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

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

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

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

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

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

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

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

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

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

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

He that will not apply new remedies must expect new evils, for time is the greatest innovator.

Sir Francis Bacon made that observation long ago, in 1595 CE. The importance of innovation in how we do things has only increased with time. India needs innovative thinking more than anything else.

I have discussed on this blog at some length the problems of higher education in India. To summarize briefly, the problem is one of scarcity of supply. This is what I call an “engineered scarcity” because it arises from the government control of the system. In free societies with free markets, scarcities are not a chronic feature. Why? Because any scarcity due to say sudden and persistent increase in the demand is met with increased prices which in turn increase supply and the scarcity disappears. For scarcity to persist for decades, the system has to be rigged such that the supply cannot be changed to respond to the demand.

The government of India depends on manufactured scarcity because socialism thrives thus: first create the scarcity through governmental control; then the government doles out the scarce thing to favored groups; the people are brainwashed into thinking that since the government is the source of the supply, it (the government) must be the benevolent entity in the economy; therefore all efforts must be made to keep on the good side of the government so that one is favored with some of the scarce good.

The Indian government controls the supply of education for two reasons. First, it can extract rents from it. Licensing is the mechanism. To get licensed, one has to pay a bribe — often in the hundreds of millions of rupees to officials who have the discretion to refuse the license. Rent seeking is one motivation for the government control. The other reason is related to India’s “democracy” — buying the allegiance of favored vote banks by discriminating for and against specific groups. If you belong to a specific religious group, you get special treatment, and therefore that religious group’s vote is guaranteed.

Manufactured Shortage

This is all old hat and I merely repeat it here for setting the context. The main thing is that education in India suffers from engineered (or manufactured, if you please) shortage. This leads to immense social welfare losses. I propose one mechanism to fix one small part of this welfare loss. I say “small” only because it is small relative to the aggregate set of problems, not because it is trivial. This small part actually amounts to billions of dollars worth of welfare losses.

Now on to the specifics. The problem I will address is one of selecting who gets to have the privilege of going to an elite publicly funded elite institution of higher learning such as the IITs.

FACT A: The demand far outstrips the supply. Why? First, because the education is subsidized. So you get more than you pay for. When something is under-priced, naturally more demand will be higher. Second, even if the education were priced at full cost, the life-time benefit of an IIT education far exceeds the full price.

FACT B: Because of fact A, people are willing to pay a high price to get into an IIT. How much would people be rationally willing to pay? Something approaching the difference between the private cost of an IIT education (tuition fees, food, rent) and the private benefit (the discounted net present value of an IIT education.) So if the discounted net present value of an IIT education is Rs 100 lakhs, and the private cost is Rs 16 lakhs (4 lakhs per year for 4 years), then people would be willing to pay upto Rs 84 lakhs.

But of course no one really pays that much to get into an IIT. For one thing, for Rs 84 lakhs, one can go abroad and get a decent undergraduate degree. The point here is that people are willing to spend a large amount of money to just get into an IIT. And they do indeed spend a lot in their attempt to do so. An entire industry exists just for that purpose. The coaching classes industry. The more successful firms in this industry charge more fees than the IITs charge. And people routinely spend more on trying to get into an IIT than they would spend if they ever got into one.

As I have mentioned previously in a post before, the more successful coaching classes, let’s call “1st order”, themselves have to select whom they will admit — which leads to the absurd situation that there are “2nd order” coaching classes — those that coach students to pass the entrance exams of the “1st order” classes. Venkatraman Ramakrishnan mentions this in his interview. But I’ll come to that in a bit.

Cost of Coaching

For now, let’s do the numbers. The figures say that around 300,000 students appear for the Joint Entrance Exam (JEE) for IITs. These days it is not unusual for students to go to coaching classes for a couple of years before attempting the JEE. Assume conservatively Rs 1 lakhs per year as the cost of getting coached. Assume that around 2 out of 3 of those who appear for the JEE have attended coaching classes. That gives us an estimate of Rs 6,000 crores (2 lakhs x 300,000) for the size of the IIT coaching industry. (That’s approximately US$ 1.3 billion.)

That $1.3 billion is incurred every year and what is worse, it is amounts to a huge welfare loss since it is essentially a rent-seeking activity and therefore a dead-weight loss to society. The coaching does improve an individual’s chance of getting into an IIT but its aggregate social effect is nothing at all. It just intensifies the competition. It is an educational arms-race.

An analogy I find illuminating is this: if I stand up on my seat at a stadium to get a better view of the game, some others will also do so. Then in a short while, the entire stadium will be standing up and everyone will be exactly where one was in terms of visibility of the game while sitting down but now everyone ends up paying the price of watching the game standing up.

From the pool of 300,000 aspiring students who appear for the JEE, around 10,000 are selected. That’s one student out of 30. But is it true that the students ranked 10,001 to 50,000 are incapable or unprepared for studying in an IIT? Most likely, they are almost as good as those ranked above them. I am confident that if the capacity exited, 50,000 students could enter the IITs and do as well. We all know of people who failed to get into an IIT and ended up being very successful. Recently I learned that Venkatraman Ramakrishnan did not make the IIT grade but was good enough to win a Nobel prize in Chemistry. (That name once again!)

Changing the Rules

The rules of the game have to be changed. The best option would be to get the Indian government out of the life-blood-sucking control of education it has. But that is going to happen the day hell freezes over. The second best option therefore is to fix this welfare loss of competitive exams and make the whole business of coaching classes irrelevant.

Mr V Ramakrishan, the aforementioned Nobel laureate, says in connection with entrance exams and coaching classes, “Maybe the exams could be re-designed. I don’t know how to do that. But maybe they can be re-designed so the coaching class actually has no use.”

“I have a very cunning plan, my lord,” as Baldrick said to Blackadder.

Instead of an entrance exam, select students for IIT by a random draw. First, allow anyone who wants to, fill out an application form. The bar for qualifying for applying should be set at an appropriate level so that say 50,000 students qualify. (More about that in a bit.) Scan the 50,000 applications using software tools, rank them, and reject the bottom 10,000. Next randomly pick 10,000 from the 40,000 remaining and admit them to the IITs following the usual process.

Now a bit about how to choose the 50,000 students. Figure out how many high schools qualify for being sufficiently good that their top student can benefit from an IIT education. Suppose there are 250 such schools. Divide 50K by 250 to get 20. So the rule says: from the total applications from each qualifying school, choose the top 20 applicants.

The advantage of this is easy to see. First, the students will strive to do well in their schools — not just ignore school and go spend all their time in coaching classes for JEE. (They may still go to coaching for their school subjects — which is not the best but it is still better than cramming for the JEE.) So all these schools benefit and this shifts the competition to the school level from the national level. Second, people may strategically choose to change schools to go to a lower ranked school so that their chances of getting to be in the top 20 increases. This will tend to improve the quality of students in currently low ranked schools.

There are too may reasons why this is a good idea for me to get into. Besides, I refuse to insult the intelligence of the fine readers of this blog by spelling out in detail why this is a brilliant ideal.

Overstressed Kids make Lousy Students

And now for the interview with the famous Mr Venkatraman Ramakrishnan. He’s famous now because he won a Nobel prize. I have seen him on some videos recently. I must say that I like the man. He’s down to earth and not full of himself (unlike a certain Indian Nobel winner who shall go unnamed here). As Venky notes (in an interview I link to below) “India has somehow gone slightly overboard about this Nobel Prize.” That is god’s honest truth. Indians go tend to go overboard with prizes from abroad. Be that as it may, I like the man because he also points to the same bits about the malaise in Indian education system.

Regular readers of this blog know that I keep saying that the problem is that Indian schools are lousier these days than before because now the kids don’t have any time to have fun. They are all the time doing school related stuff. We used to go to school for a few hours a day, do home work once in a while, never go to “tuitions” and run around the neighborhood having fun. We had lots of time to have fun and also a lot of time to understand what was being taught in school. What needs to be taught in schools is not a huge lot. It has to be good and limited in quantity. I am a minimalist when it comes to information being fed to kids. (I have written a lot about this previously on this blog.)

Now a days, kids go to school and then to tuitions and then do homework — from the time they wake up to the time they go to bed. They don’t have time to think and are forced into becoming stupid automatons. Mr VR makes that point in the excerpt I quote from the transcript of his interview with Yadugiri of IISc, published Jan 2010. (Hat tip: Yoganand Saripalli.)

Excerpt from the Interview

The first two pages are about ribosomes and RNA structures — stuff for which VR got that prize, stuff that is boring as all hell to me. So I would skip all that if I were you. Here are the good bits:

Any ideas on how science can be popularized in a country like India?

VR: I don’t know. . . I think, you know, first to have good teachers, obviously. Teaching cannot be the last resort profession, where we fail at everything and become a teacher. If that’s the case then you won’t have good teachers. My teacher was actually very good, and I was very lucky. But it’s not always the case, right? Actually there’s a terrible problem in India, which is, you have these elite institutions that everybody wants to get into and so the schools are teaching to that. But that’s not enough. Now people take entrance exams to get into a coaching school which prepares you for the next entrance exam. Next you’re going to have an entrance exam that prepares you for the entrance exam to get into the coaching school. It’s kind of ridiculous. That mentality is counterproductive. I think, if that were stopped, that alone would actually help focus people’s attention on where it finds interest. Instead, they are interested in exam problem solving. That’s a real waste of time. I mean, these poor kids – they work all day in school, they come home, maybe they have a quick snack, and then they’re off until 9 pm or something to this coaching school, you know. So when do they have time to think about science? I said in an interview that I thought that people should have much less homework, that excess homework kills the imagination. Amartya Sen went a step further. He said we must have no homework. All the work should be done in the school. So when they go home, they’re free to think, to read, to have hobbies, etc. And he said that coaching schools should be abolished. Because, he said, coaching schools also exaggerate the difference between rich children and poor children because they can’t go to coaching school. I never went to a coaching school, and I’m perfectly happy.

Do you think entrance exams need to be done away with?

