Desicritics Category: BizTech: Development

India and Pakistan - Future Scenarios

Sandeep Bansal — Tue, 2 Mar 2010 07:46:17 EST

Sixty three years ago, the two countries started their journey, torn by bitter memories of partition. The relations between the two nations have been troubled right from the start. Two similar examples from around the world the come to mind - West Germany and East Germany, and the two Koreas.

There are some basic similarities. These countries too had to go through a bitter partition. They followed different political systems and were bitter rivals of each other. One essential difference is that they essentially were one country - i.e. both East and West Germany claimed that they represented the entire Germany. Same is true in case of North and South Korea. In case of India and Pakistan, their rivalry is essentially over Kashmir. Though India was earlier a united country, it is extremely unlikely that partition can be reversed.

The German Story

After the Second World War, both East and West Germany were essentially poor and devastated. But West Germany under the allied influence, introduced free market reforms. It also benefited by large scale aid by the US. By the 1960's and 70's, there was large and visible difference in conditions on the two sides of the border. People in East Germany wanted to move to the West in search of a better life. The Berlin Wall was constructed to stop this. The difference in living standards continued to increase. Perhaps it was the aid from Soviet Union that was keeping things just about together in East Germany. In late 80's, Soviet Union was badly battered in Afghanistan. As a result, it could not continue its aid to the East. The Berlin Wall collapsed.

The Korean conundrum

The story between North and South Korea is somewhat similar. Both countries have remained bitter rivals since the end of the Korean War in 1953. Both countries have contrasting political and economic systems. While North Korea is a totalitarian dictatorship with centralized economy, South Korea is a democratic country with free markets. North Korea implemented land reforms, introduced free health care and education. At one point of time, its HDI indicators were better. However, gradually South Korea's export led economy has moved way ahead. Today its HDI indicators are much better. Its per capita income is $20,000 as compared to a minuscule $1100 in North Korea.

Sung Yoon Lee in his article in ForegnPolicy says,

In contrast, beyond North Korea's southern border lies a free and affluent Korea, one that claims sovereignty over the entire peninsula and to which millions of Northerners would move if given the choice. By its mere existence, Seoul poses an omnipresent existential threat to Pyongyang.

In his article, Lee predicts that North Korea like East Germany cannot survive forever. It will collapse at some point of time. It must be noted that it currently receives aid from China (just like East Germany did from Soviet Union) and South Korea without which vast proportion of its population would die of hunger.

Comparing India and Pakistan

Can such an eventuality occur in the Indian Subcontinent? On one side we have India, a democracy (with its own flaws), an rapidly growing economy and rising living standards.But it is also the home the largest number of poor, there is growing rich-poor divide and a growing Naxal violence. On the other side of the spectrum is Pakistan, at best is a military controlled democracy, a country that is battling with an identity crisis, is a nuclear weapon state, is said to be source of terrorism worldwide.

Small signs of such a thing are present. Pakistanis today are worldwide seen with suspicion. They are lined up and frisked separately at airport. Many Pakistanis abroad claim themselves to be of Indian origin in order to escape this. Some Pakistanis artists like Musicians also want to get hold to an Indian Passport. Of course, these people are a small minority.

But is such a thing really possible. My answer to that will be for the moment, NO. The difference in prosperity in the two countries isn't that huge. India's rank according to HDI index is 134 while that of Pakistan is 141. As per Wiki, India's per capita income $1022 while that of Pakistan is $1017. Our Gini ratio is actually higher at 36.8 as compared to just 30 for Pakistan. Historian William Dalrymple too writes that there is little difference.

On the ground, of course, the reality is different and first-time visitors to Pakistan are almost always surprised by the country's visible prosperity. There is far less poverty on show in Pakistan than in India, fewer beggars, and much less desperation. In many ways the infrastructure of Pakistan is much more advanced: there are better roads and airports, and more reliable electricity. Middle-class Pakistani houses are often bigger and better appointed than their equivalents in India.

However, he goes on to point out some major differences - landholdings. democracy and education. Soon after independence, land reforms were introduced in India. This was promised the Congress. In fact, this is often referred as one of the reasons of creating Pakistan, (protecting the interests of Zamindars). In Pakistan, this feudal system still exists and as a result there is inequality and social tension. Pakistan has seldom enjoyed Democracy. However, often freedom is difficult to directly quantify when it comes to measuring prosperity. Regarding education in Pakistan, he writes

No problem in Pakistan casts such a long shadow over its future as the abject failure of the government to educate more than a fraction of its own people: at the moment, a mere 1.8% of Pakistan's GDP is spent on government schools. The statistics are dire: 15% of these government schools are without a proper building; 52% without a boundary wall; 71% without electricity.

