Thursday, November 29, 2007


An important reason why life has changed so dramatically for so many of us, and in such a short span of time, is the spectacular progress achieved in the world of computers and technology. In 1965, Geoffrey Moore predicted (in words to the effect) that every two years, there would be a doubling in the processing power of computer chips. This is now known as Moore’s law and it has broadly held true ever since.

As much as this law is about the exponential growth of computing power, I also believe it is about the power of human enterprise, initiative and open markets, united by freedom and undivided by borders, to deliver results far beyond what the human imagination can realistically conceive.

I like to imagine how this law would have played out in the former Soviet Union. Here is my guess about the likely scenario. To begin with, all research into computers, microchips, semi conductors etc. would be centralised at the massive, publicly funded, V I Lenin Institute for Information Technology, employing an army of scientists, bureaucrats and assorted hangers-on.

At the beginning of the year, the Director of the institute would receive a mail from the country’s planning commission setting out the targets to be achieved in the various areas. The planning commission would, very likely, have set ambitious targets for the growth to be achieved by the economy as a whole and also the various sectors within it. So, if the country is to grow at 8 percent, it would make sense to demand that the Institute deliver chips with a processing power 12 percent, 15 percent and maybe even 20 percent (the sheer ambition!) more than what was achieved the year before.

Assuming that the institute functions like any other government run establishment, it would likely end up at the year-end achieving an increase somewhat short of the given target. Also, they would work hard on good, scientifically plausible excuses as to why the entire target could not be met. Of course, it is also conceivable that the scientists at the institute are fully aware of the true potential in this field (unlike the planning commission mandarins), and actually achieve a 40 percent increase. But then, they choose to deliver only 20 percent for now, in order that the next year’s target becomes a breeze, when they can sit back and relax and yet deliver the plan target.

The reader is welcome to think of alternative scenarios but it is unlikely that the Institute (or the wider research establishment in a command economy) would have delivered double the processing power every two years and that too over a span of three to four decades. Not surprisingly, Moore’s Law under central planning would then have been a doubling of processing power not every two years as in a free economy, but perhaps every four years, or more, and with no warranty about the bugs.

With this kind of difference, and over the course of a decade or two, it is quite likely that staggering differences in the processing power would have opened up between the western chip and the Soviet version. I have long suspected that one of the reasons why the Soviet economy fell significantly behind its western peers  a process beginning in the mid-70’s, and really the basic reason for its collapse  was the shortage of computing power for day to day economic activities. In order to compete militarily with the west, the Soviet economy would necessarily have had to reserve the major chunk of its best computers for military uses like designing warplanes and missiles. This would have starved the civilian sector which would then have been forced to rely on inferior alternatives like the humble calculator or even the pencil and paper (with assistance from the good old logarithm tables).

Of course, such a view would run counter to the established wisdom in the west, cherished particularly by the Republican right-wing in America, that the Soviet Union bled to death because it could not keep up with the quantum jump in military expenditure during the Reagan years. Add to this, the huge cost of fighting the unending war in Afghanistan (where the insurgency was armed and funded by the CIA), and it became the final tipping point. From the Republican perspective, this is all very convenient. You can now follow up with the claim that Reagan was the (Republican) President who won the cold war for the west. And from this point, it is only a short walk to putting a halo around his head.

I must say that even as I disagree with the Republicans on this one, I also sympathise with the view. It does convey the desirable impression that the cold war was won the hard way, the macho way, by standing up to the enemy and not blinking. As for my view (admittedly less popular), it has to be said that Moore’s law would likely have held true irrespective of the actions of the American government and its military, and without heed to the billions they spent on armaments. After all, it draws its momentum from the efficiency and otherwise inherent superiority of the capitalist economy, and not from orders barked out by someone wearing the Pentagon’s stripes.

An admission, therefore, that the cold war was really won by Moore’s Law holding true over a couple of decades and more, would be a let-down. It is hard to imagine an American general puffing up his chest to say, “Yeah, we won the war, and we’ve just figured this out. It was thanks to Moore’s Law.”



In the world at large, there are some economies that perform well and some that do miserably. Many would belong to the middling, mediocre category. Whatever the category, it is a fact that all economies suffer from distortions of some kind or the other. For example, in India, distortions at the social level like our rigid caste system or norms that prevent large sections of women from entering the job market have historically inhibited growth in the economy.

