Preface
I decided to study Economics as a subject when I was in Class IX simply because the word Economics sounded mystical and sophisticated and because most people around did not appear to have any idea of what economics was all about. Half a century later, I find now that almost every one loves to be an economist by birth right, though most individuals revel in ridiculing professionally trained economists. After all, economics was once defined as the ‘study of mankind in the ordinary business life’. So, each person engaged in ordinary business life is an economist.
It is amusing however that each individual/ group of individuals develops or subscribes to such theories of economics as are compatible with each person’s economic aspirations. When their actions motivated by their own economic theories interact to produce, through what Adam Smith called the ‘Invisible Hand”, certain aggregate economic outcomes (recession, unemployment, price inflation, food scarcity, poverty, erosion in the market value of wealth) that hurt interests of some or many, the adversely affected cry foul blaming others’ economic behaviour. Almost all therefore seek the assistance of the State or Government to act like God to protect them from uncertain and adverse economic behaviour of the aggregate economy. Everyone economist then wants the Government to become a magician super-economist to eliminate all economic uncertainties, reduce economic distress, ensure economic equality, equity and justice, and counter the evil ‘Invisible Hand’ and punish the few individuals and groups whose actions can be blamed as the cause of economic distress and economic injustice.
This created the grounds for and sowed the seeds to breed brilliant economists among the special classes of politicians, economic and financial market administrators and regulators, intellectual commentators in the media and corporate management. Virtually every other member of these classes is a street smart economist, not merely by birth right of an ordinary citizen but as self-certified on the job professional economists qualified to explain and opine on all economic affairs as well as prescribe and implement economic policies for the Government. Yet, the Super-economist Government with the large army of mostly self-certified economists has repeatedly failed to win the battles and the war against the evil ‘Invisible Hand’ of unstable and hurting aggregate economic behavior: Mother Goddess embellished with the powers transferred by all the great gods seem to be locked in a perpetual war with very little success against the Satanic ‘Invisible Hand’,
‘Everyone Loves Being Economist’ merely seeks to explore what goes on in this ‘world of everyone economist’ in constant turmoil of Great Recession, Double-dip recessions, financial crises, sovereign debt defaults, etc. The chapters in this document draws from a selection of posts on my blog ‘Amusement Sensekonmix: Conflict between Scientific Truth and Emotional Aspiration’ at http://senkonomix.blogspot.com .
I dedicate this book to my grand daughters – Gia (Gimly), Veidika (Immly) and Eelina (Tikly) who may not care for economics, my sons - Sowmdeb and Kapildeb who happen to have some formal academic training in economics, and also to those of colleagues and friends who consider/ed me an economist of some sort.
Basudeb Sen
January 1, 2012
Kolkata, India
1. Everyone Economist
Friday, January 23, 2009
[Dialogue between a Guru and a Student who speaks more than the Guru. The content may appear close to being non-sense, but that is the way the World is and therefore so funny and entertaining.]
G: We can explore economics when applied in policy making as a source of amusement.
S: Yes, people deal with what is referred to as Economics in interesting ways. We
are destined to use knowledge of economics often to yield fun and entertainment.
G: That applies to all knowledge. Knowledge allows man to create and enjoy fun and entertainment.
Inclusive Economics
S: True. But Economics is special. It offers unlimited scope for fun and entertainment even when we do not want to use Economics for fun and entertainment, even when we believes that we are using the knowledge of economics for serious and meaningful purposes.
G: You need to illustrate this.
S: That is the whole purpose of today’s discussion. As we go along, we will use illustrations and examples.
G: Let us start with some preliminaries. First, let us try to find out what economics is and who are the economists?
S: Suggest some definition please.
G: Economics is the study of mankind in ordinary business life.
S: So, as part of economics, one can study anything about mankind so long it is nothing non-business or extra-ordinary business. That is as good as studying everything on earth. There is hardly anything that the mankind does is not either as part of ordinary business life or that is without any impact or influence on ordinary business life.
G: There is another definition. Economics deals with allocation of scarce resources to alternative, competing uses to maximize satisfaction of man or society.
S: It means so long as scarcity of resources exits and multiple uses of the same resources are possible, economics is applicable. There is hardly anything that mankind does that does not involve dealing with scarcity and choice among alternative means and uses? So, economics seems applicable in all spheres of life. All knowledge is therefore linked to economics.
G: But does economics have so much content?
S: Yes, it does and it is always expanding its scope. Earlier academic economists used to talk about Principles of Economics in the context of specific economic problems/ phenomenon. The classification in economics was based on schools of thought: classical economics, neo-classical economics, marginalist school, Keynesian economics and so on. Later on area of interest developed new classification, micro-economics, macro-economics, monetary economics, international trade, welfare economics, mathematical economics, public economics, and so on. Now, you get to hear about specialization within specializations that together cover practically everything: health economics, economics of education, engineering economics, environmental economics, managerial economics, financial economics, economics of intellectual property, urban/ rural economics, agricultural economics, housing economics, infrastructure economics, petroleum economics, energy economics, behavioral economics, development economics, economics of poverty, transport economics, and so on. Some physicists now are developing something called econophysics.
G: Let us grant all pervasive and inclusive characteristic of economics for the sake of argument. Now, let us find out the economists.
The Economist Being
S: Almost every individual is an economist. Everyone deals with scarcity of resources, alternative uses of resources and choices. So everyone is a practicing economist of sort.
G: Doesn’t such a definition apply to physics, chemistry, engineering, geography, philosophy, mathematics, medicine, politics and other fields of knowledge. Almost all individuals are partly scientists, physicists, chemists, engineers, mathematicians, geographers, philosophers, political analysts, accountants, doctor and so on?
S: Not really. It is difficult to become a physicist without being strong in mathematics or a formal training or education in physics. Many may observe doctors prescribing medicine to different patients over time. On that basis, they may even offer medical advice to friends. They may be acting like pseudo-doctors. But they are never regarded as doctors and they would seldom believe that they have really any knowledge of medicine. No one can serve as an engineer without acquiring formal training in engineering.
G: What is different for economists?
S: To be an economist, one need not have to have a formal training or education in economics or any other discipline. Individuals have to act as economists and most people consider themselves as economists of some sort, irrespective of the extent of their knowledge and education in economics. You need no qualification or meet any eligibility criteria to be an economist.
G: Why do individuals need to act as economists?
S: There are a number of reasons. First, individuals are now increasingly realizing that economics is some sort of a mix of natural and artificial system. For long most people believed that individual’s economic condition depended on the pious intentions and honest efforts of the State (Govt. / Ruler/ King/ Dictator). But recent events have shown how corrupt and inefficient the State can often be. People have realized how incompetent the State can be in dealing with the economic problems faced by the individuals and households. People are increasingly finding the State helpless and powerless against economic events adversely or favourably affecting the economic conditions of the individuals.
G: Is that true? Are people in general aware?
S: Certainly most people are not in full realisation of the truth of powerlessness of the State. They are only observing the instances of the hapless paper-tiger position of the State. But they still need the protection of a belief, however illusive and false, that the State must be all powerful like the God almighty as projected by the devotees of the God. Many who believe in God and pray to Him continue to cling to the God despite going through hardships that seem unending. They do so merely because they feel miserable without a belief in someone all powerful who can rescue them from their sufferings. Similarly, most individuals still believe in almighty State because without such a belief they feel helpless and miserable.
G: In that case what are individuals doing?
S: They are increasingly getting afraid that the artificial institution called Government may be corrupt, dishonest, incompetent and above all really powerless to control economic events or bring about the desired economic results they expect the State to produce. They still nourish a hope that the State may become less corrupt, more honest, more capable and develop power to control economic events or their impacts. But in their hearts they may be seeing the writing on the wall.
G: How is this happening now?
S: Because of the progress of technology, increasing cross border relationships among people of different countries and the differences in economic conditions of people in different countries. The TV and the Internet have made individuals to develop an international perspective. The Press and the Media cover the entire World as if everything is local news. People are traveling abroad and making cross border economic and financial transactions. People are not only using domestic currencies and bank accounts, they are becoming familiar with foreign currencies, goods, banks. They have become conscious of the economic conditions and change in various countries, thanks to the Media.
G: What is the result of all this?
S: People have come to know that there is strong interdependence of economic conditions and economic events across the World and the State has no power to control what happens elsewhere. Even they are witnessing the continuous failure of the State to control what happens within a country in the economic sphere.
G: How are they responding to these findings and realizations?
S: They are trying to make them more competent and capable in dealing with the economic problems individually and in groups. They are learning how to enhance their interest by being smarter than the paper-tiger State. Earlier the individuals depended on the State. Now they are trying to use the institution of the State in their own self-interest. To do so they need to consider themselves as economist or rather act as a rational economist being.
G: How are ordinary people trying to become the Economist Beings?
S: Common people are simply asking questions that academic economists have been long trying to answer. Common people are trying to know what has been the domain of academic and professional economists.
G: In the absence of any formal education and training in economics, how will they know the answers?
S: That is an important but separate issue. But they are trying to know and form their own opinions about what could be the truth. Today, young people in the richest countries are asking whether they are slaves of the economy or they can control the behaviour of the economy in a desired direction. They are asking why jobs have started shifting from one country to another. Why some currencies are becoming stronger and why others are becoming weaker? Why some countries can keep their currencies pegged? Why foreigners from poor countries are allowed to work in the rich countries? Why is it that a mere 1% of the population so wealthy and why poverty afflicts poor nations? How does spending billions of dollars by a few wealthy persons on space trip affect the common peoples’ lives? Why interest rates change and cannot remain constant? Why should the values of their homes they are most unlikely to sell rise rapidly and then crash?
G: Why should they ask such questions? What is their motivation to know?
S: Because they suspect that answers to these questions will help them understand whether and how far their economic conditions and life are related to these issues. They want to know whether someone can control the behaviour of economic variables to protect them from adverse effects of such movements in economic variables.
G: But these simple questions are not so simple to answer. Nor are the answers easy to comprehend.
S: You are right. But they feel the need to know and indeed they really need to know instead of being fooled by false promises and explanations of politicians, columnists and economic administrators and getting confused by the rigorous analytics of the academic economists and economic policy experts. It would never be easy to decipher the truth. But it would be easy to
G: Maybe at this stage, we should examine some examples for a better appreciation of these thoughts.
Government as Employment Generator
S: You are right. Let us take the case of employment.
Since the days of the Marxism-baked Soviet Economic Planning, Roosevelt’s New
Deal program after the Great Depression in the USA and the emergence of Keynesian Multiplier theory, the economist have been brought up in the faith that the Govt. can lift employment level in the country through macro-economic policies. And, this belief continues in the face of failure of Govt’s to create productive and sustainable employment and the emergence of employment opportunities from sources that are far removed from Government’s power and activity.
G: How can that be a belief among the academic economists and economic administrators?
S: But that is the truth. Governments can raise taxes and use he proceeds to dole out income to people who get employed without any productive job to do. But real employment is generated and destroyed by the natural economic forces. The governments and economic administrators just take credit when employment increases and announces grandiose plans when unemployment rate rises. This is true of all countries. It is the funniest but highly profitable business that Governments and economic administrators have developed. People needs to believe that Govt. can and do create employment. This want is satisfied by the Governments, politicians, economic administrators and regulators: every other member of these groups is a street smart economist, not merely by birth right of an ordinary citizen but mostly as self-certified on the job professional economists self-qualified to explain and opine on all economic affairs as well as prescribe and implement economic policies for the Government. They get fabulously paid for the special economist services they provide to the citizens to provide false guarantee for protection against so many unfavourable economic conditions including unemployment.
G: I am sure you are joking. After all, India has been implementing Five year Plans during the last 55 years to increase employment and employment has been increasing. All advanced countries use fiscal and monetary policies to ensure employment and output growth. Are they fooling us?
S: We have a great desire to be fooled in this area. We cannot feel comfortable with the truth that the creation and the level of employment are not within the control of human beings and in particular these cannot be permanently impacted in any cost-less, significant and permanently by Govt’s efforts. We derive considerable satisfaction from the cultivation of the belief in Govt’s power to reduce unemployment. The economic utility of the institution of government lies only in deliver us a sense of satisfaction and comfort that it will do all that is required to protect us from economic distress and lift us to economic prosperity, irrespective of the repeated failure of government in this regard. This is the make believe world of fantasy without which people cannot live in the modern day of uncertain economic conditions.
G: You seem to suggest that all this is fiction that modern human societies need to be entertained with.
S: You are absolutely right. In India we have seen very rapid growth of both high paying IT sector jobs as well as not so high paying ITES sector jobs. In USA we have seen many ITES firms closing down to offshore these elsewhere including in India. Both the US Govt. and the Indian Govt. could do nothing to stop this economic phenomenon.
G: What has the Economist Individual been observing and concluding from this?
S: Let us first talk about the US. Common Americans feel bad that jobs of on-line, real-time client servicing, medical transcription, accounting entries and also software development for American companies. For them it is disgraceful to American and most important a cause for reduced employment and income opportunities for Americans. They want to know why this could happen and why this could not have been stopped.
G: How will they know this? Even economic experts and academics have different views on this subject. Can layman understand all this?
S: But the layman economists need to know first whether they can rely on experts? Whether the American companies are to blame for outsourcing? Whether Govt. could have stopped this trend of outsourcing? And, whether outsourcing was really bad for the Americans?
G: What did they come to know?
S: They have come to know that outsourcing is good from American consumers’ point of view. That it does not make economic sense to produce the outsourced services any more locally in America. Just like America imports cheap clothing for their use, it is better to buy cheaper ITES services from India. American labour is too expensive to produce these low value added services any longer. That American labour can continue to maintain their standards of living only if they can re-deploy themselves in relatively high value added industries.
G: How does this knowledge help them?
S: In many ways. They now have come out of the phobia of blaming American companies. They are no more under the illusion that outsourcing was bad for Americans. They no more waste much of their time and energy in pursuing with the belief that the American State/ Govt. can stall outsourcing. They do no longer dream that the American Govt. is capable of finding economic policies that would stall outsourcing without hurting the interests of American consumers and workers. They are seeing the writing on the wall and preparing themselves for alternative employment and income opportunities. They are becoming independent and formulating their own individual strategies to protect their income and employment through transition to newer areas of work. Politicians will now find it difficult to fool them that the Govt. can and should stop outsourcing. This is emancipation from the clutches of politicians and columnists.
G: Do all Americans have this understanding?
S: Surely not. But they have started suspecting that outsourcing is not bad. Better that the Govt. does not interfere with the decisions of the American enterprises to outsource. It was great fun and entertainment that they have witnessed through the debates among the columnists and politicians on both sides of the issue of outsourcing. They know that the Truth lies somewhere else.
G: What fun and entertainment are the Indians enjoying?
S: Soon after 1947 when India won Independence, particularly after central economic planning was introduced in India in 1951, Indians have been brain-washed that they can do much to improve their economic lot and it is only the Government of India along with the State-level Governments who can only cause economic uplift of Indians. And, the Governments would provide employment to all through the mechanism of economic planning and control over economic activities.
G: And, Indian economy got into the quagmire created by this belief in the Govt.’s and politicians’ super natural power to control economic conditions. For decades we continued to give away more and more power and resources to the State and our economy remained slow moving and we remained among the poorest in the World. The entire savings of the people of India in the form of bank deposits were deployed only as per the wishes of the State and the State owned and managed 80% of industrial and infrastructure activities. The State decided what to produce, how to produce, where to produce, how to distribute the output and at what prices. And, yet year after year, the State failed to deliver rapid economic growth and reduce the intensity of under-employment and unemployment. All of a sudden as the software and others ITES sector demand from abroad created a tremendous employment growth, thanks to the purely private entrepreneurial effort of some non-resident Indians who returned home. This sector surged before the State could control and thereby constrain rapid growth of employment and income in this sector. Today, the governments may try to take credit for this but everyone knows that this employment came because the Americans and the Europeans gave this employment opportunity to Indians and other Asians because that was economic for them and their Governments had no real power to control this.
G: Fine but what is amusing in all this?
S: It is amusing that the people continue to believe that Govt. can create employment for people with their economic, administrative and legislative powers while this is not what really happened. How blind is the faith in Govt, as economic magicians! This is true of both Indians and Americans and other countries.
G: And, this continues not because people are not aware of the economic laws but because everyone thinks that he or she is a good economist. Even they criticize standard economic theories that according to them fail to explain their own behaviour of dependence on Govt. as the God to fulfill their economic aspirations. It is surprising that the standard economic theories failed to explain the power of the wish “ Govt. bless you” as the source of economic growth, development and prosperity. Only if the Govt. blesses people, people will get employed or get their employment secured/ protected. This is an amazingly strong belief that most economist citizens share across the Globe. What can be more amusing!
S: Economics is such a wonderful source of fun and entertainment when you leave standard Positive economic theories out and everyone becomes Normative economists. Jobs get allocated between Americans and Indians as per the laws of positive economics, but economist citizens in most countries thank or blame the Govt. for getting/ losing jobs.
2. Illusive Economics Magic Wand
Tuesday, April 7, 2009
S: All the people want to be economist because they need to understand things that affect their economic lives. But hardly a few have the put in the hard work required to acquire knowledge. So, they accept economic ideas unverified provided they feel comfortable with the idea and dump other ideas with which they are not comfortable treating them as wrong. The truth or the theory is established by majority belief as in democracy. That is how popular economics is what has developed in modern economies.
G: And, one of the theorems of popular economics is that “government can and do change the economic destiny of country and its people in a positive way”.
S: You are right. This theorem is proved democratically i.e. most people vote for the theorem. No other proof is required. And, no scientific, logical or empirical proof is available so far. So, we go by the strength of the belief in the theorem in terms of popular acceptance. And, popular acceptance is guaranteed. Just like medical or health insurance or more appropriately life insurance, each person needs a protection from the risks of the economy working in a manner that adversely affect employment or income or wealth of a person. The concept and the acceptance of the theorem is such a kind of insurance, though incomplete and largely illusive.
G: But economists and policy makers talk about macro-economic policies for economic growth, inflation control, etc.
S: Yes, they do. Their business is to do that and satisfy the psychological need of the people apprehensive of uncertain economy behavior. Even in free market advanced economies, individuals from a quite early age get anxious about the stability of income earning employment and sudden shocks of loss of current jobs due to sudden recession, technological obsolescence, shift of consumer demand pattern and international competition. They start feeling that they individually become the slaves of something called ‘economy’. They seek a master of the economy. The Govt. fills in this vacancy even if the govt. fails to dictate the economy.
G: Is it not possible to design a societal system that removes this uncertainty?
S: This is what Man wants to achieve: to become the master of the economy through the institution of government. The progress of human civilization is all about trying to become the Master of Nature and Master of the Economy. By trying to become one does not necessarily make you the Master. Scientific knowledge has helped Man to evolve technologies to manage various risks originating in the Nature, but we are far from being Master of the Nature.
G: You seem to suggest that the same is true of the struggle of Man against the Economy. Those who are tonally afraid of fighting within the free market mechanism and individual liberty, designed socialism, communism, state ownership of all resources, state-led economic planning, and so on. These concepts appeared to succeed for a while but their grand failures for most of the time are now part of recorded history of economic development of countries in Asia and Russia. Those who wished to fight within the free market, so-called capitalist systems evolved the concepts of business cycles, aggregate demand, insurance, welfare payments (unemployment doles), insurance, pensions, fair labor laws, Keynesian income/ employment multipliers, macroeconomic management through monetary and fiscal policies of the Govt., international economic cooperation and economic aid. But even with all, long past experience in economy management, Governments in these economies are nowhere near of being in charge/ control of their economies. But the effort at occupying the position of Master of the economy must continue to maintain the illusion of certainty protection through Government and look away from the inconvenient reality pf uncertainty in the levels of income, employment and inflation. So far, such attempts to ignore this has given some benefits in terms of one of these variables for a period of time only at negative benefits in terms of other variable soon and for long period of time.
S: But the Governments in modern economies do exercise tremendous power and dominance of economic activities!
S: Yes, by exploiting the fear of uncertainty that individuals in general suffer from, the governments have acquired this great and dominating power only to do things (implementing economic policies) but their power to yield real results in terms of economic growth, economic stabilization, higher income and wealth distribution and most importantly in raising economic efficiency, productivity and technological progress has been very negligible. The economic growth, economic stability, improved income distribution, rise in economic efficiency, per capita income and productivity in the last 100 years are due mostly to efforts and decisions of individuals and very little due to govt. plans, policies and efforts. Govt. has just become another player in the economy, a player of increasing great size but very little positive net impact of the behavior of the economy.
G: You really mean that macro-economic policies of govt. or State controlled economic planning had negligible impact.
S: Yes. Net impact has hardly been positive. One must remember that when Governments take certain measures, individuals respond to them in various ways and not exactly in the way govt. assumes and wants people to respond. The responses of individual and non-government economic entities interact with govt. response to produce the actual results. Even a monopoly producer may not fulfill its desire: it all depends on the response of large number of buyers.
In the case of Govt. policies, the response of the individuals may be overt or covert and changes over time.
G: Are you talking of things like changes in inflationary expectations, money illusion or effect of taxes on work effort that influence the outcome of govt. policies?
S: Yes. But I am also referring to how talented, creative scientists and technologists respond to govt. policies, systems and structures.
I am referring to individuals’ urge for doing things in their own ways rather than in govt. dictated ways. I am referring to withdrawal by the most talented to commonweal just because of govt. dictates and distribute favour or incentives. Individuals may have their own concept of sovereignty just like nations enjoy. You must have heard about the story of a king ordering/ appealing to all households to contribute a mug of milk to the artificial milk pond he has been constructing. He got few people pour milk, some abstaining and some pouring water or water mixed with milk.
G: But after the Indian govt. changed the economic policies from those linked to a closed, public sector dominated and bureaucracy-dominated, non-competitive administratively controlled mechanism to those linked to liberalized competitive market, open economy environment, India has recorded very rapid economic growth. One must give credit to govt. economic policies for this success.
S: Yes, the new policies have delivered for which if we give credit to Govt., we must be prepared to accept the great discredit to govt. that failed with its economic policies for the 40 years 1951-1991. The period of success is small compared with the 40 year period of grand failure that led to bankruptcy of the Indian economy. More important, the Govt. did not change its economic policies. In fact, they were most reluctant to change. The change occurred because the Govt. did not know what to do: so, they left doing what they were doing earlier. It is the natural forces of economics that brought the change. There is no way we can give credit to Govt. had done because they had no other choice.
G: So, you do not support the idea that Governments and central banks implement macro-economic, monetary and fiscal policies or State economic planning.
S: The issue is not about supporting the idea. The idea has evolved naturally to solve the human need for security against economic risks to individuals.
There is no way you can stop this idea from being implemented if the human civilization has to continue. However illusory and false the govt. guaranteed security against risks to individual/ family income and employment is what the market (voters) demands and obtains is the government guarantee.
