The pot-holed road

Thoughts about India, the United States, and occasionally, the world at large.

INCLUSIVE LOOT: THE DARK SIDE OF INCLUSIVE GROWTH

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(Originally published on July 20, 2012 on the website of Centre Right India)

In two recent posts on Centre Right India, I’ve argued against the idea, and the economics, of inclusive growth.

Events in India (recent and beyond) suggest there’s another facet to this debate. Is all the cant about inclusive growth a mere façade for “inclusive loot” by a class of self-serving politicians? Okay, that’s too harsh; let me rephrase. Even without the intention, can it happen that inclusive loot is a more likely outcome than inclusive growth? After all, it’s clear that inclusive growth is easier said than done. Maybe, in the process, inclusive loot is easier done (though not said).

Now that we’ve accumulated a fair body of evidence, it’s easy to put a finger on the link that ties inclusive growth to corruption. Inclusive growth is about spending huge amounts of public money on social welfare ostensibly with the aim of giving a leg up to the poor, and thus spread the gains of growth. At the same time, it’s common knowledge that higher outlays on welfare are accompanied by greater leakages and more money lost to waste and graft. In short, the more you spend, the more it gets siphoned off.

There’s more to it. Given the way the government functions in India, a little extra thought suggests that when you double the expenditure on welfare, corruption would more than double, simply because the level of oversight and control to be exercised over how the money is spent is never simultaneously doubled. If at all it happens that oversight is proportionately tightened, it would happen with a lag, most likely after the damage is done.

For example, in an efficient set-up where things are under control, pilferage may be restricted to tolerable levels, say, 10 percent out of a budgeted spend of ten million rupees. But the same set-up would likely see 15 percent of its outlays siphoned off when expenditure doubles to twenty million rupees. In the doubling from ten to twenty million, the amount lost to leakages increases more than proportionately, from one million to three million rupees. Why this would happen is not hard to figure out. Here’s one angle to it.

It’s a fair guess that in recent years many government departments have seen sharp increases in their budgetary allocations, given all the focus on big-ticket welfare programmes. Yet, how many would have seen manpower increased in proportion to the money being routed through them? Or, how many would have put through a proactive revamp of systems and controls to cope with the money that came flooding in? Of course, it can be argued that government offices are notoriously overstaffed, and that a lot more work can be got out of them just by picking up the slack. Then again, that is ignoring the evidence that work cultures in these places are especially ossified. The expectation that folks who haven’t been exerting themselves for long would suddenly be galvanised because important national objectives are being routed through their departments beggars belief.

There’s another reason why, over the years, things would indeed turn out this way.

At the risk of oversimplifying, it may be said no one is born corrupt. We may become corrupt for different reasons, most commonly because we keep running into people around us who are corrupt and who appear to be merrily getting away with it as part of a prevailing “culture of corruption”. The message is seductive—there’s an easy way to an easy life, and the risks are but minor.

Link it further to the state of affairs created by an activist government where spending on mammoth welfare schemes is relentlessly on the increase. All the money sloshing around in the system generates ever more examples of people around you who get away with it. At this point, corruption becomes a self-fulfilling prophecy. No surprise, then, around the time the 2G spectrum scam was breaking, the UPA Chairperson Mrs. Sonia Gandhi was heard bemoaning the shrinking of the moral universe in the country. Actually, a lot of it is intrinsic to the path she has laid out for the country, and therefore of her own making.

The German-Jewish political theorist Hannah Arendt coined the phrase “banality of evil” to explain the actions of the Nazi war criminal Adolf Eichmann. Conventional wisdom is that evil men do evil things. Hannah Arendt offered the insight that there are occasions when evil can also be a function of thoughtlessness, particularly the tendency of ordinary people to obey orders and conform to mass opinion without critically thinking about the consequences of their action or inaction [Wikipedia].

In the same way, there’s a “banality of corruption” that breaks free of the conventional notion that corruption in society is a face-off between the uncompromisingly honest and the incorrigibly dishonest. In real life, it can also be about ordinary people merely conforming to the prevailing standards of lax morality. We are untroubled by our conscience because even the conscience operates within a frame of reference. That is to say, in a tribe of cannibals, the individual cannibal will never ever suffer the pricks of conscience.

Despite all the leakages, the money spent by the government gives rise to a sizable constituency of free riders who are privileged to live off the handouts from the government. Sooner than later, between the free riders and the looters—whose numbers are also substantial because loot extends all the way from the top to the bottom—the count swells into a critical mass that becomes a powerful vested interest dedicated to maintaining the status quo, no matter what the larger costs to the country are.

This, then, becomes a reform-resistant country where the cracks, when they appear, are promptly papered over and bad policies keep piling up because any kind of course correction would involve making too many people unhappy. But, economics based on delusion has a limited shelf life, and matters cannot go on like this indefinitely. Typically then, reform-resistant economies wake up into a nightmare, with a full-fledged crisis on hand, which makes reforms imperative. All of a sudden, the political will to carry out reforms is easier to muster.

By this logic, India would soon be running into another 1991 moment; a crisis serious enough to give rise to the next set of real reforms, as opposed to the tinkering at the edges that passes off for reforms these days. And yes, all the recent talk about our deteriorating macro-economic fundamentals must be seen as an integral part of this process of heading into a wake-up call—another crisis to force our hands into the next set of far-reaching reforms.

(Author’s note: This is the final article of a three-part series on inclusive growth. The earlier articles were The Fallacy of Inclusive Growth and The Sham Economics of Inclusive Growth.)