In this article, I’ll focus on economic distortions, i.e. affecting the way wealth is created and distributed and the way people earn their living. Distortions, in this context, may be understood as systems and practices or ways of doing things that prevent the economy from attaining its full potential with the given level of resources. Incidentally, the impetus for economic reforms springs largely from the recognition that even without throwing in more money, and by creative tinkering with systems and practices, an economy can deliver better results.

Even as distortions persist in an economy and become impediments to growth, there will always be a section of the people who profit from them. Accordingly, in a country where the banking system has limited reach, money lenders would gain. In a place where the infrastructure for supply of water is poor, there will be a thriving community of traders who bring it in tankers or sell bottled water. And where the electricity supply is poor, a whole industry develops around generators, inverters, UPS, voltage stabilisers etc. To the extent that they fulfil a need arising from the inability of the state to fully perform its services, it is perfectly in order.

The problem arises when they become focal points for successful opposition to efforts aimed at tackling those weaknesses in the system on which their livelihood depends. This would give birth to a new distortion. Indeed, prevailing distortions in an economy are not always of historic origin that emerged years ago and that we now have to live with. As a matter of fact, new ones are created all the time. Like when a new technology threatens redundancy for some sectors of the economy and the government steps in to protect those at risk. This compels the economy to carry on with the burden of a sub-optimal technology or system with lasting consequences.

The government’s refusal to permit FDI in the retail sector for fear of its impact on the local kirana stores and the ban on some large retailers like Reliance Fresh by certain state governments are just the recent examples. India has a hugely inefficient retail sector with high levels of wastage (of perishables) and very high mark-up in prices from the time goods leave the producers to when they reach the consumer. A large format retailer sourcing directly from the producer and who also sells directly to the consumer would make a lot of sense. And yet, thanks to the government, we’ll now live with this inefficiency for a few years more.

Similarly, decades of socialist oversight have so distorted the labour market that the overwhelming majority of our workforce (over 90%) toil in the unorganised sector with little or no benefits. The tiny minority who gained an early entry into the organised sector (the entrenched labour aristocracy) have benefited hugely and their unions are now the main stumbling blocks for much-needed labour law reforms.

It follows therefore that what we call economic or structural reforms is nothing but the practical process of removing the distortions that have taken hold in the economy. It also follows that the starting point for any serious effort in this direction would be pain. This is the pain felt by that section which was so far profiting from the distortions and are now deprived of their easy pickings. Experience would suggest that such groups are rarely anything more than a minority. But quite often they are organised and have a voice louder than their numbers. Also, economies where poverty and backwardness go back over many years are likely to have many such distortions often feeding on each other. In this scenario, it can happen that while the different groups benefiting from the various distortions individually remain in a minority, collectively, their numbers can add up to a majority and more. And typically these countries would present the greatest obstacles to economic reforms. Since everyone gets to dip a finger in the pie, the minimum consensus for change of any sort will be sorely missing.

In a society where everyone gets to take advantage of a prevailing atmosphere of lawlessness, it can be taken for granted that support for enforcing law and order will be minimal. That everyone suffers in some way or the other from the lawlessness will probably not make a difference. It used to be said about Australia that a thief running away from a policeman in hot pursuit was more likely to get help from bystanders, simply because too many Australians have ancestors who came to grief on the wrong side of the law. In India, many of our otherwise law-abiding citizens would feel uneasy about reforms in the electricity sector, what with an unwelcome prospect of accurate metering. Not surprisingly then, even when economic reforms make perfect sense, it is always difficult to get it started. And where the process has begun in earnest, it will always present an easy target for the anti-propaganda.

I once saw a Polish film on television in the days when Doordarshan was the only channel available and they had this wonderful late night series of the best in international cinema. It opens with an elderly, unkempt man with a flowing white beard living in seclusion in the woods. He was in fact a doctor who, for some reason I could not make out, had fallen out of favour with society. One day, he is approached by a man who brings his young son along. The boy is crippled in one leg and has not walked since a childhood accident. We see the doctor examining the boy and telling the father that he can be cured by an operation on the knee. The father agrees (possibly because he was his last hope) and we see the boy lying on a makeshift table, his eyes trustingly following the doctor as he goes about preparing himself for the ‘operation.’ The doctor is now ready. What follows is a moment I shall never forget. As the camera closes in on him, we see him positioning a hammer over the boy’s kneecap. “Don’t.” I remember screaming within myself. “The man is a quack.”

