Month: November 2004

The Care and Feeding of the Permanent Arms Industry

Atanu Dey5 Comments

Don’t let me stop your great self-destruction.
Die if you want to, you misguided martyr.
I wash my hands of your demolition.
Die if you want to, you innocent puppet!
————– Pilate to Jesus at the trial in Jesus Christ Superstar.

Fact: A permanent arms industry requires perpetual wars for its sustenance.

Fact: The most advanced industrialized economies have the most high-tech industries.

Fact: The arms industry is one of the most intensively high-tech industries.

Final fact: The US has the most sophisticated high-tech armaments industry.
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The Trick is not to Mind the Pain

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I came across this quote in Myke’s weblog.
T.E Lawrence wrote in the Seven Pillars of Wisdom:

All men dream: but not equally. Those who dream by night in the dusty recesses of their minds wake in the day to find that it was vanity; but the dreamers of the day are dangerous men, for they may act their dream with open eyes, to make it possible.

I recall a scene from the movie “Lawrence of Arabia” where Lawrence puts out a burning matchstick with his bare fingers. Someone tries to immitate him and burns his fingers and asks Lawrence what is the trick. Lawrence replies, “The trick is not to mind the pain.”

The Price of a Revolution

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The recently concluded elections in the US gives credence to
what H. L. Menken (1880-1956) predicted when he wrote:


“As democracy is perfected, the office of president represents,
more and more closely, the inner soul of the people. On some great and
glorious day the plain folks of the land will reach their heart’s
desire at last and the White House will be adorned by a downright
moron.”


There is much truth in the saying that a country deserves the
government it gets. It is a chilling realization that India is
not exempt from that general rule and we somehow deserve the
inept government we have had since the country became independent
in 1947. The collorary to the generalization must be that a
change in the quality of government can only come about as a
consequence to an improvement in the quality of the soul of
the people of India.


Fundamental change — whether in an individual or in a people —
is extremely hard. It is sometimes triggered by some external
event, mostly of a negative nature. Only when an individual is
confronted with the dire consequences of his past mistakes does
sufficient momentum for change accumulates and he makes a break
with his past. Wars and other catastrophes, natural or otherwise,
transform societies, and are called revolutions.


If you want to have a revolution, be prepared to pay the price
of a catastrophe.

Corruption and Economic Development: A Reference

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Yesterday I claimed that
India is the world’s largest kleptocracy somewhat along
the lines of the claim usually made about India being the
world’s largest democracy (if you use a really flexible
definition of democracy, of course.) One reader, Sudhar, wanted
to know exactly how is it that corruption retards economic
growth. It is a very important question. I could spend a whole
day writing about that but being bone lazy, I am taking the
easy way out of giving you a reference. Why re-invent the wheel,
eh?


So the article you may wish to read is
from the Whirled World Bank
by Paulo Mauro:
Corruption: Causes, Consequences, and Agenda for Further Research.
To quote just a couple of paragraphs:

From economic theory, one would expect corruption to reduce economic growth by lowering incentives to invest (for both domestic and foreign entrepreneurs). In cases where entrepreneurs are asked for bribes before enterprises can be started, or corrupt officials later request shares in the proceeds of their investments, corruption acts as a tax, though one of a particularly pernicious nature, given the need for secrecy and the uncertainty as to whether bribe takers will live up to their part of the bargain. Corruption could also be expected to reduce growth by lowering the quality of public infrastructure and services, decreasing tax revenue, causing talented people to engage in rent-seeking rather than productive activities, and distorting the composition of government expenditure (discussed below). At the same time, there are some theoretical counterarguments. For example, it has been suggested that government employees who are allowed to exact bribes might work harder and that corruption might help entrepreneurs get around bureaucratic impediments.


