THE BRIDGE NOT BUILT

It is almost 20 years to the day when socialism in the former Soviet Union and Eastern Europe imploded with such startling spontaneity. There is now both a general awareness, and a general consensus, that the collapse came about because socialism as an economic and political system was deeply flawed.

In India, our own extended flirtation with socialism came to an unhappy end a little later, sometime in 1991. A legacy of the four decades under a socialist mindset is a continuing and widespread ignorance of what really makes the free market economy tick. That is why, at the slightest hint of trouble in the market place, so many voices can still be heard calling upon the government to intervene. Like so many idiots asking to be shot in the foot.

That India’s reforms began (unlike in the socialist bloc) a little before our economy had well and truly fallen into pieces, has another unhappy consequence. Many of us have at best a half-baked understanding of the contradictions in socialism which so thoroughly undermined this wonderful piece of theoretical construct. And, while faith in socialism has suffered extensive erosion, it has not been replaced by outright hostility, as in Eastern Europe. This is understandable. For the people of Eastern Europe, the experience would have been like being thrown into an inferno and coming out burnt and scarred. The Indian experience, by contrast, was milder and involved rescue before permanent damage. This explains why a decade and a half after that near-fatal encounter, ideas inspired by socialist idealism still keep popping up in our public discourse with such appalling regularity.

Why did socialism give up the fight without a fight? Within the unrepentant leftist movement, some of the more moderate voices attribute the collapse to political reasons like the lack of the essential freedoms of a democracy. A prominent left wing economist speaks of a “democracy deficit” that let the system down. This is a hypothesis easily refuted. All you have to do is to think of the major economic success stories in the last two decades.

The most talked about example is China and we know very well that this country has an acute democracy deficit. Singapore, a city-state that began its existence in the 1960s as a collection of fishing hamlets, is now an economic powerhouse but far from being a model democracy. Hong Kong was administered for long as a colony by the British, without much of a say for the local people and that is how the Chinese are carrying it forward today. South Korea, Taiwan and Chile are prosperous democracies these days, but at the relevant points in history when their economies took off, they were dictatorships for prolonged periods.

The point is clear, beyond debate, and therefore needs an emphatic reiteration; the collapse of communism in the Soviet Union was driven by economic failure. It took 70 years in the making because this was, after all, a militarised and totalitarian society. The order and enforced discipline made sure that some good things would also come out which served to paper over the cracks. That is why even as its foundations were eroding and the contradictions catching up, the socialist state managed impressive strides in education and healthcare and maintained a semblance of full employment (The quality of output from the ‘full’ employment was, however, a different matter altogether).

When socialism collapsed, the largest pillar that gave way was the role of the government in the economic sphere. Under socialism, government was an overbearing, overarching presence which stifled creativity and initiative and standardised mediocrity. The example of collectivised agriculture in the former Soviet Union is telling. About 97percent of the total land under cultivation was farmed by the state either through collective or state farms. The remaining 3 percent was allowed for private farming and it accounted for 1/3rd of the total agricultural output of the country. Not surprisingly, the Soviet Union was a frequent importer of food grains, from Australia, Canada, Argentina, and its nemesis, the United States.

The United States is today is the richest and most powerful country in the world. It has been so for the best part of the 20th century. It stands to reason that for this country to have come so far, its government must have done a lot of things right over the years. The US does not have a public sector in the way we have, although the federal government does run a bureaucracy that, critics say, has become too vast and too costly. The US government does not own any airlines, oil refineries, commercial banks, factories producing armaments, warplanes, cars or whatever. And yet, this country has a powerful, influential section within its intelligentsia who distrust big government and want its role to be kept to the minimum possible. They believe in the government getting off the backs of its people.

The contrast with India is striking. For the best part of 40 years after independence we wasted our time trying to build a welfare state on a foundation of unrelenting poverty. In the pursuit of equity, our national preoccupation was with dividing the cake, no concerns about growing or enlarging it. Our government invested heavily in airlines, oil refineries, commercial banks, insurance, factories making armaments, warplanes, cars, watches, scooters, metals, textiles, coal … name an activity and there’s a fair chance that there is a public sector enterprise involved in that. Our experience in economic development gave birth to the notion of the ‘Hindu’ rate of growth, to this day one of the finer examples of sarcasm in economics. It is painfully obvious that our government got it wrong on so many counts. And yet, our intelligentsia continues to be dominated by people whose most creative utterances are peppered with “the government should do this, the government should do that.” Having shot themselves in one foot, they now seek parity for the other foot.