This education gap is the most striking way in which Pakistan is lagging behind India: in India, 65% of the population is literate and the number rises every year: only last year, the Indian education system received a substantial boost of state funds.

But in Pakistan, the literacy figure is under half (it is currently 49%) and falling: instead of investing in education, Musharraf's military government is spending money on a cripplingly expensive fleet of American F-16s for its air force. As a result, out of 162 million Pakistanis, 83 million adults of 15 years and above are illiterate. Among women the problem is worse still: 65% of all female adults are illiterate. As the population rockets, the problem gets worse.

Currently, India's literacy rate is 65% and should increase to 80-85% by 2030. One obvious concern here is what is the quality of this education and are these people employable. And I am sure even in India, there are schools that don't have proper building or electricity(particularly in the Naxal belt).

Nevertheless, India is way ahead of Pakistan in terms of education. But another concern is that a large proportion of the population receives education through the outdated Madrassa system.The so-called secular forces are merely promising reservations for them, even though in 60 years, reservations haven't made enough impact on SC's and ST's. Reservations were supposed to be an instrument that removes the caste identity. Instead it has only strengthened it. A divide based on religion is even more dangerous. Ironically, it has been the so-called communal party that has talked about reforming the madrassas, something that has been looked with suspicion by the community.

Future Scenario:2030

Where will India and Pakistan be in 2030 economically, this is an important question. Will there be any difference in the level of Indian prosperity with respect to Pakistan change?

Over the last 20 years our economy has grown consistently. In the last five years, we have grown by nearly 8%. There are rumors that we are capable of achieving 9-10% growth rates. Let us assume that we will grow at an average of 7% over the next 10 years and at 5.5% in the subsequent 10 years. The growth rates will come down because of base-effect. Despite these highly conservative estimates, India's GDP would be at least 4.2 trillion dollars. Our rate of population growth has been coming down consistently and present it is roughly 1.55% (Source). Assuming an average growth rate of 1.45% over the next 10 years and an average of 1.35 over the subsequent 10 years, our per capita GDP should be roughly 2700$ in 2030.

What would the number be for Pakistan? Under Musharraf, from 2002 to 2007 Pakistan did post impressive growth of 6-7%. But such stability in the country is rare. In 2009, the growth rate was just 2%. Assuming an average growth rate of 4% over the next 10 years and 6% over the subsequent 10 years(highly optimistic considering the frequent bomb blasts and terror attacks), in 2030 Pakistan's GDP would just be $436 billion. Assuming its population grows at 2% and 1.8% as against present figure of 2.2%, its per capita income would in 2030 would only be around $1800.

These are highly conservative estimates and the real picture might actually to be much much better than this.For example, considering current education levels in Pakistan it is highly unlikely that they can sustain such growth rates of 6% over such long periods. Despite this conservatism, India's GDP would be 10 times that of Pakistan while per capita GDP would be 1.5 times. More likely figures are that our GDP will be 14-15 times that of Pakistan and per capita GDP will be around 2.5 times that of Pakistan.

Impact of this growth

India's GDP would be at least 10 times that of Pakistan. In another five years time, India's economy would overtake China as the fastest growing economy. This should translate into enormous leverage for us. Around 10-15 years ago, China's human rights record was severely criticized everywhere. But one hardly hears that today. China's influence was very much visible at Copenhagen.

India is bound to enjoy similar influence by 2030 or even before that. By 2030, India would have almost certainly hosted the Olympics. We are not even sure whether Pakistan could host even the Asian Games by then

I do not foresee a Germany like situation which led to the reunification of Germany. But I do expect that if there is appreciable difference in prosperity and if this grow is inclusive, domestic support for terror is should come down appreciably.

Another important thing is that if there is an appreciable and visible difference in prosperity, it shall become increasingly difficult for the Pakistani Military to continue with its astronomically high defense expenditure. Presently India spends around 2.5% of the GDP on defense while Pakistan spends around 3.5-4%. Hence, in 2030 our defense budget should be close to 100 billion dollars ( 2.5% of 4.2 trillions). This would be 25% of the Pakistan GDP in 2030. Naturally Pakistan would try and match India's defense expenditure by increasing its defense to atleast 8-10% of the GDP.

