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

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

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

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

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

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

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

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

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.

Fairness is the cornerstone of justice. It is unfair — and therefore unjust — for the government to force non-Muslims to subsidize Islam because ultimately it is not the government’s money but rather the taxpayers’ money that the government hands out to promote Islam through its haj subsidy. Once again, for an Islamic state to tax its non-Muslim subjects is understandable since Islam dictates that non-Muslims pay jizya — “a poll-tax levied from those who did not accept Islam, but were willing to live under the protection of Islam, and were thus tacitly willing to submit to the laws enforced by the Muslim State.” (Wiki.) The Indian government is not an Islamic one — at least not yet — and therefore must not impose jizya on its citizens.

From an economic point of view, subsidies and taxes are sometimes justified. For instance, revenues required for the provision of public goods have to be raised in some way and taxes are one way of doing so. There are welfare losses which arise from taxes but in the case of the provision of public goods, the derived benefits could outweigh those losses. There are good reasons for subsidies also. When markets under-provide some goods (such as is the case for some public goods), then subsidies are justified. Even then, from an economic efficiency point of view, the taxes required for balancing the subsidies should be paid by the beneficiaries of the public good in question.

Aside from public goods, one can make a case for the public provision of some good or service. (Note that merely because a good or service is publicly provided does not make it a public good. Private goods can also be publicly provided, just as public goods can be privately provided.) One such case would be due to high transaction costs, such as when it is too expensive to determine individual quantity used and apportion costs among a very large number of users. Collective provisioning of the service and funding it though taxes may be the most practical method.

The haj subsidy fails all of the tests above. I suggest that the Indian government should abolish the haj subsidy. I think that if people want to go on haj, they pay for it themselves, and if they cannot afford it, just as is the case for any other activity, ask for donations from those who wish to give voluntarily. Forcing people (such as myself) to pay for the haj is immoral and unethical.

Here’s a mechanism which I believe would be fair, reasonable and practical. Instead of the current practice of the government taking part of my tax money and allocating it to support the haj, the government should let me decide how much I wish to contribute to the haj and indicate it on my tax returns. Note that this amount is over and above whatever taxes I have to pay. That is, if my tax is Rs T, and I wish to contribute Rs H for the haj, then at tax time, I will pay Rs (T + H) to the government. Then the government can add up all the H’s in all the tax returns and use it to support the haj.

This way no one is forced to support an activity that he or she disapproves of. The best way would be to get the government out of the haj subsidy business entirely, of course, but this is just a way of ascertaining the collective will of the Indian taxpayers.

There is a larger principle here. I think charity should be a voluntary activity. The government should not be in the business of deciding for any citizen how much of that citizen’s resources should be allocated to charity. For instance, the government should not be handing out disaster relief funds to any foreign governments. (See Funding Islamic Terrorism and the followup.) The people are quite capable of deciding how much they want to contribute to disaster relief in whichever part of the world they feel like. Non-governmental organizations exist by the millions (this is not hyperbole — it is a fact) and they do collect donations for disaster and other relief work.

I hope that the case against the haj subsidy is decided soon and decided in favor of those who wish to see it abolished. I am going to request all my friends and colleagues who blog to raise this issue. It is time we started a “Stop the Haj Subsidy Movement” — banners for blogs would be good idea as well. OK, if you have design skills, please let me know.

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

An Example

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

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

Wadhwa’s Lessons

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

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

Wadhwa concludes his WSJ piece with:

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

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

Lessons for us

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

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

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

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

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

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

Policy Implications

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

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

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

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

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

The Market Driven Future

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

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

With the LAFIA Delegation

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

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

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

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

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

In Conclusion: India will be Free

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

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

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

It’s about time, don’t you think so?

My analysis is one of hope, potential and possibilities. Although political freedom was achieved 60 years ago, economic freedom is still a distant dream for the majority of the population. It is understandable why political freedom is easier to achieve relative to economic freedom. The entire population of the nation has an interest in political freedom — with very rare exceptions. But there are factions within the country that oppose economic freedom because they have a vested interest in the perpetuation of a command and control economy. Yet without economic freedom, the nation is unlikely to achieve its potential.

