Category: Economics

It is common knowledge that the Indian economy which was securely imprisoned since independence in 1947 has undergone a radical transformation and has seen a departure from its dismal 3 percent “Nehru Growth” to a more respectable 6 percent and more since the 1980s. There is little room for debate on that fact. What observers appear to disagree on is what were the factors that led to the transition from the “Nehru Growth” to the present.

Very broadly speaking, here is a thumb-rule I use to figure out what factors led to the Indian economic growth 1980s onwards. List every policy—domestic, international, industrial, education, health, banking, etc—that Nehru and his descendents imposed on the economy. Systematically reverse the policy and as you do so, you see the economy accelerating. In other words, if your goal is to create a set of policies that would ensure economic stagnation and deepening poverty of a large economy, the shortest route for you would be wholesale adoption of all the Nehruvian policies. Conversely, the quickest method of figuring out what to do to for economic growth, is to take any component of the Nehruvian policy prescription and apply the reverse.

To the extent that Nehruvian policies have been reversed, India’s economy is prospering. If the economy has not attained its potential growth rate yet, it is because not all of the mindless Nehruvian (but I repeat myself) policies have been discarded yet. I have no doubt that the nation will become slowly wise eventually. How many hundreds of millions will suffer poverty in the meanwhile is a question that is best not contemplated.

What got me thinking about the “Nehru Growth” rate is a recent paper in “IMFstaffpapers: A journal of the IMF” by Rodrik and Subramanian “From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transition.”
Continue reading “From ‘Nehru Growth’ to Productivity Surge”

“Magarpatta City” lies in the south-east outskirts of the city of Pune in Maharashtra, my home state. Searching for place to live in led me to Magarpatta City yesterday. Since moving out of my Mumbai apartment in mid-February, I have been a homeless person leading a rootless life living out of a suitcase. February saw me in New Delhi, Nagpur (my home town), and Bangalore; March was spent in New York City, Long Island NY, Boston MA, and Newark DE; April I was in Berkeley CA, Saratoga CA, Seattle WA, and Tampa FL. Upon my return to India on May 3rd, I spent a few days in Mumbai and then came here to Pune with the idea of storing my suitcase for a bit and have a home for a couple of years.

Searching for a place to call home is not an easy task. You cannot refer to a directory of places available for rent because there is no such central depository of information. What information exists is fragmented and incomplete. There are listings in local newspapers but you would have to consult many sources published over an extended period. Given space limitations in newspaper classifieds, the information for any specific place is incomplete. You would have to call and/or visit to see for yourself what is on offer. Search costs add up and makes the market for rental housing needlessly inefficient. Where there are information imperfections of this kind, specialized services emerge. Rental property brokers step into the picture as specialized agents bridging information gaps manually.

Brokers have specific areas of the city that they operate in and have inside information on available places. To increase my chances of finding a suitable place, I had to engage through various sources, a set of brokers. Each has about a dozen properties to show. The process is time-consuming and frustrating because of a number of reasons. First, there are numerous levels of indirection. The broker is one link in a network of relationships. Broker A, for example, will call up an intermediate B who will in turn call up C who has the key to the apartment. When you go to see the property, a confluence of events have to occur such as the presence of B and C for you to actually look inside. At places, I have spent over an hour just waiting, while the actual seeing of the place took only about two minutes.

The second reason for the frustration is cultural, the inability to say no. I have a set of very specific criteria about the place I wish to rent. Somehow I get taken to see properties that don’t come anywhere close to what I have clearly stated I want. Why do they do that? Don’t they waste their time as well as mine? There has to be a rational explanation. I conjecture it has to do with conveying an impression that they have earned the commission they charge.

Brokers charge about two months’ rent as commission. If they were to show only those properties that meet the specifications, they would perhaps be able to show only one or two places. If that means you rent a place through a broker after he (or she) shows you only a couple of places, the impression could be that the commission is disproportionate to the work done.