All debates about what the govt. could do or should do to raise economic growth, ensure stability, control inflation and reduce economic disparities are intellectually stimulating and at the same time a source of amusement because govt. policies and efforts are inefficient and ineffective in delivering promised/ intended results most of the time. The risks remain despite the govt. and often increase because of the govt. meddling in economic affairs.
G: I understand what you mean by amusement economics now. So why not have some examples now.
S: Good idea. You know what common man economist think about the Keynesian theory of multipliers.
G: Yes, it says if the Govt. increases spending, economy can expand and grow by a multiple of that spending. For example if Govt. spends additional
X amount of money, income of the people in general increase by an aggregate amount that is a few times of the amount of increase in govt. spending. And this expansion results in additional employment.
S: How much does the National Income increase if the Govt. makes additional spending of say $one billion?
G: That depends on the marginal propensity to consume (mpc) by households and others. If mpc is 0.75, the multiplier under the simplest economic model is 1/ (1- 0.75) or 4. The National Income would increase by $4 billion.
S: So, why doesn’t the Govt. increase it’s spending by say $ 100 trillion and
Increase National Income by $4 trillion every year?
G: I really do not know why Governments do not employ this easy policy to economic growth. Probably govt. needs to finance it’s extra-spending by printing money or taking loans from the public or raise additional taxes. And, there may be difficulty here,
S: So, govt. is not as powerful as simple Keynesian economics suggests or the economist in the common man would like to believe.
G: There are other economic theories which says too much printing of money may cause high inflation, too much borrowing by Govt. may raise interest rates and reduce private sector investments.
S: Fine, why not raise taxes to fund additional Govt. spending?
G: That can be done but increasing taxes will have a negative multiplier effect on National Income.
S: Will that totally offset the positive multiplier effect of Govt. spending?
G: In terms of the simple Keynesian Income determination model, it will not.
A billion dollar increase in Govt. expenditure will increase income by $ 4 billion and a S1 billion additional taxes will reduce income by 0.75/ (1-0.75) billion or$ 3 billion. So the net effect of equal amount of increase in Govt. spending and
Taxes will increase income by $1 billion. Thus the balanced budget (Govt. spending exactly matches Taxes) multiplier is always1.
S: That is excellent. Tax all incomes at 100% and spend the entire money back. You will continuously increase National Income.
G: You are joking! In such a situation what is the use of generating income if people cannot consume anything, paying the entire income as taxes?
S: Ah, you are right. Then just tax all incomes at 75%. Still you will have continuous income growth. It seems that is what the Communist or dictatorial regimes seem to do.
G: But, too high a level of taxation may hurt household expenditure. People in democracies may object.
S: So, one popular economic policy of spending faces another unpopular policy. The Govt. has to make a package that makes best selling to the people even if the package finally delivers nothing. However, in state controlled dictatorships this does not matter: neither do the people and their economic conditions matter much.
G: Yes, the same economic policy packages supported by ruling politicians at any time are almost always opposed by the opposition parties.
S: This is because economics has two hands: While on the one hand, an economic policy packages are popularly correct; on the other hand the same thing is popularly incorrect. Is this not amusement?
G: How can you call this amusement? Economics is a complex subject and it is not so easy to formulate the most appropriate economic policies.
S: Yes, such complex things are debated by people who have no formal training in
Economics and in any case by those whose credentials as students of economics is highly suspect. And, decisions on complex economic matters are taken based on votes. These are really interesting entertainment democratic nations engage in and pay a high price for that without even knowing.
G: Economics is not like physical sciences and therefore one has to go by democratic majority rule for deciding what are right and what is wrong.
S: Unfortunately, the results from economic policies are not chosen by votes or democratic majority rule. But coming back to your multiplier example, why do not we make the mpc close to the number one? Then, even with a small increase in govt. expenditure, one can get nearly infinite increase in national income.
G: If mpc equals 1, then the multiplier becomes infinity. So a $1 billion increase in Govt. spending will increase national income by infinite times. But, you cannot force people to consume all of the incremental income. They will need to save for the future. So, mpc cannot be equal to 1.
S: Ok. Then why not have mpc of 0.99? This will lead to increase in income by 100 times of the Govt. expenditure. So you need not have a high Govt. expenditure and yet the people will have considerable amount of savings because of a much higher level of income despite a low savings rate of 1%.
G: You are in a joking mood. The Keynesian model is not as simple as you are trying to make out. There are many underlying realistic assumptions we have to consider.
S: I understand that Economics is very complex subject. But the way the common people, the politicians and the economic administrators discuss and come to conclusions about appropriate macro-economic policies, the multiplier theory looks so simple. And, that is why economics is a great source of amusement.
G: A general conclusion is that higher the mpc, higher is the multiplier.
S: That is interesting, the more people consume the higher is the income growth produced per $ of govt. spending. But isn’t there another economic growth model that emphasizes savings - something called Harrod-Domar Model that is Keynesian in nature.
G: Yes. The lesson from Harrod-Domar growth model is that national income growth rate is equal to savings rate divided by the incremental capital output ratio (ICOR).
S: So, if the savings rate is higher, income growth rate becomes higher. If the savings rate is 32% and the ICOR is 3.2, the income growth rate is 10%
G: If the savings rate increases to 38.4%, income growth rate will rise to 12%.
S: Here we find higher savings rate yielding higher income growth while in the
Multiplier Example we found higher consumption rate and lower savings rate yield higher income growth. Economics is really amusing.
G: No, you are being mischievous somewhere! Both consumption and savings are important. The ultimate objective however is consumption now or later: savings is the bridge to transfer consumption from now to later.
S: The amusement offered by Keynesian Economics as practiced by the common economist and politicians is enormous. We take up that again at appropriate time.
Let us stop today to keep something for the later.
3. Learning Economics from Newspapers
Saturday, May 2, 2009
G: Today, you must give more examples of the economics of Govt.’s power to enhance growth, improve efficiency, create productive employment and improve income/ wealth distribution.
S: As you please. The other day some young person trying to pick up the first microeconomics felt that supply and price are inversely related and therefore this curve depicting this relationship should be negatively sloped.
G: But that is not correct. The standard textbook in economics says the supply curve should be upward slowing. Higher the price, higher is the supply.
S: You are right. But this young person looks from a different perspective. He says that higher the supply, lower should be the price. He also says that higher the demand, higher is the price and therefore the curve depicting this relationship should be upward sloping. Is he not correct? Does not economist agree that higher supplies, other things remaining same, lead to lower prices?
G: Yes, his propositions are correct. But the economic textbooks are also correct in drawing the demand curve downward sloping and the supply curve upward sloping.
S: This is amusing economics!! Two contradictory things are simultaneously correct!!
G: You are unnecessarily trying to make economics amusing. The young man would find out that both are true and really not contradictory after he studies a few more chapters of economics from theory of consumer behavior and demand through the theory of the firm and supply to market equilibrium.
S: Suppose, he does not progress further in his study in economics but later becomes an economic administrator or political leader. What kind of economics policy speeches and economic policies is he going to make or approve? Many persons who study economics in school or college think that they are masters in economics, even though many with Master/ Ph d degrees in economics may not have mastered economics!
G: But that is not the fault of economics.
S: I am not blaming economics. But the fact remains that economics may be used in amazing ways in real life. And, part of the problem may lie with the way economics textbook is organized and economics is taught.
G: Why do you say so? Economics textbooks are organized in the most logical and systematic manner.
S: Yes. That may be true from the point of view those who have already learnt economics. It may not be the best for the layman trying to take lessons in economics. I remember when I started my economics studies at the age of 14, I had asked my 26 old brother, how can I relate my economic lessons with what I see going on the market place that I visit so often. He told me then that I should not try doing this and get confused and wait till I acquire a Master’s degree in economics. I should just concentrate on understanding the concepts and theories first.
G: You are outdated by half a century. Nowadays, fresh economic students have to do real life projects. Anyways, what is your suggestion?
S: I suggest that you teach economics in an iterative fashion the way mathematics is taught. You tell in the beginning not to divide anything by zero. Later on you introduce the concept of infinity. First you teach fractions, then decimals and then show the correspondence. Something like that so that the student knows that he does not know something and therefore cannot apply his knowledge so easily in life.
G: Can you make your suggestion a little clearer?
S: Since many persons trying to learn economics have the tendency to relate their learning to real life situations, they need to be warned about the mistakes they may do while conducting their projects. You first teach market and market equilibrium prices where you stress on a system of two equations with two variables, quantity (q) and price (p). Discuss the implicit forms of these equations. Discuss how, in each equation, p can affect q and q can affect p. Clarify how these are interdependent variables. Take p as the independent variable and explain the impact of its movement on q for each equation. Then take q as independent variable and explain the impact of changes in q on p. Then define a demand curve and a supply curve. Illustrate with alternative shapes of demand and supply curves, using alternative ways of using the x and y axes (once measure price on y axis and once on the x-axis.
G: You are actually suggesting splitting chapters and re-sequencing contents at the cost of some repetition but making students aware of the risks involved in applying little knowledge in reality.
S: Yes. After you make students explore what the shape of the demand and supply curves could be, they come back to market equilibrium issue again and explore its existence, uniqueness and stability under different assumptions. This is followed up with econometrics of estimating demand and supply curves and the problem of identification with real life projects. In the absence of such iterative and project work, every layman will think economics is so easy to understand but will learn wrong things/ Since each person thinks that he is a competent economist by birth, the economic textbook is considered a supplementary and optional reading.
G: I think you are getting too detailed into the subject. I get your point.
Like it is said do not give a scissors to a monkey, do not allow layman to read economics books by writing the books in a manner that makes only the serious to get trained in economics and others keep away and realize that economics and economic policy making is not the business of ordinary brains.
S: You are right. Just as most people realize that they do not have the quality of a trained brain to be a physicist or mathematician, they better avoid knowing economics from newspapers, magazines and politician’s speeches. Recently, some political leader wanted to know whether agriculture and industry can grow together or they can grow only at the cost of each other. She put this question on Yahoo Answers and got hundreds of replies. It seems economics has no standard answer of its own and the question is solved by opinions of anyone who thought of giving reply.
4. Economics by Public Opinion
Saturday, May 2, 2009
G: I understand what you are saying. Knowledge cannot be acquired by foolish methods by untrained brains. Any such effort is highly risky.
S: You wanted more illustrations. One morning about four decades back, my friend had gone to the market and found the prices of potatoes were significantly higher than the previous day. He asked the potato seller as to why prices suddenly increased sharply after being stable for a few weeks. The seller exclaimed “Are you not aware the value of your money has gone down yesterday and therefore you are entitled to lesser quantity of potatoes with each rupee?” My friend could not understand and the seller explained that the previous night the finance minister of the country announced a devaluation of the rupee and a new Rupee-Dollar exchange rate. If each rupee bought fewer US cents, each rupee should buy lower quantity of potatoes. Often, sellers of goods raise the prices of their ware citing inflation as the reason.
G: You will call this funny and amazing because common man economists are talking as if they are rigorously trained economists.
S: Does a devaluation of Rupee in relation to the US dollar occur because the prices of potato and other Indian goods have increased or does price inflation for non-traded goods occur because of devaluation?
G: Both are possible. But it is unlikely that potato prices in India will increase because more rupees are required to buy a dollar following a rupee depreciation or devaluation. But market prices respond to information.
S: Yes. But why do market prices respond to information that is not relevant? Is it because in economics everything depends on everything else or because every man has his own understanding of economic relationships, irrespective of what economic theory says or rigorous empirical research suggests.
G: What economics or economists can do if that happens?
S: I am not trying to discuss the role of economists in this regard. I am only pointing out that relationship between exchange rates and prices are not established by economic theory or economics research but by the opinions of the public. This is pure and simple amusement that people debate about the relationship based on what they feel is good or bad. For example, people are very nationalistic and patriotic when they crib about the falling value of the national currency.
G: But there is nothing for Indians to feel great about rising value of the Rupee in terms of the US $. Then China would have allowed the Yuan to appreciate so that Chinese feel better.
S: But the Americans are sore about Yuan is not rising in relation to the dollar and at the same time about the British Pound or the Euro appreciating! Isn’t this funny?
G: Apparently a source of amusement according to you. But the fact is Yuan- dollar is fixed by the Chinese Govt. while the Pound-dollar and the Euro-dollar rates are determined by market forces. So, the Americans should not worry about the exchange rates. They should worry about their low savings rate, large and growing trade/ current account deficit. They have an economic problem.
S: America has a problem that is reflected in the dollars depreciation. But China does not have a problem with huge and growing trade/ current account surpluses and rising foreign exchange reserves! They are selling cheap goods produced by exploited Chinese labor paid meager wages and that too by giving soft credit to the US govt.
G: But Chinese do not sell goods on credit to the US.
S: If Chinese invest their surplus dollar holdings (accruing from exports to USA) into low yielding US Govt. treasury bills, it means that the Chinese have given soft loans to USA so that the US can buy the Chinese goods.
S: Yes, in some sense that is true a poor country is financing a rich country to purchase goods from the poor country.
G: But I thought economics textbooks suggest that poorer countries should borrow capital from richer countries to enhance their ability to grow faster. Isn’t this funny?
S: You are putting things in simplistic manner. Economics is a complex net of inter-relations.
G: Yes, it seems so complex that the Truth is in the beholders’ eyes. India runs a trade and current account deficit but the Rupee continues to rise in dollar terms. So, every kind of economic policy is best possible for different economies. It is correct for China to have a virtually constant exchange rate fixed by Govt., run huge and growing trade/ current account deficit and foreign exchange reserves and invest in US treasury bills. It is correct for India to run current account deficit, have growing foreign exchange reserves and an appreciating Rupee. It is best in US economy interest to run huge trade and current account deficit and a depreciating dollar. Amusement of the highest order!
S: Economics does not say so. There are differences in economic systems of different countries and the political economy structures are different.
G: Yes. But economics says that as a currency depreciates, it will generate market forces to reduce imports and increase exports, thereby reduce the trade deficit. An American teenager asks why this does not happen to USA and still the US manages to grow and does not face a depression or bankruptcy? Why the Chinese or Indians do not draw down their foreign exchange reserves to increase their capacity to grow even faster? Economics seems to have no answers to these questions!
S: Of course there are some answers, but there are no unanimous, unambiguous answers because of the complex nature of interrelations among such a large number of economic and political variables that affect economic outcomes.
G: And, this complex cobweb provides for amusement and entertainment.
5. Genetic Economics for Forecasting and Policy Advice
Saturday, May 2, 2009
G: In 1991, when the new Congress govt. was forced by the situation of bankruptcy and deep economic crisis, to start the process of economic reforms, one of the first things they did was a major devaluation of the Rupee and moved fast ahead to move away from officially pegged exchange rate to a regime of exchange rate determination in the market. When this was going on, a large number of Indian economists feared that the Rupee would soon fall to Rs.60 to a dollar. This did not happen. Now it is possible to explain this in terms of many other developments that took place since then. It is amusing that economists are generally pessimistic even if they are proved wrong again and again.
S: Economic forecasts are based on assumptions and the assumptions may turn out to be wrong by subsequent events. In any case, if pessimist forecasts turn out to be wrong, no one complains because the situation is better. Pessimism is a safer bet for economic forecasters: if the forecast turns out true, you are treated as a wise person who says, “I told you so”. If the reality turns out to be better than what was forecast, people forget the pessimism of the past. It is almost like astrologers. You read the daily/ weekly/ monthly/annual forecasts based on birthday stars and forget until the pessimistic forecasts turn out to be true.
G: You seem to think too poorly about economists!
S: I am sorry. I did not mean that. Economists’ forecasts are really valuable. But these forecasts have no meaning for the laymen. Rather, the use of economic forecasts has generally been aimed at fooling the common citizens. Politicians and governments use forecasts to manipulate the minds of people: economists provide the support to the politicians and governments to do so.
G: Economics being a complex subject, the misuse of forecasts is possible. And, economic policies based on forecasts that have low probability of coming true or without estimate of such probability, may be harmful.
S: It is interesting that today some economists are recognizing that economics is a complex subject because economic systems are fairly complex. Jeffrey Sachs say that making policy for an economy, shares many of the challenges of clinical medicine but the practice of development economics is not yet up to the task. Economies, like individuals, are complex systems. Like the circulatory, respiratory and other systems of a human being, societies have distinct systems for transport, power, communications, law enforcement, national defense, taxation and other systems that must operate properly for the entire economy to function appropriately. As with a human being, the failure of one system can lead to cascades of failure in other parts of the economy.
G: This is interesting. When at the instance of the US, Bolivia tried to eradicate its peasants' coca crops in the late 1990s, rural poverty deepened. Then, the social and development programs of the govt. led to a fiscal crisis which in turn led to civil disorder, with the police, army and peasants battling in the streets, toppling of government and a new period of extended instability.
S: So, what is his prescription?
G: Economists, like medical clinicians, have to learn the art of differential diagnosis. Doctors know that high fever might reflect dozens, or hundreds, of underlying causes. Clinical economics should train the development practitioners to hone in much more effectively on the key underlying causes of economic distress and to prescribe appropriate remedies that are well tailored to each country's specific conditions. Clinical economics like clinical medicine, should view treatment in "family" terms, not just individual terms. In the case of a country, the entire world community is part of the family. It is an interesting idea.
S: Yes, but this idea is really new. Even forty years ago, we had learnt to visualize economies as organic systems and reference to economic diagnostics and pathology were very common while applying econometrics to model economies and the purpose of empiricism was to diagnose the functioning and failures of different economic systems. I think time has come to transit over from mere clinical economics to genetic economics. Time has come to develop economic genetics. We need to identify things like DNAs, RNAs and other proteins that affect economic behavior of people and economic interactions among people of different genetic sequence.
G: You are amusing yourself. But if some economist can talk about clinical economics, there could as well be genetic economics.
S: Seriously, if the genes determine and explain differential behavior among human beings, economists may soon have to deal with genes.
S: According to economist Mr. Sachs, economic advisors need to have a profound commitment to search for the right answers by analysis thoroughly steeped in the history, ethnography, politics and economics of the place as also a commitment to give honest advice. They have the responsibility to speak truth.
S: Isn’t that amusing?
G: Sounds familiar. Most great leaders advise others in similar language. Business executives do, diplomats do, presidents and ministers do, and political leaders do: convocation addresses are in the same vein.
S: You are absolutely right. All this is amusing in two ways. First, economists have to cooperate with genetic engineers and medicine experts to find out what genes develop such commitment and honesty and how economists with weak genes in this area can be treated to bring in the desired commitment and honesty among economic advisors in the practice of development economics.
G: What is the other component of amusement?
S: Most important is that the most truths in economics is not known or are conditional truths. Whatever is gathered as truth are only those that have some chance of being true and some chance of being completely wrong/ untrue. The policies taken on the basis of such probable truths are risky. Economists are not willing to specify that risk, nor are they saying what can mitigate the risks. No economist speaks the truth that economic policies are associated with varying degrees of risk and they are not explicit as to how these risks can be managed.
G: You seem to be highly critical again?
S: No. The economic advisers, policy formulators and decision makes have to be accountable for their predictions and decisions unlike business executives and individuals who are accountable for the decisions they take. Decisions by democratic majority do not fix responsibility and accountability. Parties sponsoring economic decisions must be accountable: parties that are responsible for failed forecasts and failed economic policies must lose opportunity to seek vote unless they change their ideologies or purge the leaders who took or influenced the society to support their decisions that failed. It is a pity that decisions supported by democratic majority are not evaluated ex-post. It is ridiculous that those who took failed decisions or those who did not quantify the risks correctly are not penalized through disqualification and censure publicly. Those who ask people to vote wants to remain outside accountability (except seeking re-election) through independent scientific evaluation mechanisms while they want all others to be accountable for their actions. Nothing can be more amusing than this.
G: You are again in very cynical mood. Can we close for the day?
S: Why? I was visualizing the promise that the emerging discipline of Genetic Economics holds for us. That is being optimistic. We could explore this further. We keep that for another session later.
6. Economics As it Suits One
Saturday, May 2, 2009
G: It is difficult to understand the distinction you make between protesting against particular case of oppression and injustice caused to a person X of distant country by another person Y of a distant country and protesting against oppression or injustice meted out to you or your son.
S: It is difficult for you, but simple for me. I am against people living beyond their means. In fact, that is a kind of social norm that is known to every one. But some people do not follow this principle. I have no obligation or duty to protest against each or one or two person trying to leave beyond means. But I might object if my son tries to leave beyond his means because I get more pain when I see my son getting into an imprudent behaviour. I do not have to teach anyone in this age that no one should oppress others or cause injustice to others. I expect everyone to be fair, just and non-oppressive. I do not logically need to object when a person deviate from my expectation. But I will object if my son tries to oppress my daughter or my daughter in-law.
G: Can you give some more analogies?
S: Most human beings on this earth have been taught to behave like human beings. I also do not like human beings to act like animals. But each human being has the right to act like a monkey or a dog. If some human beings do exercise that right, I do not have a logical reason to register my protest whenever a person exercises that right. But I might object when my son or a close friend acts like a monkey or a dog not because of any scientific, logical reason but simply because I am pained to see my friend or son just behaving like an animal.
G: You seem to believe in the saying that ‘Charity begins at home’.
S: In my words here it means ‘just and fair behaviour begins at home and in my own country’. Even if I think that America is oppressive or unjust or Saddam is oppressive or unjust, I feel sad but am not inclined to start a campaign against or for America or Saddam. I would still be inclined to stop my son becoming an oppressor or an unjust person.
G: Any other example?
S: Yes. I am against killing people. But as a soldier in the war front my task is to protect my life and my country not by running away but killing enemy. If my country’s soldier keels the enemy soldier or the enemy soldier kills my country’s soldier, I have no reasons to protest, though I am against any one killing any other and against wars taking place. Similarly, when a criminal kills a kidnapped child for not getting the ransom in time and then flee as the cops are after him, I do not need to protest against murder. I am only sad. If the child is from my family, I may react violently to express my grief or even kill the criminal if I happen to catch him. That’s an emotional outburst and not a rationale scientific behaviour. I do not organize protest against killing of a person by another person as they occur because that has no rational basis.
G: The weird examples you give make a mess with cause and effect paradigm.
S: You are right. We know that some human beings will have natural tendency to oppress others, be unfair and cause injustice to others. We know that some human beings will protest against such oppression, unfair treatment and injustice. But protesting against some cases of alleged instances does not necessarily follow from any cause-effect paradigm. Equally important the concept of fairness and injustice or oppression varies from society to society and from circumstance to circumstance. In terrorist organizations, if a terrorist wants to leave his organization after some time, he will be provided such treatment as such organizations consider fair and just which is different from and irrelevant to when a member leaves a sports or cultural club.