Our greatest achievement to date  our world class IT industry  grew into a giant because the government for many years was unaware of what was taking shape and forgot to both tax it and throttle it. Our next best achievement  the telecom sector  took off when the government of the day had the courage to step back and let in the private players after the state monopoly had become a model of sloth and inefficiency.
In fact, examples abound to show that whenever the government steps back, productive forces are unleashed in the economy.

Why, then, do governments have this uncanny knack of making a mess of it even when their intentions are good? Here is an example that gives more than an ample hint.

As usual, I shall ask you to imagine that you are the top government official in a remote poverty-stricken district entrusted with the mandate of improving the lot of the people. During your travels, you come across two neighbouring villages separated by a river. There is frequent movement of people and a flourishing trade between the two sides carried on country boats operated by a community of indigenous boatmen. In a particular year, you receive substantial funds from the government to be spent on roads and infrastructure projects. And you decide to build a bridge across the river at the point separating the two villages. After all, it makes so much sense with all its potential for improving the lives of people on either side, with improved connectivity, access to markets and by further integrating the economies of the two villages.

But no sooner is the decision announced  although a thought experiment, it is still set in India  that all hell breaks loose. There is a virtual revolt by the community of boatmen. They fear, and rightly, that once the bridge is built, their livelihood will come to a halt. Fortunately, unlike our current crop of politicians, you are made of sterner stuff. So, even when you get frantic phone calls from the local MLA and then one from the MP, you remain steadfast. You are convinced that this is what progress is all about. The likely harm to a few cannot and should not be allowed to hold back progress for so many.

And then one day, you receive word that the leader of the boatmen is at your office and wants to meet you. He walks in with a young boy, a spare, slightly-built man with the weather-beaten face of one who works in the sun all day. There is no hostility, no defiance in his tone, only an abject helpless pleading. “In my family, like all our community here, we have all been boatmen for generations. But my son (and he indicates the boy) is the first to go to school. My only hope in life is to see him grow up with an education so that he does not become another boatman.” He pauses, as he gathers his thoughts. “But if that bridge goes ahead, that will be the end of an occupation for me and the end of school for my son. I just don’t know what will happen to us.” The tears well up in his eyes and he looks down. This is a proud man but today he looks beaten.

Even as you don’t say anything, you look at his son. And, as he holds your gaze, his eyes have the same look of helpless pleading. It is a poignant moment. What you hold in your hands is a power that in its own way is greater than that of life and death. It is the power, literally, to make or break a life. And you must decide.

I will end the story here because my purpose is not to tell a tale but to make a point. It is a simple proposition that by now should have been drilled into our consciousness. And yet, we are in many ways farther from this truth than ever before; that when governments overreach into the economic sphere and arrogate to themselves the powers to decide what should and should not, what can and cannot be done, more often that not, the decisions go against the long term interests of its own people. And this is particularly true in a democracy where it is necessary to be seen as being responsive to the people. Because, in practice, it is always expedient to respond to the pressing concerns of a section of the people, than to be true to a general concern for progress of an entire people.

And that is why countries where governments have a large, disproportionate say in the economy end up poorer and more backward than those where the government’s role is limited to, and subject to, well defined and robust boundaries. The United States of America is today the richest and most powerful country in the world today. It is not a coincidence.

MOORE’S LAW AND THE END OF THE COLD WAR

An important reason why life has changed so dramatically for so many of us, and in such a short span of time, is the spectacular progress achieved in the world of computers and technology. In 1965, Geoffrey Moore predicted (in words to the effect) that every two years, there would be a doubling in the processing power of computer chips. This is now known as Moore’s law and it has broadly held true ever since.

As much as this law is about the exponential growth of computing power, I also believe it is about the power of human enterprise, initiative and open markets, united by freedom and undivided by borders, to deliver results far beyond what the human imagination can realistically conceive.

