Category: Development

… Professional publicists know there is always a good living to be
made by catering to the public’s craving for optimistic reports. Such
behaviour finds no justification in the attitude of the Buddha,
expressed five centuries before Christ: “I teach only two things: the
cause of human sorrow and the way to become free of it.” The present
work, though written by a non-Buddhist, proceeds along the Buddhist
path — first to reveal the causes of human sorrow in population
matters and then to uncover promising ways to free ourselves of the
sorrow.

Hearing the Buddha’s statement today many people think, “How
depressing! Why accept such a pessimistic outlook on life?” But they
are wrong: it is not a pessimistic view if we reword it in terms that
are more familiar to our science-based society. Reworded: “Here is
something that isn’t working right. I want to fix it, but before I
can do that I have to know exactly why it doesn’t work right.” One
who looks for causes before seeking remedies should not be condemned
as a pessimist. In general, a great deal of looking for causes must
precede the finding of remedies.

‘Living Within Limits’ by Garrett Hardin – Prof Emeritus UCSB.

To my mind, the ability to make distinctions is one of the more important characteristics of a fully civilized human being. Savages, very small children and animals do not share that characteristic. An untutored person will not be able to distinguish between two related but separate concepts. Indeed, the ability to do arithmetic depends on the ability to distinguish numerical information. I cannot stress enough the importance of being able to do arithmetic because those who refuse to do (or cannot do) arithmetic are doomed to speak nonsense. A bit of arithmetic is often all that is required to demonstrate the idiocy that pervades public discourse around the world.

Take the matter of poverty, for instance. If one were to think about it for a moment, one immediately realizes that the simple division operation throws much light upon the issue. Here is what I mean. You aggregate the stuff available in a specific period and divide by the number of people. If the result is a small number as opposed to a large number, you have poor people as opposed to rich people. Stuff matters. What is stuff? Things that you find, things that grow, things that you produce, and so on. At the very bottom of the structure of any economic system is stuff. Economists call it “goods”.

This does not appear to be quantum mechanics. But it might as well have been quantum mechanics given the widespread ignorance of that fact that goods – or stuff, as I like to call it – lie at the foundation of the economy. Sure there is “services”. Haircuts, dentistry, advertising, computer programming, and so on are services. But underlying any service you can imagine, there is stuff. If there wasn’t stuff, there would be no services. For instance, I sing you a song (hypothetically that is, because my singing is nothing to write home about) and you pay me for it. That payment is just a simple transfer of claim to resources that finally end up in stuff. I take the money and buy stuff to eat or to wear or some such. That transaction we can call ”transfer”, since we have not produced any more stuff, only you have transferred your claim to stuff to me.

Stuff matters. The aggregate amount of stuff available to a population matters. Like I said, you could just find it (oil in the ground, fish in the oceans), or you could grow it (in farms and orchards), or produce it (factories). Only when you have stuff can you indulge in transfer (via services rendered) or exchange (trade). Pure exchange does not increase the aggregate amount of stuff available. Taking from Peter to pay Paul does not make more stuff available.

Stuff is produced using land, labor, and capital – the factors of production. Advanced industrialized economies use relatively more land and capital (and use them more efficiently given that they have advanced technologies) and relatively less labor and produce a lot of stuff. The average amount of stuff available is therefore high because they have fewer people to divide the stuff among. So they are rich. They are rich not because they have more money, but because they have more stuff per capita. Since they can produce a lot of stuff using less labor, all of the labor is not employed in producing stuff and so the surplus labor can produce services. and the labor involved in services can be given a share of the aggregate production of goods. That share is called “income”. And this income is denominated in monetary terms. Money, in this case, is for facilitating accounting of the stuff produced and who gets how much. If you don’t have stuff backing the money, it is useless. That is, handing out money to people does no good unless there is some stuff behind it all.

Production of stuff matters. That labor is required to produce the stuff is an unfortunate fact of life – so far at least. In a perfect world, robots would produce stuff and people would be unemployed, free to compose music or watch the grass grow or whatever. In the imperfect world we live in, we have to use labor to produce stuff. But the less labor we use to produce stuff, the better off we all are – with the obvious caution that we have to distribute the stuff equitably, of course. But the problem of distribution only arises after we have produced stuff. If little is produced, little can be distributed on average and therefore on average we will be poor. Distribution is a less taxing problem than production.

Now here is the point that I am building up to. If an economy produces a heck of a lot, and yet a significant percentage of the population is poor, then we know that there is a problem of distribution. In that case, we can improve the situation by a better distribution through transfer of stuff to those who are poor. But if the aggregate production of stuff divided by the total population is a small number, the economy will be a poor one irrespective of the distribution. Merely taking from Peter to give to Paul makes no difference to the aggregate amount of stuff available.

So here is the basic question we need to ask: Will a proposed scheme or policy produce more stuff or not? If the answer is no, then we have not solved any problem. Take internet kiosks in rural areas. From what I gather, they are being mainly used for astrological charts, internet chat, e-governance services such as the printing of caste certificates (whatever that is supposed to be good for), “learning computers” and other such services. If internet kiosks in rural areas does not directly, or indirectly, lead to the production of more stuff, it is pointless. Or take the “Employment Guarantee Scheme.” Merely giving people employment does no good if in the end more stuff is not produced. Might as well get people to dig holes in the ground and then fill them up again for all the good it does to the overall economy.

We need to distinguish between employment and production, between money and income, between aggregate production and distribution. India’s economic policies have stressed employment and not production. That, in no small measure, is why India is poor. Until India’s economic policies shift away from employment and towards production, India’s fortunes are unlikely to change.