G: So, you cannot agree to be part of any particular organized protests against alleged case of oppression or injustice as conceptualized by an organizer of protest, especially if you suspect that the organizer has some other ulterior motive to do so.
S: Exactly. All that happens are all natural phenomena. Those who organize protest or protest are as much a natural force as those like me who may not feel the need to protest or be part of an organized protest. There is nothing to choose between these two different kinds of forces. There is nothing so specially great or scientific or rational or human about organizing or raising protest. What is relevant to one type of human beings is irrelevant to others and vice versa.
G: So, I have enough of your weird examples and your weird funny logic.
S: It may be enough for you. But I am not fussy about that. I know that each one of us do only that what God wants each to do at any moment of time. Economics therefore varies according to what suits different individuals and societies. Some Indians say that the US attacked Iraq to get control over the latter’s oil fields and that is bad. But another economist might say that Iraq’s oilfields are not meant for Iraq’s Saddam to decide their exploitation and use: natural resources are for the entire human society. Poor people want the rich people to pay more taxes to help the poor do better. I find in it an economics of begging camouflaged with the argument of equity and equality. Poor people want prices of petrol and kerosene and cooking gas to remain fixed for ever because that suits them. The scarcity of these materials warrants that their prices go on increasing because that suits the logic of distribution. Economics for each individual, group or nation is what suits each: the science of economics is different and does not care for any one’s perception or wish.
7. Economics by Ecology and Environment Phobia
Saturday, May 2, 2009
S: Should we discuss the example of the worldwide concern about protection of ecology and environment?
G: In such a straightforward issue, I do not think there can be any debate. The way human beings are exploiting natural resources, the World is heading towards an ecological and environmental disaster.
S: So, you mean that protection of environment and ecology is relevant to everyone.
G: Yes. This is the relevant perspective for everyone.
S: You want to say that everyone in the World know the scientific truth about how human beings are exploiting the environment and the non-renewable natural resources. This is first cause-effect relationship you depend on. Then you want to say that since everyone’s life and the lives of the future generations are at stake due to environment pollution and ecological damages being caused by human behaviour, everyone should be concerned. That is another cause-effect relationship you invoke. That is why you say that Environment and ecology concerns are relevant to everyone or the human society.
G: You got me correctly. That is what I want to say.
S: Unfortunately, you are wrong. First, everyone in the World does not know the scientific truth about human behaviour and environmental and ecological disaster. Only some people know.
G: Yes. If some people know the scientific truth, that is enough. All persons may not know at a given point. But truth is truth. Truth implies that human beings should change their behaviour. It is suffient if some persons who matter and have the power, know the truth t.
S: That’s how you perceive. But for those who do not know the truth, your perspective is irrelevant. Second, even if everyone knew the scientific truth, not all are interested in protecting the future. In fact many may not have any view about the future after their death.
G: Yes, some persons are very selfish. They do not care about the future generations. They are fools. They are not relevant.
S: Correct. For these people, your perspective is irrelevant. Let us assume for your sake, that everyone knows the scientific truth and are not selfish and care for future generations’ welfare. Still, the issue may not be relevant to some of them because they do not know what solution will change human behaviour.
G: Human beings should to try to find out solutions. That is why I think what I say is relevant to all who knows the truth. It is most relevant for the knowledgeable culprit. It is the economically advanced West that is responsible for exploiting the environment and ecology in a non-sustainable and damaging way.
S: I do not agree with you. The debate on this subject will continue for long, if not ever, again and again. For that are the way Nature’s laws operate. There will be crises coming again and again because of the natural greed of human beings and consequential Natural Resource exploitation on a massive scale in ways that hurt the ecology and the environment.
G: So, you seem to agree
S: No. I do not agree with you. The ultimate disaster is not round the corner. Human beings will not be an extinct species in a short while. Human beings will continue to be doing other things in the meanwhile: invent technologies and changing life styles that will reduce the dependence on exhaustible natural resources, increase the use of renewable natural resources, increase the efficiencies of the use of natural resources, conserve ecology and protect environment as well as make possible comfortable living in adversely changing ecological and environmental conditions. We therefore need not anticipate a complete devastation in the foreseeable future.
G: You seem to have great faith on human capability to innovate, invent and adjust. But the West, particularly America seems to be interested in making the environment progressively adverse to normal, healthy human existence.
S: I do not agree that the West or America will continue to be the major contributors to ecological and environmental problems of the World today. The major contributors will soon be just two countries, China and India. They are poor and are on rapid growth trajectory. Their consumption of materials will bulge simply because of their size of population. If at all, it is the West that will come out with more efficient technological solutions to achieving rapid economic growth with less environment-polluting effect. In the meanwhile, we expect advanced countries to slip down the lower standards of living? We want to say that “Hi, country ‘X’. You have enriched yourselves in the past by polluting environment and hurting ecological balance. Now, you stop. It is our turn to become rich by damaging the environment and ecology. We want reservation of less rich countries like us in future entitlement to pollute environment and contribute to ecological disaster”. Does this seem logical, rational, consistent or scientific?
G: Yes, we should get our turn! But we are not so mean. Rather we would like to work towards environmental and ecological protection. Let the West reduce its exploitation and consumption of natural resources in a manner that reduces depletion of finite stock of non-renewable sources of energy and other materials. Let them reduce pollution and protect environment. This will allow poor countries to consume more of such resources to grow fast economically.
S: Extra-ordinarily brilliant logic. The only problem is the relevant has become irrelevant here.
G: How?
S: It is known that earth has a finite stock of non-renewable natural resources. You want a fair distribution of each of these among all the people in the World. So, you may think of dividing each natural resource equally to each person irrespective of where the resource is located and where each person is located. As if, for each natural resource, you have a giant international company that has issued equal number of its shares to each person in this world. But then how do you deal with people of subsequent generations and the growth of population? You cannot solve this problem. Even if you had overcome this problem somehow, you face another problem. How do you take account for the exploitation of past generations that had exploited these resources? Better forget the past. Start fresh now. How do the shareholders use their shares to buy the natural resource they want to consume? So, you allow for trading in these shares and you allow a free international market for each natural resource to develop.
G: But markets are not always efficient and fair.
S: So, you would most likely suggest that we appoint some World Government or international democratic forum to solve the problem. But you cannot because you are tied to your nationality and you will need to develop of a system bureaucracy to deal with International Dispute resolution. That can be more inefficient and unfair than the market system. Your statist, bureaucratic efforts are as much a natural force as the free competitive market system. The actual outcomes may depend on the interaction of these forces.
G: You seem to believe that human beings cannot design and implement a more efficient and less unfair system than the natural system or free market system!
S: I do because that is the hard truth. The cause-effect paradigm leads you to the conclusion that extravagant exploitation of non-renewable natural resources and inefficient use of such materials affects ecology and environment. That is what you have observed from past history. But that does not necessary imply that the rich nations are doing just that, unless you have a cause-effect obsession syndrome. You want advanced West to reduce their contribution to pollution and allow emerging economies to increase their contribution to pollution. So, you fix standards, start carbon credit and start trading in carbon credit. That is a good market system idea, but that cannot solve your basic problem. Ideally, you want an overall absolute limit on each kind of pollution that human beings generate per year or per decade and you want each human being in the world to have the right to pollute only up to a limit determined by the overall absolute limit divided by the total human population. But, this seems so funny that you create the right or entitlement to pollute environment. And, you want to have larger entitlement for Indians and Chinese to pollute!
G: I see the point you are trying to make. It looks so silly. But as human beings we have to do something.
S: That is what you are naturally inclined to believe. Doing something is not necessarily better than doing nothing! Of course, people like you will try to do this. You will do this because of Natural Law that is playing out through your nature and inclination. But other natural forces will also operate. They will operate directly or through other persons with inclinations different from you. The future will be result of interaction of different natural forces. You cannot achieve anything better than what Nature allows you to do.
G: You are coming back to your stochastic destiny principle again.
S: You are absolutely right: that is the ultimate truth. Creation and destruction are natural processes that cannot be controlled by the mere wish of human beings except by chance.
G: But we must be concerned with ecology and environment when we know the truth.
S: If you are by nature inclined that way, you will do just that. In fact, it is the western world that shows greater concern than the poor countries. So the poorer countries want to preach that the already rich countries should develop technologies that would protect ecology and environment. And, they want a fair share of the entitlement to damage ecology and environment.
G: They should.
S: They need not. If we are so concerned with ecology and environment, each one of us should be completely avoiding doing anything that is scientifically proven to have an adverse effect on the environment and ecology. There is no need to seek greater entitlement to damaging environment and ecology. But human beings are naturally conditioned to pick up fights because of self-interest and jealousy. For that you do not need to demonstrate your ability for reasoned argumentation.
G: Are you trying to make an oblique reference to my identity of “Argumentative Indian”, a la Nobel Laureate Amartya Sen.
S: If you think that to be argumentative is a great characteristic, you should be proud of such an identity.
G: Isn’t argumentative a great characteristic?
S: It’s for you to value your characteristics. For me all characteristics are great and powerful: they can lead to great creations as well as destructions. I maybe thankful for just being what I happen to be as a result of the interaction of different natural forces in the past. But past is no more relevant to me except as a pleasurable trip back in time or tools of my natural tendency to play the game of reasoning and analysis. Past, in its various parts, has been contributing to making what I am and what I will be in future. Past is not relevant to me: it is the process that yields the present that I am.
G: You mean to say that you are not an argumentative Indian?
S: I am all that Indians commonly features. I am as argumentative as an Indian can be. But I am also as acquiescent as an Indian can be. I am as religious as an Indian can be. I am as Western as an Indian can be. There is no particular Indian that I think dominates me all the time. The exact process in which the past centuries and millenniums have contributed in my making is not known to me. I cannot be proud about anything that I have not myself done. I can only be thankful to the past.
G: But in our discussion, being argumentative is relevant.
S: I agree. But being argumentative does not necessarily mean that we are rational and reasonable human beings. Being argumentative is not necessarily a virtue. It may merely be a form of easily accessible communication that avoids physical fight, avoids violence to settle disputes and that help people to learn if they wish to learn.
G: Hold on. We have been in argumentative mode since long time. Now you say that we are not rational, reasonable human beings!
S: See. Let us not mix up things, though this is so natural for argumentative people to do.
We are trying to be rational as far as we can. That’s what human beings can do. We cannot ensure rationality. Consider the fact that poorer nations like India and China want to grow fast and catch up with the advanced richer countries, for which they need to consume great amounts of hydro-carbon fuels and thereby inflict damage to ecology and environment. To minimize the overall damage, the current rate of damage by richer countries therefore needs to be brought down. That is argument for fair sharing of entitlement to damaging environment to ecology and environment.
G: That is true. The richer nations, particularly the USA cannot be allowed to inflict such huge damage as they are doing every year now.
S: This type of argumentation will not solve a dispute. This is another example of Cause-Effect Obsession Syndrome. If the dispute and the poor claim entitlement to damage based on population, argumentation of this type will soon end and yield to settlement through wars by the use of money, muscle, technology and intellect. That is what is natural and happening even now.
G: So, you are saying that scientific reasoning with the rich countries will fail to change their behaviour.
S: They will change their behaviour in their own interest, not because of the argument put up by poorer nations. They know that the stock of minerals and fossil fuels are finite and hence will try to find out ways of getting more of their needs per unit of energy or any finite natural resource. They may even accommodate the poor nations out of sympathy. Your argument is flawed and irrelevant to solving the ecological and environmental problem of the World.
G: Why do you say so? You do not agree to fair sharing?
S: In order to feed the billions of Indian and Chinese, if we use chemicals fertilizers and pesticides, we will hurt ecology and environment more. If we do not want to use polluting chemicals to feed the billions and give them decent dwellings, we will need to cut down forest cover and damage ecology and environment. No civilized person will raise the question as to why poor nations dramatically cut down on their population by half. You can’t stop producing more and more poor people. You do not think of fair sharing of the entitlement to produce numbers and burden our planet.
G: That kind of argument is hitting below the belt.
S: No. It’s the Cause-Effect Inverse to expose the Cause-Effect Obsession Syndrome from which one suffers and as a result produces invalid, biased arguments. You do not like that the issue of population size and its impact on environment and ecology because that is your weakness. If you had fewer numbers to deal with, you would have required much less of energy and materials to make them rich. But even with huge populations, you still like to imitate the life-styles of the rich West and its extravagant use of finite resources that leads to ecological and environmental damage.
G: Then, what is the solution?
S: I do not know. But mere argumentation cannot solve the problem so long as you argue only to promote your interest at the cost of others. That’s not reasoned argumentation; it is mere shouting. You know how much water billions of poor people will require when they become rich. You know how much of non- biodegradable plastic material waste they will generate to damage ecology. Yet you cry that the rich waste is unfair!
G: What then is the alternative?
S: There is nothing. There is no choice. You are destined to shout thinking that you have strong reasoned arguments when actually you really do not have any argument to justify your existence that burdens this planet. That is the natural law operating through you. You produce more poor people and when by natural consequence they become terrorists you justify the growth of terrorism by blaming the extravaganza of the rich West. That poor countries suffer is relevant but their argumentation is irrelevant so far as ecology and environment is concerned.
S: You are saying that whether poor countries remain poor or become rich, disaster is unavoidable.
G: Yes, that is the inevitable unless Nature reveals the solution by enabling scientists and technologists to find new technologies that remove the current constraint on resource availability and environmental and ecological impact of resource use.
8. Amusing Rights to Intellectual Property
Saturday, May 2, 2009
G: Can we have one more global example of cause-effect obsession syndrome, cause-effect inverse and relevance of irrelevance?
S: First, let us deal with what causes some people to seek right to intellectual property (IP) and its protection from being copied for commercial purposes. Those who have anything that is novel that they have designed or discovered or invented may have a need for IP protection. They want to make money from their own IP or at least want to get recognition for their contribution. Some of those who think and can demonstrate that they have created something novel and the use of that creation by others should be subject to their permission which they may grant at their discretion, if necessary against payment of some monetary consideration by those they have agreed to allow such use.
G: The cause is the desire on the part of the creator to benefit from his/ her creation and the effect is the demand for IP.
S: Yes. But there is an underlying reality that is not so explicitly stated. If X has invented something that can be successfully commercialized and money made without any possibility of copying on commercial scale by others, there is no need for IP protection. Unfortunately, for most creations copying is generally very easy. Therefore, restriction on copying is what is being sought. The cause-effect obsession syndrome starts then as follows: if you allow free copying no one will have incentive to create or innovate things that can help human society to progress. So, IP right is nothing but negation of human right to copy.
G: Right to copy!
S: Yes, freedom to copy can be regarded as a fundamental human right. Without copying human civilization cannot exist. From the childhood you learn to copy and parents urge you to copy them so that you can live. You must copy how to walk, how to keep yourself clean, how to eat and drink, how to talk, how to read, write and communicate, sing, dance and so on.
G: So, the cause-effect inverse here is that if you do not allow free copying right, human society cannot make progress. If I am not allowed to copy running and innovate as to how I can increase my speed of running, how do I catch a thief running away stealing my money from my pocket?
S: You are right. That is why many creators themselves want that their creation be freely copied without any restriction. They enjoy that many people benefit by costless copying of their inventions. The greater is the incidence of copying the greater is their delight.
G: So, you are against copyright laws.
S: Please do not jump to conclusion without logical justification. I recognize the natural need and right to copy. I also agree to the need for copyright laws. If copyright laws are not there, authors will not write for a book, publishers will not publish books, music companies will not record songs, movies, dramas and events on tapes, audio/ video cassettes, compact disks etc. But despite all copyright and patent laws, we have official sales of recorded music industry falling behind the sales of illegal copying based pirated music distribution industry. A similar thing happens in pharmaceuticals industry. The official industry has to innovate to make unauthorised copying and piracy uneconomic and restricted. That is the technological and marketing challenge the official industry has to take up.
G: So, you say that both copyright and copying will continue.
S: Yes. But one should note that not all things that you see some other person do can be copied or at least easily copied by you or others. There are a few possibilities of copying: a novel creation can be easily copied sooner or later or difficult to copy even after a long time, or almost impossible to copy in the foreseeable future. There are a few possibilities on the cost of creation: a novel creation without much cost (resource, time and/ or effort) or with substantial cost. For simplicity, we can have six possible combinations: (a) easy creation & easy copying, (b) easy creation but difficult copying, (c) easy creation and impossible to copy, (d) difficult creation and easy to copy, (e) difficult creation and difficult copying, and (f) difficult creation and impossible to copy. For (c) and (f) categories, there is no problem. Problem arises in the remaining four cases.
G: Creations of category (a) also does not pose any problem. For that which is easy to create, there is nothing that the first creator can demand to be compensated for. The same thing may have been created soon even if the first creator had not been the first to create.
S: You are right. Categories (b) and (e) also do not pose much of a problem because there is an embedded IP protection for quite some time, copying being difficult. Real problem arises in the case of (d) category creations: if you do not protect the commercial interest of inventions/ innovations that cost much time, effort and money but easy to copy, adequate effort and money may not be attracted to the creative process of innovations and inventions. As a result, the society may suffer from slower progress of the human society.
G: For (d), therefore everyone will agree to Intellectual Property Right (IPR) and IPR protection.
S: I also believe that everyone will agree.
G: Then where does the debate originate?
S: It arises from how the inventions or creations are classified as novel creations of category (d) and how long the protection is granted for them. Failure to identify creations of category (d) as such or inadequate protection period for such category creations may hurt the process of creations and therefore the interest of the creators and the progress of human society, though the copiers may be benefited.
G: On the other hand, creators of (a) category creations may try to show that their creations are category (d) creations. This will also hurt the process of innovations besides hurting the society’s interest.
S: You are right. Thus, the problem arises not with IPR protection as such but with the way the IPR protection is ensured in the case of (d) category creations: short, unambiguous laws on IPR, proper identification of IP creations of category (d), and the enforcement of such IPR. This clearly is not an easy task and cannot be handled of run-of-the-mill, ordinary bureaucrats. It requires highly perceptive scientist personnel capable of quick decisions on IPR protection applications and IPR protection intelligence and police personnel with adequate powers and accountability.
G: But this is an almost impossible task in large population countries with high propensity to copy clandestinely without paying the creators any consideration
S: Yes. That is why India and China may find it difficult to have strong and effective IPR regimes.
G: But there are non-profit foundations which do lot of collaborative research on the basis of what is called open source model of development as in the case of software development. These foundations and the people who participate in open source software and other scientific problem solving do not seem to worry about IPR or the pecuniary or reputation/ recognition prize rewards.
S: You are right. This is new model of development of science and technology is driven by motivations like the psychologically good feeling of being challenged by various unsolved problems or of being part of an open community of problem solvers or simply the scope of learning new things. Often, such open, collaborative efforts results in faster cracking of problems than the time taken by the closed door, secretive scientific and technological in-house research undertaken by company R&D and research institutions.
G: If that were so, why do we emphasize on IPR?
S: First, complete open source process of creative innovation and invention may not suit all areas of science and for large companies to depend on. Second, such open, collaborative efforts at problem sharing and problem solving may actually increase the efficiency of problem solving within companies and research institutions. Third, the open-source, collaborative efforts can also lead to new regimes for IPR protection laws. Those who participate in the open, collaborative processes may get something in the nature of free stock options: options in this case will be on the sharing of gains from patents based on collaborative generation of solutions to scientific and technological problems.
G: Ultimately, strong IPR regimes will help countries like India and China to gain faster.
S: Yes, relatively low income countries with large population of scientifically trained minds should do better by giving up the practice of copying and start participating in open source development of science and technology. It is a cause-effect obsession syndrome that leads us to believe that IPR protection is in the interest of already advanced, rich countries and multinational companies. When we look at open source process of scientific and technology research, we develop a cause-effect inversion. Then, we start seeing that effectively designed and implemented IPR regimes are relevant to poor countries like us: reliance on unauthorized copying the creations of foreign innovators and denying IPR to foreign innovators actually hurt countries like us more than the advanced Western countries.
G: But you can’t expect poor countries to spend huge amount of resources to innovate.
S: The issue is that can poorer countries remove their poverty through copying. Both the goal of lifting huge populations from poverty and the means of copying are wrong. The goal should have been to enable each of their citizens to become as rich as possible. If you aim low, you achieve only that. If you aim high, you apply your brain better and succeed. But whether you aim low or high is not within your choice. The means to achieve the goal should have been to allow creative and productive talents in science, technology and entrepreneurship inherent in human beings to flower.
G: How can poor, uneducated people identify and use their talents? You have to educate them first. That is why the State plans programs to do that.
S: State can only plan. The State cannot implement and get the results. People achieve the results individually and groups at their pace. Directing, controlling and cajoling them do not help. If State plans for the people, the people think that it is the State that has the responsibility for and capability of achieving what the State plans.
G: If the State does not arrange for economic and social development, which will?
S: You suffer from Cause-Effect Syndrome. You think planning is the cause and achievement of desired goals is the effect without any scientific basis. Did all inventions and discoveries in this World result from State planning? Confront the Cause-Effect Inverse by finding how state planning and initiative had caused the following effects: the proof that the Earth revolves around the Sun and the Sun does not revolve around the Earth, the discovery of the theory of relativity, the building of the first airplane, the use of the wireless technology, the development of the principles of management, the technique of double-entry book keeping, the popularity of cricket or soccer or Lawn Tennis all over World, the proliferation of amusement parks and shopping malls, the development of plastic money. State is irrelevant to the progress of human civilization.
G: But some States do better than others!
S: Yes, that happens because some States allow greater economic freedom to citizens and allows merit and talent to compete in exerting their influence on how the State functions. Such states may do better than other states that curb individual freedom, encourages acquiescence, rewards loyalty to the Ruling class and requires merit and talent to seek State patronage.
G: You mean to say that India’s economic development in the last 60 years was possible without the State’s direction, control and initiatives.
S: Whatever India or any other country has achieved so far is purely because of individual enterprise. The results achieved are not because, but in spite, of the adverse effect of State’s active meddling with economic affairs of the country.
G: Why do you say in spite of the State?
S: Because State planning and control has constrained the progress of education, dynamism of entrepreneurial risk taking, motivation to excel, and so on. When the whole World was available for Indians to acquire knowledge, to trade with and gain, to compete with and succeed, the Indian State ensured that the people of India live virtually isolated from the World. Economic freedom was snatched away from the citizens by the State in India. Citizens that live in economic serfdom perpetuated by the State’s over-riding power cannot deliver outstanding results on a sustained basis.
G: Why did India choose the State-ist model, if what you say is true?
S: There is one and only one reason: You choose as your nature permits you. That’s getting back to Stochastic Destiny Principle, as you would like to point out.
G: But since the economic liberalization started in 1991, India has become less Statist.
S: That is your illusion. Instead of a fixed short chain that you tug in the neck-collar of the dog you can use an expandable-and-contractible leash chain also. That is not freedom.
G: How is this relevant to IPR? You have a tendency to digress!