Written by Ranjan Sreedharan

September 3, 2012 at 12:49 am

Posted in Uncategorized

THE SHAM ECONOMICS OF INCLUSIVE GROWTH

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(Originally published on July 13, 2012 on the website of Centre Right India)

As an idea, inclusive growth has a powerful resonance to it. It tugs at our heartstrings in ways that make us fall in line as adoring and unquestioning believers. We are happy that it makes us happy, because we feel this glow in our hearts which, in and of itself, becomes adequate validation of the idea. And that is delusional thinking. When it comes to ideas that drive policies at the level of the government, what matters is how things play out over the long term. The original intent behind the policy is often irrelevant. For instance, the stated intention of socialism was that the working people of the world would unite and create a workers’ paradise. The reality it gave birth to was far different, and we know that too well.

Inclusive growth is similarly flawed. It starts off with a pretense, posing as a morally superior alternative to the rapid growth that fosters inequalities with (allegedly) no respite for the poor, and the slow growth that leaves everyone miserable, as India discovered a while back. It’s a false choice because in the real world an insistence on something that’s not on the table merely sets you up for disappointment. The only available choice is between fast growth and less fast, or slow, growth. Inclusive growth, in practice, leads to growth below your potential, to slow growth, and to all the consequences of slow growth we know very well. This was the central argument of my earlier post, “The fallacy of inclusive growth.” In this article, I take the case further, and look at the seriously flawed, seriously deluded, economics of inclusive growth.

The economics

Since there’s no magic wand in economics, the objectives of inclusive growth can only be achieved by diverting money and resources to socially desirable purposes which are also, typically, less productive. Therefore, when the government has to choose between a six lane highway (that potentially pays its own way through tolls and the fillip to economic activity in the area) and a project at similar cost to supply free medicines to the poor, the nod goes to free medicines. But, no matter what opinion we may hold about its necessity or desirability, it still remains a diversion of resources from an economically more productive use to one that is less so.

What is more, while the purpose is noble—about doing good to the poor—diverting money into less productive uses is also about sacrificing a part of your economic potential, which will show up as slower growth in the GDP. In the initial days, the trade-off may appear acceptable, even sensible, and ideal for display on a t-shirt with the slogan, “SAY NO TO TRICKLE-DOWN ECONOMICS.”

Conceptually, it throws up two very knotty issues. On paper, the sacrifice imposed on the productive economy should show up as equivalent benefit in a less productive side of the economy. In practice—and this is particularly true of countries like India with massive governance problems—the transmission losses can be huge, so that rather than add value, the exercise becomes one of massive value destruction. We end up with the costs exceeding the gains by far, the damages outweighing the benefits.

The other issue, more important and less appreciated, is about the longer term consequences of such policies. This is to do with the power of compounding, as in the compounding of interest (thanks to which your money doubles in seven or eight years currently). When you decide to sacrifice a portion of the GDP today, it may seem tolerable or desirable to begin with. Over time, the loss turns out to be far greater than what you had originally countenanced. Here’s how.

Had it not been sacrificed, the foregone portion of GDP would have automatically contributed to more production and further growth in the next year. A year later the loss is even bigger, because a sacrifice that began as 100 in the first year becomes 108 the next year assuming a growth rate of 8 percent. In turn, it becomes 116.64 in the third year, 125.97 in the fourth year… so it goes, getting bigger and bigger with each passing year. Think of it as a multiplier in the negative which continues to be at play every passing year for the rest of your life, your children’s lives, and beyond.

As policies aimed at inclusion are persisted with over the years, the GDP sacrificed in the initial year, to which is added the sacrifice of the current year, plus the potential increment to GDP foregone in the current year from the sacrifice of the previous year, all these keep on accumulating and increasing exponentially over the years, to show up as a big hole in the economy we are not aware of. We don’t realise it is there because the hole takes the shape not of “what was once, and is no more”, but rather the invisible form of “what may have been, but is not”.

I believe this is a huge point that India’s band of gung-ho, do-gooding politicians, bureaucrats, economists and intelligentsia alike, have never grasped. That is why we are content to keep on repeating the same mistakes over and over, albeit in different labels and guises. The concept of the mixed economy that was meant to combine the best of socialism and capitalism has now made way for the idealism of “inclusive growth” where growth will continue to be fast, at the same time, with real out-of-turn benefits for the poor. And why would that happen? Apparently, for no better reason than that we have willed it so with all our hearts. Indeed? And how did the mixed economy end up giving us the worst of both systems? Well, if you are an Indian, you would know by now that this country that thrives on scarcity never runs short of excuses.

It’s fair to say that if India had not gone down the welfare way of Nehru and his like-minded successors, the sheer power of GDP growth alone would have pulled far more people out of poverty than all the welfare schemes of the government put together. Look at the record of the East Asian tiger economies that began in the fifties and sixties at about India’s level and are now far ahead. Or, for that matter, take the example of China which, beginning from the eighties, has lifted millions more out of poverty than we have. And to think that in 1980, China’s GDP per capita was marginally lower than India’s. Today, they are about three times our level. As any visitor to China will vouch, the difference is striking.

The math

Let’s get down to some simple mathematics. If India is to reach China’s level as of today, of course, we must triple our GDP. At a consistently high rate of growth, say, eight percent, it will take us a little over 15 years to get there. Settle for an inclusive growth rate a mere couple of percentage points lower, at six percent, and you add an extra 5 years to the process. But examples like these are commonplace and cut no ice. Let me then try again, this time with an example about the hole in the Indian economy we never think of.