VR: Well, it’s very hard. Look, if you have a very large country, you have a limited number of seats, and there’s a lot of variation between schools and states, then there’s no alternative to an entrance. I don’t think you can ever avoid it. But coaching classes… I think it’s very hard to legislate against coaching classes, but maybe, if people develop a culture where they sneer at people who go to coaching classes, where parents and educators realize. . . And maybe the questions could be changed so that going to a coaching class won’t really help you. I think the US tries hard in its entrance exams, so that the coaching classes don’t have a huge effect. They do have an effect even in the US, but not as dramatically. Maybe the exams could be re-designed. I don’t know how to do that. But maybe they can be re-designed so the coaching class actually has no use.

Related Posts:

Indian Reservations. May 7, 2007. (Note the extremely clever title. As in reservations for natives.)

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.

Imagine No Reservations. May 14, 2006. (Compare to John Lennon’s song. I am so clever.)

The fundamental problem with the Indian economy is that the education system is one of the most flawed systems in the country. If there is one sector which is in dire need of reform, it is that education system. The most urgently required reform is to get the government out of it—lock, stock, and barrel. The recent move by the government to further increase quotas in the so-called elite institutions with a view to social justice is akin to rearranging the deck chairs on the Titanic. No, I take that back: it is akin to scuttling the lifeboats even as the ship is sinking.

I have heard the claim that the Indian education system must be wonderful because the IITs produce so many wonderfully successful NRIs (non-resident Indians), especially in the US. They bolster their argument with the specious reasoning that it is harder to gain admission into IITs than into Ivy league schools, and that Narayana Murthy’s son had to use an Ivy league school as a safety school.

Sure it is harder to get into the IITs than into the top American schools. That does not mean that the IITs are in any way better than those American schools. It is a Herculean task to get into a Mumbai local during commute hours, compared to which using the Paris Metro is a piece of cake. Congestion is not an indicator of quality. When supply is severely limited relative to demand, there will be a mad scramble to get some.

Reservations about Reservations. May 20, 2006. (Heh heh. Another great title, even if I say so myself.)

The supply of higher education is severely limited. The reason for this supply limitation I will go into in a bit. The demand is high. The competition for admission leads to economic waste, for starters. Then there is the even more expensive skewing of the objective of the students: they are often not spending time and resources to understand the subject or because they like it, but because they want to do better in the admissions test than their competitors. Instead of producing thinking, cooperating humans, the system forces too many to focus on a narrow objective and to develop a maniacal zeal to study for a test that is more of a test of narrowly defined skills rather than an overall test of fitness to pursue higher studies. This exercise, I am sure, damages many students’ personalities so that they become anti-social and un-cooperative. They become incapable of group cooperation in solving problems. I have met too many IIT graduates who are perfectly dreadful people to hang out with. They are self-absorbed, narrow-minded, money-grubbing uni-dimensional idiots. I should hasten to add that there are notable exceptions to this characterization, of course.

The issue of reservation in higher education is not really complex. It is rather simple if one thinks about it for a while. Einstein observed that the universe is ultimately comprehensible. Compared to that, the economic system of a nation is child’s play. Although apparently confusing, India’s failures are totally comprehensible if one bothers to look at it with some degree of care. Just investigating thoroughly only one aspect of the economy would reveal the fact that ultimately it is the combined result of a small set of conditions. I will explore to its logical conclusion just one simple fact: why is education in India so supply constrained. It will become apparent that there are systemic problems which can be addressed. Like a good detective story, the plot line is simple. The system is the way it is because it leads to gains for those who are in charge. Once we have considered the facts, the solution will be obvious.

He does offer a few practical suggestions: Suspend politicians facing criminal charges, as civil servants are suspended pending trial. Establish a fast-track court just for government officials so that cases are resolved expeditiously. Persuade judges to make an example of a few political wrongdoers as a public flogging for the rest. [Emphasis added.]

Public flogging as a deterrent, eh? How quaint. Now where have I read that before? Ah yes, over here! In October 2005, in a post titled “The Ownership Society” I wrote:

Imagine for a moment the following rules. The CEO of the state electricity board is given the ownership of that entity. The job description: “provide power now and build capacity so that there is sufficient capacity for the next 5 years” (assuming that it takes 5 years to build capacity.) If the CEO fails to do that, the entire salary paid to the CEO will have to be repaid and the person—who may have left the job by the time the shortfall is detected—will be publicly flogged in the town square.

Now this rule should be made fully clear to the prospective candidates and anyone who takes up the job must know the consequences of failure. It is because people know up front that they are shielded from the consequences of their failures that they fail in the first place.

I really don’t care whether the power I use in Pune is provided by a public firm or a private firm. As long as I know that if I suffer, those who are responsible for my suffering also suffer, I would be quite content. More importantly, I believe that if the penalties are made sufficiently appropriate, these failures will not happen very frequently.

I don’t really care if there is a Ministry for Power in India or not. What I would care about is that if there is one, the man or woman who wants to have the power and the glory of being the minister, would also be flogged publicly for any problems that arise as a result of their tenure.

I don’t really care whether the railways are run by the government or not. But if there is a train accident, the rule should be that the railway minister will be flogged publicly and given as many lashes as there are deaths due to that accident.

Public flogging of public officials is the answer to the problem of public officials not taking their charges seriously. Not just corporations. Take politicians. Any election promises they make about how they will change the economy must be taken seriously. And then if they fail to deliver, hold their feet to the fire. Candidate A claims that he will make something happen, then as elected leader A, he becomes the owner of that something. If he does not deliver—you guessed it—public flogging.

Want to be the prime minister of India? No problem. Take ownership of the country and set goals that you say you will achieve. If the goals are not achieved as promised by you, public flogging over an extended period of time. What this will do is to bring the right sort of people into public life. People who know what they are capable of doing and who will not mess with the fate of millions knowing that their behinds —literally— will be on the line.

Flogging is a simple enough measure to implement. It does not require high tech equipment. What it does require is a judiciary that can impose the punishment and carry it out.

Corruption in an organization? Here is my solution which will fix it pretty fast. Suppose Mr A has been involved in corruption. Don’t just flog Mr A, get his boss (Mr B) and his boss’s boss (Mr C) and flog them as well. Why so? Because Mr C will be extra vigilant and keep on Mr B’s case and tell him to be on the lookout that no one under him is into corruption.

What this multi-level flogging does is this. It makes managers liable for corruption in institutions that they control. That is, it gives the managers ownership of the organization they control. Irrespective of how deep the organization is, if a person at a certain level is corrupt, include the two higher levels and flog those two individuals as well.

You may think that I am not really serious. But I am. I am dead serious about this. You want to make India the least corrupt economy on earth, get serious about dealing with the problem for just a few years. After a few dozen high level officials have been publicly flogged, corruption will be a thing of the past which children will read about in their history books.

You may say that instead of flogging, why not just impose a fine on them. That would not hit where it hurts. Merely fining someone who has lots of money is not pain enough. The penalty has to have a sting. Here is what I mean. In Finland, the penalty for a moving traffic violation such as speeding is monetary but it is indexed on the income of the person. A dotcom millionaire was fined $93,000 for speeding.

So flogging should do very well in India. Those in high positions value their pride. They depend on their image. If they penalty is public flogging, they would cease and desist from doing what exacts that penalty.

Public flogging of public officials is a proposal which can transform Indian society more than all this talk about empowering the citizens that we are getting dizzy from reading in the newspapers. Everyone and his brother is advancing all sorts of wooly ideas about how to transform India. Here is an idea that will not see the light of the day of course, but it has the real power to transform.

I once again argued for public flogging in Mar 2006 in a piece titled “Terrorism, the way out” and wrote,

Dr Manmohan Singh and the leader of the Government of India, Ms Sonia Gandhi, would never feel the pain of terrorism. A thousand – or even a million – Indians could perish at the hands of terrorists without having the least effect on those leaders. At most their security will be strengthened a bit more, more public funds will be spent on getting them more black commandoes as bodyguards, more road and air traffic disrupted when they travel, more citizens will be inconvenienced to protect the leaders from terrorists. The leaders will never be inconvenienced to protect the people, however.

Is there a way out? An economist would respond, “Yes, get the incentives right.” My proposal is to create the mechanism which would transmit the pain of terrorism to the leaders. In a sense, I advance the creation of a nervous system that carries the pain signals to the brain. The incentive mechanism I propose involves public flogging but is not limited to that.

After every terrorist attack, the Prime Minister, the head of the government (if not the same as the PM), the Home Minister (who is in charge of security), the police chief in whose jurisdiction the incident occurs, and the Defense Minister should be publicly flogged, with the number of lashes equal to the number of deaths, within two weeks of the incident. So for the Varanasi terrorist attack, Dr Singh, Ms Sonia Gandhi and the others listed above (I don’t know their identities) should be flogged by 21st of March in the courtyard of the Rastrapati Bhavan.

Aside from the public flogging, the other measure would be to fine them 1 percent of their wealth for every 100 deaths. This means, after 10,000 deaths under their watch, they will have all their wealth confiscated.

What would this accomplish? Firstly, it would put the fear of the lash into them. They would have the incentive to actually reduce the chances of terrorists succeeding. For instance, right now they would for political reasons molly-coddle Islamic preachers sermonizing the slaughter of infidels. Or they may be considering increasing the number of buses and trains between India and Pakistan. Or they may be advocating more porous borders with Pakistan and Bangladesh. When they know that these measures will increase the incidence of fatal terrorists attacks, they will not be so careless with the lives the citizens.

Second, the fines will help with the compensation to the families of the victims of terror attacks. Indian leaders have enormous wealth – from foreign gun deals, from cattle feed, from handing out licenses and permits, and from dipping extremely sticky fingers into the public till. Some of that wealth could be given back to the people.

Insult to their dignity and their behinds combined with injury to their pockets will work wonders.

Now let’s be realistic. Public flogging of the criminals occupying the highest levels of the government will happen a little after hell freezes over or a certain blue-turbaned man grows a spine, whichever comes later. Criminals don’t have an incentive to create incentives that deter criminals. We do have criminals in government, don’t we? A public watchdog organization reports that the new parliament of 543 members will have 143 MPs who have criminal cases pending against them. Of these, 71 have serious criminal charges such as murder. Being charged is not the same as being guilty, of course. But guilt can be established pretty efficiently and quickly, if the system was designed properly. But why on earth would criminals be interested in putting that system in place which would condemn them?