I like to imagine how this law would have played out in the former Soviet Union. Here is my guess about the likely scenario. To begin with, all research into computers, microchips, semi conductors etc. would be centralised at the massive, publicly funded, V I Lenin Institute for Information Technology, employing an army of scientists, bureaucrats and assorted hangers-on.

At the beginning of the year, the Director of the institute would receive a mail from the country’s planning commission setting out the targets to be achieved in the various areas. The planning commission would, very likely, have set ambitious targets for the growth to be achieved by the economy as a whole and also the various sectors within it. So, if the country is to grow at 8 percent, it would make sense to demand that the Institute deliver chips with a processing power 12 percent, 15 percent and maybe even 20 percent (the sheer ambition!) more than what was achieved the year before.

Assuming that the institute functions like any other government run establishment, it would likely end up at the year-end achieving an increase somewhat short of the given target. Also, they would work hard on good, scientifically plausible excuses as to why the entire target could not be met. Of course, it is also conceivable that the scientists at the institute are fully aware of the true potential in this field (unlike the planning commission mandarins), and actually achieve a 40 percent increase. But then, they choose to deliver only 20 percent for now, in order that the next year’s target becomes a breeze, when they can sit back and relax and yet deliver the plan target.

The reader is welcome to think of alternative scenarios but it is unlikely that the Institute (or the wider research establishment in a command economy) would have delivered double the processing power every two years and that too over a span of three to four decades. Not surprisingly, Moore’s Law under central planning would then have been a doubling of processing power not every two years as in a free economy, but perhaps every four years, or more, and with no warranty about the bugs.

With this kind of difference, and over the course of a decade or two, it is quite likely that staggering differences in the processing power would have opened up between the western chip and the Soviet version. I have long suspected that one of the reasons why the Soviet economy fell significantly behind its western peers  a process beginning in the mid-70’s, and really the basic reason for its collapse  was the shortage of computing power for day to day economic activities. In order to compete militarily with the west, the Soviet economy would necessarily have had to reserve the major chunk of its best computers for military uses like designing warplanes and missiles. This would have starved the civilian sector which would then have been forced to rely on inferior alternatives like the humble calculator or even the pencil and paper (with assistance from the good old logarithm tables).

Of course, such a view would run counter to the established wisdom in the west, cherished particularly by the Republican right-wing in America, that the Soviet Union bled to death because it could not keep up with the quantum jump in military expenditure during the Reagan years. Add to this, the huge cost of fighting the unending war in Afghanistan (where the insurgency was armed and funded by the CIA), and it became the final tipping point. From the Republican perspective, this is all very convenient. You can now follow up with the claim that Reagan was the (Republican) President who won the cold war for the west. And from this point, it is only a short walk to putting a halo around his head.

I must say that even as I disagree with the Republicans on this one, I also sympathise with the view. It does convey the desirable impression that the cold war was won the hard way, the macho way, by standing up to the enemy and not blinking. As for my view (admittedly less popular), it has to be said that Moore’s law would likely have held true irrespective of the actions of the American government and its military, and without heed to the billions they spent on armaments. After all, it draws its momentum from the efficiency and otherwise inherent superiority of the capitalist economy, and not from orders barked out by someone wearing the Pentagon’s stripes.

An admission, therefore, that the cold war was really won by Moore’s Law holding true over a couple of decades and more, would be a let-down. It is hard to imagine an American general puffing up his chest to say, “Yeah, we won the war, and we’ve just figured this out. It was thanks to Moore’s Law.”

GOVERNMENT SPENDING AND PUBLIC WELFARE

(On the economics of the heart vs. the economics of the brain)

In a poor, developing country (which, by the way, India still is) a problem the government faces is how to spend the limited money it raises by way of taxes and other sources. The means are modest and the claims on resources are many. In such a situation, how should the government prioritise its expenditure.

Here is an experiment that gives an ample hint. Imagine you are the top government official in a poverty-stricken village with the mandate of improving the lot of the people there. You have at your disposal a very modest grant from the state budget but full freedom and authority to decide how it should be spent. Since this is only a ‘thought’ experiment, and since you are the government official, we shall assume that your intentions are noble and that corruption is not part of the equation (somewhat divorced from reality but acceptable for an experiment under ‘controlled conditions’ as they say in science.) In the course of your duties, you come across the following cases where the money you get from the government can be well spent.

