Shortages and Nehruvian socialism go hand in hand. Just take scooters, for instance. You could not just take scooters some years ago, actually, thanks to the quota permit license control raj. You had to wait for years before you could lay your hands on one. You could jump the queue if you paid with “hard currency” or paid a premium (black money) to someone who had the foresight to book one years in advance with a view to capture some of the rent that arises out of shortages.
The situation today would have been unthinkable then. Now dealers of two-wheelers practically drag you off the street, give you a cold drink, and by the time you have finished it, they have arranged financing and you roll out the door on your new bike clutching your free gift of a toaster oven. Then your choice was severely limited to four or five models; now a reasonable estimate must be a hundred different makes and models of two-wheelers.
There is no shortage of examples of shortages, some of which persist till date. One plausible answer to why these artificial shortages were engineered is rent seeking by those who were in charge of handing out the licenses and quotas. Where the government was the monopoly provider (as in air and rail transportation, telephone services, etc), shoddy quality, inadequate quantity, high prices, high costs, commercial losses, and institutional corruption was the norm. In those instances where private sector providers were allowed, the entry was limited and rent extracted by introducing competition for the market. When firms have to compete for the market, competition within the market is limited and results predictably in low quality, high prices, and shortages.
Here is a thumb rule to figure out if the government is involved in a particular endeavor. Is it characterized by poor quality, shortages, high costs and prices, and corruption? If yes, then the government is involved; if no, then the government is most likely not involved in that business. Let’s apply the rule to electrical power since I am sitting here on Sunday afternoon with no grid power, a regular feature of daily life in Pune. The backup generator is on.
Poor quality: check
Severe shortage: check
High price: check
Corruption (“T&D losses”): check
Null hypothesis: government not involved
Empirical evidence: null hypothesis rejected
I leave it to the interested reader to apply the rule to other instances and test it. The cumulative effect of government involvement in all those sectors gave the Indian economy what I call the “Nehru rate of growth” with a long run annual average of 3 percent or so. India’s poor economic performance—and the resulting poverty—is due to poor economic policies. India is poor out of choice.
For now, I will move on to education in general, and in particular the matter of reservations in higher education, a matter we have visited before here. By the 12th standard, the drop out rate reaches an astounding 94 percent. Of those who finally graduate out of college, only around 15 percent (or, one percent of the those who enter grade one) are employable, leading to a severe shortage of qualified college graduates. The sheer economic waste of human resource is the greatest scandal that very few people pay any attention to.
The fundamental problem with the Indian economy is that the education system is one of the most flawed systems in the country. If there is one sector which is in dire need of reform, it is that education system. The most urgently required reform is to get the government out of it—lock, stock, and barrel. The recent move by the government to further increase quotas in the so-called elite institutions with a view to social justice is akin to rearranging the deck chairs on the Titanic. No, I take that back: it is akin to scuttling the lifeboats even as the ship is sinking.
I have heard the claim that the Indian education system must be wonderful because the IITs produce so many wonderfully successful NRIs (non-resident Indians), especially in the US. They bolster their argument with the specious reasoning that it is harder to gain admission into IITs than into Ivy league schools, and that Narayana Murthy’s son had to use an Ivy league school as a safety school.
Sure it is harder to get into the IITs than into the top American schools. That does not mean that the IITs are in any way better than those American schools. It is a Herculean task to get into a Mumbai local during commute hours, compared to which using the Paris Metro is a piece of cake. Congestion is not an indicator of quality. When supply is severely limited relative to demand, there will be a mad scramble to get some.
On average, fewer than two out of every one hundred who appear for the entrance exam for IITs get admission. If you were to choose the top two percent of any population, the average quality of that group will be a few sigmas higher than the population average. The IITs turn out good students because those who get in are good to begin with. Then for four years, these way-above average kids compete fiercely among themselves for grades. Finally, from this bunch of super-achievers, those with the highest grades and potential are snapped up by the best American universities. By the time these graduate out of the American universities, they are the crème de la crème who have self-selected themselves for intelligence, drive, ambition, and vision. We read about them as the Silicon Valley millionaires and billionaires, and pat ourselves on the back for having a wonderful educational system.
That is most definitely not so. The dysfunctional Indian education system is the saddest and costliest example of governmental ineptitude and malfeasance. The solution to the problem of the Indian educational system has to have at its core getting the government to let go of its chokehold on the system.