Let’s repeat what TSR wrote (quoted right at the top), “Since no part of the Establishment has an interest in punishing corruption, trying for a more sweeping solution quickly leads into the realm of blind hope.”

Deva, deva!

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

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

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

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

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

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

Villagers are moving to these centres, he noted.

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

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

(Link thanks to a comment by t.)

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

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

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

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

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

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

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

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

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

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

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

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

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

SPIEGEL: Such as?

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

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

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

SPIEGEL: But how afraid should the West be?

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

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

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

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

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

The mechanism that I would recommend is simple. For every plastic bag manufactured, collect a disposal fee. Let’s say it is Re 0.10. This fee gets passed on to the consumers – the people who ultimately decide whether to accept a plastic bag at the store or to bring their own re-usable bag, the people who decide whether to chuck the plastic bags on the streets after use, etc. The next step is to have collection centers where for every plastic bag turned in, Re 0.08 is returned.

What happens if this method is used? First, the number of plastic bags used will go down. Simple econ 101: price goes up, quantity demanded goes down. This is good for the economy since plastic bags are made out costly petroleum.

Second, discarded plastic bags are a source of income for those who take the trouble to collect them and turn them in. From what I have seen in Mumbai, in a couple of hours, one can collect 500 of them and thus make Rs 40 by turning them in. My conjecture is that following this sort of scheme, you will not find a single plastic bag in the streets of Mumbai.

They did precisely that in Ireland, as the NY Times reports. Motivated by a Tax, Irish Spurn Plastic Bags:

There is something missing from this otherwise typical bustling cityscape. There are taxis and buses. There are hip bars and pollution. Every other person is talking into a cellphone. But there are no plastic shopping bags, the ubiquitous symbol of urban life.

In 2002, Ireland passed a tax on plastic bags; customers who want them must now pay 33 cents per bag at the register. There was an advertising awareness campaign. And then something happened that was bigger than the sum of these parts.

Within weeks, plastic bag use dropped 94 percent. Within a year, nearly everyone had bought reusable cloth bags, keeping them in offices and in the backs of cars. Plastic bags were not outlawed, but carrying them became socially unacceptable — on a par with wearing a fur coat or not cleaning up after one’s dog.

I hope that the movers and shakers in Mumbai will learn from example even if they cannot follow the simple economic argument.

Curiously, the end of that NYTimes story ends with the line: “This year, the [Irish] government plans to ban conventional light bulbs, making only low-energy, long-life fluorescent bulbs available.”

Bloody hell, they did not learn from their own experience that banning does not work, whereas taxing an activity that has negative externalities helps. Truly mind-blogglingly strange. If conventional light bulbs cause damage, include the cost of that damage and the people will themselves figure out whether to buy CFs or incandescents.

Deva! Deva!

The signs are not good. I don’t mean about my bag but about the whole airlines business in India. People are not paying attention to the fact that India needs a long haul mass transportation system. And airways cannot be the long haul mass transportation system, nor can it be the road system. It has to be the rail system. There is nothing as efficient as steel wheels on steel rails for transporting hundreds of millions of people over distances that are of the order of hundreds of kilometers.

Last year I had proposed what I call an “Integrated Rail Transport System” which is worth revisiting. (A followup to that proposition is here.) I think it is time to again argue why an IRTS makes sense.

Yesterday’s The Hindu (a misnamed paper if there ever was one on the planet) carried an op-ed item which talked about China’s rail system. “At 76,000 km, the total length of China’s railways is behind only that of the US and Russia, and it is expected ot reach 100,000 km by 2020. The country already boasts of the world’s fastest train.”

The article quotes from a World Bank report titled “Highways and Railway Development in India and China from 1992 to 2002.” You wouldn’t believe it but it seems that in the early 1990s, India was ahead of China in route kilometer per capita and total route kilometer. In the decade starting 1992, China invested US$85 billion and jumped so far ahead of India that it is unlikely that India will ever catch up with China. India invested only US$17.3 billion in the same period. India’s route kilometer grew by ONE percent and China’s grew by 24 percent.

If only, lord if only, just once if India did something right in terms of infrastructure. Why are they so incredibly dense — the Indian policy makers — that they cannot get a friggin’ clue even when it stares them in the face? When would they stop their silly posturing about being this or that superpower and actually do something that will make the world stop and take notice?

I will now take a break for a moment of silence to mark the grief that I feel about the blind leadership that Indians vote for themselves. This blog will continue to propose solutions, of course, knowing full well that it is as useful as trying to teach a pig to sing: it cannot be done, it is a waste of time, and it annoys the pig.

I have argued against PURA because it makes no economic sense. However I suspect that the recommendation will be overturned and money will be wasted on PURA.

“Vinod Khosla’s Marshall Plan for rural India” is the subtitle of a “How the World Works” article by Andrew Leonard on Salon.com.

I must admit that the article is very well written. Here are some excerpts, for the record:

The daily drumbeat of biofuel headlines has made Vinod Khosla — co-founder of Sun Microsystems, former Kleiner-Perkins venture capitalist, and ethanol evangelist/entrepreneur extraordinaire — a hard man to ignore of late. But Khosla’s massive bet on renewable energy as the answer to climate change and peak oil (and big profits) may not even be his most ambitious scheme to remake the world. In 2002, Khosla co-wrote a paper with development economist Atanu Dey sketching out a plan to boost economic growth in rural India. It’s hard to think bigger than a bid to upgrade the living standards of some 700 million people — as the paper notes, one out of 10 people on this planet is a rural Indian. (Thanks to the India Economy blog for the link.)

Here’s a bit more.

Khosla and Dey’s basic proposal, however, is simple enough that one wonders why it hasn’t been tried before. The authors suggest that in part this is because the cost of connecting people with the right level of infrastructure and associated services was too great. But the same information and communication technologies (ICT) that have enabled Indian programmers to compete on a global stage can now also enable entrepreneurial rural Indians to gain access to the ideas and information necessary to boost their nascent business operations on a local level. “ICT is therefore the enabling technology that empowers the model,” write the authors.

Read it all.

India’s economic growth and development is predicated to a large extent upon the development of its 700-million strong rural population. Currently, the majority of India’s population lives in about 600,000 small villages and are engaged primarily in agriculture and related activities. Since a very large labor force in agriculture necessarily implies very low per capita incomes, a substantial portion of India’s current agricultural labour force has to move to non-agriculture sectors for incomes in all sectors to go up. The challenge is to manage the transition of a large segment – perhaps even 80 percent – of the rural population from a village-centric agricultural-based economy to a city-centric non-agricultural economy, and do so in a reasonable period.

Urbanization and Development

Economic growth is both a cause and consequence of urbanization. By urbanization is meant the dense aggregation of people into economically interacting units (cities and towns) of anywhere between 100,000 people and several million people. Cities are engines of economic growth because they give rise to economies of scale, scope, and aggregation. This is so because infrastructure – buildings, roads, power, telecommunications, water, sanitation, security, maintenance – can be provided economically to larger aggregations of people. Availability of low cost infrastructure in turn makes the availability of a wide range of services possible in cities as opposed to very small villages. It is the aggregation of supply and demand for economic goods and services (and therefore indirectly for infrastructural goods) which account for cities.

Constraints

A set of basic facts define the constraints within which the economic growth and development of India’s rural population must be addressed. Fundamentally, they relate to resource constraints, the nature of infrastructure, and the future trajectory of the geographical distribution of the population.

First, people need access to a wide range of services which allow them to engage in economically productive activities. These services include, at a minimum, market access, educational, health, financial, entertainment, transportation, and communications. It is primarily these services which enhance life and livelihood, and with which any population is concerned with.

Second, the provision of services depend on the availability of infrastructure. Without the foundation of affordable infrastructure, affordable services cannot be provided.

Third, infrastructure investment is ‘lumpy’ – the average cost of provision of infrastructure is inversely related to the scale of the operation.

Fourth, if there were no limitations on the financial and other resources available for providing infrastructure, it would be possible to provide infrastructure at every village. Resource limitations preclude this option.

Fifth, even if the full set of infrastructure were provided at every village, they will not be commercially sustainable as the aggregate derived demand for the infrastructure will be insufficient to make them commercially viable. Clearly, subsidy of infrastructure for 600,000 villages is not an option considering resource constraints.

Finally, while the current geographical distribution of the rural population is into over half a million small villages, the future distribution is a much smaller number of much larger aggregations of people – if the desired future is one where the agriculture sector’s share of GDP is to be significantly smaller relative to manufacturing and services sectors, and if the majority of the labor has to be engaged in non-agricultural activities. In other words, the basic geographical structure of population distribution will eventually undergo a change, whether one likes it or not.

Not Village-centric

It is therefore argued that ‘village-centric’ development is not feasible because of resource limitations and because people naturally tend to migrate out of villages to cities. Furthermore, it not desirable since a vibrant economy depends on the aggregation of the population into units much larger than a small village. In short, investing scarce resources into villages is short-sighted and uneconomical.

Based on the above considerations, a model for rural development has been conceived called RISC – Rural Infrastructure and Services Commons.

The RISC Paradigm

The RISC idea is to bring to the rural population the full set of services that are normally available only in urban locations. It works within the constraints of limited resources by focusing attention to and concentrating investments at specific locations to obtain economies of scale, scope, and agglomeration.

RISC follows the logical trend of moving away from vertically integrated institutions to one of horizontal segmentation and specialization. Thus, conceptually and operationally, a RISC has two levels: the lower one is the infrastructure level (I-level) which provides a reliable, standardized, competitively-priced infrastructure platform consisting of power, broadband telecommunications, and the physical plant (building, water, air-conditioning, sanitation, security). The I-level is achieved by the coordinated and cooperative investment of firms that specialize in the component activities.

The user services level (S-level) is above the I-level. Co-located at the S-level are firms that provide user services such as market making, financial intermediation, education, health, social services, governmental services, entertainment, logistics, etc. The presence of the I-level reduces the cost of the services and therefore the prices that the users face. Economies of scope and agglomeration are obtained by the presence of the variety of different service providers.