John Kenneth Galbraith in an interview to Outlook in 2001 said, “that the progress of India did not depend on the government, as important as that might be, but was enormously dependent on the initiative, individual and group – of the Indian people. I feel the same way now (as I did some forty years ago) but I would even emphasise it more. We’ve seen many years of Indian progress, and that is attributable to the energy and genius of the Indian people and the Indian culture.”

A limited degree of liberalization in the early ’90s (thanks to the then prime minister PV Narasimha Rao) led to enormous and widely celebrated achievements by the people of India. If a little bit of economic freedom could achieve so much, with greater liberalization one can expect the eradication of persistent and chronic poverty.

I think that the three most broadly defined critical sectors where liberalization is a must are infrastructure, energy and education. Currently they are the brakes and they have the potential to be the engines of growth.

Energy independence is possible. India has to think beyond fossil fuel because that is a limited horizon fuel, mostly imported, and the competition for the limited resources will intensify with the growth of global demand. Fortunately, India is very large and is in the semi-arid tropics and therefore blessed with sunshine. Solar power research and development is costly but the paybacks are enormous because once developed the technology has immense returns on investment. India can be a solar power superpower.

Infrastructure can gain from privatization. Roads, ports, airports, and railroads. I think the emphasis has to be on a modern efficient fast rail transportation system. First, trains run on electricity. That means that the system is independent of the source of energy — you can generate electricity from wind, solar, coals, gas, oil, or whatever. The same cannot be said of air transportation. Cars can run on electricity but cars need roads and roads are not the most efficient compared to rail.

Finally education. The world of the past was essentially static compared to today’s world. Innovations and advancements are happening at rates that are accelerating. Current rate of technological and scientific growth means that every year more progress is made than was made in a couple of decades in the last century. A centrally controlled education system could have served a limited purpose in a static world but in a dynamic world it is impossible for the old education system (developed 300 years ago by the Prussian government) to meet the current challenges, to say nothing of the totally unknown world just a few decades hence.

The future is not what it used to be. The future of a century ago was not as unpredictable as today’s because the set of possible futures was small. Our present uncertainty about the future has expanded not just in the size of the set but we don’t even know what each possible future contains. The trend is undeniable: as we humans become more powerful in controlling our present, the future becomes less predictable. The boundaries of our ignorance and the range of uncertainties expand beyond human cognition. Our “unknowledge” of the future is unbounded.

It took thousands of years to go from the invention of the wheel to powered flight; it took only an additional 65 years for humans to walk on the moon. Just 50 years ago, IBM’s 5 MB disc drive was state of the art. It cost (in today’s dollars) approximately $250,000 and was as big as a fridge. Today 5 GB – a thousand-fold more storage – costs a dollar. Each year humans create additional exabytes (10^18 bytes) of information. That is, each year more information is created than was created in the entire history of humanity. Technological advance can no longer be plotted on linear graphs; they require logarithmic scales.

Impressive technological advancement at a collective level implies that any individual is totally incapable of even comprehending the technology, leave alone control it in any meaningful sense. It is obvious that nobody knows how to build, say, a modern commercial jetliner. One may know a bit about the avionics, another may know a bit about jet turbines, and yet another about advanced composite materials, and so on. But no one knows it all.

Human ignorance manifests itself on three other dimensions in the production of goods and services. First, no one knows what the future goods and services will be. Second, no one knows who will produce those. And finally, what their impact on human society will be is a mystery. Look no further than the Internet to evaluate human ignorance along those dimensions. Could anyone have predicted any of the services we take for granted today even 25 years ago? Could anyone have picked the winners? Too many young people are doing jobs today that did not exist when they were born.

So how do we prepare to meet an unknowable and uncertain future? Not surprisingly, the answer must lie in the same forces that actually create the future. Every advance in human technology – which is essentially embodied knowledge – is the result of entrepreneurial activity. The innate drive to build ever higher upon the existing base of knowledge finds its full expression in economically free societies. Economic freedom and the freedom to organize lie at the core of humanity’s remarkable successes.