The question then is: what exactly is the problem with the government? My answer is that it is a mentality of scarcity and poverty. It does not believe (and here I am guilty of anthropomorphism) in abundance. It treats the citizens as if they are incompetent children who will not be able to work out solutions for themselves without the patronizing paternalism of the socialistic control of every aspect of economy.
There is one apparent paradox: if the government does not allow economic freedom, why does it allow political freedom? Would it not make more sense to restrict the latter and relax the former? I believe that the paradox is solved by the realization that most of India is abjectly poor and illiterate. Lack of economic freedom over generations cause poverty and that leads to illiteracy as well. Poor, illiterate people cannot meaningfully use their political freedom. Indeed, it is easy to politically manipulate very poor illiterate poor people for electoral gains. Promise them free electricity, free TVs, free land, and they will vote you into power. I am not making this up since I am neither that cynical nor that imaginative.
Is there no role for the government in the education sector? Yes, there is, but it is severely restricted to three functions:
- First, funding (but not the provisioning) of universal education up to high school level
- Second, providing an independent regulatory authority for the higher education sector so that private firms can compete fairly on a level playing field
- Third, providing educational loan guarantees to banks
Sufficiently poor people cannot afford to send their children to school. The total cost to them includes not only the direct cost of going to school but also the opportunity cost of the lost earnings of the children. But since the total life-time benefits of a high school education must exceed the total cost of that education, there is a role for the government to subsidize the education of the sufficiently poor. But the government should not run primary schools. It should leave that to the competitive private sector. Give vouchers to the poor which they can use to pay for the private schools. This is not rocket science and pretty much all possible problems can be anticipated and proper mechanisms designed to fix them. (I will be happy to do this separately.)
The role of the government in higher education is simply to ensure that private providers of education compete fairly. The government must empower an independent regulatory body. Independence is important so that politically motivated interference into higher education is minimized.
There must be no subsidies for higher education. Higher education, for all intents and purposes from the point of view of an individual, is a private good. That is, the private benefits of higher education exceed the private costs. Sure higher education also has positive externalities (and therefore has public good characteristics), but that externality does not have to be internalized by subsidizing higher education for those who are rich enough to afford it.
But what about those who cannot afford higher education even though they are qualified for it? The answer is that they have to be given loans by banks and these loans have to be guaranteed by the government. The basic point is simple: the credit constraint that the poor face with regard to higher education can be released with little effort. This the government must do and if done competently, it will take only one generation for the every poor family to become non-poor.
Let’s see how this would play out in the case of a hypothetical “sufficiently poor” family. Abhi and Anu’s parents are daily wage earners who need the Rs 10 each kid earns every day to keep the family going. So sending them to school where the tuition fees and other school related expenses are Rs 400 per month per child is out of the question. Their total cost of sending a child to school is Rs 400 plus the foregone earnings of Rs 300 per month.
So the government gives vouchers that Abhi and Anu use to pay for the privately run school in their neighborhood that they attend. And on top of that, the government gives the parents Rs 600 every month as long as the kids continue in school. Net cost to the family: zero.
All the way to finishing high school, Abhi and Anu continue to receive free schooling and the parents are given an incentive to continue to keep the kids in school. By the time they finish 12th grade, both Abhi and Anu are as properly schooled as any other kid from a middle class family who are not poor. As it happens, Anu is the bright one and she wants to go to engineering school. She appears for the entrance exam and clears it. It is not an entrance exam to select only a small percentage of a huge pool of qualified students. It just ensures that the student has the required motivation and skills to study engineering. She is bright and is well prepared and she gets in. That is not surprising because about 75 percent of those who apply do get to study their subject of choice. Her brother, Abhi, is into medicine. Same story as his sister: a simple entrance exam to test for eligibility and he is in.
But then they are still poor. So they go to one of the several banks and show proof their acceptance and the bank gives them the loan that they need to go to college. When they graduate from their professional courses, they will pay off the loans with interest. Their children will not be requiring support from the government at all. Only one generation needs help.
Not just that, no one is even remotely interested in knowing the caste of anybody. If you are qualified, you get to go to college. If you are poor, and have admission, you get a loan.
Imagine there is no reservation; no one cares what caste you are; no one denied a chance to study and learn because of lack of money. (Sung to the tune of John Lennon’s “Imagine.”)
Imagine if I stopped here for now. And carry on some days later. Wouldn’t that be wonderful?