Given that rural populations are very poor, it is reasonable to expect that the aggregate demand of a single village for any single service will be very low. However, the aggregate demand for, say, a 100 villages for a single service could be significant. Aggregating the demand for many different kinds of services of the same 100 villages would translate into lot of services. These services would require infrastructural inputs which can be commercially and sustainably supplied. Thus, a RISC would supply to the needs of about 100 surrounding villages.

The total rural population of India can be covered by about 6,000 RISCs each servicing the needs of approximately 100,000 people. Further external economies of scale can be obtained by implementing a few thousand RISC locations across the rural landscape. Access to a RISC for any rural person would be only a ‘bicycle commute’ away.

Operationalizing RISC

The distinction between the I-level and the S-level becomes apparent at the operational level. The I-level is provided by a small number of firms which specialize in the provision of infrastructure. The essential requirement is that the investments from these various firms are coordinated. This resolves the ‘coordination failure’ generally associated with investments that are large, lumpy, which have large lead times in implementation, and have long pay-back periods. These can be private sector or public sector firms.

There is an element of planning in the creation of the I-level. But it is not a top-down, bureaucratic, government imposed centralized planning. It is coordinated investment in various components of the infrastructure so that they all make each other mutually viable. The role of the government is highest at this level.

The government has to facilitate the process of the creation of the I-level first through light-handed regulation. Second, it has to give required tax incentives to the firms. Third, the government may be required to facilitate investment though loan guarantees. Finally, it has to help with the acquisition of land required for the projects. The model does not require the government to directly fund any of the infrastructure.

The firms providing the infrastructure will be basing their investment decisions on adequate return on investment, of course. The infrastructure will be used by, and paid for, the firms which are at the S-level and which provide the services that the users demand.

The composition of firms at the S-level will be almost entirely market-driven. There will be two basic categories of services. First, services which the users are willing and able to pay for. This means that the benefits to the users of the services will be greater than the costs. These are the ‘income-enhancing services’ such as greater market access. Second, services which are not fully priced such as government services and those provided by NGO and charitable entities.

What RISC Does

RISC provides a signal to coordinate the activities of a host of entities: commercial, governmental, NGO’s. It synchronizes investment decisions so as to reduce risk. It essentially acts as a catalyst that starts off a virtuous cycle of introducing efficient modern technology to improve productivity that increases incomes and thus the ability of users to pay for the services, and so on. It creates a mechanism that reduces transaction costs and therefore improves the functions of markets.

Therefore, RISC
* serves as a focal point for the bi-directional flow of information and materials within the rural areas
* clusters economic activities in specific rural locations by facilitating firms’ businesses
* seeds urbanization and urbanize the rural population without socially costly rural to urban migration
* integrates the rural economy with the national and international economy and remove inefficiencies

By providing a full complement of services, RISC creates a ‘mini-city’ which seeds the formation of a city by drawing to it the population from the surrounding villages. Initially, those who need the services will commute to the RISC location but as time goes by, the area around a RISC will naturally evolve into a small city. RISC is the grain of sand around which the pearl of a city can develop.

Development of People, Not Villages

The economic development of the rural population, rather than the development of villages, is the goal. This requires that the population have access to services, which in turn requires the availability of infrastructure. Infrastructure investment is lumpy and cannot be economically provided at the scale appropriate to small villages which are the norm in rural India. Furthermore, looking to the future, the economy of present day rural India cannot continue to be dispersed into 600,000 villages. The population will have to migrate to a much smaller number of larger aggregations. These formation of these aggregations can be catalyzed by the coordinated investment of infrastructure, either in greenfield ventures or in existing locations where there is road or rail connectivity.

RISC is not an attempt at social engineering through centralized planning. Neither is it another model of Internet kiosk or telecenter. It aims to solve a problem by appealing to the profit motives of all participants, be they private sector, NGOs, or the public sector. The good that will surely come out of it can only be attributed to Adam Smith’s invisible hand.

Reference: Dey, Atanu and Vinod Khosla (2003), ‘RISC – Rural Infrastructure and Services Commons’. Full document available at Deeshaa.org and at Khoslaventures.com.

He then went on to ask in what way RISC differs from PURA. My response, for the record:

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

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

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

As vehicles of development, PURA and RISC are as similar as trains and planes — they both transport people but they are dissimilar in all other respects such as the principles on which they operate, where they operate, how much they cost, etc.

The underlying reason for the differences between the two models is perhaps that RISC is designed by a development economist, and PURA is what a technologist and educator (Dr PV Indiresan) could come up with and is promoted by a former defense administrator and technologist (Pres APJ Kalam) with very little understanding of the process of development or economics. But then, I guess if I were to design rockets, I would not be any more successful in that venture than non-economists are in designing economic systems.

Which brings me to a point that should be underlined. Our natural world is awesomely complex and our man-made world is becoming increasingly complex. We have come a long way from our hunter-gatherer past, or even our more recent agrarian past. Those were simpler times and it was possible for a non-specialist to make contributions to various fields of human endeavor. Amateurs had a chance because in some sense all people were amateurs. But now it is the age of specialists and specialization. This is not surprising since it is precisely specialization and division of labor that leads to our technologically and scientifically sophisticated world. You have to have medical training for you to be somewhat competent in the practise of medicine; you have to have formal training in law before you can hope to make fundamental and original contribution to the field of law; you have to have studied economics for a fairly extended period before you have a good chance at speaking knowledgeably about it. Of course, studying a subject does not guarantee that one cannot make a fool of oneself in that subject; it only decreases the probability of holding absolutely idiotic views in that subject.

I have noticed that people are especially susceptible to the illusion that on matters economic they are quite well qualified and that they don’t need to study the subject before holding forth on it. Very few would start arguing about the merits of neural-net computers vis a vis quantum computers without having more than a nodding acquaintance with computer science. But when it comes to economic development, many an amateur boldly ventures forth where experts fear to tread. Pony-tailed self-styled gurus hold forth on the subject as do technologists who wouldn’t recognize an economic argument if it came and punched them on the nose.

Does it matter? I think it does. People who are ignorant and are ignorant of their ignorance can, without intending to, cause a great deal of grief to others. One particularly egregious example is that of those who boasted of scaling the commanding heights of the economy after India’s independence. Their ignorance doomed India to a set of policies that made India an economic basket case. Tottering on the brink of disaster, a few policy makers woke up in 1991 and changed course slightly. But we are not out of danger yet.

Beware of monkeys.

The situation today would have been unthinkable then. Now dealers of two-wheelers practically drag you off the street, give you a cold drink, and by the time you have finished it, they have arranged financing and you roll out the door on your new bike clutching your free gift of a toaster oven. Then your choice was severely limited to four or five models; now a reasonable estimate must be a hundred different makes and models of two-wheelers.

There is no shortage of examples of shortages, some of which persist till date. One plausible answer to why these artificial shortages were engineered is rent seeking by those who were in charge of handing out the licenses and quotas. Where the government was the monopoly provider (as in air and rail transportation, telephone services, etc), shoddy quality, inadequate quantity, high prices, high costs, commercial losses, and institutional corruption was the norm. In those instances where private sector providers were allowed, the entry was limited and rent extracted by introducing competition for the market. When firms have to compete for the market, competition within the market is limited and results predictably in low quality, high prices, and shortages.

Here is a thumb rule to figure out if the government is involved in a particular endeavor. Is it characterized by poor quality, shortages, high costs and prices, and corruption? If yes, then the government is involved; if no, then the government is most likely not involved in that business. Let’s apply the rule to electrical power since I am sitting here on Sunday afternoon with no grid power, a regular feature of daily life in Pune. The backup generator is on.

Poor quality: check
Severe shortage: check
High price: check
Corruption (“T&D losses”): check
Null hypothesis: government not involved
Empirical evidence: null hypothesis rejected

I leave it to the interested reader to apply the rule to other instances and test it. The cumulative effect of government involvement in all those sectors gave the Indian economy what I call the “Nehru rate of growth” with a long run annual average of 3 percent or so. India’s poor economic performance—and the resulting poverty—is due to poor economic policies. India is poor out of choice.

For now, I will move on to education in general, and in particular the matter of reservations in higher education, a matter we have visited before here. By the 12th standard, the drop out rate reaches an astounding 94 percent. Of those who finally graduate out of college, only around 15 percent (or, one percent of the those who enter grade one) are employable, leading to a severe shortage of qualified college graduates. The sheer economic waste of human resource is the greatest scandal that very few people pay any attention to.

The fundamental problem with the Indian economy is that the education system is one of the most flawed systems in the country. If there is one sector which is in dire need of reform, it is that education system. The most urgently required reform is to get the government out of it—lock, stock, and barrel. The recent move by the government to further increase quotas in the so-called elite institutions with a view to social justice is akin to rearranging the deck chairs on the Titanic. No, I take that back: it is akin to scuttling the lifeboats even as the ship is sinking.

I have heard the claim that the Indian education system must be wonderful because the IITs produce so many wonderfully successful NRIs (non-resident Indians), especially in the US. They bolster their argument with the specious reasoning that it is harder to gain admission into IITs than into Ivy league schools, and that Narayana Murthy’s son had to use an Ivy league school as a safety school.

Sure it is harder to get into the IITs than into the top American schools. That does not mean that the IITs are in any way better than those American schools. It is a Herculean task to get into a Mumbai local during commute hours, compared to which using the Paris Metro is a piece of cake. Congestion is not an indicator of quality. When supply is severely limited relative to demand, there will be a mad scramble to get some.

On average, fewer than two out of every one hundred who appear for the entrance exam for IITs get admission. If you were to choose the top two percent of any population, the average quality of that group will be a few sigmas higher than the population average. The IITs turn out good students because those who get in are good to begin with. Then for four years, these way-above average kids compete fiercely among themselves for grades. Finally, from this bunch of super-achievers, those with the highest grades and potential are snapped up by the best American universities. By the time these graduate out of the American universities, they are the crème de la crème who have self-selected themselves for intelligence, drive, ambition, and vision. We read about them as the Silicon Valley millionaires and billionaires, and pat ourselves on the back for having a wonderful educational system.