There would be increasing public pressure against this and unrest among the people would rise. This would result to much more Army control over the civilian Govt and military highhandedness. Thus most probably by 2030 Pakistan would under direct Military control.Furthermore, the increasing military asymmetry would force Pakistan to lower its nuclear doctrine. Thus the sub-continent would actually become a much dangerous place in 2030.

Limitations of this analysis

The methodology of this analysis is just too simple to cover everything. First, the GDP figures are based on nominal values rather that PPP. Using purchasing parity method, the comparative figures would actually improve significantly for India.

Secondly, India has been lucky to have stable Govts. at the centre since 1999 and increasingly governance is becoming the sole criteria that is used by the people while voting. What if there is a hung Parliament. India has previously witnessed this during the 1989-91 and 1996-98. During this period, the growth was minimal and reforms were stagnant.

Thirdly, merely achieving these growth rates are not sufficient. Whether this will translate in improve in prosperity. Whether this growth will be inclusive. Whether all communities including the Muslims who are currently lagging behind in all social indicator be a part of this growth. Will the Maoists be suppressed. Will the development reach the Naxal belt.

Finally, will there be any war either with Pakistan or with China. War could change the above numbers. Of course any resolution with either of the two will also improve the numbers vastly.

These are extremely difficult questions and only time tell. However, if India plays its cards well, great glory is awaiting us. For Pakistan, it is important to understand that India's rise is inevitable. It will be their choice whether they would like to be a part of this growth or not. It is therefore important for Pakistan to understand that going forward, they will not be able to compete whether militarily or economically.

Politics of Identity - A Discussion on the UID Project

Ruchi — Mon, 1 Mar 2010 07:55:52 EST

By February 2011, India will become the first country in the world to issue its residents biometric-based numbers (UID) to establish identity. For this purpose, the Central Government has constituted the Unique Identification Authority of India (UIDAI) under the Planning Commission. The UID number is marketed as a fundamental enabler for efficient delivery of government services and inclusive development. As per the Authority, benefits of the UID number include elimination of leakages in welfare programs like PDS and NREGA, and facilitation of targeted education and health interventions for underprivileged children.

A less publicized purpose of the UID number is to improve national security. The impetus for UID came after the November 2008 Mumbai terror attacks. In January 2009, the Center issued notice to maritime states and two UTs to issue identity cards to all coastal residents. In an interview in the aftermath of the terror attacks, Chidambaram announced Government's decision to set up the UID authority. The UIDAI was established in February 2009, within three months of the attacks. By the Authority's own admission, “The UIDAI is only in the identity business. The responsibility of tracking beneficiaries and the governance of service delivery will continue to remain with the respective agencies”. Presumably “security” is not just a peripheral but the primary purpose of the project.

The UID project underscores the need for transparency of objectives of government programs and the importance of civil participation to ensure democratic end-use. Covert objectives are tantamount to subversion of democracy. Public opinion and approval of this undertaking are contingent on its stated altruistic goals; the Indian populace is unlikely to sanction a project for its own increased policing. Furthermore, since UID is a tool and not an outcome, it is susceptible to misuse by vested interests. Therefore, it is necessary to preemptively block dangerous outgrowths with legislative measures. While continuous engagement with the civil society is necessary to develop a comprehensive list, some obvious safeguards are outlined below.

First, non-enrollment should not be treated as criminal. There's a history of States using anti-terrorism/anti-insurgency pretexts to flout or curtail civil liberties; often political issues are treated like law and order situations. Enrollment is currently discretionary, likely 'cause of the impossibility of universal enrollment of a billion plus. However, there could conceivably be a push for universal enrollment in border, coastal and/or “red” states leading to potential harassment of undocumented individuals, esp. poor migrants.

Second, governments should not use UID numbers to trump individual choice. States should not be allowed to specifically target individuals from insurgent areas, inconvenient political groups etc. Moreover, state agencies should be barred from using UID numbers to withdraw essential services in any area to coerce relocation or discourage migration.

Third, social security services should not be withheld due to non-enrollment. The UID number is envisioned as a tool to monitor implementation of government schemes and programs. Therefore, it is likely that these schemes will mandate UID enrollment before providing services. In the case of social security services, the onus of enrollment should be on the organization, not the beneficiary. Also, the enrollment cost (estimated @ Rs. 20-25 per number) should not be taken from social security scheme outlays.

