India – the Next Big Player

Perception and reality are two different things, of course, but they do influence each other. How India is perceived by the US (and vice versa) matters. A significant shift in that perception is clearly visible, going by the writings of observers of the developing India-US relationship. John Mauldin’s Thoughts from the Frontline carries an analysis by George Friedman titled India the Next Big Player.
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Fixing the holes (Incentives edition)

Never underestimate the power of incentives, is what my economics guru used to say all the time. Economics is at its most generalized form the study of incentives. Positive analysis involves digging below the surface to uncover the incentives of the concerned economic agents (people) with the aim of explaining why things are they way they are. It is not just out of intellectual curiosity that one wishes to figure out why things are way they are. It is only the first step to the ultimate goal of obtaining a more desireable outcome. Of course, determining what is a desireable outcome involves value judgements and therefore dependent again on the concerned economic agents and necessarily subjective. But there is nothing subjective about the incentive schemes that need to be implemented in moving from the present state to the desired future state.
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Searching and Finding

Books influence us profoundly, of course. But for a book to work its magic on you, you have to be ready. The Buddhist have a saying that when the student is ready, the teacher appears. Actually, what that means is that when the student is ready, the presence of the teacher becomes known to the student. The teacher has been around all along but the student did not have the faculty to recognize the teacher. The prepared mind is a necessary condition for books to have any impact.
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Benefits of Weapons Trade

Once, as punishment for disobeying his mother, Sam Clemens was made to paint a fence. Like all boys he disliked being forced to do chores. He began to think of some way to get out of it. When his friend John showed up and declared that while he was going for a swim, Sam will have to continue his work. “Work?” said Sam, “A boy does not get to paint a fence everyday.” Sam continued to appear to be enjoying his painting and soon enough John was pleading to take a turn at it. Sam says, “No, it is skilled work.” Finally, John bribes Sam with part of an apple to have the privilege of painting the fence. By the end of the day, Sam gathers a whole bunch of toys and all his friends end up doing the painting and thank him for the opportunity.

Years later Sam, writing as Mark Twain, included that in the story of Tom Sawyer’s adventures.

What brought that story to mind was the recent jubilation amongst some commentators and political observers of the US-India partnership in defense, trade, and other matters international highlighted by Prime Minister Manmohan Singh’s visit to the US. The US will — among other deals — sell arms to India.

I am delighted whenever barriers to trade — political, physical, philosophical, ideological, or merely idiotic — come down because in general there are gains from voluntary trade of goods and services. The gains from trade are well understood enough that there is little point in flogging that horse. Except for the corner cases, of course. Does trade in “bads,” in contradistinction to “goods,” such a great idea? The natural instincts of an economist is to reply “it depends.” It depends on what the “bad” is I suppose and on what sort of externalities arise from such trade.

Take, for instance, trade in weapons of mass destruction. Is it welfare enhancing? The seller of these weapons clearly profits from the trade. What about the buyer? Does it really promote the security of the buyer? These questions bear investigation. While the answers may all be very trivially obvious for some, it is not at all clear to me. Though the perception may be widely shared that buying weapons is good use of scarce resources, it could also be wildly incorrect.

The reluctance of the US when it comes to selling arms to developing countries is like Sam’s reluctance to let his gullible friends paint the fence for him. When he finally relents, the friends are happy and suitably grateful to him for his magnanimity. Only in few trades are all the gains one-sided but trade such as these are exemplars of that set.

My concern here is development and the factors that lead to development. In an interdependent world, India’s development is connected with the state of development (or underdevelopment) of other parts of the world. The state of development of the global economy is of course geographically diverse, but it also has a temporal component to it. Some countries developed earlier than others. And this has some interesting implications.

One of the implications of being a late-comer in economic development is that one has the advantage of being able to adopt advanced technologies from developed economies. By judicious adoption of imported technology related to economic goods, development can be accelerated.

Information and communications technologies (ICT) developed by the US is available to India at a much earlier stage of its development than was the case for the US. Catching up is quicker. That is the happy part of the story. But when it comes to economic “bads,” the story is equally depressing. Adopting advanced weapon technology is extremely costly for developing nations and can hobble development immensely.

The US had passed its age of being a subsistence economy for a long time before it started on its path to developing weapons of mass destruction. Its agriculture was booming, it had a huge manufacturing base, its people were literate and educated, it had a massive stock of housing, its institutions were mature, and so on. Given that foundation, it could afford the luxury of going into the research and development of weapons, and built the most advanced and expensive military hardware in world. The unfortunate part is that there are countries like India which have hundreds of millions of people stuck in the subsistence phase of development. And the leaders of these under-developed countries eye the expensive military hardware and salivate. They are forced to attempt to keep up with their neighbors in their competition to get as many shiny nuclear-tipped missiles as possible.

If I was made the global dictator temporarily, and was given the power to make only one absolutely binding and enforceable global law, it would be to ban weapons trade altogether. If neither India nor Pakistan could buy nuclear subs and missiles, fighter jets and bombers, the ordinary people of these countries might have a better shot at a human existence.