That is most definitely not so. The dysfunctional Indian education system is the saddest and costliest example of governmental ineptitude and malfeasance. The solution to the problem of the Indian educational system has to have at its core getting the government to let go of its chokehold on the system.

The question then is: what exactly is the problem with the government? My answer is that it is a mentality of scarcity and poverty. It does not believe (and here I am guilty of anthropomorphism) in abundance. It treats the citizens as if they are incompetent children who will not be able to work out solutions for themselves without the patronizing paternalism of the socialistic control of every aspect of economy.

There is one apparent paradox: if the government does not allow economic freedom, why does it allow political freedom? Would it not make more sense to restrict the latter and relax the former? I believe that the paradox is solved by the realization that most of India is abjectly poor and illiterate. Lack of economic freedom over generations cause poverty and that leads to illiteracy as well. Poor, illiterate people cannot meaningfully use their political freedom. Indeed, it is easy to politically manipulate very poor illiterate poor people for electoral gains. Promise them free electricity, free TVs, free land, and they will vote you into power. I am not making this up since I am neither that cynical nor that imaginative.

Is there no role for the government in the education sector? Yes, there is, but it is severely restricted to three functions:

• First, funding (but not the provisioning) of universal education up to high school level
• Second, providing an independent regulatory authority for the higher education sector so that private firms can compete fairly on a level playing field
• Third, providing educational loan guarantees to banks

Sufficiently poor people cannot afford to send their children to school. The total cost to them includes not only the direct cost of going to school but also the opportunity cost of the lost earnings of the children. But since the total life-time benefits of a high school education must exceed the total cost of that education, there is a role for the government to subsidize the education of the sufficiently poor. But the government should not run primary schools. It should leave that to the competitive private sector. Give vouchers to the poor which they can use to pay for the private schools. This is not rocket science and pretty much all possible problems can be anticipated and proper mechanisms designed to fix them. (I will be happy to do this separately.)

The role of the government in higher education is simply to ensure that private providers of education compete fairly. The government must empower an independent regulatory body. Independence is important so that politically motivated interference into higher education is minimized.

There must be no subsidies for higher education. Higher education, for all intents and purposes from the point of view of an individual, is a private good. That is, the private benefits of higher education exceed the private costs. Sure higher education also has positive externalities (and therefore has public good characteristics), but that externality does not have to be internalized by subsidizing higher education for those who are rich enough to afford it.

But what about those who cannot afford higher education even though they are qualified for it? The answer is that they have to be given loans by banks and these loans have to be guaranteed by the government. The basic point is simple: the credit constraint that the poor face with regard to higher education can be released with little effort. This the government must do and if done competently, it will take only one generation for the every poor family to become non-poor.

Let’s see how this would play out in the case of a hypothetical “sufficiently poor” family. Abhi and Anu’s parents are daily wage earners who need the Rs 10 each kid earns every day to keep the family going. So sending them to school where the tuition fees and other school related expenses are Rs 400 per month per child is out of the question. Their total cost of sending a child to school is Rs 400 plus the foregone earnings of Rs 300 per month.

So the government gives vouchers that Abhi and Anu use to pay for the privately run school in their neighborhood that they attend. And on top of that, the government gives the parents Rs 600 every month as long as the kids continue in school. Net cost to the family: zero.

All the way to finishing high school, Abhi and Anu continue to receive free schooling and the parents are given an incentive to continue to keep the kids in school. By the time they finish 12th grade, both Abhi and Anu are as properly schooled as any other kid from a middle class family who are not poor. As it happens, Anu is the bright one and she wants to go to engineering school. She appears for the entrance exam and clears it. It is not an entrance exam to select only a small percentage of a huge pool of qualified students. It just ensures that the student has the required motivation and skills to study engineering. She is bright and is well prepared and she gets in. That is not surprising because about 75 percent of those who apply do get to study their subject of choice. Her brother, Abhi, is into medicine. Same story as his sister: a simple entrance exam to test for eligibility and he is in.

But then they are still poor. So they go to one of the several banks and show proof their acceptance and the bank gives them the loan that they need to go to college. When they graduate from their professional courses, they will pay off the loans with interest. Their children will not be requiring support from the government at all. Only one generation needs help.

Not just that, no one is even remotely interested in knowing the caste of anybody. If you are qualified, you get to go to college. If you are poor, and have admission, you get a loan.

Imagine there is no reservation; no one cares what caste you are; no one denied a chance to study and learn because of lack of money. (Sung to the tune of John Lennon’s “Imagine.”)

Imagine if I stopped here for now. And carry on some days later. Wouldn’t that be wonderful?

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

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

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

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

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

Vistor’s Hostel

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

Rural Infrastructure

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

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

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

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

Scattered Economy

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

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

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

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

RISC

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

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

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

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

[Continue?]

“What about the morons?”

“Ah. Morons never do the wrong thing. They get their reasoning wrong. Like the fellow who says all dogs are pets and all dogs bark, and cats are pets, too, and therefore cats bark. Or that all Athenians are mortal, and all the citizens of Piraeus are mortal, so all the citizens of Piraeus are Athenians.”

“Which they are.”

“Yes, but only accidentally. Morons will occasionally say something that’s right, but they say it for the wrong reason.”

That piece of dialog is from Umberto Eco’s Foucault’s Pendulum. Earlier in the dialog between Belbo and Casaubon, Belbo claims that “there are four kinds of people in this world: cretins, fools, morons, and lunatics” and that a normal person is “just a reasonable mix of these components, these four ideal types.”

I am persuaded that politicians in India are not normal people in the sense Belbo means it. They are an unreasonable mix of the ideal types, mostly moronic. What got me thinking about this was the ban on plastic bags that is scheduled to go into effect in Maharashtra next week.

Here is what happened. End of July saw not only unusually heavy rains – a cloudburst, actually – in Mumbai, but also record high tides. Mumbai, never having an efficient storm drainage system, succumbed to massive flooding and millions lost property and hundreds died as well.

Now comes the moronic reasoning. You see garbage everywhere in the streets in Mumbai. Garbage has plastic bags. Uncollected garbage lying in the streets can block drains during a storm. So ban the plastic bags around the state of Maharashtra to avoid flooding in the city of Mumbai.

If you will permit me a brief digression at this point. You may ask, why are we ruled by morons? Sweetheart, we are ruled by morons and cretins because the vast majority of us are morons and cretins. If we were not, it would not be possible for our elected leaders to be morons and cretins. In other words, we cannot be a population of enlightened beings and somehow end up with morons and cretins as the rulers. Conversely, an enlightened leadership cannot arise from a population largely consisting of cretins and morons. Leadership is endogenous to the population, especially in what is popularly called a “democracy.” George W. Bush, for instance, is a cretin and he rules because there is a majority in the US sufficiently moronic and cretinous to have elected him as their Dear Leader. Leaders are endogenous to the population and reflect the dominant traits of the population they govern. But then you may say, what about Clinton? He was not stupid. And a majority of pretty much the same population voted for Clinton in two elections! How did this happen? Well, my precious, just like individuals, populations change too. Sometimes the change is sufficient on the margin for the majority of the moronic to dictate the rulers and the rules.

Anyhow getting back to plastic bags and their bans by the morons that rule Maharashtra.

Banning plastic bags does not do away with the real problem. The problem is, first, there is too much garbage, and second that the garbage is not being properly disposed of. Indeed, the ban will cause a greater use of tetra packs which are more expensive and bulky and they will actually increase the volume of garbage produced. It will enrich the makers of tetra packs and I wonder if there is some sort of a kick-back deal between them and the ruling cretins.

I accept that the ruling cretins cannot understand the system they have the power to influence. But what I cannot understand is this: don’t they have intelligent advisors? Can’t they seek the counsel of people of normal intelligence? For instance, if I were asked, I would immediately propose an alternative to the idiotic banning of plastic bags.

The mechanism that I would recommend is simple. For every plastic bag manufactured, collect a disposal fee. Let’s say it is Re 0.10. This fee gets passed on to the consumers – the people who ultimately decide whether to accept a plastic bag at the store or to bring their own re-usable bag, the people who decide whether to chuck the plastic bags on the streets after use, etc. The next step is to have collection centers where for every plastic bag turned in, Re 0.08 is returned.

What happens if this method is used? First, the number of plastic bags used will go down. Simple econ 101: price goes up, quantity demanded goes down. This is good for the economy since plastic bags are made out costly petroleum.

Second, discarded plastic bags are a source of income for those who take the trouble to collect them and turn them in. From what I have seen in Mumbai, in a couple of hours, one can collect 500 of them and thus make Rs 40 by turning them in. My conjecture is that following this sort of scheme, you will not find a single plastic bag in the streets of Mumbai.

The benefits of this scheme: it is revenue neutral. What the state collects in fees, it pays out in collected plastic bags. The user is charged a little more and this charge goes to the people who make a living out of picking up the plastic trash from the streets. The scheme also reduces the use of plastic bags and encourages conservation by promoting re-usable bags.

Practically every problem we see around us admits a market solution. Get the incentives right and the market will figure out the most efficient way of solving the problem. On the other hand, banning is the strategy of the failed Nehruvian ideology of command and control. It will not work and will make matters worse. They will encourage corruption and bribery. The police will use the ban as a baton to beat the shopkeepers with to extract even more than they already do.

Sad really. It is all karma, neh?

By persistently going against the popular illusions of the age, one risks the possibility of being branded a crank. I expose myself to that fate because it is my desperate hope that I may be able to change a few minds and perhaps influence policy however indirectly.

ICT as the Nervous System

The crux of my argument is that information and communications technology (ICT) plays a supportive role in an economy. Not unlike in a body, where the nervous system though critical is worthless unless the musculo-skeletal is robust, the digital network is worthless unless there is an underlying non-digital economy of stuff such as manufacturing, agriculture, and services. You need to have factories and farms, roads and railways, schools and shops, houses and hospitals — not just broadband digital 3.5G MP3 camera phones for surfing the web.