Fourth, private organizations should be debarred from pooling data to form comprehensive individual profiles to prevent invasion of privacy. The Authority aims to make the UID number the preferred mode of identification for both users and public/private organizations to drive revenue through its identity authentication service. Given an incontrovertible unique number for one individual across all of his/her life transactions creates the tremendous risk of this data being pooled to recreate the individual's life history

Fifth, expenditure incurred should be rationalized and transparent. The UID project comes with no expenditure caps; estimated enrollment costs alone are over Rs. 3000 crore. Unsurprisingly, there is deep interest from multinational technology and private finance organizations. Engagement with civil society will be vital to control ballooning costs and hijack of the project for private profit.

Coming back to the project's stated purpose of forming the basis for efficient delivery of government programs. It is worthwhile to debate both the relevance and effectiveness of the UID number for delivery of welfare schemes. The problem in targeted welfare schemes is of eligibility and not identity. The varying number of BPL families in the country is due to changing eligibility criteria such as income, calories, and other wellness indicators. Moreover, the largest leakages in welfare schemes are due to organized intermediary defalcation not fake beneficiaries. At best, the UID number will address the latter less significant problem.

Additionally, the design of the UID number reduces its effectiveness. The number will only store name, DoB, gender, parent's name, address (permanent and current), photograph and biometric info (ten fingerprints and iris scan) and will only verify identity of individual; defining and tracking beneficiaries, governance of service delivery will all need to be managed at the individual state government, program or scheme level and entail additional expenditure. This approach leaves a huge lacuna in execution and renders already nascent benefits more uncertain.

For instance, UID will alleviate only a small subset of leakages in NREGA and PDS, two of the biggest social security programs. Moreover, this increased efficacy will be contingent on beneficiary identification through biometric readers, which are susceptible to damage and sabotage. Even in the case of mobility, the benefit of UID will rest on administrative and systemic change by delivery organizations to allow transfer of benefits on proof of identity instead of requiring proof of eligibility again. E.g., ration cards for migrating family.

Last, there are considerable dangers to successful implementation. The UID project will require enormous technical capability and reliance on thousands of disparate intermediaries (“registrars”) for accurate and honest enrollment of each resident. In India, all large databases are riddled with errors; some voter lists alone are incomplete and erroneous by as much as 40 percent. Furthermore, the benefits of UID implementation are contingent on near universal enrollment, which is jeopardized by two risks. First, enrollment of individuals without documentary proof of identity rests on the “introducer” system, similar to opening an account at a bank. This strategy is both irrelevant and inadequate for migrant workers (especially those in the unorganized sector) and legions will remain unenrolled.

Second, in the absence of universal coverage (target enrollment at 600 million people or ~50% of population four years from launch), there will need to be alternatives to the UID to obtain service, verify identity etc. Since, enrollment in UID will not be mandatory, but “demand driven” to “access the benefits and services associated with it”, the benefit (one number to prove identity for life) will need UID to be accepted as preferred proof of identity by all significant private and public organizations. Given that UID verification will be chargeable (up to Rs. 10 per verification), private organizations may prefer alternative proof of identity thus further reducing incentive for voluntary enrollment.

The UID project is one of the most ambitious programs in India, without precedence or parallel anywhere in the world. Given its scale, centralization of power and potentially invasive use, there is need for transparency of its purpose with the civil society and a collaborative design process to ensure that democratic ideals of the country are upheld and derived benefits outweigh its costs.

Note: A few people are organizing for a concerted effort to mainstream discussion on UID – if you would like to join, please email me gupta (dot) ruchi (at) gmail (dot) com

China - Censored Growth

sufferingsocrates — Thu, 21 Jan 2010 09:20:46 EST

I am extremely proud and happy to be in India. India could have multiple issues, both regional and religious. But that speaks volumes about the strong emotional bonding that India has enjoyed all through the 62 years of Independence. Notwithstanding hostile neighborhoods, India has continued to be peace loving, and sometimes even too docile for its own good. There is honestly no comparison of India with either Pakistan or China. While Pakistan has been the rogue nation, owing to a politically mismanaged nation and a nation with radicals lurking in every corner, China has been the nation trying to bully around, not only its own citizens, but other Asian nations as well.