Assume that India’s trend line growth rate is eight percent per annum. The left-liberal types who run the show these days determine that this growth, high as it may be, isn’t doing any good to the poor. They point, with some glee, to statistics about malnutrition being widespread—surely you’ve heard this, there are more malnourished children in India than all of Sub-Saharan Africa—and it’s pronounced a crying shame. What follows is a mother-of-all welfare scheme, a massive state intervention to eliminate hunger that will run for one year, to be paid for by sacrificing growth for one year. For just one year, the national consensus is that we interrupt our growth process with zero percent growth, on condition that we revert to the trend line growth of eight percent the very next very year onwards. With our soft corner for all kinds of do-gooding, we’re only too happy to give up a year’s growth for a great cause. Besides, isn’t the obsession with GDP a hallmark of the neo-liberal agenda?

Whatever the justification, here is the outcome, and it’s not pretty. A sacrifice of eight percent growth for just one year alone will cumulate, over a period of 35 years, to India’s entire GDP for the current year. Surely, that’s something! That’s not all. Place it further in the context of India’s six and a half decades of independence and the abysmally low growth rates of the first four decades. Now take a deep breath and try and figure out how many Indias of the fifties, sixties and seventies we are missing in our economy today. That is the big hole in the Indian economy we never talk about.

Beyond the math

When you get down to it, the math in favour of rapid GDP growth is compelling. And yet, there are real gains elsewhere too, in ways that cannot be quantified. A globalised world is also an intensely competitive place. Even for little things, you compete with someone, somewhere else in the world. Anyone familiar with the workings of a free market would know that competition rewards the winners disproportionately. Quite often, the winner gets to take it all. If you come first, the entire pot of gold is yours. If you are fractionally behind at second place, you twiddle your thumb.

Rapid GDP growth, in these circumstances, is a huge plus. It gives you that extra edge which nudges out your (overseas) competitor. For example, if you are an exporter with a new six-lane highway to your factory, you will immediately save time and money on freight costs. Sometime later, you discover that you can make do with fewer inventories of raw material and expensive spares because replenishments are delivered so much faster. You now save on financing costs as well. Further, when overseas customers visit your factory site, they like what they see, and they have more faith in your ability to execute orders on time. Put it all together and when the next big export order comes up, you are able to quote a price three percent less than before. You succeed in outbidding your Chinese rival. At this point, you become the winner, and you take it all. Your country keeps the foreign exchange earned, the employment generated, the taxes paid, not to forget, the real savings in social spending now that more people stand on their own feet.

A tale

Two newly set up banks go into business around the same time, the Fat Cat Bank and the Bleeding Heart Bank. The names are not subtle, and you know what they are up to. Yes, they represent two opposing philosophies of business. Fat Cat is about banking the old-fashioned, conservative way, where money is given out based on considerations of security and viability of purpose. Bleeding Heart believes passionately in going beyond the narrow focus on profits to look primarily at the need, and circumstance, of the borrower. Their mission, vision, corporate purpose—whatever you call it—is steeped in an overarching desire to do good to society. More than viability, their officers are trained to assess the sob story behind each loan proposal. The more compelling the distress, the faster the loan gets sanctioned (in a manner of speaking). Needless to add, Bleeding Heart keeps interest rates low and affordable to its predominantly underprivileged clients.

Given the way I have outlined the plot, how the story ends can be guessed at. But, it’s not the endpoint that interests me as much as the theatre that precedes it. Bleeding Heart Bank starts off in a blaze of glory and publicity. The media is fulsome in its praise with glib talk about a “paradigm shift” in banking practices pioneered by this institution. Compelling stories of poor borrowers and their smiling faces make it to prime time on television and to positions of prominence in the print media. The widow with three small children who gets going with a small-time catering business, the old man forsaken by his sons who gets a new lease of life with a paan-shop… I’ll say no more because your imagination is as good as mine.

In contrast, Fat Cat Bank is either ignored on a good day, or pilloried on a bad day. It’s held out as the quintessential bad apple, symptomatic of the unbridled pursuit of profit that is at root of everything wrong with free markets and naked capitalism.

As I said before, how the story would end can be guessed at. However, it’s still worth recounting how it would play out. In spite of the “good” work done, the laws of economics eventually catch up with Bleeding Heart. They find out that the cost involved in handing out small loans at low interest to a multitude of borrowers is a money losing proposition. And then, without attention to viability, a large part of the credit portfolio ends up as non-performing loans. The extra provisioning pushes up costs even more. The losses mount, capital is eroded, its net worth is wiped out, and pretty soon, it’s in the queue for a tax-payer funded bailout.

In contrast, Fat Cat Bank survives and goes from strength to strength. Over the years, the ventures financed by the bank end up generating employment for many, and opportunities for ancillaries and suppliers. In an irony of sorts, what was achieved initially by Bleeding Heart—amid publicity and the popping of flash bulbs—is accomplished quietly and without fuss, by Fat Cat Bank.

The moral

A simple tale contains the germ of a compelling idea at the heart of economic development. Broadly speaking, there are two components to development. Firstly, there is the “outcome”, which is what we all look for, and which gets measured in terms what we have in our hands. The other component rarely commands our attention, and is simply the “process” by which outcomes are delivered.

A colour television, for example, defines the point of entry into the lower middle class. If you don’t have it, you don’t make the cut. A good way to acquire a colour television is to save money out of income from a gainful economic activity and then buy it. In this case, the “outcome” (ownership of a colour television) is ensured by a “process” which involves a productive vocation leading to income, and thence to savings.

On the other hand, there’s an alternative way that was pioneered by the DMK in Tamil Nadu. It made the colour television a campaign promise, a showpiece of their election manifesto. In this example, the outcome was delivered, but without thought to the process. (Note: delivering outcomes by piling up the debt, running the currency printer at full speed, or raising taxes to punitive levels, don’t count as “process”.)

