The Power of Incentives

It is said that one should not ascribe to malice what can be adequately explained as stupidity. I would go one step further and say that one should not ascribe to malice or stupidity what can be explained by basic self-interest. In other words, the power of incentives. Incentives matter and just like you can explain all sorts of natural phenomena by understanding the law of gravitation, you can explain all sorts of diverse economic puzzles by asking what are the incentives.

Consider this. BBC News on Sept 3rd 2004 carried an item: Solar plan for Indian computers. Some excerpts:

Authorities in the Indian state of Uttar Pradesh have drawn up a pilot project to use solar power to run computers in village schools…

Many have to use kerosene lamps for light and most government-run primary schools have no power at all.

It is hoped the plan will help schools cope with the rural power crisis.

Last year, the Uttar Pradesh Education for All Project Board bought about 1,000 computers for selected primary schools in all 70 districts.

The schools were selected in villages which had no power lines, and teachers were given special training for computer-aided education.

Consider the typical village school in UP: totally strapped for resources, teacher absent most of the year, perhaps not even a blackboard, students unable to afford books and most likely malnourished. Why, one asks incredulously, would anyone be spending money on computers when there are more important needs that are crying out for resources?

The report goes on to say:

A further 1,000 computers are to be purchased this year for village schools, but most of these will not work because there is no power available.

The mind boggles at the waste of resources which a poor state can ill-afford. Funds for rural public education are severely limited and yet they are wasting it buying computers that will serve no apparent purpose. These funds could have been used more effectively in paying teachers living wages, buying supplies such as books and blackboards, perhaps food for the starving students. Why?

Here is my explanation. Some time ago, I had pondered the question of why telephones, radio, and TVs don’t make the conference circuit. The vendors of PCs have an incentive to push their wares and they are a powerful lobby. Couple that with the avarice and corruption of the “authorities” mentioned in the BBC report, and you have the answer. When tens of millions of rupees are spent in bulk purchases of computers, there are kickbacks. The authorities make their pile, never mind that the computers end up being expensive non-functional display items in the villages without power.

But wait, it gets better. No power for computers? No problem: use expensive solar power to power them. And you will find the vendors of solar power panels eagerly getting into the game of rural development. They make hay while the sun shines.

It is disgusting, all things considered. Last Friday I made the mistake of driving about 10 kms on Mumbai roads. It took an hour and a half. We were stuck at a T-junction for about 20 minutes because of a deadlock. Vehicles had moved into the intersection and there was no way any vehicle could move. I had described a similar situation earlier in a post entitled Seduced by ICT:

Recently I came across a news item which said that they are looking at solving Mumbai’s traffic problems by making Mumbai roads “electronic intelligent roads.” I don’t have the slightest doubt that it would involve huge outlays to the tune of millions of dollars and lots of people will make lots of money up and down the line providing expertise and hardware and software for this hi-tech venture. I am also convinced that it will not make the slightest effect on the congested Mumbai roads because it is not the roads that need the intelligence but the people designing the roads that need to be intelligent.

Close to where I live in Kandivali, a suburb in North Mumbai, there is an intersection that is almost always caught in a grid-lock. The intersection is like an “H” with bi-direction flow of traffic along all the sections and it has one traffic signal at one of the points where the horizontal section meets the vertical sections. Traffic gets log-jammed around 300 meters of this intersection and it takes about a half hour to cross this bit every evening. Hundreds of autorickshaws, buses, cars, trucks, two-wheelers, and whatnots spew exhaust fumes and honk continually and people suffer. It is astonishing that the traffic people have not figured out that the simplest thing to do would be to paint some part of this intersection with the “KEEP CLEAR — DO NOT BLOCK” sections and put a couple of traffic cops to teach the people to keep off these sections. It would be a simple effective system which would cost very little compared to the enormous price that everyone pays throughout the day due to the congestion.

Instead, the Mumbai municipal corporation is investigating ways of using electronics. Why not better road markings and so on? Because there is not much money involved in a simpler but more effective system. Simpler may be better but there is not much profit in it. A blackboard, a teacher, and a dozen slates and some chalk may be simpler and better for adult education, but there is not as much profit as in putting PCs with literacy programs to teach adults how to read in rural areas.

That is all there is to it. Expensive solutions are proposed because those in control of the spending benefit. This is a universal phenomena, not restricted to poor overpopulated corruption ridden third-world people. Doctors in the US freely sometimes recommend unnecessary heart-bypass surgeries instead of recommending life-style changes. They make more money performing by-passes and don’t make any money if the patient changes his life-style.

The power of incentives is awesome. Look carefully at the roots of persistent poverty and you will see that someone makes money and therefore it is in the interests of the person to perpetuate that poverty. This is not even limited to the economic sphere alone, of course. Mother Teresa’s goal was religious glory and her incentive was therefore perpetuation of overpopulation because people are the fodder that the church feeds on. Is there a way out? I think there is. Stay tuned.