Thomas Friedman noted in an article that China is at cross roads of whether to adopt a new age China, or get subdued under the Communist rule. He goes onto mention how China is grappling to come to terms with an increasing knowledge consuming world, which would force the nation to embrace and gain knowledge through multiple channels for its own development. What this would do is inhibit the stringent measures of the Chinese rule, because the exchange of knowledge information needs vast amount of transnational interactions. Human rights violation has been a long discussed issue in China, with executions for crimes being very common, and no freedom for citizens.

Not surprisingly, this is the very reason the Chinese officials are wary of the Web 2.0 revolution and want to monitor human rights activists' actions. One wonders what insecurities should the Chinese have, when it is in the cusp of becoming the second largest economy in the world. The Chinese government is increasingly insecure of uprisings which could arise out of their strict policies. Why else would it raise a cyber army just to track down, hack computers across the world and steal vital information ? Google is threatening to pull the plug from China for this very issue of China hacking into accounts of human rights activists. What China is not realising is, more the restrictions, more are the chances of uprisings and revolts.

In another very disturbing move, China is going to scan text messages to filter out unhealthy or ill-content in mobile phones. What this means is, a Chinese citizen, who may share some passionate messages with his/her spouse over mobile phone could well be jailed and may even be executed ! It is truly unfortunate that China is imposing restrictions in citizens' private lives as well. Already, the rule of a single child in China is coming back to haunt the Chinese. It is resulting in a rapidly aging population in several important cities in China, forcing Chinese to rethink the single child rule. If the single child policy wasn't interference enough in private lives of citizens, scanning text messages is outright intrusive.

For precisely such restrictions and rules that the Chinese employ, it is hard to understand if there will be any emotion or sentiment left in a Chinese citizen. Being patriotic is great, but who would want to be patriotic for a nation which does not allow freedom, even in personal lives ? Who would want to be patriotic to a nation which is always monitoring every single step of any and every citizen ? Which citizen would like to continue in a country, where they live more in fear than for the love of the land ? Consequently, it is not difficult to understand why, any Chinese trained individual would be more robotic than human. Devoid of any emotion or sentiments, be it sportsmen or the army, would automatically tend to be more machine like. Without true love for the nation.

Now think of India. A nation highlighted as being poor, winning Oscars for its slum dwellers. But what India has is, freedom of speech and expression. Sometimes, a little too much of it one would say. But India has stayed on for 62 years with an incredibly diverse populace, and also embracing liberalization along the way. Corruption maybe rampant in India. But pray, where is corruption not seen ? The Indian growth story has been quite remarkable, and more and more honchos in businesses are from India. The world has confidence in an increasingly globalised India, in spite of its infrastructure woes and red tapism. The simple reason is the freedom and the confidence that businesses can flourish in, and that India has the brain power as well as the manpower.

Unlike a Pakistan, India has continued to vote democratically. Though there have been fragile governments, no Indian citizen can complain about the freedom (s)he enjoys.Pakistan is struggling against foes they themselves fostered over the years. India has been the victim of terrorism from Pakistan, and is increasingly under threat from an insecure China. China's insecurity is understandable, with India's increased presence both economically and diplomatically. China is certainly miles ahead economically and militarily, but India and Indians have their hearts in place.

China - No More Gimmicks

Madhan Karthikeyan — Sun, 17 Jan 2010 04:39:05 EST

When a Company grows very rapidly outpacing its competitors and produces a balance sheet which is less transparent, an obvious suspicion will revolve around the company. The doubt arises as there is very less data to support the growth of such company and all that you can see is glowing number in the quarterly/Annual reports. This was the exact case of Enron, the biggest bankruptcy in the history of US. Now, replicate the same analogy for a country in the current economic scenario, which grows very rapidly at a time when other countries even hesitate to say that they are out of recession. This is China for you!

In recent days, a lot of voices are being heard warning about the Chinese Bubble. This started with the Hedge fund Investor James S. Chanos who predicts that China is headed for a crash, contrary to the popular belief that the country is growing at a faster pace. He is the person who predicted the fall of Enron and similar other Bankruptcies. So, nobody is daring to ignore him. After all, that is his job and he has an impressive track record for years. Chanos, a hedge fund Investor simply bets against a Company/Country, as he believes that it will go down in few months. If his prediction is right, it results in an insane amount of money. (Especially, when they bet against the popular opinion). Classic example is George Soros, whose betting against 'Bank of England' earned him $1b in a single night. This was in 1992.

Coming back to China, Chanos suspects that "Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent". He is planning to give a detailed speech about this at the Oxford University by end of Jan'10.