S: This is another example of the Relevance of the Irrelevance. When you are so obsessed with State-ism, you cannot imagine the potential of economic freedom to the citizens. Unless the individuals are free, exploitation of creativity is constrained. The citizens are forced to copy rather than innovate since the State does not believe in IPR.
G: But we have copyrights and patents since long.
S: Yes, some legislation exited till the recent changes took place. But we know how high has been the incidence of violation of copyrights, trademarks and patents as also the extent of piracy in recorded audio/ videotapes and CDs, drugs, automobile spares and so on.
G: In such a huge country, enforcement is not an easy task.
S: It all depends whether one chooses to be equal to the task. One makes choice one is naturally inclined to make. That’s your destiny. But that does not justify the poor enforcement record. Poor IPR laws and poor enforcement encourages copying, breeds mediocrity, discourages innovations and kills motivation to excel, which hurts economic and social progress. Copying clandestinely, according to me, is an activity of people with low self-esteem.
G: If you are poor, you are prone to copying.
S: You are right. Some poor people find no alternative but to steal to live their lives. Some other poor people organize muscle power to become bandits to commit robbery or become terrorists. Some other poor people just tolerate their poverty. It all depends on the natural inclinations of the individuals. Violation of copy rights, trademarks and patent laws, however, are committed generally by rich people, even if they belong to poor countries.
G: You do not seem to be interested in prescribing solutions.
S: Prescribing solution is easy. In fact, our discussions point to alternative solutions. The responsibility of choosing a particular solution and the success or failure of a chosen solution lies only with those who want to solve the problem. They choose according to their natural inclinations. That is in accordance of the stochastic destiny principle.
G: As usual, we have to close this session without reaching an agreement.
9. Economics of Government Land Allocation
Saturday, May 2, 2009
G: Land is given by God: it should be owned by any one. Its use should be decided by Government. What do you think?
S: Better enjoy a real life story of how adults play children’s games.
G: What is this story?
S: Mr. Fakir, an erstwhile small farmer from Singur district, and Mr. Amir, a renowned industrialist. They had a chance meeting in a small restaurant at a New York Airport. Mr. Amir was enjoying a cup of coffee waiting for his next flight to Los Angles. This is what they were discussing:
“ Fakir (F): Good Morning, Mr. Amir. Enjoying your Coffee, Sir.
Amir (A): Yes. Thank you.
F: Sir. There’s headline CNN news on our country and your company, Sir.
A: You know about my company!
F: My name is Fakir, Sir. I have come to USA because of the new car factory your company is setting up in my native village.
A: How did my car company cause your travel to US, Mr. Fakir?
F: I am very happy, Sir, that your company helped me to come to USA and enjoy a better life.
A: Mr. Fakir, I am unable to understand the link between your coming to US and my company.
F: Sir, please notice the CNN headlines. ‘Legislators break Assembly House Furniture: Furor over Amir Car Land deal’.
A: Yes. In our democratic country, every political party seems to know the best for the country but they seldom agree on what is the best. They do not seem to know how to account for costs and benefits of the land transfer to our company.
F: Sir, I do not agree with you that they do not seem to know only what is best for the country. As far as I see, the politicians do not seem to know anything except street shouting, fighting, and lecturing to the illiterate and half-educated majority of our countrymen. And, of course, they know how to act as medieval kings collecting money from others by ingenious methods of extortion and spending growing amounts of public money without contributing anything worthwhile to the country.”
G: Before you continue further, let me say that you are yourself are playing a mischievous game to ridicule the politicians and democracy.
S: Well, I could do that. But that is not the relevance of my story. It is all about how different sections of the society consider what is a relevant argument and what is not. May I continue with the story?
G: Please do.
S: Mr. Amir was obviously interested in discussing about politicians. So the discussions continued as follows:
A: You know as an industrialist, I cannot afford to annoy the kings and the potential kings of a democracy. To survive as a businessman, I must keep good relations with all political parties. But I am interested in knowing how my company helped you to come to USA.
F: Sir, that is because your company wants to set up a car factory back home in our village.
F: Please elaborate. Mr. Fakir.
F: Sir, I am benefited just because you planned to set up your car factory there. I come from the rural, agricultural locality where your company is setting up the factory to manufacture low cost Amir Car for relatively poor countrymen. My father in-law inherited from his forefathers a large tract of agricultural land in the same locality. The Govt. took away the major part of the land he held about two decades back to distribute these lands to landless farmers. That was named the great land reforms revolution.
A: I have read about this great land revolution. Land owned by rich peasantry in excess of a certain individual/ family ceiling was kind of confiscated and then distributed among the landless farmers: this was hailed as great socialistic achievement of ensuring land to the tillers. This resulted in rapid growth in agricultural production and productivity. But what did your father in-law do after losing the land?
F: Fortunately, the land was still in his name. As the legally required documentation formalities were not properly completed during the last twenty years, mutation of ownership in favour of the farmers who received the land as gift from the Govt. was not completed. So my father in-law could still sell the same land to locally influential land dealers at a very good price.
G: You are again trying to project the State as a kind of villain.
S: That indeed is not my intention. But can you rule out the possibility of what story indicates about the credibility of agricultural land ownership records? You cannot. But this is Relevant when judging the credibility of the State’s power. Let me continue:
A: Why did these dealers give a good price to your father in-law? The land truly belonged to the farmers who got the land from the State.
F: The land dealers being influential knew about the possibility of land deal with your company in advance and used their information to buy the land from my father in-law and others. Ultimately, they sold the land to the govt. at a price equal to about double the market price. Within a short period of three months they made 20 % return on their investment and earned a measure of goodwill in govt. circles for facilitating quick land acquisition.
A: So, you mean that both your father in-law and the land dealers benefited because of our decision to set up a car factory there. But how did you get benefited?
F: I happened to fall in love with and marry the only daughter of my father in-law. So, he gave my wife a part of the sale proceeds he received. I used part of money he gave her to get trained in information technology enabled services. This helped me to get a job in a multinational financial services company operating a BPO facility in my State’s capital city. After three months’ training, I will be posted as Assistant Client Service Operations Manager in my city. I am taking the same flight with you to Los Angles and could not resist picking up a conversation with you and than you.
A: It was so kind of you to do that. I am happy that I met a person like you who could account for at least three sets of people who benefited even before my company invested a rupee in the car factory.
G: So, you agree that the State power can benefit lot of people.
S: Hold on Sir. Whenever the State tries to bring benefit to the people the State also inflicts a cost. Moreover, the beneficiaries from State decision about whom we have heard so far in the story are not supposed to be the intended beneficiaries of State’s action. Let me continue with the story:
F: Sir, I must tell you that there may also be some who may suffer because of your car factory.
A: I hear that some landowners in your locality are not willing to sell their lands to the Govt. for ultimate transfer to my company for setting up the car factory. That is why they are agitating. That is why there was this revolutionary act by opposition political party in the Assembly House in your State capital. The small farmers who lost the land and did not get compensated must have been adversely affected.
Fakir: I am one among such small farmers who lost the land once given to them free by the State, Sir. A small piece of land was given by the Govt. to my father as a landless farmer two decades back. I along with my four brothers inherited that land. But it was really uneconomic for four of us to cultivate that small land. It was too small. The Govt. helped my father to get this land free for twenty years during which he earned from the land and gave us some education. We were not much interested in continuing as farmers on a small plot of land. Even then losing the land was emotionally painful. But the land dealers gave us some money so that we do not create any fuss. So, we got some money. Two of my brothers have decided to set up small food-cum-stationery shops to cater to the demand of the construction workers for the factory and subsequently to the demand from the employees of the proposed car factory. The other two brothers have been working in nearby towns as semi-skilled factory labour for the past three years.
A: So, the farmers like you and your brothers are not adversely affected. But all farmers are not going to get small business opportunities to earn their living or may not have got any money from the land dealers. In any case not all are as fortunate as you or your father in-law.
F: You are right. Some farmers, who got their land from the govt. two decades ago, had got their name in the land ownership records. They have got good compensation from the govt.: they got nearly double the market value of the land they gave to the govt. Not all landowners, who sold their lands to the govt., are real farmers and with the sub-division of ancestral land among siblings, the small land plots are in any case becoming uneconomic to cultivate. It would have been useful if your company had set up, instead of a car factory, an agricultural cultivation factory and employed the farmers as agricultural workers. I understand some of the farmer families would get employment in your factory.
A: Yes, when the car factory comes up, it will absorb some displaced farmers as factory workers. There is a proposal to train some farmers in skilled work required by the factory. And, during the factory construction period, the farmers can find employment as land preparation and construction workers. But it seems that some of the real farmers will not get compensated.
F: Yes. Even after two decades, some sharecroppers, who were given land by the Govt. free, could not get their ownership registered in the official records. They are unable to legally claim compensation for the land they were actually cultivating and now being acquired by the govt.
A: The govt. should compensate them also.
F: Yes. That is likely to happen now that the govt. has come to know of the ground level reality.
G: So, you see in democracy, the State is so responsive to the ground reality.
S: You are right. But only after considerable agitation the State comes to know what the ground reality was. The compensation was not originally designed properly to ensure that all the genuine owner-cultivators get the compensation. That speaks volumes about the efficiency and credibility of State machinery even in a democracy. That is the point I consider relevant. Let me continue the story:
A: In that case, the entire land deal will be fair to all. Everyone will be protected and satisfied.
F: Still some people would have transitional problems once they lose their land you are getting for the car factory.
A: This happens even when a factory closes down because of permanent loss of its commercial viability. New factories come up to absorb some of them. Others have to be taken care of by the Govt. by giving them training in other vocations and skills, finding for them redeployment opportunities as also providing them some financial help to tide over the transition process. Our factory may create some new employment directly. But more employment will be generated outside our factory. Our vendors, suppliers and transporters will create employment. The people working in the factory will generate demand for goods and services from new local shops that will hire people from local farming families.
F: Maybe, that will happen. But people say food prices will rise as a result of transfer of land from agriculture to industry.
S: How will the prices go up?
F: According to the opposition party politicians, the transfer of such a large tract of land from agriculture to industry will mean loss of agricultural output. The output of rice and potatoes will decline. This will mean prices of these will rise.
A: That may not be true. Actually, the land that the factory will take away from agriculture is a small percentage of total agricultural land in your State. So, agricultural production need not go down as a result of our factory taking away some land. We must try raising the productivity of agricultural land by consolidation of fragmented land and introducing large-scale commercial farming. Then we can produce more agricultural crops even by using much smaller land area for farming.
F: I suggest that you set up large agricultural operations factories, if not instead of, but in addition to a car factory.
A: We may not be very good at running an agricultural factory. But when the govt. allows, some others who are more competent than us in this field will set up such large agricultural factories when the Govt. allows such things. At present, that is not permitted by the govt.
F: That is unfortunate. We will need more and more land for residential homes, schools, colleges, entertainment parks, offices, factories, shops and roads to meet the demands of our huge and growing population with rising incomes. This would mean transfer of more and more land from agriculture.
A: Do not worry. One day, the State will realize what it needs to do about increasing agricultural productivity and production so that industrial, housing and transport growth in your State does not get constrained.
F: But till that happens more factories means less agricultural output. We will have to import food grains and other commodities from other States and countries to keep the prices in check and feed our countrymen.
A: Such imports will take place automatically. Other States and countries will export their agricultural products to your State and your State will export various goods including small cars from our car factory to the outside. At one point of time, your state had numerous tanks and ponds. These were supplying various types of fish to the kitchens of your State where fish is daily item of consumption. Later, water in those ponds and lakes were drained out and residential and other buildings constructed in their place. Your state now imports fish from other states where fish is not a daily item of consumption!
G: Your story repeatedly comes back to point out the deficiency of the State.
S: That is not relevant. What is important and relevant to the people in democracy and the minds that are exposed to scientific methods is that the State and its machinery as also the opposition political parties do not have adequate brains that can apply scientific methods or they just do not care about being scientific and knowledgeable. It is only after some citizens start crying and protest that the State machinery collect and come out with facts. Common citizens like Mr. Fakir do not get to know the truth but has to depend on politicians’ propaganda and misleading information. As the story reveals, the political establishment does not care to disseminate correct and credible information in time:
F: But why did you take away good agricultural lands producing three crops a year for the car factory? You could have taken barren or low productivity lands.
A: We require a large stretch of contiguous land that enjoys convenient links to good transport and other infrastructure. The contiguous tract of land we chose for the car project unfortunately contains a small percentage of highly productive lands. Some three-crop producing land is interspersed with some one or two-crop producing land. So we cannot help. This seems unavoidable.
F: But good quality land should get higher compensation.
A: Ideally yes. But in the 21st century, all land under agricultural operations must produce as many crops as possible and all agricultural land that industries are not taking away should be upgraded to produce multiple crops wherever and whenever possible.
F: How would you like to value the land plots you are purchasing?
A: The ruling market price could be a basis for valuation.
F: Ruling market price does not really reflect the true value of the land being acquired by the govt. for your car company. A competitive market for selling and buying land does not exist. So, land cannot be valued at the ruling market price.
A: I agree with you. That is why I understand that the govt. is giving a price that is nearly double of the ruling market price. But how do you really value of the land being acquired by the State for onward sale to your company?
F: It is so simple. You have to find out the opportunity cost.
A: You are right. Each piece of land acquired should be transferred at its opportunity cost.
F: The opportunity cost is nothing but the aggregate sum of the present values of annual income, net of all costs, which the land owning farmer will have earned by using the land for agriculture for the next 30 or 50 years. To arrive at today’s values, each future year’s annual net income from the land has to be discounted at the interest rate on long-term government bonds.
A: Ah! You are talking about the valuation methods we adopt when we make investment and other resource use decisions in industrial companies.
F: If that is the method you found suitable in your companies, why can’t the decision to transfer land from agricultural use to industrial and other uses be made with the help of such methods of accounting for costs and benefits?
A: I agree with you. We should use scientific accounting methods to arrive at correct decisions.
F: In that case, transfer of land from agricultural to car manufacturing factory should be at least at the opportunity cost, i.e. at the present discounted value of the future stream of net income from agricultural use of the land. If a new factory is viable after purchasing the land at that opportunity cost price, the land can be transferred to the car factory. Otherwise, it is a net loss to the society.
A: I agree.
F: Have you done such calculations to find out whether the society will be a net gainer by transferring agricultural land in favour of the proposed car factory?
A: Not really. This is what should be done by the State because it has taken the authority to decide on land use. Maybe they have done but such calculations do not seem to be available in the public domain.
F: Yes. We have a non-transparent, opaque democracy managed by elected political despots. We cannot expect such calculations to be made or, if made, disclosed to the public.
A: Please do not ask me to comment on this.”
G: The Govt. has already started getting these calculations made. Some relevant information is being made public. I understand a white paper may be released. And, all this has become necessary since the opposition parties have gone into violent agitations along with indefinite hunger strike by their leaders.
S: It is sad that the political parties behave like despots lording over citizens. The white paper should have been the first step before the decision to acquire land for transfer to proposed car factory was taken and publicly announced. If the opposition parties were responsible and accountable rather than despotic leaders, they would have themselves produced such a white paper for public scrutiny and debate as soon as the Govt. announced its plan to acquire land. Just because you are political party leaders and supporters you cannot play irrelevant games like the children do. This is what is relevant to judging the quality of democracy and the efficacy of the use of the powers of the State.
Those who have faith in State and democracy have blind faith in them. They are incapable of questioning the quality and credibility of democracy and the use of the powers given to the State. They suffer from cause-effect obsession syndrome or are pure and simple engaged in the lucrative business of fooling and oppressing the common citizens.
G: You continue with your story.
S: Fine, the story is even more pathetic.”
F: It seems you are getting the land cheaper. You should pay higher prices for the land you are buying from the Govt. Land cost is a small percentage of the cost of setting up a project. If you give a 50% higher price, your total project cost would not have increased by more than 25 or so.
A: You are right. But the people who have invested in our company expect me to buy land and other things at the lowest possible cost without undermining quality. I am obliged to do that. If other states offer me land at a lower price, I have no moral right to buy land in your State at a higher price.
F: I agree. But it seems that the govt. is a big loser from your car project.
A: No, that is not true at all. With the new car factory and activities linked to it, more employment, more income and more income tax and other revenues will be generated. Over a period of time the govt. will also benefit considerably.
F. I thought so. Thanks to your car project, every one in the State seems likely to be benefited, except a few who would have temporary difficulties and they can be assisted to tide over that transition phase. But no one seems to have used scientific methods to calculate the cost and benefits.
A: You are right.
F: It is because of the reluctance to apply scientific methods to calculate costs and benefits that we have heated controversies and bandhs? Also, such useless and costly controversies and bandhs may happen again and again when factories, townships, airports projects are proposed and the govt. has to go in for land acquisition. Each bandh is a cost to the society without any benefit: so are the protracted emotional debates in the media, the legislature’s offices and political propaganda meetings. All this is sheer wastage of national resources: money, paper, time and effort.
A: You are right. Maybe in democracy we have to bear this additional cost.
F: I do not agree with you, Sir. We are reluctant to use proper quantitative accounting of effects of alternative decisions. When we are in the political arena, our politicians and elite classes forget everything except counting of potential votes in favour or against, emotionally charged public speaking without any substance, and muscle power. Muscle power technology and street shouting technology are the pillars of our democracy: accounting technology is for other commercial business applications.
A: You have a brilliant idea. How did it occur to you? You are not a Chartered Accountant or MBA.
F: No, Sir. I am only a bachelor of commerce. It seems accountancy and accountability is not what our democracy likes to adapt to.
A: Good observation. We could discuss this if we meet again. “
G: I am trying to comprehend the relevance of your story.
S: You should. Just think if two persons can have such a conversation on their own without much quantitative information, what were the political parties and their great leaders as also the govt. doing. Playing games at the cost of the society? But let my story end in a positive note, before we close this series of dialogue sessions:
“F: You are a very old, reputed industry house with considerable focus on societal welfare. Why don’t you consider grant options to buy 10 shares of your car company per acre of land given to you by the farmers with an exercise price equal to your company’s market price as of 31st March 2009 and options exercisable between 31st March 2012 and 31st March 2015? With that the farmers will feel that they have an upside. This would prove that you have purchased the land with a greater measure of fairness.
A: Thank you for a novel suggestion. But I regret we have to hurry now. They have announced the last and final call for our boarding.
F: Yes, Sir. Thank you for spending some time with me.
A: I enjoyed the time with you. Good luck to you, young man. May our country be filled with citizens like you and you become
10. Economics of Generating Crises
Tuesday, April 7, 2009
The Current Global Economic and Financial Crisis is really a Two-in-One State-created Market-distortion Induced Crisis. There are two crises that merged into one:
A. Unsustainable Trade Imbalances and Market Distortions created by State/ Governments that dominate their economies finally bursting, and
B. Financial crisis emerging out of State policy-led distortions in financial market mechanism in the US.
Together A and B accentuating each other form a formidable Crisis. Who created this Crisis? Economists and politicians have told the citizens that this was caused by a few greedy, dishonest corporate executives, especially in the financial sector. What were the Government and the politicians doing while the crisis was being seeded by the few evil corporate executives? Oh! That time they did not know of how these evil people were working. Now, they know and will introduce tougher regulations and laws to ensure that this does not happen again. People are happy that the Government is doing everything possible to punish the evil corporate executives.
This is really amusing. The real story of the crisis could have in different as the following history suggests.
Unsustainable Trade Imbalances & Market Distortions
Over a decade, poor nations provided subsidized credit/ investment funding to profligate rich nation’s spending for consumption. China ran continuous trade deficit with the US. China grew fast economically and provided employment to millions by producing low value added consumer goods, giving low wages to labor and sold them cheap to the US, investing the surplus dollar earnings in low interest bearing US Treasury bills and helping the US keep the inflation rate low. Such abnormal economic situation can never sustain it had to burst. Chinese policy of controlling the exchange rate of its currency, Yuan, to neutralize the adverse effect of its huge and growing trade and current account surplus on its export competitiveness had to burst. At the same time, energy market imbalances accentuates with rapid economic growth of populous, poor nations. Energy prices soared; energy profits and petro-dollars aggravated asset inflation and also funded/ sponsored- terrorism business. Distortions rose to alarming proportions in energy, exchange rate, commodity, labor and weapons markets. Such unsustainable market distortions can get corrected only through thru’ economic
Financial crisis - Crisis of Confidence
Populist dreams were sold by political regime through market interventions. This sowed the seed of the financial crisis. How? Just go through a rewind of the sequence of events.
Currently (Time Zero), all Political Regimes are coordinating Bailouts, Fiscal Stimulus and Monetary/ Quantitative Easing Actions throughout the World. These actions include: a. Raising and expanding Deposit Insurance,
b. Buying illiquid, impaired housing and other loan assets
c. Guaranteeing inter-bank lending
d. Infusing capital
e.Relaxing Marked to market capital adequacy and provisioning and market price based financial reporting, etc.
What happened before that? Follow the events chronology in reverse order: here BC means Before Crisis or Bailing out of Crisis.
BC1: US Banks flushed with funds but not lending amongst themselves and to others. They were flush with funds because
BC2: US Fed pumped liquidity to encourage bank lending because
BC3: Banks stopped inter-bank and other lending because
BC4: There were Run on US banks because the fear spread that banks are insolvent and people started withdrawing deposits. This happened when the Political Regime lost in the Woods of Economic Greenery they were trying to exploit without knowledge and responsibility. When they had lost their minds under pressure of economic forces they allowed
BC5: Fall of Lehman Brothers as the political regime got trapped between the need to contain systemic risk by rescuing Lehman Brothers and their propaganda that financial firms failed because of their and their executives’ greed that led to imprudent behavior. The electorate wanted the greedy people to be punished rather than being bailed out by Government money.
Therefore, the political regime tried to play safe against common people’s verdict against bailing out the people who caused the crisis by their greedy and imprudent act. The political regime had to come clear out of the
BC6: Uncertain Political Stance on Pvt. Cos./ executives Bailout as elections were coming up soon and the electorate was agitated over this issue because earlier
BC7: The political Regime rescue of AIG, Freddie Mac and Fannie Mac from going into bankruptcy after giving an impression to the electorate that the political regime would not support failing financial firms and followed a policy of
BC8: No Rescue of failing Small banks and firms like Merrill Lunch and others in grave trouble after the political regime came into criticism by organizing
BC9: Rescue of Bears Stern, after a long period of inaction and ignoring the signals given by the market on the problems in the financial sector. During this period
BC10: Rating agencies issued downgrade calls on Investment banks/ financial institutions exposed to housing mortgages.
BC11: Bond prices fell sharply as mortgage defaults soared under ne the impact of rising interest rates from 1% to 5% (homeowner liability increased 40% with every 2%-point rise in interest rates) Interest rates were raised as anti inflationary measures with rising oil prices, growing budget deficits and current account deficits caused inflation to rise.