One specific channel through which corruption may harm economic performance is by distorting the composition of government expenditure. Corrupt politicians may be expected to spend more public resources on those items on which it is easier to exact large bribes and keep them secret–for example, items produced in markets where the degree of competition is low and items whose value is difficult to monitor. Corrupt politicians might therefore be more inclined to spend on fighter aircraft and large-scale investment projects than on textbooks and teachers’ salaries, even though the latter may promote economic growth to a greater extent than the former.


It is a very accessible article and one does not have to be a
genuine economist to gain considerable insight from it.

India, the World’s Largest Kleptocracy

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My brother came to visit me at our offices in Lower Parel in Mumbai this afternoon. He was duly impressed by the spanking new buildings that occupy what used to be Morajee Mills land. I guess I can understand why he was impressed because usually he ends up in seedy run-down offices trying to do business. He has a bunch of dealerships for equipment and materials required for large-scale public sector enterprises. As part of his business, he has to visit the offices of his customers who are housed in crumbling offices because state-owned loss-making enterprises are severly resource constrained and cannot afford nice premises.
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India and Utility Computing

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Stand-alone computing a la PCs delivering “services” is fine for those who can afford that luxury, but is definitely a show-stopper for those who have very little disposable income and yet can make use of those services that PCs deliver. I remind myself repeatedly that people do not want a PC — what they actually want are the services that a PC delivers. As long as we focus on the fact that it is services — and not the hardware nor the software — that matter to people, we will not end up putting the cart before the horse. So if a firm were to deliver those set of services at an affordable price, it is immaterial to the consumer whether the consumer (of those services) uses a PC or some other device. Continue reading →

You might be a third world country if …

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Indian roads reflect the amazing diversity that is India, a mix of the modern and the ancient. It is as if a cross-section of the entire history of transportation were displayed for all to marvel at. A huge mass of humanity using every conceivable mode of transportation — from no-wheelers to two-wheelers (powered and otherwise) to three-wheelers to four-wheelers to sixteen-wheelers — moves along at varying speeds on what apparently are roads. I say moves but at times the whole mass merely sits there for hours. That is what happened during one stage of my journey from Mumbai to Pune last week.
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A Path with a Heart

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Many years ago, while in high school, I had read a bunch of books by Carlos Castaneda about the Yaqui shaman don Juan. Later on in the US, I learnt that Castaneda’s claim that don Juan was a real person was questioned and most likely he made up the shaman. In short, his books were not an anthropological study but fiction. In any case, what the books presented was an alternate reality which was accessible through magic and psychoactive drugs. I am wary of all claims of magic. I do believe that the world is magical but I don’t believe that magic is a sufficient explanation of the world. Keeping the caution that one should not throw out the baby with the bath water, the don Juan’s advice is worth remembering. Hence the following bit.
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The Poor as a Fertile Source of Slave Labor

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I have never been able to shake off the conviction that there must be a very good economic reason for why there are so many poor people around the world. You may say that I am crazy to connect what apparently are totally distinct facts about the world but bear with me for a bit while I lay out my argument.

I argue that the large pool of poor people serve as a reservoir of extremely cheap labor which helps the rich. The rich have control and are powerful. They could choose to bring about the end of poverty. But they don’t because absent grinding poverty, the cheap labor will dry up and lead to less favorable outcomes for the rich and powerful. I hasten to add that the rich and the powerful cannot be distinguished by the color of their skin, racial origin, or nationality. The rich and the powerful exist in rich and poor countries alike. Their interests are aligned irrespective of which part of the world they live in.

Thus the rich in India would advocate policies that will ensure that the reservoir of poor Indians never run dry. Empirical evidence is plenty. There were only about 150 million abjectly poor people in India around 1950. Today, about 50 years later, India has about 300 million abjectly poor people. Mind you, this is after implementing every conceivable form of “pro-poor” policies. Not a single policy maker would ever claim that their policies were anti-poor. They all are for the benefit of the poor. And yet, the numbers of the poor continually increase. I claim that the policies are “more-poor” rather than “pro-poor”.