As the iron law of economic development goes, outcomes are sustainable only when they emerge naturally and effortlessly as the end product of a robust process. When outcomes are delivered by government fiat, without a process to back it up, you’ve picked up a fight you cannot win.

The big idea

If there’s one lesson from the success of the East Asian tigers, and now China, it’s that development takes off for good when we get the big ideas of our times right. India wasted the first four decades after independence because the big ideas of those days were delusions. The idea that the state should control the commanding heights of the economy, the idea that private enterprise motivated by profit is inherently evil and must be tightly regulated by licenses, quotas and permits, the idea of the mixed economy that would (magically?) combine the best of socialism and capitalism while leaving out the worst… these were the big ideas that dominated those miserable days. Once we got our big ideas wrong, broadly speaking, everything else that followed veered off course too.

Why this should be so, isn’t too hard to figure out. Big ideas work like plate tectonics in Geology; they set off tectonic shifts that work its way at a subterranean, subconscious level, comparable to Continental Drift in method and certainty of eventual outcome—albeit on a much compressed timescale. You don’t see it happening but, ever so steadily, it catches up with and subdues other forces in its path, even as popular attention is riveted to the frantic activity above ground.

As the big idea of our times, inclusive growth is a dud. Thanks entirely to the seduction of this idea, we have ended up passing a series of big laws to deliver big outcomes, with no thought to the process to lead up to the outcomes. If only development could be propelled by passing big laws, surely the Bushmen of the Kalahari Desert would long ago have called a tribal council, passed laws giving their tribesmen the right to food, jobs, education, healthcare, and by now acquired veto power in the UN Security Council.

Why economists don’t get it

There’s been much angst recently over the seemingly abrupt way in which the Indian economy has turned for the worse. Given the multiplicity of depressing macro-economic indicators, it is no surprise. GDP growth has slowed to a nine-year low, inflation is stubbornly high, the central government’s borrowings are out of control, our Current Account deficit has hit unprecedented levels and the Indian rupee has lost nearly a quarter of its value against the dollar in less than a year. The concerns are valid but somewhat misplaced. The fact is, once you know what the big ideas driving the economy are, and once you have a fair sense of what it’s capable of doing, and undoing, you would know that the macro-economic numbers are nothing but footnotes to the big ideas of the times.

Looking back, India’s economy was headed south the moment inclusive growth took over as the big idea for our times, the moment our resources began flowing into causes that added to the warmth in our hearts, but little else. It was just a matter of time before tectonic forces caught up with ground level forces. And what are these ground level forces? Well, typically, you’ll come across economists studying them using toys like GDP growth rate, employment, inflation, fiscal and current account deficits, currency exchange rates, to name a few.

Not surprisingly, our economists never saw the rot coming. Most of them look upon their craft as a science, and subject it to all the rigors of science. It means they are dependent on data to show up before they can form a conclusive opinion or make a definite call. By the time the data had presented itself, the picture was bleak and the rot was obvious to anyone who cared to look at it objectively. If you notice your school going child is spending more time at play and none with her books, you fear for her grades and would intervene immediately to get her to mend her ways. An economist would take the stand that nothing definite can be said at this point, not until there is concrete data to back up your assumption that her grades will likely suffer. When the data does come, in the form of a report card awash in red ink, it may be too late.

And that is my grudge against India’s economists. Too many of them are in the business of looking at numbers in order to make predictions about the future. I disagree. In trying to get a sense of where the country is headed, I also like to look at the people behind the numbers. It’s not a bad idea. At school, there were many kids whose math scores could be safely predicted all the while. As we go through life, many things happen to us in the form of consequences of the actions we take. And the actions, in turn, are determined (and preceded) by our thoughts and ideas. In the same way, the macro-economic indicators that economists are so fond of are nothing but a numeric representation of the consequences of all the economy related actions taking place in the country. And these things don’t happen randomly or in a vacuum. On the contrary, they arise as a corollary, or a follow-up, to the thoughts and ideas dear to the ruling establishment—those who lay out the broad contours of policy, those who determine the general direction for the country.

If you happen to be an economist, this should a sobering thought. The macro-economic numbers that take up so much of your time actually emerge at the fag end of a chain which begins with ideas that translate into actions, leading to consequences, and unintended consequences, that finally get captured as data. One way to be ahead of the curve is to evaluate the ideas for what they are worth. If it can be determined with some certainty that the ideas are rotten, it’s only a question of time before the numbers on the ground begin to reflect the rot.

That is why the debates in economics are unlike those in literature. In literature, it’s possible to make a reasonable case that the fiction of James Hadley Chase merits the Nobel Prize. Likewise, in economics, you are always free to advocate whatever is the currently popular delusion but there is a difference. Sooner than later, the consequences show up on the ground. In economics, delusions may well begin with euphoria but they always end in trauma. In literature, you can safely take your reverence for Chase to the grave.

To conclude, why democracies fail

The subject, why some countries prosper while many others fall by the wayside, has attracted diligent academic attention over the years. I have no doubt it’s all a very complex, nuanced territory with many shades of grey to it. Without appearing to underestimate the complexity, here’s a simple rule why democracies that appeared to have got things right for a while would suddenly fall off the radar.

Typically, a developing country that is also a democracy would put in place market oriented reforms only after exhausting all the alternatives, when the country finds itself poised at the edge of a cliff. Reforms generate prosperity and inequality in equal measure, which go on to foster both a sense of entitlement, and a sense of injury that feeds a class of malcontents. With waning appetite for sacrifice and savings, left-liberal types emerge from the sidelines to take over the government, or to force a shift to the left. Once again, the big ideas are about delivering instant outcomes. Once again, the nitty-gritty about the “process” gets the short-shrift.