From this point of view, the tragedy of the world is not so much that there are so many poor countries, but that there are those rich countries that have surplus resources to devote to developing weapons that ultimately starve the poor. And the leaders of these poor countries fall all over themselves in praising the foresight and the wisdom of the leaders of the rich countries for giving them the opportunity to buy these weapons.

Mark Twain had unusually praiseworthy words for India. He would have been pleased by the increased tries between India and the US. But I am sure that he would have been saddened by the irony in the celebration of some in India at the chance to buy American weapons.

The IRTS — Revisited

Make no little plans. They have no magic to stir men’s blood and probably themselves will not be realized. Make big plans; aim high in hope and work, remembering that a noble, logical diagram once recorded will never die, but long after we are gone will be a living thing, asserting itself with ever-growing insistency. Remember that our sons and grandsons are going to do things that would stagger us. Let your watchword be order and your beacon beauty. Think big.

Daniel Burnham, Chicago architect. (1864-1912)

Story goes that there lived a man who was of modest means. He had banana trees in his backyard which provided him with a supply of broad leaves. He would harvest them to use as disposable plates to have his meals on, as is the custom in many coastal regions of India. Attempting to save the green leaves for use at a later date, he would carefully choose the yellow decaying leaves to have his dinner on. Forever trying to save the green leaves, he spent his entire life eating on yellow leaves. A foolish prudence, born out of not recognizing that green leaves cannot be saved from turning yellow, resulted in a self-imposed needlessly impoverished life.

Savings are important as a means but not as an end. They have to be invested in endeavors that increase productive capacity so as to increase future stream of goods available for consumption. Of course, lending one’s savings for others to consume or invest in their productive enterprises is not as bad as letting the saving rot in your backyard. But it is best to save and invest those savings in your own home where it will do you the most good, especially if those savings are for projects that have an “inevitability” about them. Indeed, when it comes to “inevitable projects,” it may even be wise to even borrow if needed than to put off implementing them with the notion that you would do them tomorrow. There are two reasons: first, putting them off may reduce your present productive capacity and therefore your present income will be lower (and so will the future stream of income.) Second, in the future the cost of implementing the project will be higher.

There are many “inevitable projects” that the Indian economy needs. Three critical ones are (1) universal primary literacy and education, (2) solar energy, and (3) an integrated transportation system. They are all critical for number of reasons which I will go into later. For the moment, I will focus on the last because it will illustrate what I mean by “inevitability.” This is a continuation of my piece on the Intergated Rail Transportation System.

Inevitability

We cannot get away from confronting these facts. India is a very large country of over a billion people, soon to be the most populous country. India is also extremely poor. When we say poor, we mean that compared to the number of people, the amount of goods and services the people produce is on average very low. We produce too little. Most of what we produce, we have to consume just to keep body and soul together. And in that too we fail miserably evidenced by the fact that half of our children below five are malnourished.

This suggests that we should either increase our production, or reduce our population, or both. Increasing our production implies either using more productive resources, or using our productive resources more efficiently, or both. To achieve greater production and productive efficiency, an efficient transportation system is not optional but mandatory. Without one, the economy cannot achieve productive efficiency.

The transportation system of an economy as geographically large, as densely populated, and as resource constrained as India’s, has to have as its backbone a rail transportation system.

Roads transportation is not an option for India for a number of obvious reasons. Cars and fossil fuels are expensive. Very efficient alternative fuel cars are even more expensive. With 17 percent of the world’s population and 2 percent of the world’s land area, we cannot afford the luxury of high speed expressways the way that the US can. We have to be more fuel efficient than the US because it is not even theoretically possible to emulate the US with its automobile/airlines system. The US appropriates approximately a quarter of the world’s total energy use with only about five percent of the world’s population. To reach US standards of energy use per capita, India would have to increase its energy consumption 25-fold. (NOTE: all figures in this piece are approximate. The exact figures will not substantially alter the argument.)

To put it another way, India would have to use four times the total amount of energy currently consumed by the entire world. At present, India has to import over half of its fossil fuel needs and pays an unaffordable amount for it. India’s economy cannot be sustained on imported fuel. From here flows the case for solar energy, which we will not dwell on right now.

The same argument as above applies with even greater force when air transport is considered as the backbone of a national transportation system. Only a very insignificant percentage of Indians can afford to fly. By afford I do not merely mean individual capacity to pay. The system itself cannot accomodate it. You cannot have 75,000 daily flights serving India’s billion people, which is what you would need to match the US’s air transportation system around daily 30,000 flights serving around 0.3 billion Americans.

A bit of arithmetic is all that is needed to expose the underlying reality that we don’t have the option of having road or air as the backbone of India’s transportation system. We not only cannot afford the fuel (source constraint), but we cannot also afford the pollution (sink constraint) of 700 million cars and 20,000 airliners spewing exhaust — as would be required to match the US on a per capita basis.