One such policy now making the rounds is the so-called “Employment Guarantee Scheme” which I mentioned here last time. In my considered opinion, this would raise the level of poverty in India and increase the number of poor. How this will come about, I will address later. For now, I will move to the utility of the poor. They are good for slave labor.

Slavery is an ancient institution. Mention slavery and you conjure up images of Africa. In the past, Africa paid the price and the benefits went to Europeans, both in the Old World as well as the New World. The rich and powerful, both in Africa and in Europe (and their American colonies), gained immensely. Let’s not forget that African slavery was not an entirely European-driven phenomenon. Africans were involved in it as much as anyone else. Africans managed the supply-side while Europeans the demand-side.

For guns and other European manufactures, powerful Africans would conduct raiding parties with guns and cavalry. Here is a heart-breaking account by James Richardson writing about it around 1850:

A cry was raised early this morning: “The Sarkee is coming!” … It turned out that a string of captives, fruits of the razzia, was coming in. There cannot be in the world … a more appalling spectacle than this. My head swam as I gazed. A single horseman rode first … and the wretched captives followed him as if they had been used to this condition all their lives. Here were naked little boys, running alone, perhaps thinking themselves upon a holiday; near at hand dragged mothers with babes at their breasts; girls of various ages, some almost ripened into womanhood, others still infantile; old men bent two-double with age, their trembling chins verging towards the ground, their poor old heads covered with white wool; aged women tottering along, leaning upon long staffs, mere living skeletons … then followed the stout young men, ironed neck to neck! This was the first installment of the black bullion of Central Africa; and as the wretched procession huddled through the gateways … the creditors of the Sarkee looked gloatingly on through lazy eyes, and calculated on speedy payment.

Only humans are capable of inhumanity. It is part of human nature and I don’t think that it can be eradicated. It takes different forms and shapes depending on the fashion of the era and the compulsions of the age. The compulsions range from monotheistic madness (the Crusades, the Islamic hordes destroying peaceful non-Muslims) to nationalism (the Nazis slaughtering Jews, the Americans carpet-bombing countries, the Belgians killing millions in the Congo, the Pakistani army slaughtering between 3 and 6 million other Pakistanis, … the list goes on) to natural resources (too many to mention but Iraq is the lastest example.)

{To be concluded tomorrow.}

Sir, won’t you buy this bridge and the Employment Guarantee Act?

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The converse concept of bounded rationality, it seems to me, must be unbounded stupidity. So is the statement that humans exhibit bounded rationality merely an euphemism for the fact that humans are prone to unbounded stupidity?

A moment’s reflection should convince us that the world around us is definitely complex and we cannot really fathom what the consequences of our actions will be. The best we can do is to try to learn from our previous bouts of “bounded rational” actions and try to avoid being unboundedly stupid.

Here is where one starts wondering what is it that I am going on about. I was coming to that.

It all began when recently my friend Dr Malpani emailed me about the Employment Guarantee Act, the details of which you can find here.

There seems to have been some sort of convention (details) where they adopted a resolution outlining the “non-negotiable” features of an acceptable EGA. These include–

a permanent and universal work guarantee, extension to the whole of India within three years, payment of minimum wages in all circumstances, central government funding, safeguards for the interests of women, decentralised implementation, and full transparency at all levels, among other features.

More about this later. But now, let’s go to Niger, the second largest country in Africa. Extremely poor and definitely overcrowded. Soil erosion, desertification, frequent famines, flash floods, lack of water — the usual laundry list of mini-disasters. So what did they do? They decided to dig trenches and wells to stop the flash floods and thus prevent further soil erosion which was causing desertification. Then they realized that it was actually leading to more desertification, instead of less. They had to cut back on their policy of digging wells for farmers to water their cattle.

A Niger government official explains:

Wells attract animals. Animals eat the vegetation. Because the wells attract so many animals, the vegetation never gets a chance to grow back. Which is the beginning of desertification, the very process that the wells were designed to prevent.