There is an elderly gentleman living alone, in failing health and badly in need of unaffordable medical care. Next, there is a tragic case of a pregnant young widow with no means of support whose husband had recently died in an accident. The third case is that of a family with a young kid in school where the husband has recently lost a job in a city textile mill. He now survives on menial jobs and feels he must pull his son out of school. And lastly, there is an ambitious young man who works in the city as a petrol pump attendant and would like a loan to get started with his own grocery store in the village. The funds with you are sufficient to support only one of the above claimants and no more. Who would you support with the government’s funds at your disposal? Take your time and think over it. In the meantime, here is my conclusion.

Societies where the prevailing value system mandates the flow of scarce resources towards any of the first three claimants (does not really matter which one) are those likely to remain poor and backward for extended periods of time. The society which makes it easier for the ambitious petrol pump attendant to have a first claim on the funds would be in the forefront of countries breaking free from the confining shackles of poverty and underdevelopment.

The logic may be explained thus. Government expenditure is most effective in promoting the long term and sustainable welfare of its people when there is a multiplier involved. In other words it must do good and that good in turn must lead to other good things coming out of it. More precisely, government expenditure should head in that direction where the multiplier is the greatest among the competing alternatives. In the example I have given above, there is clearly no multiplier at work in aiding the elderly gentleman. There is some long term multiplier in the case of the young pregnant widow and that of the family with the school going child. But not to the extent as in the case of the petrol pump attendant who wants to invest in a village store, with all its potential for fulfilling a real need of the villagers and of kick-starting the local economy.

The funds given away to the first three cases would essentially constitute charity and would necessarily entail more of such spending in the coming years with little visible difference to the village economy at large. The petrol pump attendant, on the other hand, would require money only for this one year, to get started. Not only are you free to fund other projects or cases in the coming years, the likely repayment of the loan would allow you to double your future outlay. Incidentally, the choice of occupation for the young man was no accident. Dhirubhai Ambani began his career as a petrol pump attendant.

In a sense, what I have outlined here is an example of the perennial clash between the economics of the heart versus the economics of the brain. One is all about feelings and emotions, and those essentially fuzzy notions of justice and equity. An extreme and distorted form of this is what we would call populism, where rather than merely ignoring the long term benefits, you actually go about doing harm to it to secure your short term compulsions. The other side of it, which may aptly be called ‘economics of the brain,’ appears heartless and cruel, but over the long term works wonders for its citizens.

In India, improbable as it may sound, something like this actually happened and with remarkable success. Back in the mid-sixties, during the early phase of the Green Revolution when the country was reeling from food shortages and from the ignominy of the PL-480, it was consciously decided that the target group for spreading awareness about the use of High Yielding Varieties of seeds would be not the poor marginal farmer but the relatively better off farmers with larger land holdings and better education. It was reasoned (and quite correctly too) that these farmers would be in a better position to assimilate the new techniques and deliver results. In the event, one of the criticisms against the green revolution is that it increased rural inequality. But considering that it freed us from both the food crisis and the PL-480, few of us would care to deny that the exercise was well worth it. Indeed, to this day it remains one of independent India's greatest achievements.

This is a critical lesson people in India are yet to fully understand. The matter of economic policy has to be guided by reason accompanied by a sense of detachment. When you bring in the heart, what you get is a palliative and never the bitter medicine that actually cures the disease.

A government that defines its purpose as the business of attending to sob stories, is never out of business.

LIBERATING THE POOREST OF OUR POOR

(A radical new plan for attracting private sector investment into the education of the poorest and most deprived of our children to give them a way out of the vicious circle of poverty)

There is just no denying that despite India’s recent economic achievements, large parts of our population continue to see little improvement in their day-to-day lives. What is perhaps worse, they also have very little hope for a better future. A telling statistic is the continuing and widespread prevalence of malnutrition among children in India. At more than 40% (and greater than in sub-Saharan Africa), it is the surest indicator of the blighted future that lies in wait for so many of us.