Here are a few factors which raise questions about China:

The Chinese economy is largely based on Exports to US and European countries, which means the Chinese currency 'Yuan' has to appreciate less against the dollar or Euros to continue the impressive GDP growth. China being a growing economy leads to appreciation of their currency, but the Chinese central bank has prevented the appreciation and has kept the exchange rate between dollar and Yuan almost the same for past few years. This largely helped them to maintain low prices for their goods in the foreign market and thus accumulating billions of foreign reserves. Now, you may think that it's plays to the advantage of Chinese economy. But, the economy at such a mass scale doesn't work this way.

When a country has huge amount of money among its people (in a manipulated market, the Chinese central bank prints loads of Yuans equivalent to the dollars), the value of the currency itself decreases. This triggers an increase in inflation, as the price of the domestic goods increases over the period of time. So, to prevent inflation the Chinese government should at least stop the surplous flow of Yuan. This can be broadly achieved by two ways:

1. Increasing the interest of the money that is been lent by the Chinese Central bank
2. Preventing the Consumer banks from lending out more money. This can be achieved by instructing the banks to increase the limit of cash reserves.

However, during the time of recession, the Chinese government infused a stimulus package of around $600 billion dollars into the economy to prevent any huge recession impact. So, this stimulus money along with the existing flows triggered a real estate boom in China, where the prices of lands/home rapidly increased every month and thus creating a 'Real estate Boom'. Now, the government is highly worried by this boom as they have just witnessed on how the US hosing market turned into bubble and got burst.

This is clearly evident from the fact that the government has just announced that they are backing off the stimulus package and have also announced few strict measures to bank on the lending policy.

Now, the Chinese have to control the interest rates, imports and exchange rate similar to adjusting the volume equalizer in a music player. They have keep adjusting the numbers as and when the other value changes.Since the market is in a bubble stage, a small miscalculation can result in disaster.

Moreover, there is more pressure on China from world countries to stop manipulating the Yuan against foreign currencies. Recently, when China surpassed Germany as the world's second largest exporter, Germany had put lot of political pressure against China to stop the currency manipulation. Apart from Germany, other countries are applying similar pressure, as the cheaper Chinese goods are flooding their markets which eventually slows down the growth of in-house industrial houses. Also, there are also threats from other countries that they will stop buying Chinese goods.

All one can conclude is, China will not grow at the same rate as earlier. If it continues to do so, it will not last long for even a few months before which the real-estate boom market will turn into a bubble. For sure, China can expect heavy backlashes from world countries for its continued currency manipulation.

Solar Eclipse and the Haiti Earthquake

Suresh Naig — Sat, 16 Jan 2010 16:03:02 EST

On the day of solar eclipse on 15th Jan, there was a debate in Bangalore specific English news channel. As usual, a scientist who believes in nothing other than science, an astrologer who has a mixed belief system, a rationalist who neither believes in science nor astrology and a moderator who gave an impression that he never listened to anything other than his own voice were assembled in the studio.

It was a live program and so many persons participated in the program asking silly questions most of the time and occasionally sensible ones too. One caller wanted to know whether there could be any connection between the Haiti earth quake and the solar eclipse. As usual the scientist gave an emphatic NO and when asked to explain by the astrologer, he explained Haiti was nowhere on the path of solar eclipse.

It appeared to me that the scientist was arrogant, in the sense that brushing aside anything without an open mind and scientific study is unscientific. Unlike the religion which has strict rituals which cannot be questioned, whereas the question is the essence behind scientific discoveries, if brushed aside could become counterproductive to the very science. Answers to certain questions gave us electricity, anti-biotics etc. If those right questions were not asked by the right people, science at large and we in particular would have been the losers.

When scientists confess that earth quakes cannot be predicted, I understand that it cannot be predicted 'today', with the present knowledge and gadgets in our possession. Our met department has created a model, collating all the details for the past 50 years or so on the monsoon pattern and try to predict the future monsoon with such limited details of half a century, resulting in widely off the mark prediction of monsoon every year. What is wrong in collating the details of past eclipses and earthquakes? Most of the discoveries in the past were serendipities and who knows yet another could be waiting in what scientists brush aside as coincidence.