It was possible in the static past to organize society under dictatorial authority. The feudal lords, and later kings and emperors, managed somehow to control relatively primitive society in a manner. But progress imposed enormous informational demands which no central authority could even theoretically possess. Communism’s fall is evidence that even a slightly complex economy cannot be controlled because even if one has the power of coercion, no one has the knowledge to do so. Free enterprise created the complex modern world of today and free enterprise alone will not only continue to shape the future but will provide us the means to meet that future.

To prosper – indeed merely to survive – in the future would require skills that we cannot fully imagine. Certainly a small percentage of the people will continue to be engaged in occupations that have existed for generations but the majority, especially in advanced economies, will be working at jobs that require high degrees of specialization and years of training. Those who are entering the educational system today will retire around 2070. That world is as hard for us to imagine as our world would have been for a caveman. Which imposes some very special requirements on the educational system.

The current educational system was geared to a world of the past, a world where command and control was still not entirely impossible. In India, that system served the needs of a very small segment of society and achieved only a very qualified success. It is strictly out of the bounds of the possible that the present system can ever meet the future needs and for the population at large. Innovation in India’s education system is absolutely essential and continued state control will condemn not only the system to irrelevance but the entire economy as well.

So how do we get an education system that works for the present and the future? Private enterprise and innovation are conjoined twins, sharing the cardio-vascular system of economic freedom. Entrepreneurship creates immense wealth that permeates healthy economies. Entrepreneurship alone has the capacity to create innovations in education that no bureaucrat or centralized planning authority can ever hope to achieve. Yes, central control can control but it cannot create.

In an age where each of us is immensely ignorant relative to the sum total of human knowledge, the skills that the individual acquires over a lifetime of learning cannot be imparted by an educational system that was created for a different world. The resources for building that educational system is out there. All that society has to do is to keep the state out of it so that private enterprise can do its job – which it invariably does. The role of the state is limited to light-handed regulation.

Liberalization of the education system from the political-bureaucratic nexus is absolutely necessary. Without economic freedom, we cannot expect the entrepreneurial innovation required to make the educational system keep pace with the dramatic changes that the future has in store. It would be profoundly ignorant to not liberalize education.

{This article was published in the Aug 2007 special issue of Pragati called “Rejuvenating India.” You can download the entire issue here (pdf 2.3MB). }

Let noble thoughts come to us from all universe.

The puzzle therefore is why has modern day India been so insular and close-minded? (By modern day I mean the last few centuries, and not the period variously called ‘internet era’ or ‘post-industrial era’.) Other countries appear to have become enlightened in that regard.

Digression: Talking of enlightenment, the most well-known enlightenment appears to have happened in India about 2500 years ago. The fall-out of that cataclysmic event radiated from India to other lands but vanished from ground zero almost without a trace. Fortunately, the reverberations of that detonation in far-off lands can now be heard in India and around the world. Given enough time, once again that enlightenment will be back home in India.

Consider, for instance, the Meiji Restoration:

The Tokugawa bakufu came to an official end on November 9th, 1867 with the resignation of the 15th Tokugawa Shogun Tokugawa Yoshinobu and the “restoration” (Taisei Houkan) of imperial rule. The 15-year-old Mutsuhito succeeded his father, Emperor Komei, and the following year took the reign name Meiji (明治) or “enlightened rule,” and signed the Five Charter Oath.

What was the Five Charter Oath?

The Five charter oath (Gokajyo no Goseimon) was an outline of the main aims and the course of action to be followed by the new Meiji era government of Japan after the fall of the Tokugawa Shogunate in 1867 during the Meiji Restoration. The oath set a new path in Japanese history with an emphasis on modernization and the establishment of a new social structure.

I draw your attention to the fifth oath which read:

“Knowledge shall be sought throughout the world so as to strengthen the foundation of Imperial Rule.”

That, ladies and gentlemen, is what transformed Japan and made it strong enough to dream of world domination and to ultimately grow so economically powerful that the US was forced for the first time after the Second World War to do some very urgent soul-searching.

The successes of the Meiji Reformation can be traced ultimately to their thirst for knowledge and understanding from around the world. They used ‘noble thoughts’ from all universe to learn and then out-do what others had done. They adopted and adapted to the modern world — a world that they indeed helped create at least in part.

It is time for India to have a reformation of its own. It has to have enlightened rule if it is to survive. There is no other way.