Not paying attention to the fact that the “digital economy” has as its foundation the “stuff economy” has perverse consequences of providing the illusion of progress while the system insistently regresses. For instance, unlike in those bad old Pre-internet days, today you can visit the web site for the railways in India and make your train reservation in about a half hour. You no longer have to stand in line for hours on end to get to the ticket counter and find out that there are no seats available for weeks on end. The website will tell you that the trains are full after half an hour.

The illusion of progress — at least to those lucky few who have web access — is short-lived when you realize that though you can attempt to book the seats online, the underlying system has not changed much, if at all. The so-labeled “super fast express” trains make their way at a stately 70 kms an hour average, pretty much what they were capable of doing forty years ago. Thirty years ago, the Shinkansens were doing 200 kms an hour and today they exceed 300 kmph. But in India, we maintain a dignified traditional 70 kms an hour for decades on end.

What India needs to pay attention to is the underlying hard economy which is the infrastructure upon which the soft economy of internet and services can ride. In this one, I will briefly focus on one bit of the hard economy: the railroad transportation system.

The Railroad Transportation System

The big picture shows India to be a very large country with a massive population. To feed, clothe, and house this billion plus population requires lots of stuff. For obvious reasons very large number of people and goods have to be moved efficiently over long distances. There are three primary methods for this: roads, railways, and air.

Let’s take air first. Air transportation is relatively simple and for long distances it is expedient. It is also grossly expensive for a poor economy such as India. Besides, it is totally dependent on fossil fuels and this makes it seriously polluting. Air transportation is OK for moving rich people over long distances but for bulk transportation of goods, and for bulk transportation of not-rich people, it is not a good solution. Thus, for moving about 300 million really affluent people over long distances, air transportation makes sense, as in the US. Even in the US, bulk transportation does not use air. They use the roads and rails.

Next consider roads. Roads are expensive to build and extremely expensive to operate. For moving people, the best roads can at most do an average of 80 kms per hour over long distances under ideal conditions such as can be found in the advanced industrialized economies. Private cars are expensive to own and they use polluting fossil fuel. Indians cannot afford cars because we are too poor and there are too many of us. Besides we are seriously dependent on external supplies for fuel. Finally, roads are notoriously unsafe as compared to air or rail.

Common carriers such as buses are also not the right solution for India over long distances. A recent journey of 500 kms by a “luxury” bus took 15 hours. The bus was luxurious but the road was pitiable and the overall experience put the fear of travel in me. I would have preferred to take a slow train but severe capacity limitations of the railways ruled out that option.

The best solution for India’s transportation needs is what I call an “Intergated Rail Transportation System” (IRTS) which I will outline in this piece.

Intergated Rail Transportation System

First, the “R”. Steel wheel over steel rails is the most efficient method of transporting goods and people, especially when both volumes and distances are large. It is super efficient and clean because of a number of reasons. First, because steel wheels over steel rails have very low friction and with aerodynamically designed trains, you can have the least transportation cost per ton per mile. Next, you don’t have to use fossil fuels. You can generate electricity using whatever technology is most efficient and available to power the trains. Third, you can use the same system — the tracks and the signaling and switching system — for both passengers as well as goods.

Next, trains can be very fast compared to roads and can be compared favorably to planes over short and intermediate distances. Mumbai to Pune (a distance of about 120 kms) takes 3 hours by road, city center to city center. By a fast train, with a modest top speed of 200 kms an hour, the journey should not take more than an hour. Currently the trains take over 3 hours. And by air Pune-Mumbai takes about 4 hours. You drive to the airport, proceed through security, then take a flight that spends more time taxiing than flying, and arrive and then go from the airport to the city center (which can easily take over an hour at peak traffic time.)

Over long distances such as between Delhi and Bangalore, planes have an evident advantage for people but not for goods. But that advantage is restricted to only the very rich in India. The average person cannot afford the round-trip fare which approximates the average annual income of about $400. Imagine how many people would fly between NY and SF if the price was about $23,000 instead of the $400 it is.

So the core of the IRTS is a very fast rail network connecting the major population centers. The backbone of the system is high speed trains that move between metros such as Mumbai and Kolkata (via Nagpur), between Delhi and Bangalore/Chennai (again via Nagpur.) These I call the “Cross Links” which are different from the “Diagonal Links” which go between Mumbai and Delhi (via Ahmedabad), Delhi and Kolkata (via Kanpur), Kolkata and Bangalore/Chennai (via Hyderabad), and Bangalore to Mumbai.

The backbone of the system is therefore the diagonal and cross links. Trains travel at an average 250 kms an hour and make at most one stop. Mumbai-Delhi is done in 6 hours (instead of the 18 hours currently by the fastest train.) Mumbai-Kolkata is done in 8 hours. If you want to go from a town close to Mumbai to a town close to Delhi, you do the journey in three bits: two short distance segments (relatively slow) and one fast long distance train. The short distance segments will be served by the “integrated” part of IRTS.

For short distances, the road system and the existing rail system would suffice. For instance, a journey from Pune to Chandigarh would involve a bus or train from Pune to Mumbai, a train from Mumbai to Delhi, and then a train from Delhi to Chandigarh.

This is really a hub-and-spoke model with multiple hubs (Mumbai, Nagpur, Delhi, Kolkata, Chennai, Bangalore), each serving a bunch of spokes that terminate in towns close to the hub.

Without going into details, I would like to outline some advantages of the IRTS. The obvious hurdles will also be dealt with simultaneously.

Costs

The most obvious point is that it is massively expensive to build a rail system. Even conservatively it will cost $50 billion. Here is the way out. Let it be private/public partnership. The government owns the land on which the existing rail system operates. So that could be the contribution of the public sector. The rails can be farmed out to the private sector on a “build and operate” scheme. And the rolling stock can be owned by private sector firms. These private sector firms can operate trains just as they operate airlines today. They can import the best available train technology from Japan and France just as airlines import planes from Airbus and Boeing.

The involvement of the private sector will not only free up public resources, but the increased efficiencies will propel economic growth which will increase government tax revenues.

The world is awash with liquidity these days. India needs to come up with projects which will attract these savings. Building a modern railways for India is one such project.

Employment

The IRTS will have to be built from scratch. Doing so will involve the labor of millions. Just like the interstate highway system did for the US, it will give a permanent boost the growth of the economy. Spending $50 billion will generate direct employment.

Economic Linkages

Then there are secondary effects which arise from backward and forward linkages. Forward linkages such as the development of a more efficient agricultural and manufacturing sector.

A significant portion of agriculture production is wasted as it cannot be moved efficiently enough. Manufacturing for domestic consumption and for exports is stunted because of the slow movement of goods. Both sectors will obtain efficiency gains.

Technology

India does not have state of the art railroad technology which has been developed by countries such as France and Japan. To begin with, India will have to import these and build up domestic manufacturing capacity. Since the requirements for India will be large, India has the bargaining power to insist on technology transfer. Then given that engineering and design talent is not lacking in India, it is possible that India can improve on the technology and be a leader in the field.

Vision

What we have in India is a creaky dilapidated outmoded transportation system. More than roads and airports, India needs a great rail transportation system which will form the bedrock upon which a modern Indian economy can move. It is a great challenge and if articulated well, it can galvanize the entire population. It will not be easy but then easy things are not worth doing and are rarely transformational in their impact. The movers and shakers of India should look for projects that transform, hard though they may be.

The beauty and elegance of a modern transportation system beckons. Are we up to the task?

[This post is continued at "The IRTS - Revisited".]
{Related links: See these pictures of Shinkansen (the Bullet Trains of Japan). Wouldn’t it be amazing to have trains like these in India? Reuben at Zoostation had a bit about the new Shinkansens.}

First, the government of India must credibly commit to paying every literate and numerate person Rs 5,000 (about US$100). Second, ensure that every person who wants to learn basic literacy and numeracy can do so without having to pay a single penny. Third, provide testing centers around the country (especially in rural areas) where a person can be certified to have achieved basic literacy and numeracy. Finally, sit back and let the free market grind out the outcome which is total literacy within three years.

The details of this proposal follow from elementary logic and basic common sense. First, the cost-benefit analysis. There is long term cost of having about 300 million illiterate citizens. Each year, a literate person must be at least 10 percent more productive than an illiterate person. Assuming a per capita annual product of the illiterate population to be $200 (which is about half the annual per capita GDP of India), a 10 percent increase in productivity would be an increase of $20 per year per capita. Over a working life of about 40 years, that is an $800 increase in productivity per capita. Assume that the average working life of the 300 million illiterates of India is a conservative 20 years. Then the increase in additional product due to the additional 300 million literates is a conservative $120 billion (300 million times $20 times 20 years) in net present value terms.

I am using very conservative estimates of the benefits to make the case that the cost of doing so is a very small compared to the benefits. Assume very liberal costs of delivering basic literacy, say, $100 per capita. I will argue elsewhere that this is a very liberal estimate. Add to it $100, the incentive amount paid to the person upon passing a standardized test, and you have a total cost of $200 per capita. For the total population, it is amounts to $60 billion. This is half the aggregate social benefit estimated above.

Now one may ask, how will the government, which is totally inept as evidenced by the fact that 300 million Indians are illiterate despite lofty goals of making education univerally available and has not been able to make a dent even after over 57 years of spending huge amounts, be able to do this? The answer is simple: the government must not be in the business of providing the means and method of primary education. The only job of the government should be to finance the education. Let the private sector do the actual provisioning of education.

Here is where mechanism design (thanks, Prof Richard Gilbert) comes in. Recall that anyone who passes a standardized test of basic literacy and numeracy (the exact level of literacy and numeracy I will outline later) gets to take home $100. There is another part to it: a person can be associated with a “New Deal School” (NDS) and when the person passes the test, the NDS of record gets $100.

So what exactly is a “NDS”? That is where the private sector comes in. Suppose that a private firm figures out that to make a person literate and numerate it costs $40. So it would have an incentive to recruit students and teach them as efficiently as it can. It could even happen that this firm will not only not charge tuition but indeed may go out and solicit students with upfront gifts. They may well spend $20 a student to entice them to enroll and learn because the cost to the firm will be $60 ($40 for the actual teaching and $20 as bribe to the student to enroll), and the firm will make $40 profit per student that graduates.