At this point, the fall from grace is cast in stone.

(Author’s note: This article is a continuation of my earlier post, “The fallacy of inclusive growth“. The third and final article in the series will consider why inclusive growth necessarily breeds corruption. l also recommend that my 2nd article on CRI, “Between BPL and APL, the need for an AAPL” may be read for a more complete sense of the flaws in the idea of inclusive growth.)

Written by Ranjan Sreedharan

September 3, 2012 at 12:42 am

Posted in Uncategorized

THE FALLACY OF INCLUSIVE GROWTH

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(This article was published on June 18, 2012 on the website of Centre Right India)

Underneath the warm glow it evokes, is there more to the idea of “inclusive growth” than meets the eye? Can inclusive growth ever deliver on its promise of rapid growth with real, out-of-turn benefits for the poor, or is it another pie in the sky, in the way our fixation with the mixed economy turned out to be? Is it possible that an idea you just cannot say no to, is actually deeply flawed at the level of its very DNA?

Here’s an analogy that sheds some light.

Imagine a typical class in a typical school. The greater number of students, say, about 40 percent, falls into the category of the average, neither good nor particularly bad. About 20 percent are above average and some in this lot are truly brilliant students. Those in the bottom 20 percent are laggards and way behind the rest of the class.

If a strategy similar to that implied by inclusive growth were to be followed, it would mean that the teachers would devote a disproportionate share of their time, and the school would devote a disproportionate share of its resources, to focus on the bottom 20 percent, hoping to bring their performance up by a notch or two. The average students would perhaps suffer only marginally under this policy, but the top 20 percent comprising the above average and the brilliant, would suffer grievously.

They will suffer not because they find themselves falling back into the middling, mediocre lot, but in terms of that higher potential within them that would now go wasted. Their sophisticated questions and doubts in the mind about topics ahead of their class level will not be entertained. The library will not carry the advanced and higher level books that could whet their curiosity and sate their thirst for knowledge.

When this class graduates, there will be a far greater degree of equality in the grades of the students. However, this equality would have been achieved as much by pulling up the bottom 20 percent as by stifling the top 20 percent. In real life, it is extremely unlikely that with extra attention and focus, the under-achievers get transformed into over-achievers. It’s more likely that some, perhaps many, succeed in making the transition from laggards to the average category. In other words, where these students were originally destined for low level occupations not requiring academic competence—a factory worker, a cab-driver, a mason, a carpenter—they would now be pulled up to become book-keepers, shop assistants, bank-tellers, machine operators etc.

At this point, it’s easy to conclude that the policy has worked because it has brought about a much-needed improvement in the bottom-most layer. Isn’t this the very purpose of inclusion, and a key social objective?

Well, not so fast. Think as well of what we stand to lose.

Because of their innate talent and enterprise, the upper layer will continue to remain at the top. Students from this category will still go on to become qualified engineers, scientists, doctors, managers etc., but with a crucial difference. The scientists will now turn out to be run of the mill scientists, competent enough for routine experimentation but quite removed from that cutting edge of research that generates inventions and discoveries, or the advances that push back the frontiers of knowledge. There will be far fewer of those doctors and engineers who have the ability in them to blaze a new trail with new cures and new technologies. And, there will be fewer managers with skills to innovate, to think of new ways to improve efficiency and cut costs, and to make available to consumers more and more at lower prices.

How does it matter? Does it really add up to a significant loss to the economy? Consider this.

The wealth created, or the economic value added—a chunk of which, incidentally, ends up with the government as tax—when an ordinary scientist, engineer or doctor becomes a brilliant one is far more than when a plumber is pulled up to become a bank teller. This point is well recognised in free market economies where incremental talent is accordingly rewarded so extravagantly. Top managers, lawyers, doctors, sportspersons etc. earn so much more not because their talent is twice or thrice that of their lesser peers but because that edge, the extra something they bring to their profession, generates so much more value for their customers, their employers, and by extension, for the wider economy. When a scientist is competent, he can be trusted with the routine stuff. When he’s brilliant, he’s capable of inventions and discoveries.

He acquires the ability to re-write the rules of the game and becomes a game-changer. Over a period of time, game-changers go on to change for the better the lives of people around them.

That’s why a Sachin Tendulkar may not be twice the batsman that a Gautam Gambhir or Suresh Raina is, but he earns many, many times more. It’s also a pointer to why the U.S., one of the most dynamic free market economies in the world, is also its most technologically advanced, with an outsized share of the Nobel Prizes every year. It’s also—no surprise here—the richest and most powerful country in the world.

Remarkably, even as the talented have thrived in the U.S., its ordinary working people too have done very well for themselves. A revealing example is that of car ownership. If we reckon car ownership as a measure of inclusion, the U.S. is the most inclusive society in the world. The fact is, this country has almost as many cars as there are people. Here, you can be poor and broke, on the dole or surviving on food stamps, and chances are you would still have a car.

It was not always like this. Not until Henry Ford came along with his Model T car. Introduced in 1909, it first sold for about $850 when competing cars cost more than $2000. By 1915, the price had dropped to $440 and efficiency at the assembly line had increased so much that it took only 93 minutes to assemble one car. At the time of the launch in 1909, the cars were assembled by hand and each car took 12.5 hours to put together. By the time production of the Model T ceased in 1927, over 15 million of these had been made (a record that stood its ground until 1972 when it was overtaken by the Volkswagen Beetle) and life in America had changed for the better for so many of its ordinary working people. All because of one man who changed the rules of the game, and ended up changing millions of lives for the better.