BC12: Signs of Mortgages defaults and house price downturn were evident as early as in 2005 with the emergence of excess supply in the housing market leading to higher price and leveraging risk of financiers who needed to operate under marked-to-market and prudent income recognition regulation regime.
The period of ignoring the signals of emerging problems was a natural sequence to the previous period of when Political Regime was basking in glory over its great achievements:
BC14: Surging Housing boom leading to fast employment expansion and high economic growth (house price to income ratio crosses 190% in 2002 and crosses 200% in 2004 and about 25% of house purchases were for speculation y people who already owned homes)
BC15: The initial successes in the War on Terrorism, growth impulses released by increased defense spending and higher Budget Deficits, thus neutralizing the adverse economic slowdown potential of the Dot.com sector bust and the 9/11 terror strike.
BC16: Interest rates were continuously reduced over successive quarters by about 4% points n three years despite bulging trade deficit, current account deficits and budget deficits. The interest rate reduction was the regulatory contribution to initiate the housing market growth need to effectively sell the pseudo-socialist political product: American Dream of homeownership for every household.
There was no shortage of dwellings, but 40% households were not homeowners, as they were not expected to earn enough to become creditworthy for loans to buy homes whose prices were to rise if their demand to purchase homes impacted the housing market as they would. The political regime wanted that all households must own homes that would live irrespective of the insufficiency of their current and future income levels and interest rates to borrow as much as was necessary to purchase their dream homes. To achieve this it would be necessary to:
a. Use Govt. control and influence over banks, Freddie, Fannie, investment banks, insurance companies and regulators
b. Encourage players and regulators to neglect prudence and norms (instead of building transparent market, the State was thought to be entitled to deliberately distort market mechanism)
c. Encourage Sub-prime home lending
d. Remove Mandatory 20% down payment
e. Prod Freddie/Fanny to make home ownership affordable to the poor
f. Encourage Investment bankers and unregulated high leverage so that they raise greater amount of financial resources from the market to fund the great homeownership revolution
g. Encourage Discount mortgage innovation: Variable/ Adjustable Mortgages
h. Allow high leverage and housing portfolio concentration
i. Continue Regulatory ambiguity to enable political influence to keep at bay standard risk management in financial sector (Commodity Futures Modernization Act, 2000)
j. Arrange credit default insurance market growth by removing laws against such insurance
k. Attract foreign investors with implicit State Guarantee
To summarize the Political Regime started acting God and believed in the prudence of State distorting markets to sell political dream, and in the process benefit politically-influential house builders (buy land cheap and realize profit by transferring risk at the earliest to banks/ financial institutions), leaving economy imbalances unattended, using housing construction for employment and income expansion at the cost of raising the prices of house beyond the repayment capacity of the low income borrowers, prodding and implicitly protecting pliable players and regulators, ignoring the signs of breakdown and hiding the Truth and thereby allowing the problems to compound, and acting hesitatingly in containing systemic risks from engulfing the US and the word economy.
Ultimately however the God conceded defeat to market mechanism when the latter forced the Truth out. When the costly crisis started hurting the people and payment system was about to come to a halt, the political regime blamed regulators and private sector executives and investors. In response, regulators pleaded ignorance and incompetence: Alan Greenspan expressed shock at lending institutions’ ignorance of their self-interest, admitted knowing about sub-prime mortgages only in 2005, and blamed securitization, foreigners’ demand to invest in US housing-related securities and Freddie-Fannie involvement for the debacle. Shareholders and bondholders shouted each time a bailout was arranged as the value of their investments in these and other companies/ assets tumbled to near zero levels from great heights. The common people and the electorate got really concerned as job losses started mounting with no hopes from a lame duck government and political representative bodies. Public confidence on political regime slumped. Te political regime had then to act to bail itself in.
Bail the political regime out.
People took time to understand the fallout of the politically sponsored American Dream of home ownership: US National Debt rose to 68% GDP and Current Account Deficit to 6.5% of GDP;
The evil corporate executives did not force or cause the Government to raise interest rates, increase indebtedness and run current account deficits!
11. Economics Aids Politicians' Fortune
Saturday, May 2, 2009
Economics has once again come to contribute to the sustainability of political regimes' merriment. Adam Smith largely argued for the efficiency of 'invisible hand' that constrained the profligate spending hands of the political regimes. So, Marx helped plant the seeds of political regimes that would merrily spend poor people's hard earned money. But the liberals and democrats had difficulty in adopting that model, leaving Marx to be picked up by the politicians in Russia first and variants of their model proliferate in poor State-dictated economies in Asia as the colonial rulers evacuated in the twentieth century. But the western capitalist economies of richer nations still had mental blocks to accept the principle of explicit politician-ruled economic systems. At the beginning of the Great Depression of the 1930s Roosevelt found it difficult to adopt Keynes' suggestion for and defense of large State-spending (even for digging holes in the earth and filling them up) to get out of the economic mess. The politicians in capitalist Europe and the United States searched for alternative models of enjoying unlimited spending power. Samuelson's synthesis models helped create an avenue for steady growth of public expenditure supervised by politicians and provided Government's Budget a central place in the economic system. This together with the opportunity to commercialize military technology and equipment and extend tied foreign aid to the war-ravaged and the third world countries helped political regimes in capitalist economies to expand their legitimate empire of spending profligacy. Capitalist economy governments soon became the overwhelmingly dominant consumer or supplier in many markets both in the real and the financial sectors.
Friedman's logic of keeping governments out from most markets and economic activities did become popular among the people at large but failed to affect the popular addiction to complete faith and dependence on money gobbling political governments: irrespective of what the ultimate outcome would be, Governments, like mothers, were expected to do anything that was required to ensure that the children of God get continuously improving supply of employment, income, goods and services. This concept of economic freedom, rather freedom from economic worries pervaded the developed, capitalist economy democracies as much as it enchants the developing and the communist world. Since no political animal succeeded in finding as yet the magic wand of ensuring sustained freedom from economic worries, people would continue to struggle under economic hardships and uncertainty in the hope of the success of the Savior - the political lords of the State.
Keynes- Samuelson Rescue
The Great Recession that began in 2008 seems to be getting over, although pessimists still expect a 'double-dip recession' to witness its second dip soon, raising hopes in the minds of the Marxist faith sadly disappointed over seemingly yet another surprise capitalist recovery from the brinks of a great collapse to extinction. But the political regimes are enjoying the great surge in their spending power. First, the US ran through great budget/ fiscal deficits since the beginning of the new century and encouraging and prodding the financial sector to fall into the trap of childish imprudence to support the political dream of home-ownership to all - irrespective of the varying economics of individual investment in house-ownership, by encouraging unsustainable leveraging. The artificial housing mortgage boom sucked in resources from everywhere creating employment and income as well as larger tax revenues (that could be wasted in profligate political spending. The inevitable burst of the boom caused a great financial sector crisis around the World, accentuating the normal recessionary phase of capitalistic trade cycle into the likes of the frightening Great Depression of the 1930s.
Fed Chairman Ben Shalom Bernanke with his in depth of study of the Great Depression led the US politicians to accept the so-called bail-outs and stimulus packages: with great drama over the compensation of greedy and self-paid financial sector bosses, the politicians sitting in opposite beaches took away huge sums of public money for exercising their spending freedom. This was copied by all Governments throughout the World from Europe to Asia including the right-handed globalizing left-handed communist China. For the third country politicians including India this was a great opportunity of using profligate spending power: the businessmen were happy with lower interest rates, easy liquidity (now called, quantitative easing) and bursting government spending to support consumer demand, while the common people thanked government action to save employment (even as unemployment percentage doubled in less than 12 months in the US). The Keynesian economists were happy that the entire world was at last now listening to Keynes advice made eight decades ago and Samuelson could see his multiplier-accelerator model at work world-wide before he passed away.
Awaiting Acceleration in Revival
But when will the accelerator part of the model become strong enough to allow governments to rewind stimulus and the economy will still be growing after absorbing the negative multiplier effect of lowering or withdrawal of stimulus? No one is certain yet. So, politicians can continue with their profligacy: spend to invite problem, spend more to attack problem and spend till the current problem gets solved and in the process a new problem emerges, and spend all the more again when the new inflation problem replaces the old recession problem. Government expenditure must continuously grow to satisfy the politicians’ appetite to spend. Every time, economics will come to justify larger spending power to political regimes. So, the US stimulus package in 2010 will be larger than that in 2009. India would be spending more. US inflation rate is still low, but India is facing a sharp rise in inflation.
Spend to curb future Inflation
When will the inflation problem emerge? US inflation rate is still low, but India is facing a sharp rise in inflation. The economists have an answer to deal with inflation as well. Reduce budget deficit, liberalize imports and expand capacity to match demand growth. The economists of the left handed variety are already worried about huge budget/ fiscal deficit in the US, other developed countries and countries like India (no one has clear idea of how budget deficit may be estimated somewhat correctly for China)and the consequential resurgence of inflation the apprehend. They will continue to raise progressively louder alarms if the governments do not rein in budget deficits and protect the weak and the middle classes from the deleterious impact of rising prices. So, Governments will, sooner or later, raise taxes on the rich and continue to spend vigorously to protect the non-rich notwithstanding the right-handed economists' opposition of profligate wasteful public expenditure (governments round the world have developed an unassailable reputation of using of pubic money in the most inefficient manner). The businessmen will reluctantly absorb the taxes waiting for prices to rise further to retain commercially viability and attractiveness of their enterprises.
When will inflation rise and taxes be raised? Some Keynesian economics would not call for raising taxes till capacity seems to be on the verge of falling short of demand. So this measure could wait for a while in most countries before optimism about economic expansion returns. Meanwhile, if food prices continue to rise following world-wide crop-shortfalls and food shortages, what will the politicians do? Politicians know the art of managing the citizens' outburst by diverting attention to some other problems - there are many of these available: global warming, terrorism, religious and other social conflicts: one government may be replaced by another government to satisfy citizens if they so desired.
US Recovery Signs Spread Optimism!
The United States seems to be on the path of recovering from the bottom. With greater stimulus spend in 2010, unemployment may not reach 11 % and soon start falling, even if at a very slow rate over the next Nina / ten months. Thanks Giving and Christmas sales are estimated to have been better in 2009 than in 2008. Households had deferred purchases following the rapid growth of unemployment following the fall of the Lehman Brothers and saved more of their incomes preparing for anticipated job loss. Those who could retain their jobs (90% did) have started releasing their pent-up demand for goods. Private sector investment may take some more time to pick up and unutilised capacity still remains high even if the inventories have gone down.
So, let us assume that the Great Recession has bottomed out in the US and with little or more time lag the Great Recession will soon be a past throughout the World. Inflation will be managed as it develops with the recovery gathering momentum and the different economies entering the expansion phase in another 13 to 20 months. Yet, the World economy will still be back to square one: the major international economic imbalance that exacerbated the normal capitalistic recession into a Great Recession through the medium of a severe financial sector meltdown, still remains.
Back to Square One: Unsustainable Trade Balances
The adverse impact of the financial meltdown has been attended to successfully: maybe the politicians will, for a while, dare lure financial institution chief executives in to imprudent behavior as they did in the US during 2002- 2005, prodding the mortgage refinancers, commercial banks, investment banks, insurance companies and the regulators with a implicit State comfort that nothing could get wrong so that these institutions suck in domestic and foreign debt money without adequate equity back-up. This may not be repeated. But so long as the basic economic imbalance in international trade continues, this will create pressure to generate new avenues to seed the next financial disaster. The sustained favourable trade surplus of a poor country like China selling goods cheaper to the Western capitalist economies to keep employment in China high through low\ low wage rates relative to productivity and administered, under-valued exchange rate of Chinese Yuan, will germinate seeds of next disaster. So will the continuation of huge current and trade account deficit to keep inflation low even as unskilled labor there becomes worse off as Samuelson's theorem had predicted.
Yes, China may suddenly find interest in increasing gold production and gold holdings rather than investing mostly in US treasury bills or the Euro, and cause gold prices to continuously rise sharply as they have been in the recent past as other emerging countries try buying into gold. Yes, this may benefit the US as well since it has the largest stock of gold reserves whose value would be rising. But, just as the US home prices could not rise indefinitely and had to cause a financial crash, the movement of gold prices will have its own effect in the currency and precious metal markets with speculators searching for opportunity to book profits at some time or the other. As China's foreign investments rush in to mining properties and agricultural lands in African, Latin American and other poorer third world countries, the currency markets will be impacted. Currency markets are ultimately an integral part of the financial markets. There is always the apprehension that the huge stimulus spending of the Chinese political regime, using their banks may have considerably hurt their financial health to make it riskier to transact business with them
Economics Aid for the Future
Economists do not as yet seem to have a reasonably acceptable model to capture all this ramifications of imbalance in international trading accounts of nations and recommend to politicians policies that are as convincing as those of the Keynes and those that are derived from Samuelson's multiplier-accelerator models. Will economists find something soon? They have the Hecksher-Ohlin Model framework and the related analyses on international trade. How would these be developed further and extended to be relevant and useful to the politicians across the World to initiate co-ordinated action without much bickering as they did to avoid protectionism, following Adam Smith and embark on huge stimulus packages, following Keynes in 2009? Maybe extensions of Hecksher-Ohlin models will not be easily accepted by the third world country politicians. Maybe economists will need also to model, for politicians to understand, the inter-relations of the international markets for precious metals, rapidly-dwindling other industrial metals, currency and currency derivatives, financial markets and the newer markets for trade in the existing and emerging technologies of containing global warming and carbon emissions as well as water conservation, and solid waste recycling.
Maybe China, India and other fast developing emerging economies will agree to find ways to sustain growth while reducing their claims on exhaustible natural resources and polluting the global climate in favour of the poorest nations in Africa and parts of Asia. All these may need to be incorporated in open economy economic growth models that economists would be developing now. Economics has to extend aid to political regimes to spend public money inefficiently and wastefully and yet keep the citizens continually addicted to their faith on politicians as the Saviors once again when the next Great Recession occurs out of the still persisting international trade imbalance. Maybe some economists are just about completing their inquiry into the political policy requirements for the Stability of Growing Wealth of Globalised Nations.
12. Inflation and Price Rise
Saturday, February 27, 2010
Economic thinking like other habits die hard rather refuses to die. Inflation in India has been there in India ever since I took my first lessons in Economics nearly 46 years ago in the higher secondary school.
It does not require economists to understand that inflation is bad for most citizens for most of the time (some times for some citizens it may be good, e.g., with my salary being linked to inflation during the 1970s, I used to look forward to high inflation because my expenditure pattern was less sensitive to inflation than my income was and less sensitive to inflation compared to many others(maybe I had also suffered from money illusion) or for example, recently sugar mill companies saw a four fold rise in their profits.
But every citizen is an inflation expert. Almost everyone has the same set of recommendations: government must fix prices of essential commodities and distribute them from fair price shops ( in our childhood days the emphasis was on raiding the traders who were also turned hoarders and on rationing), stop export of essential goods ( India of course have very little of such exports), import from abroad (this prescription is rather a recent phenomenon after India has moved a little towards globalization: in our childhood days imports were considered as against the great virtue of self-reliance), call strikes and bandhs against the government's inability to curb inflation and so on. Unfortunately, the text books say that to curb inflation in an excess demand situation, one need to cut demand by reducing disposable incomes in the hands of the people by raising taxes and reducing government expenditure. It is never clear to many students of economics why economics textbooks were so harsh to recommend reducing disposable incomes by raising income taxes, reducing subsidies and increasing taxes on the production or sales of commodities. Why raise the price of commodities by levying higher taxes when the prices are already going up? Why reduce disposable income of people when they are already unable to make both ends meet. A veteran graduate of Delhi School of Economics and now a prominent communist party leader therefore has said that Finance Minister Pranab Mukherjee's Indian Union Budget announcement to increase the levy on motor spirit and diesel oil will increase inflation especially through the cascading effect. I understand that a rise in tax levies on these fuels will increase prices of commodities and services which consume these fuels for their production and transportation to reach the consumers. But leftist economists generally have difficulty in understanding economic theories developed in the Western countries, except of the Marxian variety. They are not analytically strong enough to differentiate between a one shot price rise (which is not inflation) and a sustained process of rising prices (that is what inflation is). With such economics education it is hardly surprising, no communist country has been able to solve the problem of inflation so far without making goods disappear from the government controlled shops and long queues at their ration shops. It is only more dangerous to India that such politicians claim to be economic experts and promote themselves as economics experts to the common people.
Pranab Mukherjee, the old, one-time economics college professor, Finance Minister followed the textbook prescription on the one hand by raising indirect taxes on these fuels and some services and followed them up on the other hand with his contra-textbook proposals to reduce income taxes in order to put into the hands of the people more disposable income so that could buy the goods and services at higher prices.
Economics is not what is written in the textbooks but what the politicians say and do!
Some clever chap in the media has worked out that a person earning Rs 8lakhs or more will get a savings of Rs 60, 000 while the higher petrol and diesel prices will mean a higher expenditure of Rs40,000 or so - the person however cleverly forget to mention that the large number of tax payers below the income level of Rs1.6 lakhs per year will receive no tax benefit, nor will those who are near or below the poverty line: presumably, he thinks that people below the poverty line will find their wage rtes increasing as the Government steps up rural development expenditure and spending under National Rural Employment Guarantee Scheme. This may in turn raise the money income of all those who are below the minimum taxable income, except for the low pension income retires who were not lucky enough to have worked in the Government that pays high pensions with periodic adjustments for inflation. Good. Incomes would rise to compensate for inflation in expenditure.
The Delhi School Economics graduate communist leader was probably not so clever or quantitative enough to figure this out before giving his comment to be carried by the Press for the consumption of the poor citizens. Finance Minister however had calculated upfront the inflationary impact of his budget announcements and proposals at 0.41%. The communist leader may not have known that such simple calculations normally are done without the help of a pen, writing paper or calculator or computer.
Economics textbooks prescribe what governments are not to do to avoid inflation. If those prescriptions are not followed and inflation rate becomes high as a result, economics textbooks say that governments stop doing what they should have not done in the first place and urge citizens to tighten their belts till supply increases to match demand.
As in my childhood days, even now both educated and uneducated brains failed to figure out that governments are the basic cause of inflation in a country like ours. Foolish politicians fight their battles to ensure that demand increases more than the supply does. Inflation comes down as people have no alternative ultimately but to tighten their belts and as supplies manage to increase with a time lag: governments only take credit for inflation going down.
If citizens have to live with large government budgets, people have to live with inflation. There is no escape. Countries which had experienced long periods of low inflation are countries with citizens who could during those periods force their politicians to stay away from the profligacy of big and growing spending, borrowing, deficit financing and taxing operations.
Treat the irresponsible patient first instead of allowing the patient to create havoc in the hospital, if you want to live comfortably. Politicians need to be taught the lessons again and again as they are irresponsible mentally-disadvantaged patients.
13. Sectoral Growth Shadow Boxing:
Manufacturing jealous of Services
Sunday, March 14, 2010
In recent decades, services sector has grown fast and faster than industry and agriculture. More than half of the GDP or National Income is accounted for by the services sector. When people came to know about this surprising achievement of the services sector for the first time in the early 1990s, they could not believe that half of the GDP had become false (they felt that services sector did not produce something concrete and valuable). The people attached to or employed in industry, especially the engineers had the most resistance to accept the reality of the dominance of the services sector. As an economist or finance person, whenever I talked in seminar or in-house training with engineers as participants, they would point out that this statistics is a serious ailment of the Indian economy and has to be corrected. I had told them that here is no way you can do this. They would give me a smile to acknowledge my foolish belief in the services sector. And, the people born and/ or brought up under Neheruvian Socialist State planning thought that this was due to liberalization and globalization and corruption. They thought this was unacceptable. But we now know the writing on the wall at that time in the past.
Recently, some intelligent young Indians were trying to find out what is important for the future of India: Manufacturing or Services Sector? They, true their inheritance from their forefathers and old teachers, continues to believe that India needs to do great so that Industry again beats services in growth.
There is a general belief that something physical is better than something tangible. Manufacturing is good because you can see them: so TV is good, computer is good, so are cards, soaps, houses, food products, clothing, air-conditioners, mobiles and the like. . The truth is that if the production and consumption of these grow, there is no way one can stop the growth of traders and retailers, construction workers, government employees, bank workers, transportation workers, newsreaders, TV serial actors and actresses, film editors, musicians, cine-technicians and the like benefiting from increased economic activity. Unfortunately, these categories of workers are all producing services in the services sector and not in manufacturing.
We need more schools for our children and hospitals for our people: we invest in schools and hospitals. This investment is in service sector. School and university teachers are providers of service: they are not manufacturing real goods people like to see to feel good. When we invest in schools, hospitals and roads and also get more policemen and government employees to serve the citizens and fight the terrorists, these service sector people not only increase the contribution of the service sector to the national economic growth, they create demand for need various industrial products like cement, paper, books, ink, pen, computers, cars, arms, office equipment and thereby creating growth for manufacturing as also increase demand for more services.
If we know all this, why do we have shadow boxing over whether industry or sector should or can grow faster than the other and waste our energy in artificial controversies created by the economists, politicians and economists? Such shadow boxing does not manufacture anything useful. Nor, does it lead to enhanced quality service to the Nation.
There are countries in the World that have no agriculture and yet rich. Many small countries without much industry have grown because of services sector growth. As household incomes rise they need more of services than they need manufactured or agricultural products. Our country is unable to produce as much food as the people need. Let agriculture grow at least at half the rate at which services sector is growing. We can think of agriculture beating services later. Industry in growing at a few percentage points lower rate than the services sector. Let industry increase its growth rate from its current level. That will however only further increase the growth rate of the services sector. Sector growth rates are inter-linked: no sector can grow faster than what other sectors allow. Instead of thinking about who is better for us, manufacturing or services, let us make agriculture grow faster. With agriculture in such poor shape neither industry nor services will grow fast for long. Sectors do not fight for growth: they help each other to grow.
14. Democratic Statistics and Government Decision Making
Sunday, March 14, 2010
I have been reading news reports on among other things about what they write about economic affairs for the last 50 years or so. They come up with the same conclusions in different languages every x number of years. The same conclusions, of course valid ones, on the quality, reliability, timeliness and comprehensiveness official statistics have now come up again for the nth time. Statistically good performance by newspapers: only they are yet to learn the habit of referring back to the dates when they had published the same conclusions. That would be too much of statistical work to expect of journalist!