Here is the sweetest part of all. The fundamentals of a market economy will ensure that competition will develop among various NDSs. Firms will compete for students and they will end up competing on price: the firm that pays the most in bribes to students — that is, the firm which is the most efficient in delivering the needed education — will get more students. In the end, purely due to the logic of markets, the students will capture whatever is left over after costs from the $100 incentive to NDSs.

The mechanism I have outlined achieves one primary function: it ensures that the cost of providing the education is minimized through competition in the market, and it assures that firms do not make super-normal profits, and that the benefits of the competition in the market accrue to the students.

If one starts to explore the proposal, one is astonished by the richness and depth of this (even if I say so myself.) Consider the effect on the overall economy. Over a period of three years, about $60 billion worth of public spending takes place. Spending for some is income for some others. In this case, the income goes to the poorer sections of the population. They in turn can buy food, thus helping out the government distribute food to those who need it. When food gets sold, farmers benefit. Most of the money will end up in rural areas where it will be spent on various things, including manufactures. In short, the multiplier effect of this spending will be enormous.

It can be shown that the US benefitted fabulously from the construction of the interstate highway system. It was an infrastructure project the cost of which is miniscule compared to the benefits that it delivered. For India, the most important infrastructure project is the one that will build its human capital base.

{Continued in Modest Proposal Part 2.}

Rural India needs affordable services – from education to market access, from telecom to healthcare, from financial intermediation to entertainment. The key issue in rural India is the non-availability of services at affordable prices. Linked to this is the lack of perceived opportunities in rural areas. These twin factors create a situation in which few want to do business in rural India.

It also leads to the exodus of people from rural areas to urban slums, which stretch the resources in the cities and towns even further. In other words, rural India is caught in a trap that it seems difficult to get out of.

… What Dey and Khosla propose is the creation of 5,000 rural hubs across India, each catering to a population of about 100,000 or about 100 villages, such that the hub is no more than a “bicycle-commute” distance away for people in the villages. These hubs will have about 10,000 square feet, built at a cost of about Rs 2 crore each. They will have state-of-the-art infrastructure – including 24×7 electricity, broadband connectivity, security and sanitation.

This standardised infrastructure reduces the costs of operation for service providers in rural India. From the point of view of the rural populace, there is one place where it can get multiple services – services which were hitherto not available or too expensive.

Publish the exam questions on the internet. That way you avoid having to send papers to the printers, then having them sent to various examination centers, and so on.

This method avoids the need to print it centrally. Just download it from the web to your local computer at your convenience. Then print out the question paper and hand it over to the students and there you have solved the problem of leaked exams.

Simple, you say. But then add, everyone and his brother will have access to the web and all the questions will be public knowledge.

OK, I say, I forgot an important intermediate step. Put an encrypted version of the paper on the web. Every examination center could then download a copy of the encrypted paper. Then at an appropriate time, a key will also be made available on the web — say, an hour before the start of the exam. Download the key, decrypt the paper, print out a copy, run however many through a copier, and you have an almost foolproof system of delivering exam questions without leaks.

This system has only one requirement: that the key be in safe custody. But it is trivial to guard one key instead of having to see that the paper is not leaked in the hundreds of locations where the current system is vulnerable.

I call it the SEEQS — Simple Encrypted Exam Questions System which is pronounced ’seeks’.

Take, for instance, his view on energy.

One of the biggest challenges in India in the cities as well as rural areas is the availability of reliable power. Even as India goes about trying to set up gigantic power plants and revamp transmission to bridge the deficit, there is a need to think very differently about the power situation. Since there is little legacy in most parts of India (especially the rural sector), are there new options that can be looked at for providing power rapidly and cost-effectively across India?

He introduces his ideas on ICT thus:

Information and Communication Technologies (ICT) have been the dominant factor for the productivity growth in the developed markets. The problem with the current ICT is their cost – the dollar-denominated pricing makes it affordable to only a small segment of the business and consumer segment in India. While competition has ensured that talk on cellphones is now among the cheapest in India, the same is not the case in computing given that two virtual monopolies (Intel and Microsoft) control the two most critical components.

For India to develop, there is an increasing emphasis on the need to build out the physical infrastructure – roads, ports, airports, power and the like. But there is the need for a parallel digital infrastructure – high-speed networks, access terminals, software and content. While the telecom carriers are now building out the high-speed networks, not enough attention has been paid in the other areas. This needs to change.

What India needs is an affordable computing and communications platform, one that dramatically brings down the cost without compromising on the performance or utility. Luckily, many of the components are now coming together to make this happen. What is needed is for us to adopt these innovations to build the equivalent of “tech utilities” which make “commputing” (as Om Malik put it) a reality for the next markets.

Regarding market access, he starts off with

Information abounds around us, but if it is not available at the right time to support decision-making, then its value is limited. The Internet helped bring ease the distribution of information globally. In India, too, we have benefited significantly over the past decade. But a lot more needs to be done to take the benefits of information access to larger numbers across India. The need is to leapfrog from the request-reply (1-way) web to the publish-subscribe (2-way web).

He stresses the need for distribution hubs and writes:

Small- and medium-sized enterprises (SMEs) and Rural India are the twin engines for India’s economic growth and development. SMEs need technology solutions which can help them build their digital infrastructure as they search for global opportunities and seek to make operations more efficient. Rural India needs an array of services at affordable price points. The common thread is the need for distribution hubs which aggregate products and services. While SMEs need the equivalent of Tech 7-11s, Rural India needs RISC (Rural Infrastructure and Services Commons).

He elaborates on the subject of RISC as distribution hubs (caution: shameless self-promotion follows):

RISC (Rural Infrastructure and Services Commons) is an economic model for the transformation of Rural India, proposed by Atanu Dey.

According to Atanu: “Fundamentally, the specific market failure that RISC addresses is that of coordination failure. RISC is designed to coordinate the activities of a host of entities-commercial, governmental, NGOs. It synchronizes investment decisions so as to reduce risk. It essentially acts as a catalyst that starts off a virtuous cycle of introducing efficient modern technology to improve productivity that increases incomes and thus the ability of users to pay for the services, and so on. It creates a mechanism that reduces transaction costs and therefore improves the functions of markets.”

Atanu and Vinod Khosla co-authored a paper on RISC in August 2003. The monograph outlines the challenges in dealing with rural India and a framework to solve the many inter-linked problems to build a new “urbanised” rural India.

All of the above is just the tip of the proverbial iceberg. Much lies below the surface and for us to be able to transform India, a great deal of energy will be required. India is like a super huge supertanker. Changing course, leave alone reversing direction, will take a lot of blood, sweat and tears. No single entity can do it. It will require coordination, cooperation, competition, and sheer blind luck. It will require the private sector, the public sector, the government, the households, the NGOs, etc etc. The motivations will be equally diverse. For profit, for fame, for self-gratification, for power, or whatever. Somehow if the vision is shared, though our means and skills be different, every one of us can make it happen.

How to create a shared vision is of course where the challenge lies.

I continued to develop the RISC model while at Stanford University as a Reuters Fellow 2001-02. I was also putting the finishing touches on my PhD thesis at UC Berkeley in economics. The thesis was on the Indian telecommunications sector and the effect of universal service obligations on the sector. My thesis work was not related to RISC. I knew of Vinod’s interest in bringing telecommunications solutions to rural India. So I gave Vinod a copy of my model and he liked it and we decided to co-author the concept paper. He believes that RISC would be an appropriate model for the government to channel much of rural development resources. I believe it has to be a public-private partnership and that the driving force has to be the private sector.

Reuben Abraham who is working on his PhD at Columbia University was instrumental in getting me in touch with Rajesh Jain in April 2003. I had no idea of who Rajesh was nor had I heard of his IndiaWorld success. Rajesh thought that RISC made sense and decided to fund Deeshaa Ventures with RISC as a focus in September 2003. Implementing RISC is only a means to a larger goal of transforming India. I moved to Mumbai after an absence of 22 years in the US to lead Deeshaa Ventures.

We believe that the top of the bottom of the pyramid is ready for rapid adoption of not just technology but best practices from around the world and that will transform India. Rajesh’s other goal is to bring affordable technology to small and medium enterprises — SMEs are currently unable to afford solutions such as the Window/Intel ones because they are too costly.

Where we are with regards to RISC: fundamentally, it has to be admitted that implementing RISC requires at least 1) Deep understanding 2) Deep commitment 3) Deep pockets

I see the first bit the biggest hurdle. Take for instance the PURA model. President APJ Kalam has commitment and the influence to motivate deep pockets. But I feel that the PURA model does not reflect reality in some basic aspects. I have done a brief note comparing RISC and PURA. Rajesh discussed the matter with Khosla last month in California and Khosla said that he would forward the note to Kalam. Khosla told me that during his recent visit to India, he had spoken to President Kalam about RISC and also to the chief ministers of AP and Karnataka.

Currently, we are working on establishing partnerships with other entities interested in tapping the potentially enormous resources that lie under-utilized in India. The private sector has the opportunity to not just do extremely well by addressing rural India, but also do a great deal of good.

Deeshaa Ventures does not have the immensely deep pockets required for transforming India but does have understanding and commitment by the tons. I am confident that we are at the cusp of a radical transformation of India — what is required primarily is the vision and the hard work that will transform the vision into reality. I truly believe in Goethe’s advice:

Whatever you can do, or dream you can do — begin it. Boldness has genius, power and magic in it.

Then I figured that I might as well reduce my level of ignorance. So off to the web I went and found Biodiesel.org. Here are some of the basics:

What is biodiesel?
Biodiesel is the name of a clean burning alternative fuel, produced from domestic, renewable resources. Biodiesel contains no petroleum, but it can be blended at any level with petroleum diesel to create a biodiesel blend. It can be used in compression-ignition (diesel) engines with little or no modifications. Biodiesel is simple to use, biodegradable, nontoxic, and essentially free of sulfur and aromatics.

