India! I dare you to be rich

Category Archive: Economics

PV Indiresan was firmly against Keynesian ‘pump-priming’

I’ve been reading a number of books simultaneously, including PV Indiresan’s Vision 2020. Indiresan, although not trained in economics, seems to have broadly understood a number of economic concepts. He does make a few errors here and there, but he is definitely not socialist, nor Keynesian. Not entirely classical liberal, his views are broadly consistent with classical liberalism.

In particular, he has some harsh words for Keynesians:

For four decades, the government went on a spree creating jobs whether they were needed or not. The prevailing view was that employing people was a good in itself – even if there was no work to do, or the work done was not commensurate with the wages paid.

Keynesians consider themselves expert in this area. Stung by the disastrous loss of competitiveness that resulted from their policies, they have been lying low for nearly ten years. Now, they are back at the centre-stage insisting that pumping money into the economy, and increasing fiscal deficit, is the only remedy for unemployment. Fiscal deficit puts all that money and patronage into the hands of politicians and officials. Neither of them is always wise or even honest.

Applied across the board, as Keynesians would do; pump-priming is like rain, it falls both where it is needed and where it is not, even where it may do much harm. So, the consequences of classical Keynesianism are problematic at best and disastrous at worst. [Vision 2020, p.93]

I’ll summarise his key points separately, but this section was good enough for me to scan, OCR and publish.

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V.Kumaraswamy’s book on India: Some brilliant gems interspersed with forgettable bits

I’ve finished reading most of V.Kumaraswamy’s brand new book, Making Growth Happen in India: A Road Map for Policy Success [I bought the book from Flipkart]. The Kindle version should be out in a few weeks.

Overall, I’d rate the book as among the better books on Indian public policy that I've read. I'd give it 6 out of 10 (in comparison, Gurcharan Das’s books might rate around 8 out of 10, Nandan Nilakni's around 8.5 out of 10).

I have struggled to determine Kumaraswamy's worldview (i.e. his theory of the state or of the individual). He does not examine why we have a government in the first place. There is not one word I could find regarding individual freedom nor any discussion on basic governance reforms. He seems to prefer operating as a technician, not as an architect. 

This mode of operation can lead to fundamental contradictions. In some places Kumaraswamy comes out strongly against subsidies for the rich; in other places he seems to support them. In places he seems to follow Keynes (multipliers, see p.148), while elsewhere he believes markets work best. In some places he supports alternative technology (p.151: while forgetting that if jobs are to be an objective of building infrastructure, we should build roads with spoons). Although Kumaraswamy talks a lot about the need for price discovery, he seems comfortable with the continuation of many administered prices (there is no serious questioning of MSP for agricultural produce or the PDS system from first principles).

This absence of a coherent worldview flows through into the weak sequencing of topics. This is also perhaps because Kumaraswamy has strung together a number of themes from articles he published over 15 years in Business Line and Business Standard.

Despite these limitations, this book should form part of the toolkit or library of every Indian interested in public policy. It is bubbling with ideas (ranging from the bizzare to the really good). It adds value to policy debates in India.

Illustrative good bits and not-so-good bits, listed below:

EXCELLENT
1.  Suggestions regarding cost recovery (p.105 onwards, 113, 115). These are part of standard good governance toolkit across most of the developed world, but in India the rich are HEAVILY subsidised. That needs to go.
2. The need for proper analysis of infrastructure projects (p.200).
3. Some good ideas re: employment (e.g. forestry p.155, landscaping p.181)
4. Parking requirements in urban areas (p.158)
5. Good commentary re: incentives of the government as a regulator (p.180) [despite that he promotes continuous involvement of the government in a vast set of areas where it can perform better as a regulator than doer].
6. Hypocrisy of socialists (p.105)
7. Build private cities (p.104)
8. Free up interest rates and credit (p.84). On this he positively shines. Brilliant.

GOOD
1. Discussion re: incentives (p.207, etc.)
2. Position re: urbanisation – both good and poor.
3. Land acquisition (p.6)

QUESTIONABLE
1. Opposes state funding of elections without understanding alternative models (p.15, 123).
2. Suggestion to increase the bureaucracy (p. 159)
3. Thinks of the government as an entrepreneur (p.188).
4. Misplaced objection to gold (p.190-91).
5. Confusion re: the role of real estate (p.194-96)
6. Some ideas on employment are bizzare (p.146)
7. Solution re: PDS (p.179)
8. Recommendations against agricultural productivity (p.56)
9. Grossly underestimates returns to education (p.60)
10. Likes to use the stick against citizens (p.63) and brings a “planning” mindset to many discussions.
11. Poor analysis of corruption (p.12).