Henry Ford succeeded in America because soon after he started with the Model T, he could discontinue assembly by hand and switchover to mass production techniques, redeploying and rationalising his operations and work-force the way he thought fit. Ironically, more than eighty years after the last of the Model T had rolled off the production line, when a leading Indian airline struggling with rising costs and losses wanted to retrench about 1900 of its work-force during a time of global recession, there was an outcry, and the whole country—the government, the opposition, the media and the wider public—came down upon it with such a heavy hand, it was forced to back down. Without exaggeration, a Henry Ford in India would have died a bitter, broken man.

Inclusive growth may (or may not) deliver on its promise of inclusion but, because it willy-nilly implies a lid on talent and enterprise, it will certainly extract an unreasonable cost from the economy. This cost is paid in the form of opportunities missed, and the life-changing experiences foregone.

Think of a long distance race where a few runners sprint ahead, others follow behind, and some at the back fall down in sheer exhaustion. The welfare state goes out of its way to care for those who collapse onto the tracks (the so-called safety net). But inclusive growth is about actively managing the outcome of the race; those who elbow their way ahead of the pack are imposed a handicap to slow them down, while all manner of extra advantages are given at great cost to those following behind. The grand idea is that as the race heads to a conclusion, all the runners would be bunched together at the finishing line in a heart-warming display of cohesion. Not surprisingly, it is a race that never sets records; it is a race of, and for, the also-rans; a race that ennobles performance below human potential, nothing but a feel-good name for mediocrity.

I began this essay with a mundane example of a typical class in a typical school. Here’s an example from the realm of fantasy to drive home the same point. Imagine that the process of evolution was under control of a government with overriding faith in “inclusive evolution”. Somewhere around the time that homo-sapiens evolved into hunter-gatherers, the mandarins in the bureaucracy suddenly wake up to the fact that this species has left behind others in the ape family and, what is more, was threatening to pull way ahead of the pack. The official machinery now kicks into overdrive.

The homo-sapiens is ordered to be held back at the level of the hunter-gatherer while resources get poured into training chimps and gorillas in the fashioning and use of tools. No, this is not all. The consequences can be truly horrifying where the government determines that the relevant yardstick is not just disparity within the ape family, but within all living organisms, and resources are diverted into enabling the amoebae and other protozoa to catch up.

Time and tide wait for no man. As we slow down in the cause of inclusion, we allow others around us to zip ahead of us. Before we even know it, we end up slowing down a lot more than what we had bargained for. And, when we push hard on the accelerator to make up for lost time, we discover the engine has little extra power in reserve.

It has happened before and, going by the evidence today, it is happening all over again.

(Part 2 will look at the flawed economics of inclusive growth)

Written by Ranjan Sreedharan

September 3, 2012 at 12:28 am

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INDIA’S LEFT LIBERALS AND ITS SELF HATING LEFT LIBERALS

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INDIA’S LEFT LIBERALS AND ITS SELF-HATING LEFT LIBERALS

By Ranjan Sreedharan, April 1, 2012 (edited further on April 14, 2012)

This post is about the class of left-liberals in general and the ones in India in particular, because these days, they are the ones who call all the shots.

In essence, left-liberalism is an economic world view that starts off by beating one’s chest and wailing out loud because there is so much poverty around. It concludes by prescribing solutions that tend to be the same, no matter which part of the world you live in. It is the “duty” of the government to step up and provide free food, jobs, education, income, healthcare—you name it— to whosoever needs it, and that all this can be done easily if only the government would lean harder on the rich. After all, don’t the rich enjoy so many undeserved benefits from the government anyway? Of course, between the starting point and the end point it generates a lot of verbiage, but all that can be safely ignored.

Within this left-liberal class, there is a sub sect, the class of the self-hating left-liberal. How do you know you hate yourself? Here’s a test. Imagine you are in a crowded public place and someone out of nowhere lands a hard punch right into your face. And your response is, “Oh, he’s hit me… I’m sure I must have done something to provoke him… maybe, something’s wrong with my face.”

The self-hating left-liberal looks at all conflicts and all crimes from an underdog versus top dog perspective and further holds that the historical underdog—once identified as such—is never wrong. In other words, in all conflicts, the blame lies invariably with the side identified as the top dog, the dominant side, the majority etc. In a criminal act, if the perpetrator happens to be from the underdog class, without doubt the victim is to blame. If the evidence is overwhelmingly to the contrary, be sure there are extenuating circumstances to explain why the perpetrator behaved the way he did. Of course, part of the delight of being a self-loathing left-liberal is a perverse pleasure in knocking down and demeaning your own people. After all, it is easy to convince yourself that you are being fair and dispassionate when you are harshest on your own kind. Isn’t the tendency to overlook the faults of your own people and lay the blame on others an all-too-common human failing? The self-hating left liberal therefore seeks to rise above this commonplace fallacy by going overboard, to the other extreme. The preferred narrative now is that the fault is always ours, we are the ones to blame, and never they who’ve historically been the underdogs.

Not surprisingly, India’s left-liberals and their self-hating kindred go ballistic when the talk is about the riots that followed Godhra (which is a valid concern) but curiously, they would continue to cherish the belief that the train caught fire by a process best described as “self-combustion”.

Internationally, the most prominent example of a self-hating left-liberal is Noam Chomsky (professor of linguistics at the MIT) who traces all the ills in the world today to America and the deviousness of its successive presidents and governments. In India, the best example that I can think of—someone who runs ahead of even Arundhati Roy—is a frequently published international writer and journalist by the name Pankaj Mishra. He’s a good writer—incidentally, left-liberals are often good writers—and I’ve seen him on the NYT, Guardian and Bloomberg websites. I also understand he has a ready audience among the state controlled newspapers in the Gulf for obvious reasons.