How is biodiesel made?
Biodiesel is made through a chemical process called transesterification whereby the glycerin is separated from the fat or vegetable oil. The process leaves behind two products — methyl esters (the chemical name for biodiesel) and glycerin (a valuable byproduct usually sold to be used in soaps and other products).

Is Biodiesel the same thing as raw vegetable oil?
No! Fuel-grade biodiesel must be produced to strict industry specifications (ASTM D6751) in order to insure proper performance. Biodiesel is the only alternative fuel to have fully completed the health effects testing requirements of the 1990 Clean Air Act Amendments. Biodiesel that meets ASTM D6751 and is legally registered with the Environmental Protection Agency is a legal motor fuel for sale and distribution. Raw vegetable oil cannot meet biodiesel fuel specifications, it is not registered with the EPA, and it is not a legal motor fuel.

If India can grow the biomass suitable for biodiesel in marginal agricultural lands, it would be wonderful. Of course, India also needs clean-burning modern diesel engines as well. This can be one of those technologies that create a partnership between the agricultural and manufacturing sectors: the former grows the stuff and provides the latter the induced demand for its output.

NOTE: I don’t have any expertise in biodiesel. So please don’t write a comment asking for information.

Another fact: any of the factors can be inefficiently utilized.

Final fact: we are not living in a perfect world. Therefore there are immense opportunities for efficiency gains.

Labor comes from people. People are critical for production. Wasting labor — especially highly productive labor — is a crime and we pay for that crime in terms of poverty.

India is one such place where you cannot throw a stone without hitting an opportunity for improving the system with the most minimal of effort. Take the recent CAT affair. Apparently, the Common Admissions Test which is held for the Indian Institutes of Management (IIMs) hit a snag — the questions were leaked. No surprise there. The stakes are high since about one in nine applicants gets to attend the coveted IIMs. The incentives exist for gaining some advantage, by fair or foul means.

Now it is all a big mess. About 125,000 students will have to retake the exam. Imagine the economic loss. Students taking exams, and institutes spending resources for selecting students is part of the transaction costs which I keep harping on. If one can reduce these costs, production goes up and consequently meet the necessary condition for reducing proverty.

Coming back to the CAT. Where could the problem manifest itself? At the printing press to begin with and in all the intermediate locations till one gets to the exam hall. Do we still need to rely on printing the question paper at a centralized location and then have complicated logistics of safely transporting these to dozens of examination centers and guard against leaks? Clearly there are cheaper alternatives. My proposal is to use ICT. Here is what you do.

Publish the CAT exam paper on the internet.

That way you don’t have to print it centrally. Just download it from the web to your local computer an hour before the exam. Then print out the question paper and hand it over to the students and there you have solved the problem of leaked exams. Waitaminnit is what you would say. OK, I say, I left out an important bit of the solution.

Put an encripted version on the web. So everyone has the question paper and only one person has the key. An hour before the exam begins, the key is sent out and used. Any publicly available encryption software would do. I leave the details of the implementation as an exercise for the reader.

I have been reading in newspaper reports that management school applicants appear for five to eight different entrance exams. So evidently the CAT is not so common. Assuming that about 100,000 students appear for about five exams on average to get into one of the management schools, you have half a million extra exams with its attendent cost. Assuming the total cost of each extra exam to be a conservative Rs 5,000, that represents a loss of Rs 2.5 billion or about US$ 55 million.

Management schools are not the only type of schools for which the competition is so fierce with its attendent multiple exams and consequent losses. There are medical schools and engineering schools and so on. A few billion rupees of waste here, and a few billion rupees of waste there, and soon you would be talking of waste on a colossal scale. All these wasted resources finally add up to poverty. Little drops of water and little grains of sand, etc…

So the solution is rather simple: have common testing exams and use the results to determine who gets admitted. The solution is not rocket science. In fact, the model exists in many other not so remote parts of the world. Most people in the education business must know about GRE, GMAT, LSAT, and so on. What we have to do is merely imitate them. (Pet gripe: we import all the junk from these countries — notice the wrestling and MTV channels and the Michael Jackson wannabees.) But we are particularly blind to the good stuff that we should be imitating.

In the end, it is all about transaction costs. We need to reduce the cost of doing stuff — be it for deciding who gets to attend which school, or for increasing market access for locally produced goods. The use of ICT is particularly suited for reducing transaction costs. We need to pay attention to that if we are concerned about India’s economic growth.

{Followup: See a simple encrypted exam questions system (SEEQS).}

Thank you very much for sending me the RISC model.

I have read it with interest and entirely agree that India has very little chance of being a major player in world without integrating the rural economy. Having said that and having been trying in our own small way to integrate the rural areas which we are working with in our sugar factories, I am beginning to believe that we need to get some help from specialists who understand the social anthropology of our people. I do not know if any one else in your team feels the same way.

I could not agree more with Mr. Subbiah that the cultural context of our economy is extremely fundamental to our economic development and therefore having the insights of cultural anthropologists is important.

In a sense, economics and anthropology are intricately linked because humans are cultural creatures and our aspirations and our drives are shaped by the culture that surrounds us. Our thinking is bounded by the limits that culture places on us and any fundamental shift in our thinking has to accompany, if not be induced by, a cultural shift.

Fortunately, we are immensely pliable creatures and given sufficient reason to change, we change. India’s economic woes can be traced to at least some extent our culture of acceptance of the status quo and a fatalistic acceptance of what is instead of striving to improve our lot. We need to expound a new vision and spread it throughout the nation so that we start to acknowledge our potential and thereby take the first step to realize it.

Change in the way we think about the problems we confront is critical because the same sort of thinking that has created the problems cannot possibly get us to the solutions. It is the avowed goal of our team at Deeshaa to think very deeply about the source of our problems to understand what it was that created them. Then we proceed from that understanding to the next step, that of creating a solution that is not mired in the old mistaken ways of thinking. Finally, we propagate the solution to all corners of the country, the first step of which is to implement the solution as prototypes to demonstrate that the proposed solution is feasible.

It is a bit of a cliche to remark that our resources are limited while our wants are unlimited. To say that resources are limited is an incredible understatement when considered in the context of rural India — 700 million people and most of them below the poverty line even by Indian standards, leave alone global standards.

There is what can be called the first degree of poverty — the absence of resources. To make matters worse, we have a second degree of poverty: the inability to efficiently use what little there is. Though there is no escaping the first degree of poverty, there are ways of preventing the second degree of poverty.

This is what motivates me: what can be done with the limited resources so as to make the best use of them. It is depressing to note the almost unimaginable waste. I will give only one example here. But it is only one of the hundreds of such examples — all of which add up to create an almost inescapable prison that the economy is chained within.

Here is a news item:

BSNL lost Rs 9,000 crore (Rs 90 billion) for providing telephones in villages and remote areas, between its corporatisation in October, 2000 and December 31, 2002.

In a little over 2 years, it lost nearly $2 billion. It is a staggering amount. What does that really mean? Expenses exceeded revenue by $2 billion! Why did this happen? Largely because the use of the telephones did not generate sufficient benefit to the users to justify to them a level of usage that would pay for the capital and on-going costs of providing the telephones. It costs orders of magnitude more investment per rural telephone line than it costs to provide an urban line. The rural telephones are rarely used — if they are working at all in the first place.

So what are we doing wasting $1,000,000,000 each year in putting up these lines? We have village public telephones in about 300,000 villages (out of about 600,000 villages in total.) That is, we lost about $3000 per village PER YEAR. Imagine the alternative uses of that money for a village. It could easily fund a primary school. Imagine 300,000 public schools. Imagine the number of teachers you could employ. Imagine the number of children who would benefit. Imagine the multiplier effect on the economy of having a few hundred thousand additional literate people. And now compare that to the utter waste of installing dead phones in villages.

Why are we doing this? Is it because some brain-dead bureaucrat in Delhi decided that? Has he thought through the welfare implications of that policy? Is there an alternative policy? Instead of incurring a loss of $3000 per village per year, how about aggregating that for 100 villages, and using $300,000 to provide a comprehensive telecommunications center that WORKS and that actually recoups the investment though user fees?

Let me argue by analogy: imagine, just as we have the scheme of village public telephone (VPT), that we had a ‘village transportation system‘ (VTS) where we decided that each village will have one Maruti at the cost of Rs 4,00,000. Of course, lacking maintenance facilities, spares, contention about who can ride it and when, it just sits there and rots. But we have spent Rs 400K on this car, and in the 100 villages we have spent Rs 40 million to provide each with a car.

Alternatively, if we had used the Rs 40 million for this:

20 minibuses @ Rs 1 million each — Rs 20 million
40 drivers @ Rs 100K salary per driver per year — Rs 4 million
Maintenance and fuel subsidy — Rs 5 million

I could go on but you get the picture: PUBLIC TRANSPORTATION that works. A reliable bus service twice a day.

Economies of scale kick in. Fact is that Americans can afford to neglect public transportation; we cannot. So also, Americans can afford to have 2 PCs per capita — one at home and one at work; we cannot. We have to use our limited resources efficiently and intensively. That can only be done if we use scale economies and create minimum economically viable units. Thinly distributing limited resources is not the way to do this.

Given limited resources, we have to put them to that use which has the maximum return on investment. Computing for the masses is a great idea. But can we afford that right now? Probably not. What we can do, and should do, is to bring computing to those that are most capable of benefiting from it.

It is a war out there, as they say. In that context, the concept of triage is very important. The big dic defines triage as “the sorting of and allocation of treatment to patients esp. in battle and disaster victims according to a system of priorities designed to maximize the number of survivors.”

Trying to do everything for everyone at the same time leads to nothing being accomplished at all.

So my thesis is this: build a bridge across the digital divide but don’t try to get everyone across the divide all at once. It cannot be done because the bridge we can afford to build will have a limited capacity. Try to get all of them on board at once, and we all end up at the bottom of the divide.

The solution is to provide a consistent solution that will be useful for at least some part of the rural population, rather than a solution that is all pervasive but of little use to anyone.

A RISC is located away from the majority of the population. You have to get on your bicycle and pedal for an hour to get there. But when you do, you find that you have come to a mini-city where you get everything that you need — internet access, telecommunications, market services, distance education, agricultural extension, banking, health services, …