Well, as it turned out, he was a brilliant doctor who knew precisely what he was doing. After the accident, the bones in the boy’s knee had healed improperly and had fused into each other in a wrong manner preventing proper movement. By bringing down the hammer on it, the existing improper alignments were dislodged and in the operation that followed, he ensured that it would set again in the right way. Needless to add, the boy was able to walk again.

I know the director of the film would not have had this in mind. The fact is, I see a metaphor for how distortions in an economy often need to be undone with the shattering impact of a hammer so that a crippled economy can be made to walk again. And one day, it may even sprint.



Saturday, November 10, 2007


(On the economics of the heart vs. the economics of the brain)

In a poor, developing country (which, by the way, India still is) a problem the government faces is how to spend the limited money it raises by way of taxes and other sources. The means are modest and the claims on resources are many. In such a situation, how should the government prioritise its expenditure.

Here is an experiment that gives an ample hint. Imagine you are the top government official in a poverty-stricken village with the mandate of improving the lot of the people there. You have at your disposal a very modest grant from the state budget but full freedom and authority to decide how it should be spent. Since this is only a ‘thought’ experiment, and since you are the government official, we shall assume that your intentions are noble and that corruption is not part of the equation (somewhat divorced from reality but acceptable for an experiment under ‘controlled conditions’ as they say in science.) In the course of your duties, you come across the following cases where the money you get from the government can be well spent.

There is an elderly gentleman living alone, in failing health and badly in need of unaffordable medical care. Next, there is a tragic case of a pregnant young widow with no means of support whose husband had recently died in an accident. The third case is that of a family with a young kid in school where the husband has recently lost a job in a city textile mill. He now survives on menial jobs and feels he must pull his son out of school. And lastly, there is an ambitious young man who works in the city as a petrol pump attendant and would like a loan to get started with his own grocery store in the village. The funds with you are sufficient to support only one of the above claimants and no more. Who would you support with the government’s funds at your disposal? Take your time and think over it. In the meantime, here is my conclusion.

Societies where the prevailing value system mandates the flow of scarce resources towards any of the first three claimants (does not really matter which one) are those likely to remain poor and backward for extended periods of time. The society which makes it easier for the ambitious petrol pump attendant to have a first claim on the funds would be in the forefront of countries breaking free from the confining shackles of poverty and underdevelopment.

The logic may be explained thus. Government expenditure is most effective in promoting the long term and sustainable welfare of its people when there is a multiplier involved. In other words it must do good and that good in turn must lead to other good things coming out of it. More precisely, government expenditure should head in that direction where the multiplier is the greatest among the competing alternatives. In the example I have given above, there is clearly no multiplier at work in aiding the elderly gentleman. There is some long term multiplier in the case of the young pregnant widow and that of the family with the school going child. But not to the extent as in the case of the petrol pump attendant who wants to invest in a village store, with all its potential for fulfilling a real need of the villagers and of kick-starting the local economy.

The funds given away to the first three cases would essentially constitute charity and would necessarily entail more of such spending in the coming years with little visible difference to the village economy at large. The petrol pump attendant, on the other hand, would require money only for this one year, to get started. Not only are you free to fund other projects or cases in the coming years, the likely repayment of the loan would allow you to double your future outlay. Incidentally, the choice of occupation for the young man was no accident. Dhirubhai Ambani began his career as a petrol pump attendant.

In a sense, what I have outlined here is an example of the perennial clash between the economics of the heart versus the economics of the brain. One is all about feelings and emotions, and those essentially fuzzy notions of justice and equity. An extreme and distorted form of this is what we would call populism, where rather than merely ignoring the long term benefits, you actually go about doing harm to it to secure your short term compulsions. The other side of it, which may aptly be called ‘economics of the brain,’ appears heartless and cruel, but over the long term works wonders for its citizens.