I first noticed him sometime after the year 2000 when the Indian Express published a full page “expose” authored by him. It made the startling claim that the massacre of thirty-odd Sikhs at the village of Chhitisinghpura (J&K) in 2000 was actually the handiwork of the Indian Army, with the intention of maligning the militants. Recall that the year 2000 was before 9/11and Pakistan’s role in fomenting terrorism was far from being the open and shut case it is today. Those were days when we were desperately trying to make our case against Pakistan to an international audience that was still sceptical and it was a hugely damaging piece.

Looking back, we now know there was not a shred of truth in his claims, but, at a delicate moment in our history, he damaged our credibility. Since then, his political writings have continued in the same vein, generally shedding copious tears at the plight, variously, of the poor, the minorities, the caste oppressed etc. with the recurring theme that the Indian state always represents elitist or corporatist or upper caste interests.

Not surprisingly, the greatest harm caused by this self-hating class is to the country’s minority population who end up believing in the facile notion that this lot actually speaks for their interests. And that is another fallacy. True friends stand for me when they also have the courage to tell the truth to my face when I go wrong. If someone flatters me insistently, tells me I do no wrong, can do no wrong, that all my problems have roots in conspiracies hatched by “them” who are the top dogs and therefore my enemies, surely, he’s up to no good!

At the same time, there’s no denying that in a democracy the deluded left-liberal has as much right to his delusions as anyone else. But it’s also true that when left-liberal delusions run rampant and take hold of the national psyche, the entire country suffers, as India suffers now. So, what cane done about it? For an answer, we only have to go to America and look at how that great country has so effectively taken care of the issue. For instance, Noam Chomsky is considered one of the foremost intellectuals in the world today. The left leaning British newspaper The Guardian had once compiled a list of the leading intellectuals of the world and Chomsky was at the top. But go to America and the overwhelming majority of Americans have not heard of him. What is happening? Well, the fact is, as far as the mainstream American media is concerned—and this reflects mainstream opinion in America as well—Noam Chomsky does not exist. Between 1995 and 1997, I spent two years in America with subscription to the New York Times and the New Yorker and I never came across his name. In contrast, a Chomsky in India would have monopolised our television airtimes and every evening, countless Indian middle-class homes would listen in rapt attention to his self-flagellating drivel.

I mentioned in passing that left-liberals tend to be rather good writers. It’s certainly true for India where most of them have come to their ideology after a start in literature and the fine arts where the quest is for beauty and justice, and where you are obsessed by aesthetics. In contrast, economic right-wingers have little interest in outward appearances. They don’t care for beauty because their priority is to try and figure out things that work (as opposed to things that don’t work) and what is the efficient way (versus the inefficient).

The left-liberal quest for beauty, symmetry and justice has absurd implications when carried into economics. Here’s an example. Imagine you’ve been made to hold up one your hands for a long time. It hurts a lot now. The simple remedy is to just bring the hand down. But the left-liberal will not stop here. He will say that the left hand has suffered for so long that in the interests of justice and equity, the right hand too must be held up for an equal length of time. In the meantime, it never strikes him that it is your own body that suffers. With all the passion he brings to the cause of justice, he’s only too happy to inflict more pain on you.

I’m fond of repeating this over and over; delusional thinking and left-liberalism go hand in hand.

Written by Ranjan Sreedharan

April 1, 2012 at 2:04 am

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India’s deteriorating economic prospects

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Some time back (in January of 2011) when I had predicted that the India Growth Story was on its last legs, that India would be facing an economic crisis within the next 2-3 years, I had also said that we could expect a consequential fall in property prices. As a matter of fact, when you consider that the economy-wide inflation rates in India are at 12%, it means that a rise in property price of 10% is actually a fall in real terms of 2%. But now, even beyond such quibbling, comes news of a crippling  blow to India’s home loan borrowers. A 75 bps hike in home loan rates from SBI, coming on top of the vastly increased outlays on food and other essential commodities in the average family budget.

However, this is just the beginning. India is now firmly in the grip of a “bad news cycle”, the outcome of seven years of a “do-nothing” government. It means that in the days ahead, there will be more and more of such bad news coming, simply because when you don’t press ahead with reforms in time, it leaves you vulnerable to multiple downside surprises (or shocks). The recent strike by Air India pilots is a case in point.  Soon after coming to power, Sonia Gandhi  declared publicly “Profit making public sector enterprises should not be privatized”. Well, Air India was indeed profit making once, but look at the sorry mess it is in right now. And, come to think of it, would the pilots have held the government to ransom if they knew they were dealing with serious people capable of pushing through with privatization, if things came to a pass?

Already, the Finance Minister has lowered the GDP growth projections to 8%.from his wildly optimistic 9% budget estimate, but he he is yet to rework his revenue assumptions. Not that it will help because having become an “entitlement economy” (in the words of the economist Deepak Lal), there is very little the government can do on the expenditure side barring a cutback in investments which will further dim our future prospects.

There is worse to come. As elections draw near, Sonia Gandhi will step up pressure for the food security bill to be made into law. I predict that this would be a killer blow to the economy not just because of all the extra waste, pilferage and expense involved, but because a scheme that would have 75 percent of Indians eligible for rice and wheat at two and three rupees a kilo would be hugely distortionary as far as the food economy is concerned. Further, with three out of four Indians having to queue up in front our ration shops for a good part of their day, the efficiency loss to the wider economy will be staggering. Recall that in the former Soviet Union, all the essential commodities were priced very low, but people had to stand in line for hours to be able to get their hands on it. And then there were other distortions like the fact that bread was priced very low with the result that farmers who were allowed to tend to pigs at home ended up feeding bread to the pigs. 