The third reason for the frustration is structural. The market is fragmented. Information which could have been aggregated and made searchable is only present as knowledge in heads of various agents. The asymmetric information—renters don’t have information on the complete set of available properties—gives rise to ‘rent-seeking’ opportunities, the commission charged for the deal. Dis-intermediating in this situation would involve aggregating the information (which is currently held as private knowledge) and making it searchable but would result in a loss of income for those agents.

Imagine, for a moment, a more efficient system. Let’s say there is “Craigs List” type platform where landlords list their properties in detail including pictures of the insides and of the surroundings. The technology exists for making this list accessible and searchable to prospective renters from anywhere in the world at very lost costs. In a few minutes of searching, one identifies a set of properties and invests in going over to check out the places. If such were the case, I would have only seen three properties and spent about half a day. Instead, I have spent four days and seen about a dozen properties only two of which I would even remotely consider renting.

Is there a point in this renting story? Yes, a general point. The availability of technology is only a small part of the story of development. It is a necessary part but very small and far from sufficient. The technology has to be adopted. There are barriers to adoption of technology which go beyond affordability and appropriateness: adopting technology could hurt the entrenched interests of the existing system.

Using a web-based system to remove information asymmetries in most markets would eliminate rents that information brokers (and property rental brokers are information brokers) currently enjoy and therefore they can be relied upon to resist such an efficiency enhancing change. But then you may ask, how does any efficiency enhancing change come about at all when in practically all cases the vested interests would prevent the change? The answer: If the vested interests can find alternate and better roles in the new system, the change can occur. That is, if they can move up the value chain. Even after the implementation of an efficient web-based system, people would be required to help with the creation and maintenance of the list, of vetting prospective renters, etc.

Efficiency implies that less labor would be required, however. So instead of a dozen agents, I would need only one agent. In short, if the market does not expand, then there will be mass unemployment among property agents. But the market may indeed expand, both due to lower transaction costs and due to increasing population of tenants and landlords. Then again, in an expanding economy, there will be other opportunities for those who used to be property brokers. It is an old story repeatedly told: fewer secretaries when printers and word-processors became the norm but more programmers. What you lose on the swings, you gain on the slides.

So what about “Magarpatta City”, you may ask. I was coming to that. Tomorrow, shall we say?

The principle that exposure to economics should convey is that of the spontaneous coordination which the market achieves. — James M. Buchanan

The last time I was out having lunch with my economics guru, I pondered the question that is foremost in the minds of most Indians. “What,” I asked the great guru, “explains the shoddy quality of goods and services that one finds in India generally?”

“That I can tell you in one word: competition.”

“How so?” I said. “Isn’t competition supposed to ensure lowest prices, and highest quality instead?”

“Certainly. But you have to remember that a market has two sides to it. There is the supply side. And then there is the demand side. It is the competition in the supply side that ensures high quality and low prices. But if for some reason, there are barriers to entry in the supply side of the market, then you have a problem.

“Here is how it works. Suppose you restrict the entry of firms into the market by decree such as done in the “License Permit Quota Control Raj.” Suppose this leads to low quantities supplied relative to the demand. Then on the demand side, there is competition for the limited quantity supplied. So the quality goes to hell in a hand basket and the price goes up.”

I sort of realized the problem. But I needed a ‘fer-instance.’ “For instance?” I asked.

“Competition in the demand side is what drives out quality and pushes up the price. You do recall that not too long ago, the telephone system was the sole preserve of the government. No private sector firm could enter the market. What was the result? If you wanted a phone, you had to wait for years on end, sometimes as long as eight or ten years. Given the enormous waiting lines, the public sector firms supplying telephony were assured customers who would be willing to put up with shoddy phone service because the demand far exceeded the supply even at the exorbitant prices being charged.

