Category: Development

Last week on May 3rd, I began discussing Liberation and Development which I will continue now. I had written that

I will further argue that it is possible to bootstrap the process of development but only if resources are used efficiently and if problems are solved by addressing causes rather than by alleviating superficial effects.

The point I was making is that energy, credit, and knowledge are the basic ingredients for economic production. Economic production is a pre-requisite for development. Efficient use of the three basic ingredients is important. I had also taken a more generalized view of credit where I considered the stock of capital available to an economy as form of credit. It is intergenerational credit because the present generation can use the capital stock created by the previous generations. The capital stock is represented by the machines, buildings, transportation systems, etc. The source of the capital stock is investment which itself the flip side of a flow of savings. Savings in any period is the difference between production and consumption of that period. Finally, efficient use of savings translates into capital stock via through the investment route.

Does efficiency in the use of savings matter? The chairman of the US Federal Reserve Board Mr Alan Greenspan believes it does. At a conference in Chicago on May 6th, in his speech Globalization and Innovation, Greenspan said:

Although saving is a necessary condition for financing the capital investment required to engender productivity, it is not a sufficient condition. The very high saving rates of the Soviet Union, of China, and of India in earlier decades, often did not foster significant productivity growth in those countries. Saving squandered in financing inefficient technologies does not advance living standards.

Volumes can be written in merely outlining how inefficiently India uses its savings. There has to be a reason for why an economy which has a high savings rate cannot translate those savings into higher production through the intermediate steps of investment, capital stock growth, and higher productivity. One of the primary reasons could be the missing complementary ingredient which is knowledge or know-how. Our savings rate is high but savings are low because our incomes are so low. A poor person with a Rs 1000 income and 20% savings rate will only be able to save Rs 200. Compare that to a rich person with a savings rate of 5% but an income of Rs 10,000, saving Rs 500. Furthermore, the rich person is likely to have better investment advice and therefore be able to mobilize his savings better than the poor person.

In other words, when it comes to savings and what to do with them, we are caught in a classic bind which is exemplified by the lament garibi mein aataa geelaa. I cannot quite translate it accurately but it goes like this: Too much water in the dough has made it unusable; but one is so poor that one cannot afford any more flour to correct the imbalance; thus whatever little one had is also wasted. The caution therefore is that when one is poor, one cannot afford not to be careful about how to use the resources one has. How much water to add to a given amount of flour is a decision taken by policy makers who may or may not be sufficiently knowledgeable about cooking. If at the end of the day, all you have is a lump of useless runny dough, you know that the policy makers have messed up. That is what has happened in the case of India. For decades, absolute morons ruled the country whose idiotic economic policy led to the disaster we see around us today.

The economy is being freed after decades of mismanagement and misrule. But even now, we are definitely not out of the woods. Whether it is telecommunications policy or education policy: the idiots continue to pour too much water in the too little flour we have. I would like to look into the telecommunications policy tomorrow.

Lord Acton observed that power tends to corrupt and absolute power corrupts absolutely. He was of course referring to political, economic, and social power. I argue that power liberates, and absolute power liberates absolutely. I am referring to power that drives machines, or energy. This point is so important that I am forced to raise it to the status of a law. The The First Law of Liberation.

Since I am at it, I may as well outline the The Second Law of Liberation: Credit liberates, and absolute credit liberates absolutely. The corollary to that is naturally the conclusion that Microcredit liberates microscopically. The Third Law of Liberation states that knowledge liberates and absolute knowledge liberates absolutely and leads to Enlightenment. Enlightenment is outside the scope of the present discussion since it drags nirvana into the picture and since for now we are stuck in samsara, I will not insist on absolute knowledge; only the relative knowledge which is our lot in our everyday lives.

So there you have it: power, credit, and knowledge are the basic ingredients for the recipe that liberates. The utility of liberation is expressed in the Zeroth Law of Development which is that liberation is a pre-condition for development. Without freedom of thought and action, nothing of value can be accomplished. At its core, development is about freedom — economic, political, religious, … ad infinitum. Casual empiricism bears out that law: where these freedoms are missing, development is absent. If you really insist on it, check out the human development indicies of countries and you would notice that countries that are in economic, political, and religious shackles are not developed.