Overall, I plan to re-read some of the sections while I'm revising the SKC agenda. The book was money (and time) well spent.

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The microeconomics of governance: the principal-agent-subagent problem

Most (perhaps 98 per cent) of the economists across the world have a blind spot: the economics of governance. And 100 per cent of Indian economists have that blind spot.

Have you ever seen someone who keeps their home clean and beautiful but makes a mess outside? This is the key to understanding the microeconomics of governance.​ 

Collective decisions regarding which public goods constitutes part of public choice theory. This discusses the design of the institutions of democracy and their many limitations. 

But there is an under-developed branch of public choice theory which assesses whether the individual actors in specific institutions of governance can deliver the goods we want, and why most such institutions in the developing world perform so poorly. Essentially, this is about understanding the incentives of individual players at the microscopic level. There is a huge difference between managing something in the private sector (which the discipline of management looks at) and managing public goods, which is the subject of public administration. 

Chapters 4 and 5 of Breaking Free of Nehru contain an elementary discussion on the microeconomics of the main governance institutions of India. The analysis involves examining the principal-agent-subagent problem and consideration of the costs and benefits for the parties involved (politicians/ bureaucrats). In these chapters I pick up key variables in the electoral system and bureaucratic system and analyse why these are poorly designed, and will lead to perverse outcomes.

My slides prepared for the 2013 governance reforms conference  should be seen as forming part of this branch of microeconomics. My talk at that conference summarises key aspects of the microeconomics of governance:

Much of Arthashastra by Chanakya contains the microeconomics of governance (although he tends to present the conclusions of his analysis, not the underlying argument).

There is also a considerable analysis of microeconomics of governance in the new public management literature, followed in countries like Australia and New Zealand. My article on the Victorian bureaucratic system highlights part of this analysis. The aim of this branch of microeconomics is to ensure that there are sufficient incentives to perform and deliver results. 

In brief, this branch of economics is about understanding how the citizen (principal) can get the bureaucrat (his sub-agent) to do what he wants through his agent (politician).

This involves similar principles to the standard principal-agent problem, but because of the vastly greater information gaps, uncertainty, measurability issues, etc. involved, this is a more difficult problem to resolve than the more simple principal-agent problem typically considered in the field of management. There is far more gaming, far greater moral hazard, far more costs of monitoring and enforcement, than in a simple private sector principal-agent problem.

There are also issues regarding the social contract (which I've addressed in Discovery of Freedom). – on which far more work has been done by economists in the recent past.

I must say that practitioners of public administration in the West have largely understood the basics of this branch of economics, as a result of which they have designed largely functional institutions. But perhaps Singapore outdoes all of them in the depth of understanding displayed. 

Time permitting, one day I'll write a text book on the microeconomics of governance. Without understanding it, no one can deliver public goods at an efficient cost.

ADDENDUM

My comment here:

I believe the key issue is never ownership per se, but the incentives at the micro level. Government owned organisations can perform wonderfully well, as demonstrated by Singapore (see section on Tamasek in my blog post, linked below):
http://www.sabhlokcity.com/2014/07/singapore-model-authoritarian-economic-liberalism-an-alternative-to-classical-liberalism/
I've been investigating the microeconomics of governance – a subject deeply neglected by economists – over the past 15 years. Many useful insights are obtained from operating at the micro-incentives level. http://www.sabhlokcity.com/2014/08/the-microeconomics-of-governance-the-principal-agent-subagent-problem/
If the incentives are right, then government ownership should NOT present a problem for then the citizen (principal) is directly able to achieve his/her goals at the lowest possible cost.
In most cases, however, the incentives are not right – mainly because politicians are ignorant and economists don't care about details. In those cases Friedman and Rothbard are right (even if they may exaggerate in a few cases). Those are the more common cases.
Economists are generally unwilling to examine real institutions (their incentives to publish are stacked against such detailed analysis). If they do so they'll need to examine employee contracts, funding models, etc. That's a lot of hard work. Much easier for lazy mathematicians to make wild assumptions and preach "ideology". That's an unscientific approach, however. It is time for economists to study real institutions in great detail.

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Why economics is important >> Myths about the economy >> Delusions of policy makers

I thought I had published somewhere regarding the common myths about the economy but can't readily find it. [Found it now - 15 counter-intuitive lessons from economics that even most “economists” don’t understand ]. 

This is a placeholder for me to aggregate my writings and those of others regarding the common myths about the economy.

Highly competent economists (e.g. like Chanakya) are vital for any society to enable the production of wealth. India has not a single economist who comes even close – with knowledge both of economics and governance. But even ordinary economists who can provide sensible advice on micro-economic policy are scarce (although a few are certainly available). This means India continuously makes policy which even a basic graduate of economics from a decent university in the West will firmly oppose.