Founded by Professor P.C. Mahalanobis in Kolkata on 17th December, 1931, the Indian Statistical Institute gained the status of an Institution of National Importance by an act of the Indian Parliament in 1959. The Government of India had a Central Statistical Organization, a Planning Commission. So many statisticians are employed by the Central and State governments. Like IAS there is a IS (Statistical) S. What the people in ISS have been doing for all these years? Producing unreliable, inadequate and out-of date statistical information for decades (rather more than half a century)? In any case, even if data were collected with diligence, processed accurately and reliable information generated without much time-lag, how that is going to help? If the inflation is high, or food scarcity is acute or the fiscal deficit is high or electricity and coal pilferage is high, Government will still continue to say that they are taking all the various measurers to solve these problems. Quality Statistics is useful in the hands of or to the brains of Quality Decision makers. Poor quality decision-making brains cannot be compensated by improved quality statistics. How much of even the quality statistics currently available helping the Nation? What more information do we need to know more accurately and timely about the percentage of females in the age-group 18 -80 and the conditions of women in order to select women candidates to represent political parties in elections or reserve constituencies for women? How much time we require to decide on these: 60 years or14 years? How much more information did we need to know that which farmers have the lowest productivity in wheat/ rice production per labor or per acre or per kg of fertilizer? What information more is required to decide about what is the optimal pricing of fertilizers?
Statistical information is the staple food for analysts and researchers. They need more information and quality information to search out underlying trends, patterns and probable truths. Statistical information is also required to impress others about the great knowledge that one has: speakers in conferences, political gatherings, elected representative bodies and public debates and TV panels need to give out statistics (relevant or irrelevant, true or contrived, partial or misleading) to make an intellectual impression on the audience and other speakers).
But Statistics has also other probably no less important uses. One of this is for decision-making., rather informed decision –making. When decision-makers require they get out the best possible statistical evidence and take calculated risks to arrive at decisions. Decision-makers know what statistics they need and also know that they cannot get all the statistics they need because statistics data collection has a cost. They therefore follow the rule of working with the minimum but critical statistical information. Good decision makers and policy makers do not complain about statistics not being available: they ensure that the minimum critical and reliable information gets collected. But such good decision makers capable of and actually relying on quantitative statistics are rare. The Government decision-making being a time consuming process involving political, inter-departmental/ ministerial bargaining and clash of ego-based/ ideology-based opinions/ beliefs, seldom does availability of reliable, up-to-date and comprehensive statistics seem to matter much. Only when people trust statisticians on the reliability of statistics they supply, both raw and analyzed, and the decision-makers shed their hunches, beliefs and hidden interest in the decision-outcome, there is a meaning of spending money in collecting and processing statistics. Democratic processes do not make a very congenial atmosphere for effective use of statistical information and methods as decision-making inputs: rather they make a mockery of the use of statistics. Citizens tend to disbelieve the statistics supplied to support official decisions. My observations are simply untested hypothesis: they can be tested by statistics and statistical methods. But such attempts would never be made possible in democracies even if it was possible to effectively enforce the right to information, unless, however, there is a separate and independent government decision evaluation commission that continuously review each government decision on a continuing basis and sends its report directly to the office of the President for record.
15. Economics of Physical Book Keeping Addiction
Sunday, January 30, 2011
Educated people are addicted to reading of books and periodicals. Many specializes in reading novels/ fictions, some specializes in reading history, travelogues or detective stories or crime thrillers. Still some others are fans of books dealing with religion and spirituality. Management books are a favorite pastime with managers. Professors read books on subjects they teach. Political history, especially contemporary political history is a favorite among those who like participating in intellectual debates in parties.
A section of the educated book readers has always been afflicted to book keeping or rather keeping books with them in their homes and offices. They take pride in their own/ family private libraries or collection of books. Moreover, most educated people like other people to have other people to have books at home in book cases. Book keeping is treated as a civilized fashion. Educated people also favor public libraries. Large commercial firms have libraries in their offices and reference books are always kept on book shelves and book cases in executives' office rooms. The government officers and ministers take care to see that their office rooms have books - both for their ready reference and to impress their visitors. Of course, schools, colleges, universities and other educational / research establishments cannot function without Libraries. The US and British Governments have libraries as part of their cultural activities in other countries.
Nations also like the idea of displaying their admiration of education by setting up National Libraries. India has four such National Libraries - one each at Kolkata, Chennai, Mumbai and Delhi. Scholars seem to be very emotionally attached to such National Libraries.
Addiction to such book keeping helps create lot of employment: there are armies of librarians and library assistants: there is so much work: selecting, purchasing, accessing, arranging, disinfecting and cleaning books. Book shelves, reading tables, chairs and other furniture's are also required to be purchased, arranged, dusted and cleaned. Libraries require rooms constructed space for keeping the books.
Under a specific legislation, all publishers are required to send four copies of any publication they bring out to the National Libraries free of cost. Reportedly only 30%of the books published each year are sent by the publishers to the National Libraries, though the penalty for sending copies to National Libraries attract a fine of Rs, 50 or the cost of the book whose copied have not been filed to the National Libraries which send thousands of letters to publishers about bob-receipt of the copies of books the Libraries have not received: the National Library Assistants go through newspapers and magazines to read about books in the book review sections. Meanwhile thousands of books keep lying untapped or inaccessible to potential (may be zero in number) readers of National Libraries.
So, the piece of relevant legislation may be up for review soon. The Ministry of Education would give a big thrust to Nation Book Keeping Addiction. More stringent law enforcement machinery may be devised, the penalty for failing to send copies of new publications to National Libraries may be raised to say Rs2500 per book or copy, the manpower strength of the National Libraries may have to be increased many fold. There would be larger allocation of funds for space and furniture for the libraries.
Just like any other addiction, book keeping in National Libraries is only huge costs and benefits are small, except for the snob-value. What percentage of the books get referred or used even over a century of the life of a book? No one cares to estimate. What is the amount spent on National Libraries by the Government and the publishers is unlikely to be small. What great benefit do the National Libraries do by keeping millions of books published in the last 30 years since the electronic storage retrieval and reading devices and micro-filming technology have become available.
The obsession with physical book keeping must go: it is costly and its utility is meager. National Libraries may not keep physical paper documents any longer, say, after 2010 and give up the space for alternative productive use.
Libraries of physical paper documents are no longer a public good but a public wastage of National resources. By keeping physical books/ periodicals in National Libraries, the Nation's reservoir of knowledge is not going to increase, nor will education spread.
Publishers can just email PDF file to National Libraries and National Libraries' websites should allow on line access to their entire catalogue and non-downloadable, viewing of the large volume of material they start keeping instead of keeping paper documents. The four National Libraries can be just merged into one and left in the Cyberspace after 2035.
By 2050, libraries of physical books and periodicals - public, private should all be replaced by electronic tablets and readers, resource websites and connected or independent e-libraries. Indians would have given up a hugely costly, environmentally unfriendly, low value addiction and transited to a low cost, environment friendly, reader/ user friendly, high value addiction to electronic reading.
Note: Do not worry; each resident Indian above the age of 6 would have internet access, an electronic PC tablet cum reader by 2050. If they don't why talk about economic development and growth: remain in economic backwardness, economic poverty and poverty of education and intellect. I will certainly not be there either way.
16. Dear, Competitive Vegetables
Friday, March 4, 2011
Worldwide, non-vegetarians are turning vegetarians in increasing numbers. Vegetables are turning very dear because of this and also because some non-vegetarians are eating more of meat. Urban Indian are complaining of galloping, multifold rise in the prices of vegetables even as the Finance Minister of India has lamented the other day that Indians lost one winter season of fresh vegetables with decline in prices. No one seems to be able to explain why and how poor vegetables all of a sudden and rapidly became rich, high net worth articles in terms of market valuation. Even fish and mutton or eggs are unable to compete with vegetables and fruits in the competitive race to secure high valuations in the market. A Kilogram of vegetable or a dozen of some fruits now command more premium than a share of many listed companies. Just find out how much it costs to get a dozen of lemons or a kilo of green chilies.
Do not worry. Gracefully accept the emerging future: high priced vegetables are here to stay. Cereals, pulses, cooking oil, fuel oil, meat, eight-hours of unskilled work effort cannot become dearer keeping the vegetables and fruits lagging far behind. Do not expect vegetables and fruits to come within your reach: you have to raise your income to reach them. Or, cut your expenses on mobile phone calls, entertainment, electricity and fancy wear to eat vegetables and fruits in quantities you consumed before. Do not waste vegetables: if possible, grow them in your roof-tops, terrace gardens, balconies and backyards (if you still have them).
Government will be able to do very little to bring vegetables back to their poor status. To know the reality facing you ahead, read on.
Adverse weather conditions like absence of rainfall affected vegetable crops in some pockets. This may be a small reason why vegetable prices have gone up and remain at higher levels than a year ago. Future weather is unlikely to be adverse for vegetables every year.
Vegetables are now in intensifying competing for space to grow: they need higher prices to retain space, survive and feed us. Land for vegetable farming is getting progressively scarce as more remunerative alternative uses are taking land away from vegetable crops: flowers, poultry, fodder for cattle, residential houses, roads, rail tracks, factories, hospitals, schools, government offices are more remunerative to snatch away land from vegetables. True, all lands are not suitable for vegetables: but those lands where vegetables grew so long are being attracted away by flowers and other alternative uses. Prices have to rise to get vegetables back their competitiveness relative to alternative uses of land. But this may be just one reason why vegetables would be dearer to you.
The larger an urban or city area grows, the larger is the amount of vegetables that the area demands but greater is the distance from which vegetables have to be transported to the urban kitchens. Greater distance means higher transport costs and there is no way the World can avoid secular rise in petrol, gas and diesel used as transportation fuel. This again is a small reason, but a permanent one.
The ‘marketable surplus’ from small vegetable growers are going to dwindle. The wage rated for rural labor is on secular rise, especially after the Rural Employment Guarantee scheme has come into existence. The wage rate under this scheme is now indexed to inflation. The poor households who now be having higher and higher money incomes will improve their food in take including the intake of vegetables, thereby leaving a smaller surplus to be sold in the market. But this is also a small reason and may turn out be permanent. Who would mind if the poor people in the interior villages with some access to land to grow vegetables for their own consumption, have cheaper vegetable-based square meals a day, but people-friendly city/ town-based politicians will organize demonstrations against rising prices of vegetables hurting the millions of poor people in the villages.
Vegetables are perishable products in general, although some can be kept in cold storages for long (cabbages and potato for example) and refrigerated for a few days. The use of these facilities will reduce wastages as also even out the supplies over a longer time. This will in turn reduce the difference between off-season and peak season prices. But carrying and refrigeration costs will add to the value of vegetables that has to borne by the consumers.
Vegetables can be air-freighted at fairly low cost from Bangladesh, Thailand, Burma and Malaysia. This will increase supplies. But who will organize this. There does not seem to be traders with this kind of entrepreneurial ability. The customers authority and politicians out to protect large (not income tax paying) domestic vegetable traders transacting only in cash. Even if they take up the job of importing vegetables, the local politicians will ensure that only a few selected traders control the wholesale trade in their localities. So, they will keep their margins high because of the absence of competitive markets. And, they will increase their margins whenever the local politicians increase the unofficial tax/ royalty they extract from the traders. Vegetable retail chains like Reliance, Spencer will not be able to compete with them. Politicians will never allow entry of corporate houses to invest in a big way in vegetable trade and retail chains and let the country gain from higher productivity, lower wastage, greater preservation and lower costs that they could achieve in a competitive vegetable market regime. The existing localized trader oligopolies will continue to color the vegetables green with harmful chemicals causing injury to the health of the citizens. Even such vegetables will have to be bought at higher prices. This reason for vegetables to become dearer may not be very small and almost certain to be permanent given the huge number of locality level politicians earning income-tax free income out of the large difference between wholesale/ farm-gate price and retail price (Spectrum and Games provide opportunities once in a while: vegetable trade provides a permanent daily opportunity throughout India to distribute huge black income in cash for millions of political-administrative mafia.
So, start growing some bonsai vegetables yourself in your drawing rooms to enjoy viewing them as you eat your dinner of cereals and pulses.
17. Amusing & Amazing Tolerance of High Inflation
Sunday, March 13, 2011
India has witnessed roughly 10% annual inflation in retail prices for the last three years. That would mean the same consumption basket costs about 33% higher now as compared to three years ago. This should have caused poor people to starve and some of them to commit suicide, thefts, lootings and crimes to increase sharply, low middle-class households to come out on street for continuous protest rallies and governments to arrest hoarders and release stocks of essential commodities to poor people at subsidized prices. Nothing of that sort has happened so far. There have been occasional leftist political party meetings where they blamed the Union Government for the high and continuing inflation. The major opposition party is just announced anti-inflation protest rallies in different parts of the country just as the five states go to assembly elections in the next two months. There have been sporadic articles in newspapers and glossy weeklies decrying the inflation and highlight the sufferings of the common people. The TV channels still find their regular entertainment programs and other news analysis programs getting higher TRP than coverage of inflation news and stories. In sum, there is no sign yet for serious anti-inflationary agitation by the common people gathering momentum. This appears to be an amazingly higher level of tolerance on the part of the people – a behavior no one seems to be interested in explaining...
Four candidates may be willing to accept and share the responsibility of shaping this odd common people’s insensitivity to sustained high inflation rates. But politicians and economists are unwilling to give them any credit for shaping common people’s neglect of the inflation issue. These candidates are: (a) the common people have been able to increase their money incomes adequately enough to approximate the price inflation rate and the inherent money illusion among most people, (b) they have been able to alter their consumption basket in a manner that the revised basket is just about equally satisfying but costs significantly less than the original consumption basket, (c) the political parties have been so busy doing other things in the Parliament and outside (including stalling the sessions) to deal with corruption, with court cases and judicial activism that affect political parties, with fear/ threat of terrorist attacks and with intra-party squabbles, and finally (d) common people have realized that the stronger the anti-inflationary agitations and rallies, the lower is the likelihood of inflation rate coming down substantially and quickly agitations: rather, such agitations may only stoke the inflation further instead.
Take the above candidates in the reverse order now to assess their claim. Take candidate (d) first: it would be difficult to find real evidence in the last five decades of strong anti-inflationary agitations and protests really resulting in lowering inflation in any significant way. People may now be more willing to strengthen their capacity to live with inflation rather than wasting time on agitations. Fortunately for them candidate (c) has allowed them to concentrate on this strategy: It is easy to notice the contribution of the political parties to help the people increase the tolerance of inflation... They could correctly assess that the political leaders could gather more popularity and greater publicity by debating issues of corruption, secularism and terrorism and by engaging in intra-party fight for dominance than by organizing anti-inflationary public agitations against the Union Government. They could also sense that the common people are not yet really complaining because till now the first two candidates have also played a considerable part to enhance the people’s ability to endure high inflation in prices. The opposition political parties may also been afraid that anti-inflationary agitation can also boomerang against them as they are running Governments in States who can be accused of not taking those of the anti-inflationary measures that State Governments themselves can take. For example, some State Governments are not willing to reduce the duties they levy on transportation, transport fuel and essential consumption goods as also not willing to allow more competition in the trade in food items.
Now, explore candidate (b). Are common people continuously changing the composition of their consumption baskets? As prices rise along with rise in money incomes, households may have been trying to experiment with addition of new items in the basket giving up some consumption of existing items. For example, people may be spending less on physical travels and letters as communication over mobile phone has become drastically cheaper. When onion prices shot up, many people may have just skipped onions for a month or so. When vegetable prices rose sharply, they may have reallocated their consumption of vegetable Kilograms in favor of the cheaper and lighter ones that are filling but not as much tasty. More energy efficient, durable lamps are being used to save on electricity. Households may be saving on consumption of LPG to save on cooking time and allocate more time for the entertainment channels on the TV. Certain things people consume in terms of numbers like two pieces of sweat meats or two pieces of cut potatoes in the vegetable curry or two chapattis – the individual continue to eat them but they are now of smaller sizes. The distinction between rich man’s vegetables / fish and poor man’s vegetables/ fish is fast disappearing: households now have shifted in favor of a larger variety. Bengalis now think paneer massala a great dish and alu-patoler curry is not a daily must now. Many have shifted from Rui Fish to Katla Fish and as Katla’s have become costlier, some other fish have become relatively cheap. Change in relative prices resulting from greater play of market forces in different seasons are being used to minimize the impact of inflation through continuous changes in consumption basket. Many people have shifted to tea without milk. Medicine prices and doctor’s fees have risen: people are just going to chemist shops and buying OTC medicines - saving on doctor’s fees. While in terms of nutrition and volume the food basket has shrunk but people may be enjoying greater satisfaction from the increased variety. There is no point in giving more illustrations. Everyone knows how they are changing the composition of consumption basket so often in response to both rise in the average prices as also the change in relative prices of substitutes and complementary items.
But candidate (b) could not have played its role effectively in the absence of candidate (a). How far has money incomes increased? For the Government pensioners, pensions have increased substantially – they are even saving more than what they did when they were working. Workers in many organised sector across industries including banking, insurance and other financial services and bulk of the teachers and government funded education service employees, have their salaries indexed partly or fully to inflation. The 6 lakh+ households with employment linkage with the Indian Railways have got an average pay rise of 95% in 2010.The MPs got about a 100% rise in their incomes. On their savings, they have been earning 7-9% interest from banks and post office fixed deposits. The effective rates of tax on their incomes have gone down. The people covered by the Rural Employment guarantee Scheme have seen an increase of 16%-25% increase in their household incomes. Those who are not covered under the 100 days guaranteed employment are also benefited by 16%-20% rise in wage rates as a fall out of the Scheme and continued high level of activity in housing and infrastructure construction. The workers in the entertainment industry, especially the artists/ actors/ anchors, journalists have seen a substantive jump in their earnings - they are mostly from very low and middle income households and have shifted to higher middle income brackets. Many of the high-salary IT and IT-enables Service sector's young employees come from poor families and they have lifted their households from wretched conditions and have been able to protect their households from the adverse effect of inflation.
Despite the high official rate of unemployment at over 8%, the number of employees per poor household has increased. The mid-day meals in schools despite the inefficiency and leakages contribute to additional income spent on food. The rickshaw pullers have been able to get at least 16% rise in the rates during the last three years. The barbers have got at least 20% increase in hair-cut charges. The man who pumps air into your car tires has got a rate hike of at least 30%. The electricians and plumbers who serve high/ middle income households/ offices in cities and towns have increased their rates by 25%-40%. Domestic help wage rates have increased substantially, Car drivers have been able to get a hike of 25%-33% rise in their emoluments in the last three years. In many rural areas, women have formed self-help groups to raise their household incomes through various kinds of activities like commercial farming of flowers in high demand, animal husbandry and poultry, etc. The constancy in railway fares and the host of concessions in the system as also the near constancy of LPG are effectively a rise in real incomes when the general price level is rising. Bicycles for girls students, more and speedier trains, better and wider network of roads helps improve the overall productivity of the poor people as they get more time to earn a little extra. With rising money incomes, middle class develop a money illusion and reduce the percentage allocation to food and start buying manufactured products whose inflation rate has been around 5%. True, there would still be households whose incomes have remained virtually constant and they are the worst sufferers. Where are those people located and how the government is reaching them subsidies is not known. There is no transparency or clarity here. Inclusive growth requires direct cash subsidy to protect from the adverse effect of price inflation, those with fixed incomes at low levels. Where are they and how are they dealing with inflation? No one specifies them: only the middle income people with various opportunities may be complaining.
If the GDP grows at 8%, an inflation rate of 10% is more tolerable than when GDP grows at a 4% or 5%. Should India give priority to raising real GDP and employment growth or to reducing inflation rate to 5%? Should India try to find out what really has happened: with the massive subsidies on fuel (cooking gas, kerosene, transport) and redistribution on income and wealth through rural employment guarantee and loan waivers, has the post-tax, post-subsidy real income distribution has protected the poor from the high rate of inflation? India will not consider these at all. Because Indian economists and policymakers never question their age old beliefs – effective real incomes are always distributed in progressively more skewed manner when both GDP and inflation rates are high. That is the most amusing part of economics and economists in India.
18. Market for & Externalities in Consumption of Education Equality/ Equity
Sunday, June 12, 2011
God, according to a simplistic interpretation of Adyavat of Santana (now referred to as Hindu) Dharma philosophical scriptures of ancient origin, is all prevalent, exits in everything - infinitely large or infinitesimal - that is there in the Creation that we know, discover and imagine, and is container of everything. It follows that each and everything is nothing but God and each and everything is equal and there is nothing iniquitous in this Creation or the Creator, irrespective of whatever we believe in as the origin of God.
Yet, physically each infinitesimal entity is not necessarily the one and the same thing as the other entity as we perceive from our senses: many things look different, tastes different, behave differently and interact with each other differently. This applies to human beings as well. But human beings urge for equality and injustice, especially if one happens to perceive that one is unjustifiably handicapped compared with others. So, there is demand from the God to make every thing identically equal. God has not cared to listen to these prayers and different things continue to maintain their different identities in terms of length, width, area, volume, force, capabilities, attitudes, mentality, tastes and preferences, etc.
This is a great problem. The religious leaders and spiritual leaders have tried to promote the concept of universal love to remove all perception of differences, inequality, inequity and distinctions: ignore the formal difference and love everything as being equal and part of the same identity of God. This makes people to believe and practice the knowledge of Unique Singularity in everything and forget formal differences. But these preaching have failed to ensure equality and equity in the world of individuals, groups, societies and nations. The scientists have not given the humans a technology that would ensure that from a specified date in future all human beings will be born as identical human beings in all respects and remain so throughout their uniform life: that would have ensured that after a later future date there would not be any scope for distinction between men and women, between higher and lower IQ, between tall and short, fair or dark skin, and so on. Because a single compulsory dose of medicine served at birth will ensure that the child could produce during its life time only x number of children without any need for sexual cooperation and all children produced by the medicated children at birth will be of identical configuration without any influence of parentage and genes. So, the medical solution to equality and equity in human race is not yet available.
But the cleverest of the human race, the politicians have found a great and sustainable business of distributing equality and equity. For they understood clearly that the demand for equality and equity will be the only permanent and perpetual: the want for equality and equity is essentially insatiable. If one gets to eat a sweet, delicious fruit, one will demand for another and after consuming the second will demand yet another. But the law of diminishing marginal utility will set in at some stage when the person will stop demanding another fruit to eat. Rather, the person will demand different item of consumption. Unlike this, the utility from consumption of the item called equality and equity is not afflicted by the law of diminishing returns. It is rather under increasing marginal utility rule.
Let us consider a recent example. The Government of a State made education from primary to higher secondary to college and university education completely free for students from poor families with income below a minimum cut-off level. People were all happy - a great decision by the Government, unlike the unchangeable, rigid God. This government produced good of equality and equity in education has a positive external effect: more educated people is expected to provide a better social and cultural environment besides contributing to economic growth by supplying more productive educated labour for industry, agriculture, trade and industry as also creating in the process a greater demand for all other goods and services in the country. Unlike the other method of generating equality/equity product through reservation of seats in education or jobs that reduces the supply of school/ college/ university education seats to the non-poor students and thereby leading to an external negative effect on consumption of equality/equity goods produced by the State, the direct supply of equality/equity goods through what some economists called entitlement / endowment/ empowerment approach is liked by both the direct consumers of the goods (the beneficiary students and the poor families they come from) as well as the others who has to procure the same education good at a cost besides giving taxes to the Government to fund the free distribution of education equality/ equity goods to students from poor families. Everyone is happy.