“In those bad old days, you had competition on the demand side. Compare that to today. The competition has shifted to the supply side of the telecommunications market. Now private firms compete with each other to provide phone service. The years of waiting time has been entirely eliminated and now you can get phone service in a matter of hours.”

“Are there any other examples?” I asked.

“Lots and lots. Whenever you see shoddy services or crappy goods, ask yourself where the competition is. You will invariably notice that the competition is on the demand side. Train service? Government monopoly and therefore poor quality. Air transportation? Used to be shoddy but now it is much better because there is at least limited competition.

“Excess supply of goods and services is rarely a problem in over-populated underdeveloped economies; it is always excess demand.”

“So what was the reason for not allowing entry into the markets? Why restrict entry on the supply side in the first place?” I said.

“Greed. If you restrict entry, you have monopoly power. That allows you to collect monopoly rents. Here is how it works. Suppose you want to collect the monopoly rents from, say, the two-wheeler market. You decree that for a firm to manufacture two-wheelers, it has to obtain a license. How much will a manufacturer of two-wheelers be willing to pay for a license to produce and sell them? Almost as much as they will make by charging a high price in a non-competitive marketplace.”

“Who gets these monopoly-like rents? I have not heard of any rule that seeks a hugh license fees from manufacturing licenses,” I said.

“Well, you don’t have to have an explicit rule. You just have discretionary powers as to who you hand them out to. For instance, as the Minister for Two-wheelers (assume there is one), you will hand it out to the firm that pays you a lot of black money and also fills up the coffers of your political party. Corruption of the political process is a handy by-product of the license quota permit control raj.”

“Damn,” I said. “That explains to things in one shot. First, why we have lousy quality high price goods and services. Next it explains why it is so hard to get rid of the license permit quota control raj. Is there a way out?”

“Yes, there is. But it won’t happen till the last politician is strangled with the entrails of the last bureaucrat.”

Suhit Anantula reports that globally an astonishing US$4 billion has been pledged for tsunami relief till date. That is an incredible amount. Assuming that about 4 million people are directly affected (certainly an upper bound), $4 billion implies a lower bound of $1000 per person. My guess is that the aggregate promised aid exceeds the aggregate annual income of the affected population. The actual aid delivered will probably be much lower than the pledged amount, if one were to extrapolate from the past performance.

Some have advocated the creation of a single world disaster relief fund. The Aid Charade by Jody Beihl suggests:

how about creating a single world disaster relief fund. Rather than one-upping each other with bids every time a disaster strikes and competing “beauty-contest-like” for top marks, each country could simply pitch in a yearly amount — say a percentage of their gross national product. The funds could then be drawn on when disaster strikes. That would rid us of what is starting to look like a charade of bidding and perhaps insure that real help comes on time, both when and where it is needed.

The idea is not new, of course. There is nothing is new under the sun. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations (published in 1776) informs us of one such scheme carried out in on a smaller scale. Galbraith is my guide to Adam Smith and he writes:

… were it not for Smith, we might not know that after a bad storm, or “inundation,” the citizens of the Swiss canton of Underwald (Unterwalden) came together in an assembly where each publicly confessed his wealth to the multitude and was then accessed,pro rata, for the repair of the damage.

{Source: The Essential Galbraith (pg 157) Houton Mifflin Company 2001.}

The idea is that of spreading the cost of recovery across the entire population of the globe. A sort of insurance payment where the premium is paid according to the ability to pay of various parties. There are two problems. First, how do you ensure that people pay. Second, what about moral hazard? It is a well-known problem that if one is insured against loss, then one may not exercise due caution and take unnecessary risks. If, for example, the government insures people against flood damage, then people will build on flood-prone areas knowing that they will be bailed out in case of disaster. This is normal human behavior. Moral hazard examples abound. Drivers take more risks in cars which are fitted with air-bags and seat-belts.

I have worked out an ingenious way around the problem of moral hazard. It will have to wait, however. I want at least a few people to buy the book. ***insert appropriate emoticon here***