Economic development is clearly possible. Examples of economies which have developed are not hard to find. Western Europe developed following the industrial revolution first and later the United States also developed rapidly. Japan’s development was closely followed by the development of the East Asian economies, starting with Taiwan. Given so many instances of economies–large and small–developing is persuasive evidence that economic growth and development does belong to the realm of the possible.

Why has not India developed during the last 60-odd years when other economies have during the same period? What have been the impediments? Those sort of questions need to be asked and seriously answered. These scribblings of mine essentially focus on exploring issues that touch upon India’s economic growth and development. Here I will continue where I left off the last time.

India’s development is predicated on rural economic development because over 70 percent of Indians live in rural areas. Rural development is not the same as the development of rural areas. Rural area development is a sufficient condition for rural development but it is not a necessary condition at all. For India, rural development has to focus on the development of rural people rather than development of rural areas.

The distinction between the development of the people of rural areas and the development of the rural area is important. Case in point: the development of rural America.

At the turn of the 20th century, the US population was largely rural. Agriculture and related occupations employed the vast majority of Americans. The government saw the need to make higher education available to the rural populations. That was the birth of the so-called land-grant universities. (The University of California, which I attended for several wonderful years, is one such.)

Providing higher education to the children of the rural families was the need. So did they start very little colleges in the tens of thousands of little rural communities? No. They started large universities for the children of farmers to go to. The idea was that these trained people would then go back to the farms and increase the farm productivity. But what was the actual outcome? The children of the farmers got urbanized and did not want to go back to the rural areas. As luck would have it, technologies developed in urban areas were successful in raising farm productivity which meant that so many were not needed in the farms anyway. And who developed the technologies and labored in all those urban areas? Those children of rural farmers who went to the colleges were the people who supplied all the necessary bits that the rural farmers required.

The point I am trying to make is that it was not rural development that made the difference in the rural areas. It was what happened in the urban areas that changed the rural areas.

The problem with rural development, in my considered opinion, is that the focus has been the village. Nothing wrong with focusing on a village, of course. But you do have a problem if you have to focus on 600,000 villages. The moment you try to focus on 600,000 thousand of anything — villages, songs, books, cars, you name it — you become unfocused and unhinged. That is what happened with rural development.

Where did it all start? I think it was MK Gandhi’s insistence on a village-based economy that started this unhinged process. Indians take very easily to hero-worship. It is easy to just worship someone and then leave all the thinking to them. All the netas (leaders) of India then took up the mantra of village development. Self-reliance was the corner-stone of this grand edifice of the village economy. And therein lay the trap.

{to be continued.}

The story goes that a man goes to a Chinese acupuncturist for treating his headache. The doctor examines the man thoroughly and then starts to stick needles into the patient’s forearm. “Doctor,” the patient complains, “I have a headache. Why are you concentrating on my arm?” The doctor smiles and says, “See arm, see head. See! they are connected!”

Simple story but has a great deal of wisdom. The body is a unity and when one bit hurts, it is a signal that there is something wrong with the system. The pain may be localized but that does not necessarily mean that the cause of the pain is in the same location. In fact, it may even be that treating the pain will merely mask the symptom and not address the deeper cause. Superficial treatments could make things a lot worse because resources may be misdirected and precious time would be lost. In any sufficiently complex system, a holistic approach is a must for diagnosing and treatment of problems.

A personal anecdote. A friend’s wife who was in her late 20’s suddenly started having severe backache. They spent several months going to doctors who concentrated on the muscular-skeletal system and various chiropractors treated her. But unfortunately the back-pain was in fact just a symptom of kidney cancer. By the time they diagnosed that, it was rather too late.

An economy, much like the human body, is a complex system with various interconnected bits and dependencies, both internal and external. A holistic approach to the diagnosis and treatment of underdevelopment of economies is absolutely essential. Any competent development economist realizes the above of course. The catch is that to operationalize that insight is a non-trivial task. Furthermore, while the basic diagnosis and the treatment can be articulated by economists, the implementation (at least in a major part) involves politics, culture, and other such areas that are even more messy than economics.

The point to remember is that the problem we are addressing is not simple and simplistic solutions, however politically feasible, may be inadequate. One of the greatest dangers is posed by an incomplete understanding of the real problem. I call it the “Spurious Pain” problem. The so-called “Digital Divide” is one such. Among the more brain-damaged solutions to that spurious pain: PCs in every village. (I have written about this elsewhere in this blog.) Another example: farmers cannot pay for electricity. Solution to that spurious pain: free electricity for farmers.

The matter with spurious pain solutions is that instead of solving the problem, it actually accentuates the causes of the problem and one is faced with a bigger problem down the road than the one that one started off with.

Now on to the larger matter at hand. India’s development engages a lot of attention. India’s development is predicated—correctly, in my considered opinion—on rural development because around 70 percent of Indians live in rural areas. The first impulse, therefore, is to conclude that for India to develop, rural areas must be developed. For the moment, let us set aside the issue as to what exactly do we mean by “development.” Let us assume that meaning of “development” is common knowledge, knowing full well that it needs to be rigorously defined if we are serious about solving the problem of development.

The question I would like to explore here is this: Is rural development the same as development of rural areas, or is it development of the people who live in rural areas? My contention first is that the two are not the same. The solution to rural underdevelopment (and consequently to the development of the entire economy) would depend on that distinction. Second, I contend that, under certain conditions which exist in India, development of the rural areas may not be feasible at all. I argue that we should be addressing ourselves to the development of rural people, and not rural areas. In fact, I submit that it is the misplaced emphasis on the development of rural areas which is posing an impediment to India’s economic growth.
{Continued here.}

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.