BRIC Economics - Peering Into The Future

jay — Sun, 10 Jan 2010 09:37:15 EST

Predictions are powerful because when they are made by influential people they become self-fulfilling prophecies. Witness the result of the BRICs report by Goldman Sachs. That report published in 2001 set in motion a great flight of capital into the emerging markets of China, India and Brazil propelling them into the next stage of economic development. This report and its aftermath turned out to be such a big success that the projections are now being revised even more favorably towards these countries with China projected to overtake the US as the world's largest economy by 2031 several years earlier than the original predictions.

Now, the Carnegie Endowment, a reputed US-based think tank has put out its International Bulletin in November 2009 projecting the growth path of the major nations of the world up to 2050. The chart (G20 in 50: available here) effectively uses Google Motion Chart to tell the story of the rise of China and other developing countries, through the first half of this century.

According to this projection, again China is expected to surpass the United States as the largest economy in the world in 2031 with about $23 trillion in nominal GDP (a compounded average annual growth rate of 9.5%). India's GDP at that time is expected to be about $6.5 trillion - 6.65 times what we are today (a compounded average annual GDP growth rate of 9.3%). At around the same period, India is expected to overtake China as the most poulated nation on earth with about 1.47 billion people within our borders.

The story on the per-capita GDP numbers is quite dismal. The standard of living of the people in both China and India although would be far better than where we are today in 2010, it probably will not be good enough to pull a lot of people out of poverty especially in India. The per capita GDP of China is expected to be about $15,000 (up from $3,000 today) while that of India will be a dismal $4,500 (up from $1,000 today). This would mean that by generally agreed yardsticks, India would still not be a middle income country even by 2031 (A country is generally considered to have broken into the middle income category once it crosses the $5,000 threshold in per capita GDP).

One reason this is so is that China's climb is much steeper than India's when you look at how worker productivity is expected to change over the years. While the worker productivity of most countries - especially the United States and China - seems to climb appreciably through the years, India's still ambles along like the elephant that it is.

Economics 101 teaches us that the three factors that impact the economic growth of a country are capital, labor and productivity. Given that India will not be short of labor and perhaps will have sufficient capital chasing it, it is clear that increasing productivity will be the way to grow faster. In fact this is one area where India has done a really bad job. This has been our bane for decades until now and may continue to be so. Although technology is considered to be the biggest contributor to increasing productivity in developed countries, in India there are many other factors contributing to lower worker productivity. Its dismal infrastructure (power, roads, water, ports etc) is a major contributor to inefficiencies. So is its tardy implementation of any projects that it takes up. If we continue to keep the "chalta hai" attitude that we are famous for, then India will be condemned to remain a low income country for decades to come.

Experiments with Truth

mbjesq — Sat, 5 Dec 2009 12:09:28 EST

"When a thing is true, there is no need to use any arguments to substantiate it," wrote Vinoba Bhave. Oh really?

Like so many of the wonderful aphorisms spun by Gandhians about the nature of truth (and, principally, by Gandhi-ji himself) this inspiring line from Vinoba-ji is itself true only in the most metaphysical and therefore trivial sense. Truth, it seems, isn't a requirement for a socially, politically, or spiritually stirring catch-phrase, even when the very subject is truth.

Naturally, we give guys like Gandhi-ji and Vinoba-ji the benefit of the doubt. They were not only among the most brilliant men of the twentieth century, but were impressive in both the purity of their motivations and clarity of their ethics. The moral certitude of the line quoted above would, however, feel quite a bit sketchier were if it were attributed to, say, Dick Cheney, Donald Rumsfeld, or George W. Bush, all of whom might be equally plausible authors.

There are good reasons not to be too hard on Vinoba-ji. Sure, he failed to recognize that almost all the fun lies in the argument and very little of it resides in the ultimate truth of the matter. But fun wasn't really his big thing. And we must readily acknowledge that it is convenient to be able to offer the occasional pronouncement without having to "show your work", as though all of life were a high school math exam.

I spew this kind of unsubstantiated crap all the time. Sometimes I get called on it; often, when the things I say have the veneer (if not the deep resonance) of truth, I get away with it. Which brings us back to Vinoba-ji - and to our story.

I live half of each year in the country Gandhi-ji and his faithful lieutenant, Vinoba-ji, made. India fascinates and perplexes me; and I find nothing more confounding than the paucity of ethical (or even effective) political leadership in the place that gave the world these two great men. I am fond of underscoring the tragic irony of the India's useless political cesspool by questioning how this could happen in the country that gained independence through something as ballsy and original as the radical application of nonviolence and achieved the largest peaceful redistribution of wealth in the human experience.