In India, improbable as it may sound, something like this actually happened and with remarkable success. Back in the mid-sixties, during the early phase of the Green Revolution when the country was reeling from food shortages and from the ignominy of the PL-480, it was consciously decided that the target group for spreading awareness about the use of High Yielding Varieties of seeds would be not the poor marginal farmer but the relatively better off farmers with larger land holdings and better education. It was reasoned (and quite correctly too) that these farmers would be in a better position to assimilate the new techniques and deliver results. In the event, one of the criticisms against the green revolution is that it increased rural inequality. But considering that it freed us from both the food crisis and the PL-480, few of us would care to deny that the exercise was well worth it. Indeed, to this day it remains one of independent India's greatest achievements.

This is a critical lesson people in India are yet to fully understand. The matter of economic policy has to be guided by reason accompanied by a sense of detachment. When you bring in the heart, what you get is a palliative and never the bitter medicine that actually cures the disease.

A government that defines its purpose as the business of attending to sob stories, is never out of business.


Friday, November 09, 2007


(Suggesting a new payment mechanism for land acquisitions)

Much has been made of the fact that the land at Nandigram sought to be acquired was fertile farmland. The opposition to the idea of using fertile land for industrial purpose is fundamentally flawed. By this logic, any state blessed by nature’s bounty with fertile land throughout its length and breadth, will be condemned for eternity to agricultural pursuits only. Imagine we discover huge oil deposits beneath fertile farmland. Do we hold back from drilling because the land in question gives you two, three and more crops a year? The economic logic is very clear and we can ignore it only at our own peril. Land, like any other asset, must be put to that use which fetches the maximum returns.

What about the price offered to the land owners, was it too little? It is not easy to arrive at a conclusion one way or the other. All the same, it is human nature to feel short-changed and perpetually aggrieved in such matters. That is to say, the price could well have been double or three times of what was offered, without any significant dent in the opposition to the acquisition. Because, in addition to a fair price, there is also a very touchy emotional aspect to it: how do you put a price to the livelihood gone astray, especially where alternatives are hard to come by. That is why this is the right time to think about alternative approaches to payments for land acquisition by the government for purposes like setting up an SEZ.

I propose that instead of the government merely making a one-time payment as a “fair” price for their land (and livelihood), it should be declared at the outset that this is only the first of what may well turn out to be a series of payments. And here is how the remaining payments would be arrived at.One of the reasons why governments (both state and central) are keen to set up SEZs is that they increase our industrial competitiveness, generate employment and ultimately bring in increased tax revenues. Keeping a track of this increase in tax revenue may not be a simple task but it is also not very complicated in this age of information technology. The second part of the scheme would be a declaration that a certain (to be determined) share of the revenue earned by the government and attributable to the commissioning of the SEZ would be passed on to the evicted landowners by way of, say, an annual payment for a defined period of time. Obviously, the amount available for this purpose would depend on just how successful the SEZ is in bringing increased revenue to the government.

I believe this would go a long way in easing opposition in land acquisition because now there would be a reasonable expectation that the future too will have something good in store for them. Indeed, they would actually become stake-holders in the SEZ with a keen interest in its success, because the greater the success of the SEZ, the more their future earnings. And then, even as it satisfies the need for future security, it also does something for that gambler’s instinct that is there in all of us. What if the SEZ were to turn out to be a massive success? Wouldn’t I be rolling in wealth? The possibility is exciting and definitely worth looking forward to.

It takes only a little extra thought to realise that this mechanism has wider relevance. For example, tribal people displaced by the construction of a dam can be additionally compensated by a share from the future electricity generated. Or if an expressway is to be built by forcibly acquiring land, perhaps a part of the toll collected over the years should be passed on to induce people to willingly give up their land (and livelihood.)

We work not just to earn a living but also to feel good about ourselves. There is a sense of self-respect involved. The land that is sought to be forcibly acquired has a fair price, a market value. But not the sense of self worth arising from the ownership of the land and of being engaged in a vocation. That is why the present practice of a one-time payment of a ‘fair’ price, no matter what that is, is just not the best way to go about it.

There is a popular television ad for Mastercard that makes the point that the best things in life are priceless. It is a lesson our politicians, bureaucrats and economists sometimes tend to forget.