Now, India is not the Soviet Union, not as yet, and this is thanks largely to the dynamism of its private sector. But as we have relentlessly expanded the government in recent years, all sorts of problems to do with a “governance deficit” have cropped up. The concern is justified but a little misplaced. The fact is, India’s governance deficit did not spring up from nowhere; it is the natural outcome of the far more relevant “intelligence deficit” of its ruling classes.

I’ve always believed  the mistake India’s professional economists make is that they look at the numbers and then try to predict the future. I differ because I also like to look at the people behind the numbers and then make predictions about the future.  It’s not a bad idea. At school, there were many kids whose math scores could be safely predicted all the while. And talking of the people behind the numbers, I often see the pursed lips of an unsmiling face  in elegant, crisply starched cotton sarees. Not suprisingly, I am very glum about India’s economic prospects. 

“Against stupidity, even the gods are helpless”, I’ve invoked this popular quote before about George Bush. And I would say the same thing about Sonia Gandhi now. 

Written by Ranjan Sreedharan

May 11, 2011 at 10:21 am

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The problem with direct cash transfers

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The recent Budget has talked about moving away from subsidies to direct cash transfer as a way of eliminating leakages and better targeting. Rupa Subramanya Dehejia has a post in WSJ that examines the case for direct cash transfers as an alternative to the subsidy route. The article “The Case for Direct Cash Transfer” is available at this link:

This is a comment I have posted wherein I point out the obvious problem with direct cash transfers.

  • 5:46 pm March 7, 2011
  • Ranjan Sreedharan wrote:

Here is one problem with the direct cash transfer that has not been talked about so far. Entitlements that put income into the hands of beneficiaries without simultaneously making a claim on their time (in other words, money that comes in for free, without doing anything, even going through the motions of work) would more likely end up in unproductive uses.

Take the example of Kerala. In the last five years that the communists have been in power, government spending on welfare has shot up and so has alcohol consumption. Figures from the State Beverages Corporation (the government liquor monopoly) show that sales have more than doubled during this time. And you only have to look at the profile of the people queuing up in front of these stores to figure out that much of this increased consumption comes from the poorest.

Similarly, a comparison of the alcohol consumption figures in the US with Europe would indicate that alcoholism is much more rampant in Europe than America, and I believe this would have strong link to the higher levels of welfare handouts in Europe. Easy money always gets spent more easily and there is nothing “paternalistic” about this common observation.

Interestingly, by this logic, the NREGA, for all its flaws, would work better because the money here has to be “earned” and to that extent, it is a check on profligacy.

Written by Ranjan Sreedharan

March 7, 2011 at 6:21 pm

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Why “inclusive growth” is a fallacy

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The idea of “inclusive growth” is a fallacy notwithstanding its current popularity among India’s (quite unintelligent) “intelligentsia”. In this brief essay, I explain why the real choice is between fast growth and slow (or less fast) growth, and why inclusive growth in practice can only be a variant of slow growth.

The reason is simple. Since the observed realities in economics do not lend themselves to the possibility of a magic wand, the objective of inclusive growth can only be achieved by diverting resources from the more productive parts of the economy to less productive (albeit socially desirable) uses. Of course, the stated intention is to do good and enable the poorest to catch up with all the rest. Diverting money into less productive uses is then about sacrificing a part of your potential GDP growth, all for a good cause which may be summed up as “We must do better than the morally repugnant trickle-down economics.”

Conceptually, this throws up two very knotty issues. On paper, the sacrifice imposed on the productive economy should show up as equivalent benefit in a less productive side of the economy. In practice—and this is particularly true of countries like India with massive governance problems—the transmission losses can be so large as to make the exercise one of value destruction rather than value addition. We end up with the damages outweighing the benefits by far.

The other issue, far more important and far less appreciated, is about the long-term consequences of such policies. This is about the power of what economists would call the “multiplier” and what in common language would be called compounding. When you decide to sacrifice GDP or potential GDP, there is a loss to begin with. Had this not been sacrificed, the next year this portion would have automatically contributed to more production and more growth, with even greater growth and production the year after. And so it would go on as a negative multiplier for all the years thereafter.  Therefore, as policies aimed at inclusion are persisted with over the years (and when they get out of hand), the compounded sacrifice of GDP and potential GDP shows up as a big hole in the economy that we don’t even realize exists. This is because the hole takes, not the detectable shape of “what was once, and now is no more”, but rather the invisible form of “what may have been, but is not”.

I believe this is a huge, huge point that India’s gung-ho, do-gooder economists, politicians and policy-makers have never grasped. That is why we are so happy to keep on repeating the same mistakes over and over, although in different labels and guises. The “brilliant” concept of the mixed economy that would have combined the best of socialism and capitalism has now made way for the idealism of “inclusive growth” where growth will continue to be fast, at the same time, with real out-of-turn benefits for the poor. And why would this happen? Apparently, because it is our wish, we have willed it so in our hearts. Indeed? And how did the “mixed economy” end up giving us the worst of both systems? Well, if you are an Indian, you would know by now this country never runs out of excuses.

The real irony of course is that if India had not gone down the “welfare” way, the sheer power of GDP growth alone would have pulled far more people out of poverty than all the welfare schemes of the government put together. If this seems hard to believe, just look at the record of the East Asian countries that began at India’s level and are now far ahead. Or, for that matter, take the example of China which, beginning from the eighties, has lifted millions more out of poverty than we have.

Ever heard of a “Mao Tse-tung National Poverty Alleviation Scheme?” or a “Deng Xiaoping Rural Employment Guarantee Act”?

 

Written by Ranjan Sreedharan

December 26, 2010 at 1:47 pm

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