Now let us discuss the first of the Trinity: Power. (Just for the heck of it, I like to represent it by Shiva, the Mahadeva in the Hindu pantheon.) Power is another word for energy and it is energy that acts on matter to transform it. The reason that energy can do so is simply because matter is condensed energy. The fundamental point to consider is that it was energy that transformed matter into all the stuff that you see around yourself (not to mention the stuff that is yourself.) Everything without exception. I am writing this on a laptop while flying at 33,000 feet in a plane. Everything that I can see around me has been mined from the earth and transformed through thousands of processes involving technology to create machines that would astound us constantly if were not so jaded by their pervasiveness. Inside this laptop, for instance, there is a chip which processes signals. The chip is made of simple stuff — silicon, a few metals including gold, plastic (carbon, hydrogen, nitrogen, oxygen, etc.) — the kind of stuff that you can grab in any handful of earth. What transformed that earth into a chip is energy which powered the machines that embody knowledge as technology. The conclusion therefore is that power, or energy, is what you basically need, and if you have sufficient amounts of power, you can do anything that your heart desires.

Power is the fundamental irreducible basic natural resource and all other resources can be derived using it, albeit indirectly. For instance, using power, you can mine any mineral you need from sea water of which there is a practically inexhaustible supply. You can get fresh water as well from it. All you need is power. So the conclusion is that if you have a shortage of power, all other shortages derive from that. Every poor country is one that does not have access to power and every rich country has access to power. Whether the rich country’s access to power is endogenously determined or not, is a different matter. If one has any doubts about how important power is to countries, one just has to remember that in all the wars that the US fights around the world, energy holds center stage.

Next on our list of liberating elements is credit. What do I mean by credit? I mean any capital that is available to one for use without having earned it before using it. This is a broader concept than just the money credit that you can access using credit cards, banks, loan sharks, etc. I am referring to capital that has been accumulated for generations which includes machines, buildings, roads, libraries, technology, and so on. If one thinks about it for a bit, one uses stuff that one has not paid for all the time. The current generation has access to and uses capital that it has not paid for. Therefore it can be said that the current generation is using credit. And the more credit that is available to any entity, the more productive it is going to be. To understand this bit, one has to merely look at the credit available to the population of a rich nation and compare that to that which is available to the people of a poor nation. People are born pretty much with equal capabilities on the average. What distinguishes them later in life is whether they had access to credit or not. A surgeon’s son grows up to a professional, while a peasant’s son grows up to be a manual laborer. On a higher level of aggregation, the people of a technologically advanced country have access to greater credit — more machines and more know-how — and therefore they are more productive.

For a glimpse of where I am going with this, I would like to now outline my argument here:

1. Energy, credit, and knowledge are the basic ingredients for liberation.
2. Liberation is a precondition for development.
3. So if one wishes to bring about development, one has to assure the availability of energy, credit, and knowledge.

I will argue that underdeveloped countries have to struggle so hard to become developed because they are deficient in some or all of the three essential ingredients of liberation. I will further argue that it is possible to bootstrap the process of development but only if resources are used efficiently and if problems are solved by addressing causes rather than by alleviating superficial effects. Finally, I would address the question of the use of information and communications technologies for development. The point that I would discuss is that knowledge is the active agent of transformation. ICT, as the name implies, is technology that is concerned with information, and not knowledge directly. Not keeping the distinction between knowledge and information leads to confused thinking and ultimately immense waste of resources.

{Read the next article in the series Of Liberation and Development-II here.}

Rajesh Jain on his Emergic weblog has been writing a series of articles called As India Develops.

In these set of articles, he traverses a wide range of topics and lays out a road map for India’s development. (Disclaimer: I am necessarily biased in favor of his point of view because of two reasons. First, he quotes from my writings. And, second, he is my business partner.)

Also of interest is his series he calls Tutorials on Development. There are four of them, the first of which is here.

This weblog entry is in response to the comments on Rajesh Jain’s weblog entry called Agriculture and Development. The first is from Arun Anantharaman who writes:

I think people tend to assume today that the American capitalistic route is the right way to go. I am not so sure. I think we can continue to remain a significantly agricultural country (40% of the population), and I think we should. (Not that we may have a choice on that). That still leaves a mammoth 600 million in manufacturing and services.
Continue reading “Agriculture and Development — Part 2”

Rajesh Jain writes on Indian outsourcing:

Outsourcing is good for India – but it will only provide a few million jobs at best. What’s also needed is for Indians to come up with innovations to raise the incomes of the rest of India – the 700 million in rural India. Only then will India will start to make the transition from an agricultural economy.

I agree that outsourcing is of limited value to the vast majority of Indians who cannot participate in it for obvious reasons. I also agree with Rajesh about the need for the transition from an agricultural economy. One reader, Nitin, commented on Rajesh’s blog and said: Continue reading “Agriculture and Development”