Indians Make it in the USA, not in India

Prime Minister Modi is visiting the SF Bay area this weekend. Entreaties to “Make in India” will echo all around. Sadly, little attention has been given to why Indians themselves are unable to make in India, or even make it in India. Indians make it anywhere except in India. Particularly, Indians make it in the US. They are immensely successful as entrepreneurs and as top level managers in major corporations in the US. Why?

I wrote this in February earlier this year. Here it is, for the record.

Indians are not congenitally stupid. They are quite capable of getting things done. Creating schools and colleges is well within the capacity of Indians. The fact that the Indian education system is so worthless cannot be explained by the incompetence of people; it can only be explained by the fact that the government has a stranglehold on the system. Why would the government do that? Because of simple economics.

The economics of monopoly control explains the problem with India’s education system parsimoniously. If you want to make super-normal profits (what economists call “rents”), you cannot get it in a competitive market. You have to restrict entry of suppliers in the market and become the monopolistic supplier. Competition within the market always erodes rents. To capture the rents, the government can effectively shift competition within the market to competition for the market. Entry barriers is one way to effect this.

The government has entry barriers, major and minor. In essence, entry can be obtained by bribing the government. This reduces competition within the market and shifts the competition to “for the market.” One ex-chief minister of a major state of India is particularly infamous for controlling all entry into the education sector in the state and is reputed to have amassed a fortune valued at tens of billions of dollars. The high prices people have to pay to get a seat even in a worthless college in the state ends up in part in that man’s pocket. Rationally, therefore, some people make the decision to send their kids abroad if they can afford it.

Entry barriers guarantee low quality and high prices. Where there are no entry barriers, competition within the market guarantees a range of prices commensurate with quality and adequate supply. It also guarantees the absence of rents. These aspects of competitive markets make it particularly unattractive to the politicians. Rents are attractive to those who control. In this case, the politicians do the controlling and therefore collect the rents. That leads to high prices. Then there is the additional feature of a controlled market: low supply. When the supply is low, the politicians can ration out the limited supply to various favored groups in exchange for political support. This is where the caste- and religion-based quotas come into play. Naturally this is bad for the people as it fractures society along caste and religious lines. But it is good for the politicians.

The story is broadly simple. The constitution mandates the government involvement in the education sector. This is of course justified on the spurious grounds that education is a very critical sector and therefore the people cannot be trusted free-entry into providing that service. Government involvement in the sector politicizes education. The politicization of education corrupts the sector. In the end, the people suffer while the politicians enjoy the fruits of office.

The Modi government wants foreigners to invest and “Make in India.” Why would they want to make in India when people in India themselves are not allowed to make in India? I cannot fathom the logic of preventing Indians from doing things and then attempting to persuade outsiders to please do their business in India. It is time that the government removes all barriers to entry into the education sector. That will have the salutary effect of making education in India, lowering prices and raising quality. It will also save India a lot of foreign exchange that is lost to schools abroad. That will make India into a place where you won’t have to do a song and dance about “Make in India.”

Source: Make India first to “Make in India”. Feb 2015.

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