The problem is not just that so much poverty exists, but that given current realities, it is likely to be handed down as a cruel legacy from poor parents to children who remain poor because they would lack the skills to pull themselves up. Either they do not go to schools or they are forced to drop out early on.

We know from experience – so much so it’s now an entrenched part of our collective wisdom – that there are limits to what the government can do. The Indian story, in common with many other countries, has been that government efforts have in-built elements of waste, inefficiency and graft that compel the use of disproportionate resources to achieve even modest goals. Therefore, attracting private sector investment into this whole area of educating and otherwise taking care of our most vulnerable children  those who have clearly slipped through the mesh of the existing, woefully inadequate schooling system  would be an ideal solution to strengthen and supplement government efforts. But having said as much, the problem is also equally clear. How do you draw their interest into ventures that offer no profits and therefore no motives other than charity? To some extent, it can be remedied by a well-structured series of tax incentives. But the prospect of losing out on current revenue when governments are generally strapped for cash, has strictly limited appeal.

Here then is a new idea. I propose that the private sector be invited to set up schools and educational institutions for the very poor and disadvantaged (or take them into existing quality schools and colleges) with the incentive that as when such children grow up and start earning their livelihood, the income tax paid by them to the government over their life-time would go to the entity that nurtured and educated them. The beneficiaries will be under no obligation whatsoever to their benefactors. Nor will they be required to do anything out of the way. Instead, using modern information technology, the system would essentially involve a centralised database that would automatically pick up the income tax collected from them and match it with their benefactors.

The basic idea – of enlisting the services of a more efficient private sector for an identified national cause, by offering them a share of the future gains that accrue from the venture – is actually not very new. Something like this has already been put into successful practice for building up our physical infrastructure, as in getting private entities to build roads by allowing them to collect and keep the toll for a defined period. Thanks to this, India’s highways have changed beyond recognition, all in the space of a few years. And now, I suggest it is time for this idea to be extended to our social infrastructure as well.

Of course, once it is required to be put into practice, a lot of detail and fine-tuning would be needed. Should it be the whole amount of the income tax paid or only a part? Should it be for the lifetime or for a pre-determined period? How do you ensure that only the genuinely poor benefit? What about kids who do so well out of it that they get jobs abroad and do not pay any tax here? Or how about someone who becomes a successful businessman and understates his earnings? And then, if there are different schools and colleges involved in a particular case, who gets what and how much?

I believe these are at best minor quibbles. After all, we live in an age where technology offers many easy solutions to problems of centralised data and record keeping. While there are procedural aspects to be sorted out by thought and debate, the important issue is to reconcile to the idea of private participants motivated not by altruism, but by future profits. Yes, this idea is about bringing in the element of windfall gains into the area of education for our poorest and most miserable. Much in the way that privately owned companies drill for oil and continue to drill even when some wells turn out to be dry, the private entities would have a powerful incentive to look after and take care of some of our most vulnerable children and their families and lead them out of the vicious circle of poverty. They would know that even if a small minority plucked from our poorest could be nurtured to join the ranks of our wealthy and successful, they would be looking at mega profits.

As for the beneficiaries, every child who emerges with some degree of success would have pulled up one family out of this vicious circle of poverty begetting more poverty. And as for the government, the only sacrifice is the loss of that future income tax revenue that anyways would not have accrued but for this idea. Besides, in a country like India where indirect taxes account for much of the tax revenue, it is not that by forgoing the income tax component, the government loses out on everything. On the contrary, it will continue to earn (and earn substantially more) from all his purchases and consumption that will continue to be taxed.

I believe it is a revolutionary idea. I also believe that it is a simple idea that can actually be implemented without too much of a hassle. I hope that this simplicity is not its undoing. After all, we are once again in a milieu where ideas to fight poverty are considered worthy and genuine only if it involves the government stepping in with ever more grandiose ‘poverty alleviation’ schemes involving hugely increased expenditure riding on the back of increased tax collection from the rich.

The idea of doing good to the poor has only so much appeal. The idea of being seen to be hurting the rich carries more cachet.

But that is another sad story.