DON BOUDREAUX

"My goal – by teaching basic, foundational, principles of microeconomics – is to inoculate students against the bulk of the common economic myths that they’ll encounter throughout their lives – myths such as:
1) that the great abundance of goods and services available to us denizens of modernity is the result of a process that can be easily mimicked or understood in detail by smart people or planners
2) that the market value of goods or services can be raised by price floors (such as a legislated minimum wage) or lowered by price ceilings (such as rent control)
3) that benefits can be created without costs
4) that government is an institution capable of rising above the realities that ensure that private institutions never perform ‘perfectly’
5) that intentions are results
6) that destruction of property is a source of prosperity
7) that exchange across political boundaries differs in economically meaningful ways from exchange that takes place within political boundaries
8) that the only consequences that occur or that matter are those that are easily anticipated and seen"   [Source]

TOM PALMER

Twenty false reasons to denigrate freedom and capitalism

OTHERS

Basic introduction to economics – please share widely!

 

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Balbir Sihag’s book on Kautilya: the most important economics book in India since the Arthashastra

I was eagerly looking forward to reading Prof. Balbir Sihag's book (although I've read most of his underlying articles published in peer reviewed journals and commented on many of them on my blog). 

I procured the hard copy in India during my recent trip and have finally started reading it today. It is a pure gem of a book, the most important economics book written in India since the time of Kautilya himself. Please do buy it and read it. 
 
Now it is also on Kindle. Only $6! A steal. Get it!

 
I've already commented extensively on Prof. Sihag's work on my blog, but will write some more at the end of my reading of this book. Indeed, given time, I'd myself like to add to the scholarship on Chanakya – since in my view he demonstrates GREATER knowledge of key economic concepts applicable to public policy than ANY economist, dead or alive. Most economists have tunnel vision and aren't able to appreciate broader issues of governance. Chanakya ranges broadly and deeply across a wide canvas. 
 
He is also important for two other reasons:
- a great critical thinker and agnostic 
- confirms that cow meat was widely consumed in ancient India (the cow – which was worshipped, but eaten after it became barren – became "holy" only later because of Jain influence, and now we have the disastrous situation in India where farmers deposit cows in cities where they feed on garbage bins and accumulate many kilos of polythene and nails in the stomach. Let's revert to a more humane policy for cows – send them to a merciful death at the butcher. Let's not torture them the way we do. Hypocrites, all. Chanakya would have been appalled at how hypocritical – and squarely opposed to the truth – Indians have become).
 
At a minimum, I'd hope that all economists will start thinking more deeply about Arthashastra now. I expect to see a flurry of books and articles on Chanakya across the world. Application of many ideas from Arthashastra to India is guaranteed to make India the Sone Ki Chidiya that it once was.
 
Btw, I am planning to convene a meeting over the next six months in India of those interested in setting up a Chanakya School of Government. This man, Chanakya, is unambiguously the greatest Indian of all times, and deserves a major school in his honour. The school would not only teach Chanakya's work but become the world's best school of government. 
 
To progress this school, I have purchased the domain csog.in I will now prepare an outline proposal in the coming weeks and circulate it widely for comment. 
 
For the meeting, I'm proposing to invitee the following:
Balbir Sihag
Ashok Desai
Gurcharan Das
Nandan Nilekani
Varun Arya
Prajapati Trivedi
Parth Shah
Barun Mitra
Bibek Debroy
Justice Tewatia
Gopal Subramaniam
Jaya Indiresan
TN Chaturvedi
Arun Kumar
Ishwar Dayal

(FTI members can volunteer to help organise)
 
This is a very tentative list. Please send send me names of others whom I should invite – along with their ph. no./ email ID, etc.
 
Please also circulate this as widely as you can – so everyone in India starts reading this book on Chanakya, and gets involved in setting up Chanakya School of Government. 
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A tiny sliver of humanity contributes more than 50 per cent to our progress and wealth. #3

The human capital literature in economics does not have refined studies that distinguish top talent from ordinary talent. The paper I cited here was the first I had come across but it was not an empirical analysis.

Now, the Economist has written about a paper that proves this hypothesis empirically, that top talent matters most.

http://www.economist.com/blogs/freeexchange/2014/07/education-and-industrialisation?

"It is the skills held by top engineers and entrepreneurs that enables a society to innovate and foster the type of rapid technological progress that characterised the industrial revolution".

(Word version of the Economist article and PDF of the paper). 

All the more reason for India to focus on “upper-tail knowledge” – or ultra-talent.

BRAIN DRAIN MATTERS – BUT ONLY AT THE VERY TOP END.

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