[Source: Peter Biddlecombe, “I came, I saw, I lost my luggage” pg 210.]

Considered in isolation, having wells for increased vegetation is a good thing if you want to prevent soil erosion. The problem occurs when there are other confounding factors such as too many animals. If the system has multiple distortions, trying to address one of those distortions without regard to the others, could lead to unintended undesirable outcomes and make the system worse off than before.

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Here is another one from a different part of the world. A world with cars and computers, and roads and highways. And often heavy traffic congestion. It would be clear to the meanest intelligence that to ease traffic congestion, you have to build new roads and highways and widen existing ones. Except that sometimes doing so only worsens the congestion. Totally counterintuitive.

Why building new roads does not ease traffic congestion:

There is no shortage of hard data. A recent University of California at Berkeley study covering thirty California counties between 1973 and 1990 found that, for every 10 percent increase in roadway capacity, traffic increased 9 percent within four years’ time…This phenomenon, which is now well known to those members of the transportation industry who wish to acknowledge it, has come to be called induced traffic…

The mechanism at work behind induced traffic is elegantly explained by an aphorism gaining popularity among traffic engineers: “Trying to cure traffic congestion by adding more capacity is like trying to cure obesity by loosening your belt.”

Here the confounding factor is that there is supressed demand for more road transportation and as the supply of the road network expands, the demand is expressed to the point where the roads are once again as congested as before and therefore the private cost of using the road once again exceeds the benefit and people stop using the road.

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One more case in point. This time from the development literature. Urban unemployment is a common feature in underdeveloped economies. Both in the organized (or formal) sector and in the informal sector, urban unemployment leads to a whole host of symptoms such as gigantic slums, urban crime, etc.

Once again, the no-brainer solution is simple: increase employment opportunity in urban areas so that the unemployment rate goes down and thus cure the associated problems. Unfortunately, it is not that simple. By stimulating job creation in the urban sector, one can make the unemployment levels actually increase. How does that come about?

The confounding factor is that there is a vast pool of labor in the rural sector and the average wages in the rural (agricultural, mainly) sector is lower than the wages in the urban (modern) sector. This leads to rural-urban migration. By raising the probability of finding employment in the urban sector through policies that create more urban jobs, it accelerates rural-urban migration and perversely raises urban unemployment. (For details, see the Todaro model.)

The Todaro model has strong policy implications regarding development strategies. For example, efforts to reduce urban unemployment by stimulating job creation in the urban modern sector are likely to be stymied eventually, in that they will raise the likelihood of finding a good job and hence induce a greater flow of rural migrants. Todaro has argued far and wide that the best strategy to reduce urban problems in developing nations is to seriously promote rural development (economic opportunities plus amenities like health care and education).

Which brings us back to the Employment Guarantee Act.

It is a no-brainer that the EGA will make the poor better off all across the length and breadth of India. It will raise hundreds of millions out of poverty. India will finally become a wonderful developed economy. Oh why didn’t we think of this before?

If you believe that, I have a red-colored bridge across the Golden Gate which I would dearly like to sell to you for a throw-away price of only $10,000. Send me a check and I will Fedex you the title to the bridge. It is a very nice bridge. The view is totally incredible. People come from all over the world and take tons of pictures. You will not regret your purchase. Money back guarantee if you are not fully satisfied with your purchase. To the first 100 people who send in their checks, I will throw in the Bay Bridge as a free bonus in the whole deal.

Here, I will go out on a limb and predict that if ever this EGA is implemented, it will actually increase the level of poverty and the number of poor in India. It will drag those at the margins of poverty deeper into poverty. The only guaranteed effect will be an absolute increase in the amount of corruption and some politicians will make obscene amounts of money.

As they say on TV, stay tuned. Details at 11.

[See “The National Rural Employment Guarantee Scheme” and “The Importance of Producing Stuff“.]