I should add that I am making a comparison with the US for a very specific reason. It lies at the other extreme end of the spectrum of per capita resource use. We cannot go there even if we wanted to. So all arguments that I have heard about air transportation becoming more affordable in India do not amount to a hill of beans because simple arithmetic puts them out of the running.

India has a rail transportation system. It is the third largest. Or something like that. It is very large. Actually, when you talk about India, you encounter large numbers. By themselves they don’t mean much, of course. You have to put the number in perspective. India is the largest producer of milk, goes the boast. Impressive until you normalize the figure by dividing by the total population. True, India produces 30 times the milk that Denmark produces but then it has 300 times the population of Denmark. True, that India has a large rail network (40,000 miles) but then India has 1,103,048,634 people.

(Aside: If only, lord, if only people will learn how to use normalized numbers instead of raw numbers — it will save us from a lot of foolish bluster.)

India’s rail is not only large but it is also very old. It creaks along at an impressive 25 kms an hour on average. About the same speed as an average cyclist on a level road. (I have seen estimates that put the average Indian road speeds to be about 12 kms an hour.) Not just creaks along but the trains are bursting at the seams. And I am not talking of the Mumbai locals, impressive though they are in their own right as the silent killing machines.

India has to have a modern rail network which will move people and goods faster and cheaper. Yes, cheaper. The cost of moving from Mumbai to Kolkata is not merely the cost of the ticket. There is the cost of spending the 40 hours on even the fastest train. There is the cost of the heavy cross-subsidy that goods traffic pays for passenger travel. This makes shipping goods by rail artificially more expensive than road transport. This makes shipping goods more expensive and thus we consumers end up paying more. The roads get clogged with trucks and we spend umpteen hours driving short distances. We end up breathing diesel exhaust from these trucks. Well, it is best not to go into too much details about the dysfunctional system — it is too depressing.

Now here come the objections.

This new rail transportation you propose is too expensive. Of course, it is expensive. But compared to what? Reminds me of the line: “If you think education is expensive, try ignorance.” The alternative system that we have is really more expensive — it hobbles our economy. We have to upgrade it one day. Doing so now before it is too late is a better strategy.

Douglas Adams’ story “Sifting through the embers” is a cautionary tale that should be understood by all. You will eventually have to pay. It is better to recognize that and pay a bit right now or else you will have to pay a lot more later and you will get a lot less in return when you pay later.

Our people cannot afford it. Not doing something that will have overall beneficial effects just because every one and his brother won’t be able to afford it immediately is flawed socialist thinking. It means that we should we content with a dysfunctional system even though putting a better system in place will make the economy more efficient which will raise our productivity and increase our aggregate production which in turn will increase the incomes of people enough so that they will eventually get out of poverty. Not to put too fine a point on it, but I think that it is idiotic thinking to not consider the dynamic effects of a change.

It will take too long. Again flawed thinking. Man wanted to learn a foreign language. Teacher says you will have to invest 2 years of your time. Man says, that is too long. So teacher says, “Well, you can put off learning and two years hence, you will still not have learnt the language and it will still take you two more years to learn. It’s your choice.”

As I have argued, it is inevitable. So the sooner we get started, the better off we will be in the present and in the future. Indeed, the future will be much better if we get the thing now, rather than later.

Yabbut what about the poor. I think that the communists should continue to nurse the poor since they derive their living out of sucking the blood of the poor. Not very PC but that is the truth. The reason we have so many poor is because of socialism. But let’s not talk of that evil right now.

The current system does (or does not, depending on your point of view) deliver whatever it can to the poor. The new system does not have to immediately displace the existing rail system. In fact, it will gradually replace the old system. The new system should be built next to the current lines on the same land owned by the railways.

Vision

Like the man who eat all his meals on yellow banana leaves, India always uses outdated ancient technology. For once, India should aim to use the best. And using the best — even if initially imported — will help us learn how to make the best. We need to have the humility to say that we need to import stuff that we can’t make today. We need to have the pride which makes us want to take the imported stuff and improve upon it so that others will look to us when it comes to the technology. We need to have the courage to make big plans.

We need to move beyond the myopia of the politicians and the idiocy of the generals wanting to arm themselves with nuclear subs and missiles and the greed of the peddlers weapons of mass destruction.

We need vision more than we need resources.

Next time I will continue on this topic and propose that the free market can deliver what I am talking about and how the transition from a dysfunctional state-owned rail system, we can transit to a truly modern efficient integrated (that is, rail, bus, car, and air) transportation system.

Different Standards for Different Folks

F. Scott Fitzgerald had noted that “the rich are different from you and me.” Ernest Hemmingway agreed and said, “Yes, they have more money.” Having more money is a significant difference because the most important of its derivate effects is that they have more power. The concerns of the rich are more important; their pain is more acute; their viewpoint is more worthy of consideration; their comprehension of the world more accurate. As Tevya, the poor farmer in The Fiddler on the Roof notes while dreaming of being a rich man, “When you’re rich, they think you really know.”
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