(The acute dilemma facing the government in West Bengal after Nandigram and in the second part, a suggestion for a revised payment mechanism for land acquisitions with potentially far reaching implications)

In the way of tragedies, Nandigram goes well beyond what the common perception would believe. The official version, possibly a model of understatement, says 14 people were killed. They died because in our sixth decade as a democracy, we are still unable to manage our differences and carry out our debates within the bounds of civilised conduct. The other tragedy, with lasting detriment to the people across West Bengal, is that a set of sensible economic policies much needed to pull that state out of its economic morass, has now been laid to rest.

West Bengal is a state where the land reforms agenda is more or less dealt with and now, by all accounts, desperately needs a transition to industry led growth. The fact is that land reforms are not always the unmixed blessing they have been made out to be. In the beginning, the original beneficiary may well get land adequate for his needs and sustenance. But later on, as it gets sub-divided into two, three or more plots, there is very little to live on. In West Bengal, land reforms were pursued with missionary zeal and the state is littered with farming households subsisting on marginal holdings (Official statistics suggest that 91.4% of its farming households have land holdings less than 2 hectares against a national average of 78%.)

Moreover, it is well known that the process of economic development tends to marginalise agriculture, with a steadily declining share of the national income. In India, 70% of our population is engaged in agriculture (mostly small and marginal farmers) and we are just about able to feed ourselves. The US on the other hand has less than 3% of its population employed in agriculture and is capable of feeding almost the entire world. Across the developed world, the proportion of people engaged in agriculture is minuscule compared to those in services and industry. Put another way, these countries have attained development because, among other important reasons, they were also successful in diverting employment away from agriculture, towards industry and services. Land reforms, in this context, can actually be counterproductive over the long term. And that is because by providing a sense of comfort (false, or at best temporary) it merely delays this inevitable and secular movement of people away from agriculture. It is not so much a remedy as a palliative that postpones the pain without doing much for the disease. Worse, with those superficial improvements, it gives rise to an impression that the disease is under control when all along it might well be getting worse.

Of course, when talking about a movement away from agriculture, the underlying assumption is that industry and services are being allowed to develop unhindered to their potential. In West Bengal, ruled for long by wise folks who sincerely believed they knew best what was good for its people, this has singularly not been the case. The official Party line was always about the development of agriculture and the welfare of the rural areas where (and we were often reminded thus) the great majority lived. As for the industrial sector, the Party either did not care or cared only to the extent that it was a hunting ground for its CITU goons.

And that is why West Bengal presents us with something of a double whammy. On the one hand, there is severe pressure on land from the second generation beneficiaries of land reform. On the other hand, there is very little development in the industrial and services sector to offer them an alternative worth pursuing. Incidentally, it is also a pointer to why a centrally planned economy is always a disaster over the long term. Because planners (and they may all be well-meaning economists, politicians and bureaucrats) try to address today’s problems with the tools and solutions available today. The opportunities presented by new developments and the long term trends (including the impact of technology) are rarely grasped because their true significance is seldom realised in time. Nearly 30 years after the Marxists took over power in the state, NSS data indicates that the average consumption level in rural West Bengal is well below the national average and only about four percent higher than in rural Bihar. For a party that has laid claim to rural development as its focus, it is unhappy news indeed. This is not to suggest that the agricultural pie in the state has not grown, only that even as it has grown, there are more and more hands clamouring for a share, because the industrial pie has shrunk and there are no other options open.

Severe pressure on land with no alternative employment, this is the predicament that Buddhadeb Bhattacharya and the Marxist led government of West Bengal find themselves in today. They have scorned at and negated the role of private industry for too long. Now, there is belated realization that the state desperately needs to regain its lost industrial footing. It’s difficult to believe that West Bengal was once in the forefront of India’s industrial growth. Unfortunately for the Party leadership, they have cried wolf so often about profiteering, exploitation (the most exploited word in the leftist lexicon) and other evils of private enterprise, they are now the victims of their own past success. A generation of the rank-and-file indoctrinated by Marxist dogma finds it difficult to let go of its ideological hang-ups and embrace the new-found pragmatism of its leaders.

The Titanic is heading towards an iceberg. The captain is aware of it, but the crew below the deck are yet to get the message.