But the consumers of education equality/ equity goods demand more such goods because the consumption of these goods exhibit increasing marginal utility. Even after primary education was made free, many students from poor families did not regularly turn up at the school. So, free mid-day meals for students attending the school improved the quality of the education equality/ equity product and consumption of this product increased.
As soon as some students from poor families were promised free education at the university / college level because they scored very high marks in the Higher Secondary Examination, it was not only welcomed by all but some demanded an up gradation of this new education equality/ equity products. It was pointed out that these students are essentially of quality of students from rich families but will still suffer a handicap of lower nutrition food intake: so they need to be provided with the same food as the students of rich families get from their parents. Financial grants to such students would help improve the quality of the education equality/ equity product in university education.
But soon it would be realised that these poor student scholars with free university tuition and financial aid would still suffer a handicap in that they would have to face the consequences of family problems related to illiteracy and inadequate awareness of their parents as compared to the educational and financial strength of students coming from rich families in the cities and towns. For example, the richer students could afford special coaching by paid private tutors, personal computers and Internet connection at home and air-conditioned rooms at home along with more knowledgeable parents' help. So, the demand would be for free supply of computers, Internet broadband service and special coaching facility as part of the education equality/ education product. Problems would still remain to be solved: the poor students need to be supplied with knowledgeable parent-like loving guardians at the university and hostels so that they have a level playing field to compete with brilliant students from rich families in cities and towns.
Extending the same kind of logic, there would be demand for school children from poor families in rural areas to be supplied with rich pairs of adopted parents with proper educational backgrounds. The equality/ equity product improvement will have to be extended to parental gene levels. All engineering colleges have to become of equal standard Indian Institutes of Technology, all MBA schools have to be of the same quality Indian Institutes of Management, and so on.
The demand for improving the educational equality/ equity product will be never ending as the marginal utility from consumption of these products are characterised by the law of increasing utility. Governments, especially democratic ones, will have continuous growing business in selling these products at the cost of the tax payers. Equality and equity will improve as a result: but will the quality of education outputs improve?
Recently, I heard a few learned people discussing about international equality/ equity in teachers' promotion system in universities. A former Indian bureaucrat currently teaching in government funded private management institute complained that Indian teachers in Indian centers of higher education with record of publication in international / foreign journals get higher scores than those Indian teachers who publish their articles in Indian journals. This according to him and some others was discrimination against one's own country and probably reflected the mentality of slavery to the foreigners. Everyone knows that Indian research journals have not been able to get international recognition of their quality simply because international scholars do not find it worthwhile to publish articles in Indian journals. But the State has not been able to figure out how Indian scientific research journals can become accepted by the international community of researchers. So, there could be a demand for education/research equality/equity product that would remove the handicap the large section of Indian teachers who cannot get their papers accepted by internationally recognized research publications vis-à-vis the small section of teachers who can. What could be the essential design features of such a product by the government? One product could be like this: a special financial reward for each publication of any teacher/researcher in internationally recognised journal if that article is followed up by another publication in internationally recognised journal, which is co-authored by an Indian teacher employed in an Indian education/research centre who had not earlier been able to publish any article in an internationally recognised journal. The provider of the education / research equality/equity products, namely the Governments of poor countries surely should be highly innovative in designing such products, given the immensely high business potential in these countries for these products. But will the quality of the talent pool of Indian teachers and researchers improve as a result to bring India to the frontiers of education and research in at least some fields of knowledge that the World is pursuing?
19. Land-barred Economics of Bengal
Wednesday, June 15, 2011
When the Singur land acquisition debate and agitation was at its height, I had pleaded with many economics intellectuals that at the heart of the political problem in this subject lie in the reluctance to apply the knowledge of economic principles and quantitative economic empiricisms (http://sensarticles.blogspot.com/2009/07/3.html). I had argued that land has to be valued interns of the present value of the time stream of net benefits the land is expected to generate from its alternative use. A smart young economist pointed out that present value method involves use of discounting factors and the choice of the discount factor is a debatable issue itself. My friend probably was not aware that his pint was well known all over the world of applied economics and finance and yet they knew how best to use Present Value method for decision making and valuation. Or, he was aware but like me was not very enthusiastic about the work effort involved in estimating the time stream of net benefits form land as a productive asset in alternative uses. Bengalis do not like hard work any way.
Recently another of my expert economist friend appeared to be of the view that available economic principles have so far not been able to provide any guidance on the type of cases like the acquisition of land from unwilling farmers in Singur. It was a great shock to me that I am fast forgetting what economics is all about. I had thought that the standard economic principles only suggest that offer and bid prices could be an effective mechanism of convert unwillingness to willingness. At sufficiently high enough price, unwilling sellers would enter the market. If the price was high enough there would have been hardly anyone in Singur unwilling to sell land to the Tatas or the Government.
I inquired if the issue is not merely one of determining that price in the absence of a free, completive market in land as a productive capital asset. And, I thought so far that the opportunity cost was a rough guide: the present value of net cash flows from land as an asset for agricultural activity is estimated easily to provide a guide and the present value of the net cash flows of the alternative land use for the Nano car project would have provide another guide. Yes, Bengali communists may not be adequately educated in quantitative economics and finance to be conversant with present value estimation and its application in a Marx-consistent manner.
Pardon the communists. During the last four years, no Bengal economist has attempted such valuation of Singur land or has explored whether the Nano car project economics could have afforded to compete land away from Singur farmers by offering a land price high enough to make all farmers willing to sell land. The notion that the industry needs to be given land at concessional rate for industry to be set up is a Nehruvian-kind of socialist prejudice that seems to keeps Indian economists away from applying simple, ideology-neutral economic principle: land should be attracted to the highest possible returns activity in the normal course. The politicians would never agree to this because they would want to dictate the allocation of assets among alternative uses based on their preferences and in the case of any communist user of State power, based on a childish, and of course fallacious, notion of democratic principle that if owners of 600 acres are willing to sale, the owners of 400 acres must be forced to sale.
The communists’ government in West Bengal has fallen. And the new Trinamool government seems to be arguing that each owner should have the right to decide whether to sell his land or not. If that is so then each land owner must first be the present value of his earnings stream over time from his asset and then get bidders to offer him attractive enough price to win over his unwillingness to sell at what the State considers as the fair price. But the Trinamool Congress government has not commissioned investigations into these economic issues that would have made it more educated and informed as a party to deal with economic problems of the State. Political parties cannot be expected to know that there is need for knowledge of economics truth and facts to arrive at proper policies.
Maybe economics is not a subject for study for emotionally argumentative Bengali intellectuals and politicians alike.
My friend pointed out to me that one basic problem of applying conventional present value method to find the value of land is that private valuations are heterogeneous and often greater than market valuations. So, if someone is unwilling to sell land just because his personal valuation is greater than the compensation that is being offered based on the market price of similar land, should we force him?, my friend asked. He also asked, more important was whether should we force him to sell his land because most others have agreed to sell their land? He believed more firmly in the sanctity of private property. He is now convinced that we cannot ethically force anyone to sell his land or any other property for that matter.
I was amazed that both of were in agreement on the ethical issue that we should not force a landowner to sell his land under any circumstances that we both did not agree with the communists’ definition of majority rule of democracy being applicable here (the communists of Bengal seem to be more advanced in knowledge than I can compete with for I had thought there is only a single vote cast for each piece of land and hence the question of majority does not apply as the decision to sell or not is in relation to each piece of land: had all land been commonly owned the question of majority rule could apply).
Yet, I thought that I needed to clarify the economics point. My surmise was that if the present value of cash flows to the land owners from his land would be say X and the present value of the same land, if used by an Industrialist is Y and what the so-called market price used by
Government and political parties in the current distorted market is Z, Z is much less than X and Y is much higher than X. In the absence of the information on X and Y, the farmer is not able to make a real choice. It is quite possible that the industrialist buyer would be willing to offer a price Y1 that is below Y but much higher than X and therefore still much higher than Z. Thus my contention was that by not disseminating information relating to Z and X, we are not allowing the farmers to make an informed choice whether he / she would remain an unwilling seller at al prices, however high. If there exists some Y1 > X but Y1 X, there is a scope for settling down at a price in between which will benefit both parties. But since X is unknown, heterogeneous and often subjective, it would be better if we leave the transaction to the market, let the industrialist buy land directly. The state's role here would be to ensure that no coercion takes place.” I was happy that at least one of my friends agreed with me (perhaps because we were both influenced by free, competitive market economics logic).
But then, as always, I would still have something to add. To enhance proper functioning of the market, besides the State, apolitical economists could contribute to enable small farmers to get adequate information on the probable range of values of X and Y so that they can better negotiate. Various Kolkata based economics research institutes could have done some empirical studies in this area for reducing the information asymmetry between buyers and sellers in a free, competitive market for land. And, this is not difficult now for researchers to do such analysis on farm economics and industrial project economics. Banks have lot of information in their appraisal notes on numerous cases of farm and industrial finance. Even four decades ago, the journal of Agricultural Refinance/ Finance Corporation had been publishing empirical studies on the economics of agricultural operations by farmers owning and of various sizes in different locations of India. Late Prof. Ashok Rudra also did some work at that time. I wish researchers in applied economics did some empirical work on farm economics to improve our knowledge.
20. RBI Orders Inflation and Govt. to Listen to Its Interest Rate Music
Wednesday, July 27, 2011
In a post in March this year (http://senkonomix.blogspot.com/2011/03/amusing-love-for-inflation.html), we were amused with the high decree of tolerance of high rate of inaction in the previous three years. Since then the Reserve Bank of India have further strengthened its anti-inflationary policy with interest rate hikes in May and in July. With this, the RBI maintains its economic growth projection for the year ending March 2012 at 8% but now projects a7% inflation rate - 100 basis points higher than its projection released in May.
For the layman, it is amusing to know that a 100 basis point higher inflation means no reduction in economic growth rate. Equally interesting, this will be accompanied by, on present reckoning, a rise in interest rates by 275 basis points or so (already banks have transmitted 225 basis interest increase in the first four months of the current fisc). So, what will cause higher inflation - external factors and higher interest rates or higher fiscal deficit? This or high profile economists to explain: most likely consensus -: all these factors will increase inflation to varying degrees.
Yet, these inflation, economic growth and interest rate projections may have to be revised again soon, the RBI apprehends, if the petroleum oil and other commodity prices do not ease in the international markets, if the monsoon does to favour a bumper crop in India, if the government does not take adequate supply augmentation policies in time and if the fiscal deficit of the Government of India exceeds the budget target of Pranab Myukherjee. So, inflation rate may be higher than 7% and interest rates may have to be hiked further by the RBI.
RBI is particularly worried that the demand pressures, though somewhat moderated in some of the highly interest sensitive sectors as a result of the 225 basis point rise in modal lending and deposit rates, continue to be strong in most sectors. So, the repo and reverse repo rates were raised by 50 basis points on July 26: this the RBI expects to further weaken demand pressures in more interest sensitive sectors as well as the less interest sensitive sectors and reduce money supply growth by 50 basis points to 15.5% and non-food credit by 100 basis points to 18% in 2011-12.
It would seem to the layman that the RBI would be comfortable if the economic growth rate declines to say 7% or lower and inflation rate to fall to 6% or lower. Otherwise RBI may again raise the lending and borrowing rate to pull down the economic (GDP) growth rate. But even if growth rate falls below 8%, RBI may be still forced to raise interest rates if monsoon does not deliver bumper crops, and/or international commodity prices rise and/or fiscal deficit target is exceeded by say 50 basis points or more. So, we are going to be in high interest regimes.
Unfortunately, higher inflation will automatically increase working capital requirements and demand remains strong, higher interest rates may still be absorbed. This may lead to higher interest rates again. On the other hand, if the monetary policy succeeds in bringing down demand and GDP growth and banks face credit defaults, RBI would do something to ease prudential norms temporarily to stem any financial sector instability. Te best thing for the layman there fore is to tighten the belts and pray to God that there is a bumper crop (and bulging food credit) and a fall in world commodity prices. There is no point in praying to the Government as government is incapable of reducing expenditure growth and in no mood to reach the fiscal deficit target. Only hope is that the lower GDP growth may still lead to highly buoyant growth in tax revenues - better than what the government had optimistically budgeted for because of reduced leakages and higher value of sales.
Economy-God RBI will not relent till inflation rate shows consistent down trend even if higher interest rates contribute to slightly higher inflation temporarily. Let us keep our fingers crossed.
21. Economic Policy for West Bengal Government: Scope?
Sunday, August 21, 2011
The devolution of financial powers between the States and the Union governments in the Constitutional Federal structure probably does not unambiguously clarify the role of economic policy making at the State level. The US model and the EEC models are as much complex and could have been contrasted with Indian economic federalism for reforming the Indian system. This has not been done and the States have generally used political process to satisfy the State’s demand. West Bengal being the top industrialized State at the time of Indian Independence had to give up much of its legitimate demand for modernization and growth to accommodate the nice little slogans for balanced economic growth and backward region development. Therefore, West Bengal elites and intellectuals never used economics for policy making for the State. Nor did West Bengal have any view on what the State’s economy was, is or would look like in future. Selling dreams that would never be realized constituted economic policy making. For decades, West Bengal economy has been conceptualized primarily as a vehicle to demand, get or forget higher allocation of Government of India projects and expenditure in the state. The State Government published an economic survey every year with economic data and self-congratulatory composition: State Planning Boards and State Planning Department had been there without any perceptible impact on the State’s economic policy making and development.
2. West Bengal is only one among the several States in the Indian Union. In this Federal set up with constitutionally devised devolution of economic/ financial powers between the Central and State Governments, how far can a State pursue a set of economic policies that would effectively contribute to the economic growth, lower inflation/ higher protection against inflation, better employment, better income and wealth distribution and better quality of life for the State's citizens on a sustained basis? This has been discussed time to time in the past mainly from a political perspective but has not really been pursued consistently by Indian economists to yield reasonable theories so far. When the economic reforms were introduced in the early 1990s, many political parties objected to liberalization, privatisation and globalization but did not have an alternative economic theory of their own (even the Congress which happened to be in Government and had to reluctantly being the economic reforms, did not have any consistent economic model or theory to justify the process of liberalisation). The Communist economist turned politician Finance Minister of West Bengal Dr. Asim Dasgupta proposed some alternative model that was probably unattractive to the economists and politicians including the communists and lost significance with the CPM government of West Bengal seeking collaboration of foreign capital from capitalist economies for the State's industrialisation. Many claims Chandra Babu Naidu of Andhra Pradesh did wonders for Andhra Pradesh and wonder about the economic successes of Gujarat under Narendra Modi. But the issue of economic policy formulation at the State level has been neglected.
3. The issue had been rather one of getting more resources to the States from the Central pool. With the introduction of General Commodity and Service Tax is likely to intensify the conflict between the States and the Union Government. But how could the individual states pursue economic policies to meet specific goals of the States is not something that Indian economists have attempted. The European Common Market European Central Bank and Euro Currency is not yet successful and may be inconsistent with Indian federalism. But Indian economists have not generated any new theories or ideas to deal with the basic issue of economic policy making by individual State.
Economic Policy Paradigm of Government as Son of God
4. This was only natural because the State Government had envisaged a four-fold economic role:
(a) as a machinery to use whatever revenues happen to flow in to the exchequer and borrowings from the households’ savings pool for disbursing salaries (and pensions) to its ever increasing and scarcely performing staff and interest payment on ever increasing borrowings with sky as the limit,
(b) as a mechanism of acquisition of land with paltry or no compensation to the land owners and distributing them at low cost or free to others without land and needing land to do farming, set up factories and build residential buildings,
(c) as a catalyst for proliferating a micro-economic market structure of geographically and functionally distributed muscle-powered ‘license/ permit’ monopolies in the supply of building materials, education and medical services, in intermediation services for various sorts from allowing regularizing various unauthorized businesses like tea stalls, food stalls, vegetable and fish stalls, automobile repairing, construction of residential shanties and baths on footpaths, main roads, strips of lands meant for expansion of roads, as also in intermediation services for getting ration cards, birth certificates, hospital admissions, and
(d) as an unsolicited, unremunerated adviser to the Government of India on the inappropriateness and disastrous consequences of all the economic policies that it happens to pursue except nationalization, higher subsidies, higher corporate taxes, wage and pension increases for public sector employees, higher interest rates on provident funds, reservation of any type for most classes/ castes/ groups of people.
5. One economic policy option for West Bengal at present is to continue to same economic role of the State Government and therefore continue doing nothing more or new. Another variant of this status quo option is continue with the past while tinkering here and there with apparently pro-poor only measures like withdrawing State tax on LPG cylinders, increasing the number of people covered under Rs2/kg Rice distribution scheme, deferring the increase in taxi, auto, mini-bus and bus fares, crediting salaries of Government employees and teachers to their bank accounts on the first working day of each month. This kind of economic policy making would be simple and the consequences are well known. West Bengal economy will continue to grow so long as the Indian economy grows fast enough: if the economies of Bihar, Jharkhand & Oriya become fast developing West Bengal will have the benefit spill-over effects. Yes, the tax to GDP ratio will not improve from 4.5 % as ay present, debt burden will grow soon to such proportions to cause default and force emergency funding arrangements by the Government of India and the Reserve Bank of India. And, of course, West Bengal will witness a fall in her ranking in terms of economic growth rate, per capita income, and percentage of population below the poverty line, state of education and health services. How does that future scenario matter to West Bengal now if such long-term objective or strategy or vision has not been of any interest among the elite and intellectuals advising the political rulers in the State? Status Quo economic policy by default is the most attractive option for West Bengal.
A Non-divine Government’s Economic Policy Framework
6. If, however, West Bengal happens to realizes that economic policy making is important, her elite / intellectual class and politicians must first get themselves convinced of the following:
(i) although the overall Indian economic policy remained the same for all States, many States have left West Bengal far behind in economic terms as well as in terms of quality of health and education services by just pursuing economic policies that were geared to certain economic strategy objectives of those States;
(ii) dreams, rhetoric by an all pervasive command and control State involvement at micro-economic level is doomed to failure as has happened in the past and the State role as a facilitator in economic development can only lead to serious economic policy making that has chances of succeeding;
(iii) economic policy making is neither easy nor anybody’s job and West Bengal has to deploy experienced expertise in applied macro-economics, public finance, industrial economics and micro-economics to formulate State-level economic policies designed to achieve certain long-term strategic economic goals: and
(iv) Generating a relevant and consistent set of economic policy options must be preceded by quickly evolving clarity on the long and medium term socio-economic goals and clearly articulated economic problems the State currently faces and their intensity. If the intensity of the problems is severe, the medium term goals may have to be moderated and instead of incremental changes in policy radical changes may have to be implemented.
7. For the purpose of the present discussion, we would assume that the medium term strategic economic goals of West Bengal would be something like this:
(a) To enable all citizens of West Bengal to increase their skills and productivity as well as gainfully deploy themselves in viable economic activities and create wealth for themselves so that they can progressively enjoy a better economic and social standard of living, beating the adverse impact due to inflation and slowdown in the Indian economy,
(b) To pursue such policies as would help maximize the flow and effective utilization of resources from the All-India public and private sector pool of investment and expertise into West Bengal,
(c) To get out of the habit of running State Revenue Budget deficits to a progressively rising Revenue Budget Surpluses to fund State-led development projects and thereby also contribute to (a) and (b) above,
(d) To quickly demolish the system of territorial and functional monopolies and rent-enjoying elements in the economic micro-structure and administrative machinery and bring in transparent, competitive forces at play, thereby reaping a few percentage point gain in State Domestic Product growth currently lost due to corruption, administrative delays, lower productivity, under-utilization of available productive capacity, stifling of innovations and large incidence of shirking, especially by people who are remunerated by the Government. This will in turn contribute to (a), (b) and (c) above.
8. We would now make a few illustration of the economic policy options consistent with the four medium term goals listed above in Para 5. Instead of using new nomenclature, we use the economists’ fashionable terminology and cliché.
Inclusive Growth and Exclusive Subsidies
9. Enhancing the economic power of all households would involve accelerating the rate of growth of State GDP per capita along with subsidies to the poorest (the tribal community in jungle mahal, the under-employed landless labor and the unemployed: (i) maximize utilization of the NREGA, (ii) allow and encourage farmers/ fishermen the access to demand from food/ vegetable/ fish malls in cities and urban areas, (iii) expedite the Central Government’s vegetable cluster centers coming up and (iv) do not apply exclusion principle to restrict farmers and fishermen from taking advantage food/ vegetable mall owned by foreign capital or domestic capital by using the blatant lie that these smalls affect income of small retailers small groceries/ vegetable or fish vendors just to protect the market power of politically supported small club of wholesalers. Finally, augment the production of rice and vegetables by increasing productivity per unit of land – the variety f seed that is about to cause a quantum jump in rice productivity is still eluding West Bengal.
10. Subsidies to the poor is fine, but equally important is to apply exclusion principle to tax households on their purchases beyond four LPG (liquefied petroleum gas) cylinders per year (this isn’t difficult to implement these days where LPG booking and delivery is computerized). Speeding up approvals to GAIL and such other agencies interested in supplying natural gas for cooking through network of pipelines to each kitchen at a costs lower than cost of LPG fuel. Yes, poor buying water is a non-inclusive growth: but exclusion from subsidized/ free water supply should apply to households in multi-stories buildings where a flat costs in excess of Rs. 30 lakhs or for washing cars and taxis. Water consumed can be recorded by meters and consumption beyond a monthly limit per household in such flats. Instead of not delaying the process of revising the fares of buses, taxis, mini-buses and auto-rickshaws to revise in response to change in petrol and diesel prices, agitate with the Government of India to raise the limit of standard deduction (zero tax) for income tax purposes linked to auto-fuel prices movements and hasten the pace of shifting to CNG (compressed natural gas) – using the new hydro-carbon policy of the Government of India.
Human Capital for Growth
11. Creating employment for the youth is fine but not for clerical-manual work in Government and municipalities. Fresh recruits by State Government/ municipality/ Zilla Parishad/ Panchyat service must necessarily have professional qualifications in citizen care administration and demonstrated proficiency in the use of MS Word and Excel. Make graduates turned out by Universities employable would be more productive than giving them state jobs or forcing new business units to recruit them locally through political goons. To rely on employment creation through private sector investments, bureaucratic/ administrative constraints on setting up of industrial units need to be removed, complete lists of land already acquired by Government lying idle in different locations need to in public domain as soon as possible and applications/ bids for lease on a transparent basis needs to be invited. Also, publish lists of land already leased to or acquired by private sector but not being used, giving the owners time limit beyond which such land would be taken over/ back for auction/ new leases (appropriate legislation may be necessary). Liberalize exit policy in respect of industrial establishments with less than 100 workmen so that such units can be down-sized / closed and assets become freely transferable. Department of labour need not wait till industrial disputes are brought up their notice: let the Government officers monitor labour relations in each unit on a continuous basis and be proactive enough to tackle brewing disputes before they become fully blown wars..
12. Encourage young entrepreneurs to run businesses like household plumbing, electrical and electronic repair services based on phone calls/ emails in cities, provided they have police verified service assistants with complete personal identification details. Make regulations on private medical doctor clinics to keep computerized record of all medical treatment service to each patient and issue computerized receipt for fees paid by the patients. For this purpose, require doctors’ private clinics to have a computer-trained patient services attendant and a professional nurse attendant. Have surprise visits and checks with roving squads. Make it mandatory for all pharmacy and drug stores to issue computer print-out receipts against all sales. All this will improve quality of medical service, professional employment and improve revenue collection.
Structural & Institutional Reforms
13. West Bengal needs all pervasive reforms in the market micro-structure to end economic crimes like levy collection by musclemen from business units/ shops, forced intermediation (dalal chakra) in hospital admissions, engagement of medical attendants by patients hospitalized, issue of ration cards, birth certificates, mutation certificates, registered property deeds, political party-sponsored locality-wise monopolies of building material supply and mobile vegetable vending on carts, levy collection by policemen from goods carrying trucks, etc. Inflicting of social costs by private auto-repairing shops, pavement hawkers, trucks awaiting on the road for custom and by shop-owners displaying ware on the pavement and roads must attract hefty financial penalties and cancellation of trade licenses: it is a pity that the roads broadened at public cost for smooth traffic flow are being occupied by stationery cars/ taxis/ trucks queuing for servicing, repair and painting, thereby narrowing the space available for pedestrians and movement of vehicles. Separate Road Clearing Force need to be put in place. This is all part of good economic governance that adds to efficiency gains and growth.
14. Merely repeating that West Bengal is the Gateway to Asian tiger economies is of no use. The State must negotiate with the Central Government to open up duty free trade with Bangladesh in cereals, coal, jute, tea, garments, vegetables, fish (not just hilsa), foot wear, drinking water bottles, etc. This would benefit the citizens of West Bengal more. Similar, State needs to take active interest in shaping trade agreements with Myanmar, Indonesia, Thailand and South Korea to maximize benefits to West Bengal.
Fiscal Prudence
15. A well thought out strategy to get out of the unsustainable debt trap and generating revenue budget surplus is the key to enhancing the State’s ability to pursue prudent economic policy. Immediate need is to target a slowdown in revenue expenditure together with higher revenue collection both by the State and all local self-governments. Only surplus revenue budgets can help the State government, municipalities, and panchayats to make necessary contribution to infrastructure projects and other development projects to get the benefit of attracting central matching grants and aid. State and municipalities have to improve their credit ratings to raise cheaper debts for funding credit worthy projects. Tax leakages are huge at present, partly because of the state-wide web of tax-evasion intermediary services collecting fees in black: this economic crime sector has to be totally crushed with the help of information technology, tracking cash transactions of such economic offence supporting intermediaries and day-to-day surveillance. Tax base needs to be broadened and subsidies need to be more targeted and direct. Industrial promotion may needs very little incentives if the industries do not have to bear costs of getting things cleared in Government and municipal offices. Government does not have a proper system of collection of annual land revenue (Khazna): the system needs immediate computerization, bills (separate for annual khazna installments and interest due on unpaid annual khazna) may be sent to each household/ land owner and banks may be allowed to accept payments against these bills for direct credit to Government.
PPP Investment for Capacity Expansion
16. Now that the subsidized land acquisition support to private investment is being withdrawn/ minimized in the State and in the whole of India, PPP (public private partnerships) models to tap private sector investment would require fast track single window clearance mechanism and reduced politically convenient obligations on PPP projects immediately and more politically difficult relaxation on industrial exit laws after a while. The scope of the standard application of PPP model needs to widened to reduce the burden on the State exchequer: existing assets like Kolkata Zoo, other forest enclosures, Staid, vintage theater halls, swimming pools, libraries, river bank recreation enclosures and the like could attract private investment under PPP model for up-gradation, expansion and efficient, cost effective maintenance with flexibility in user charges for the rich on particular days of the week. Even in agriculture, PPP model with low equity and low interference from Government could help if contract farming and marketing of agricultural produce are also allowed.
Conclusion
17. Economic policy options appropriate for West Bengal at present and for the medium term future do not require arcane analysis. These options are well-known: what is required is the political will and administrative skills.
22, Road to Backwardness: Bengal Marched Past Potholes and Mud
Thursday, October 27, 2011
Undergraduate economics teaches the importance of roads in economic development and growth. Economists' turnpike theorems seek to establish faster roads to economic progress. In Bengal left-thinking fashioned economists for decades rejoice with Panchyati Raj and Land reforms as roads to economic progress and economic justice for three decades. Little did they realise that even in conceptualising/ designing and implementing panchyati raj, economists' optimisation rule is applicable. We now see West Bengal in the quagmire of weal economic growth impulses with panchyati raj and land reforms throwing out the communist dominated leftists rule and expose the hurdles that the 34 year- rule of economic stupidity resulting in nearly bankrupt State finances, road pot holes and vast tracts on unused/ under-utilised with weak links for movement of inputs and outputs throughout the State/ Weal links created the hill agitation problem and Maoist terrorism in the Jungles areas while Tata's unwilling to set up Nana project on only multiple cropping high fertile lands with good links in Singur and no where else and JSW steel plant waiting for good road inks to accelerate implementation of its Steel plant in Salboni. Panchyats developed roads that are too muddy for villagers on foot to be comfortable with and highways including the recent 4/6 lane ones not allowing uninterrupted flow of vehicular traffic by numerous crossings and encroament of human beings and animals from either side of the roads to regulate long distance vehicular speed to raise the costs of economic activity.
Dr. Abhirup Sarkar, a Bengali economist known for application of economic analysis to West Bengal in recent times has today penned an article on Roads in West Bengal. The conclusions are revealing of the incompetence of the elite that planned and ruled West Bengal for over three decades since 1977:
1. West Bengal has one of the longest networks of roads given its size in the India. But West Bengal remains a weakly linked State in terms of the quality of roads.
2. The proportion of good, durable roads is low in West Bengal as compared to more developed States in the country.
3. Large tracts of non-agricultural land await good road links to attract industries.
4. Many good roads connecting existing industries to cities, ports, railway junctions and markets are good enough to nurse potholes and congestion.
5. Panchayat developed roads are horrible to negotiate on automobile wheels and do not together constitute an optimal road network for efficient economic activity.
At last, West Bengal seems to have been provided a clue as to what not to do in respect of road development. Let us see what Mamata Government can do to draw up a road map for optimal road development in West Bengal. Can Mamata remove the inherited roads block to accelerated economic growth in West Bengal?
She must be aware that significant proportion of the good, wide roads in West Bengal are used by long queues of trucks, buses and cars for repair works on wayside auto-repair shops, parking of motorbikes, hawkers, open warehouses of sellers of construction materials and etc - a usage of roads that slows vehicular traffic, transfers private costs to public costs of transportation, congestion and pollution. Govt. spends tax payers' money not to benefit the citizens in general but to private encroachers. Somehow Bengali economists are not yet ready to identify private misuse of public roads as a bottleneck to economic growth in West Bengal. If West Bengal has to really change, the habit of encroachment of public roads for private use by small businesses and their poorly paid workers must go - sooner the better.
23. Economists’ Art of Transforming Simple Truth into Complex Confusion
Monday, October 31, 2011
Economists generally appear a confused lot when they discuss among themselves. When they speak to others, especially journalists, they help journalists make arcane-flavored analysis to hide the simple Truths to project economists and journalists as sophisticated experts.
Recently, Chief Minister of West Bengal, Ms Mamata Banerjee reportedly had pointed out that the State’s Finances have been brought to such an alarmingly poor health by the previous Communist government that ruled for 34 years, that the State does not earn revenues enough to finance development capital outlays beyond 7% of the revenues earned. The former Finance Minister, Dr. Ashim Dasgupta of the CPM, it seems told the journalists that Ms Mamata has given out an incorrect percentage: according to his calculations, the Budgets he had prepared recently when he was in charge allocated 37% of the State’s budget receipts on development capital outlays. The current Finance Minister, Dr. Amit Mitra (the third Dr. Ace and second Dr. Mitra finance minister of West Bengal (Dr Ashok Mitra preceded Dr. Ashim Dasgupta), retorted back saying that his Chief Minister had given the correct percentage and gave out the basis of arriving at the percentage. Dr. Ashim Dasgupta told the journalists that Dr. Amit Mitra has used an illegitimate basis of calculating the percentage and had made a mess by mixing up capital account and revenue account items in calculation of percentage. This is in short the arcane analysis of the journalists that helped create confusion in the minds of the common citizens and hid the simple truths.
First, Dr. Ashim Dasgupta’s calculation is absolutely correct. His figures are as follows: of the total budgetary receipts (both capital and revenue) of Rs 88,000 crore, the development capital outlays were Rs 33,000 crore. Thus 37.5% allocation of total receipts was for development capital outlays. (The figures I use here are just for illustration and not the figures quoted). I am sure that both Mamata Banerjee and Dr. Amit Mitra would have no hesitation in accepting the percentage calculated by Dr. Dasgupta. Because this is the simple Truth#1.
But there are more simple truths. Of the Rs 88000 crore of total receipts, fresh borrowings amounted to Rs 22,000 crore. So, Dr. Ashim Dasgupta had to borrow about two thirds of the money he used to fund development capital expenditure. This is the simple Truth#2.
Why was such huge borrowing required? Because the revenue account had yielded very little surplus of merely Rs 3,400 crore or so. This is the simple Truth #3. It means that of the total revenue earnings of about 60,000 crore (net of tied central govt. revenue grants), only about 7 % was available for development capital expenditure, the percentage that Mamata and Amit are quoting. This is the simple Truth#3.
Why is the revenue account unable to provide larger surplus to fund development capital expenditure? Simple because the State’s revenue receipts of Rs 60,000 crore are eaten up by Salaries and Pensions etc of Rs 49,000 crore and loan repayments (capital account outflows) and interest payments of Rs 7,600 crore or so. This is the simple Truth#4.
Why are revenue receipts not high? We have not heard the Finance Ministers speak the Truth in this respect. But most learned people say that the low revenue receipts in the relation to the State GDP is because of leakages in tax collections and narrow tax base continued by the communist government. This may be Truth#5.
Why are the Salary and Pensions high? Some experts say that this is because of overstaffed Government machinery at the lowest levels and pensions and subsidies to fictitious persons. This may be probable Truth#6.
Why do interest and loan repayments amount to 76% of the net revenue surplus before interest payments of about Rs10, 000 crore? This according to learned persons is due to high level of borrowings of the State (about Rs 200000 crore) and high interest rates on borrowings. This is probably the simple Truth#7.
All this may also mean that the State is falling into a debt trap. It needs more and more funds to borrow to fund development expenditure as also meet repayment obligations on old loans and interest payments on all loans. This means that the State Government is running a spongy scheme of more borrowing to service existing borrowings while capital expenditures unable to boost revenue incomes adequately. This may be the probable Truth#8.
There is no journalistic analysis to find out if the probable Truths are really true or not.
Nor, are the former and the current Finance Ministers giving any proof to show that the probable Truths are not true. All this is really amusing interest of Bengalis in economics.
Note: Had Dr. Dasgupta Ashim borrowed Rs 52, 000crore instead of 22, 000 crore he could have said that 72% of the budget receipts were allocated to development capital expenditure. And, yet the fact would still be that only 7% of the revenues would have been available to fund development capital expenditure. Financing development capital outlays in good and only way out for poor States, but such development capital expenditure should lead to faster growth in revenue receipts in future years to service the borrowings (interest and principal repayments and generate higher revenue surplus to fund new capital expenditure in future years. The problem arises if this does not happen as the case seems to be in West Bengal so far.
Dr Dasgupta may argue that if the Central Govt can borrow and print money, why can't the West Bengal Govt. borrow as much as it requires? That is the usual childish argument. The State of West Bengal gets its share from the borrowings of the Central Govt. through both tied grants in aid and the positive impact on State's revenue receipts. And, the argument is weak because all states and the central government had agreed to cut their deficits and reduce borrowings as part of fiscal discipline. Communist West Bengal however does not believe in fiscal discipline, probably because there is no reference to this in Das Capital and its derivatives.
24. Much Ado Over Ghost of 51% FDI Multi-brand Retail
WEDNESDAY, DECEMBER 7, 2011
Now that the Government has decided to defer decision on allowing 51% foreign-owned Indian companies to do multi-brand retailing in India, Indian Parliament has been saved from another winter session generating heat without work to cool down Delhi's cold and cough among the Indian educated elite. It is not very clear though why the Congress Government had to get a Cabinet clearance on 51% FDI retail before it could get the Parliament consider and pass the long pending legislation items like Land Acquisition Bill, Companies Act Amendment Bill, Lokpal Bill and a host of other bills and draw Opposition Political Parties into the game of stalling Parliament functioning for the first nine days (out of 21 days) of the Winter session: the FDI decision could have been announced after all major legislative business were over.
Good that the intense political drama over an inconsequential issue has come to an end temporarily. India can afford to wait for some more time till another bankruptcy situation arrives when Indian politicians would have to eat their own words and beg for FDI in so many areas because of compulsion. The US dollar value of the Rupee has depreciated just 16% in last four months and not yet adjusted adequately to the 30%+ inflation in the last three years. Interest rates are at some peak after 13 successive Repo rate hikes by the Reserve Bank of India. The stock markets are down and nervous as export growth is faltering, fiscal deficit overshooting budgeted targets and inflation reluctant to come down despite RBI's anger. Current Account deficit is going to be higher and economy GDP growth rate falling back to 7% or lower with hardly any strength in industrial investment. The situation reminds one of the 1989-90 bankruptcy crises and rekindles hope for new doses of economic reforms under duress / precarious economic compulsions. It would be interesting to see which new coalition Government two years down the line gets the responsibility to bite the bullet.
Be that as it may. It is worth revisiting the recent drama once again. Those who objected to FDI retailing was not prepared in advance to deal with the issue. They had done well in reacting smartly thinking off their feet n the streets. They became great economists overnight and invented a thousand reasons why the idea of FDI retailing was not only bad but evil. Let us enumerate their innovative arguments.
1. Retailing is not high technology staff that can come embodied in FDI, said the opposition experts. The same old Indian belief that Indians are poor only in high technology but very proficient in low technology activities would not easily die. The fact however is that Indian brain power is equally weak in making the best use of even low technology: just consider the quality of education based on the use of the most simple, black board and white chalk technology of teaching. But retailing is more organization than technology. How good are Indian in organizing things efficiently and effectively? Track record does not show any promise. Wholesalers, stockiest and distributors have remained virtually the same in the last forty years and large fast moving consumer goods companies continue to depend on these outdated, feudalistic chain of stockiest and distributors. Foreigners have innovated in organizational alternatives: India continues to remain dependent on archaic organizational designs for retailing. This is issue that dumb politicians will ever be able to recognize, let alone such stalwarts Jaitly, Sushma Swaraj, Yechuri, Karath, Buddhadev Bhattacharya or Mamata Bannerjee or Advani. Organizing retail business is not of the same low level of organizing political parties, rallies, strikes or the Common Wealth Games- the Indian way.
2. Only 51% FDI embellished Retailing will hurt the Indian Farmers, say the great opposition. How? They will have to sell only to a few FDI retailers who will squeeze the farmers sooner or later. It seems that FDI retailing companies are likely to be more or less akin to local political mafias who can force farmers to sell the goods only to the small or big traders favored by political mafias. These politically patronized traders squeeze the farmers and share the spoils with their political bosses. If the 51% FDI retailers come with their massive (?) money power, they will wean away farmers from the clutches of existing trade mafia and exploit the farmers thereafter. So farmers will continue to be exploited. So, why not get some FDI also!!!
Why would 51% FDI so evil and 26% not so evil so far? No one knows. Who will bring in the matching 49% of the massive FDI investment dragon? No one knows. Maybe Reliance Fresh or Spencer’s become 51% FDI. Will 51% FDI retail companies get listed and widely held and farmers and political mafias given shares so that all can share the spoil of the 51% retail? No one knows!!!
Will there be just a couple of 51% FDI retailers in India? Can't there be ten such 51% FDI retail companies fiercely competing in the Indian market? With competition there would be difficulties to squeezing farmers. There is no need to think of these - 51% FDI retail is a dragon that will gobble up Indian farmers as if there are no farmers as highly productive and as least cost supplier as Indians and India does not import goods to be retailed (unlike USA where imported ware from China - tables, chairs, clothes, toys, cutlery, etc and from other countries including India - rice, fish, spices, fruits, fruit juices, etc
3. Dragon of 51% retail will squeeze the Indian consumers says the opposition. How? They will soon drive out all existing retailers from the market and then increase their prices to fleecy the Indian consumers. How will this happen? How will the 51% FDI Indian companies sell high priced goods to the 40% Indian below and around the poverty line? How much of the remaining 60% of the population will get to buy from the outlets of 51%FDI retailers? Have FDI embellished insurance companies and mutual fund companies driven out all competition? How the low FDI content Indian airlines are companies doing by fleecing Indian air passengers? Have McDonald, Domino, Pizza Hut driven out similar Indian businesses or more such Indian shops have emerged to meet the demands of the growing new high middle class? How will the big and small FMCG companies change their procurement, marketing and distributing network and strategies once the 51% FDI retail come? Will they sell their entire produce to the new big retailers? Britannia biscuits, Maggie noodles, Hamam soaps, Horlicks, Nirma detergent, lux toilet soaps, Emami mustard oil, Colgate toothpaste will all be gobbled up by 51% FDI retailers.
What about the consumers who visit daily to municipal markets to buy fresh vegetables and fish every day - they will all flock to 51% FDI retailer outlets? What about households who buy daily grocery items on credit from the neighborhood kirana shops and pay off monthly? Will the FDI retail outlets start operating on credit sale mode? What will the small rural housewife who comes daily to the metro/ semi-urban market to sell less than 10 kgs of vegetables and flowers grown in her backyard? She will give up growing anything in the backyard? What happens to the panshops and hawkers? The FDI retailers will kill them? The FDI-retail opposition lobby knows better.
4. The 51% FDI retailers will kill the small traders and local kirana shops leading to huge unemployment says the opposition lobby. How? They can easily imagine that under the FDI influence, Indian consumers will discard their habit of purchasing as they walk back home from office, stop bargaining with the pavement hawkers and drive out vendors who bring vegetables on the door step. And while all these people currently employed in retailing, the 51% FDI retailers will retail using machines only!!!
The FDI-retail opposition lobby is matched by the pro-FDI lobby. They have lot of arguments.
1. They say "51% FDI retail will bring in foreign exchange required by the country". We know that 26% FDI retail did not bring Foreign exchange: nor did 100% FDI food processing bring in much forex. Why speculate an argument?
2. They say '51% FDI retail will reduce inflation as they will offer lower prices to the consumers'. For, they will pass on the benefits of efficiency and economies of large-scale operation. Will the FDI retailers come to benefit the Indian consumers or make money on their investments and organizational innovations? If Government continues with large fiscal deficits and waste money in unproductive projects and the agricultural production and productivity fails to grow fast enough, no one can reduce inflation.
3. They say '51% FDI will increase employment'. All new activity increases employment but that may partly be replacing employment in existing retail operations. FDI or not, Investment in retails can increase employment. What is so great?
4. They say, '51% FDI retail will lead to investments in infrastructure - rural roads, cold storages and go-downs'. Yes, large retail business cannot grow without improvement in infrastructure. If the non-FDI retail has not grown enough because on infrastructure constraints why would FDI retail take the responsibility of improving the infrastructure of roads to move goods they will be dealing in by using those very long 16 wheeler trucks/ vans. As if the roads will be used by only the FDI retailers.
The reality is that one does not need any argument for or against 51% FDI in retail. The retail business, as is true for any other business supplying goods to millions of households should have no entry barrier and attract investments. Even if 100%FDI in multi-brand retail is allowed today, we may not see much of FDI rushing in just in a year or two. India is a big and sprawling country with a great diversity of consumers. Whether non-FDI or FDI, it will take decades to modernize Indian retailing. Land and floor space acquisition is neither going to be easy or inexpensive. Contract farming is not going to be easy to manage in local political mafia dominated rural areas; loading, unloading, transportation and transshipment with substantive gains in efficiency and cost savings will not be easy to achieve soon. There will be lot of experimentation with alternative business models and strategies. Even over a decade, the scale of FDI investment in retails and size of FDI operations are not likely to become a great contributor to Forex inflows relative to India's needs or occupy a significant share of the entire retail market in India. But by then the retail market might have changed for the better - lot of wastage of farm produce in transition, storage and handling would be avoided, wares will be clean and safe, the farmers will find their lands more valuable, the kirana shops will find their shop premises and floor spaces more valuable (if they could just increase the productivity substantially) and the consumers will not be fleeced by traders and middlemen protégé’s politicians and political parties.
But Indians are more comfortable not experimenting in the face of false scare of an Unknown, imaginary Dragon that can devour the children if they do not go to sleep.
How imaginative are the Indian 'frog-in-the-well', 'jack-of-all-trade' political intelligentsia. India with a 1250 million population is served by about 15 million retail store outlet of various types. As against this, The US population of 330 million is served by just 1 million retail stores. The largest retailer by sales is Wal-Mart which now has 8150 outlets, of which about 4400 outlets serve the 33 crore US population. Besides there are so many outlets of Target and Dollar Street, and of course outlets of speciality retailers like Home Depo, CVS, Seers, Jc Penny, MacDonald’s, Pizza hut, Domino, etc. And of course so many malls that house separate floor space for different brands like Macys, JC Penny and others. Besides, Amazon reaches households so many wares.
If only 10% of the Indian population of 125 crore is targeted (leaving aside the rural areas and the urban poor), a big retailer would need at least 1500 outlets. If an outlet is opened every third day it would require close to 10 years. Land and floor space are not going to be so easy to arrange and cost would be high in urban areas. How insignificant is the FDI retail issue can be judged from these numbers? There are much more stationery, grocery retail outlets than Wal-Mart and Target retail outlets in the US. How will FDI funded retailers in India monopolise and place the Indian consumers and farmers at their mercy and drive the kirana shops into extinction. How many MacDonald, Pizza hut, Domino and Subway have come up in India in the last five years and how many local restaurants and eating houses have closed shops as a result?
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