This latter accomplishment, of course, refers to Vinoba-ji's spectacular Bhoodan Land Gift Movement. Between 1951 and 1963, Vinoba-ji walked the length and breadth of India, asking landowners to allocate a portion of their holdings to be given to the landless poor. In that time, five million acres of land were given -- and the movement also established the basis for subsequent legislative land reform in India.

But, a friend asked, is there any documentation to support this assertion that the Bhoodan Movement represented "the largest peaceful redistribution of wealth in the human experience"?

Enter Rahul Brown, who is best known to many as the auteur behind such films as The Law of Love and A Close Shave. Rahul came up with the following calculations to support the claim.

Consider the average price of agricultural land in India today: $4 / square foot, by one estimate. Land within 40 km of a city is presently worth Rs. 20-40 lakh (roughly $44.4K - $88.8K at current exchange) per acre, by another estimate.
Thus, in modern terms, Vinoba-ji's 5 million acres might be worth:

5M acres = 217.8B square feet
217.8B square feet * $4 / sq. ft = $871B

or

somewhere between
5M acres * $44.4K / acre = $222B
and
5M acres * $88.8K / acre = $444B

Rahul was willing to be conservative. He wrote, "Assume that half of the land is totally worthless. (Is anything totally worthless?) That still places the modern value of the Bhoodan Movement at between $111B and $435B USD. This would seem to verify MBJ's comment. By comparison, the Gates Foundation's current endowment is $34B, and the entire foundation world's assets are roughly at $290B."

The long-suffering American wealthy might argue that their tax dollars make Vinoba-ji's project look like chump-change. (People in other countries pay taxes too; but, in the unique American epistemology, if you don't know that other countries exist, perforce they don't -- or at least couldn't possibly matter.) Leave aside the question of whether the direct benefits conferred on taxpayers by the payment of tax disqualifies this as pure wealth redistribution; if the Tea Party class is even half as aggrieved as their ceaseless whining suggests, the taking of their assets by taxation sounds like coercion, deprivation of basic liberty, and barely sublimated violence - hardly peaceful.

That's the argument I'd make in support of Vinoba-ji's achievement. Truth worth arguing for.

Where the BRICs Stand Today

jay — Sun, 29 Nov 2009 02:47:53 EST

In 2001, Goldman Sachs released a report which projected that the four economies of Brazil, Russia, India and China were expected to become the main drivers of economic growth for the world in the coming decades. It was highlighted that these four economies which account for half the world's population would eclipse the current economic leaders in size by 2050. It will be useful to look at where these countries are today 8 years after the publication of that report.

This is not a comparative assessment of the various economic parameters to measure the progress of these countries. Rather this is my subjective opinion of how far each country has moved up the ladder of progress and influence in the world.

China: China is the one country that has moved up the ladder the most among the BRICs and in fact in the entire world. Thanks to its authoritarian regime, it has focussed all its energies to attain its professed goal of being one of the most powerful countries of the world. China understood early on that economic upliftment of as many of its people as possible is the only way to get there. With money comes power, and it has focused on this like a sharpshooter on his target. It was not willing to be distracted by any other irritants like allegations of human rights violations, currency manipulations and massive pollution of the atmosphere. As a result, today China stands tall as the number 2 economy in the world right behind the US eclipsing Japan, Germany and several others.

China Facts:
GDP = $4.3 trillion ($8 trillion PPP)
Per capita income = $3,000 ($6,000 PPP)
Population = 1300 million

Brazil: Brazil, a resource rich country, has been a laggard for most of its existence even after its independence from the Portuguese in the 19th century. It has been behaving erratically for more than a hundred years drifting between strict and loose government controls. As a result, many businesses have been loathe to invest in Brazil and those who did, burned their fingers (Fordlandia in the Amazon is a prime example). However, since 1995 they have got their act together and the country has been showing tremendous progress in the past decade. It has begun vying for high stakes in the world especially under President Lula - the 2016 Olympics being the latest example. It is still precarious to predict how it will fare in the future (because Brazil has promised a lot before, but failed to deliver), but the lamp seems to burn the brightest now more than ever in its history. Brazil has a very consumer oriented economy and is the richest among the BRIC countries in terms of income.

Brazil Facts:
GDP = $1.6 trillion ($2.0 trillion PPP)
Per capita income = $8,300 ($10,000 PPP)
Population = 200 million

India: India's promise has been long heralded but never has it been able to get its act together to benefit from that promise. India's democracy is rather chaotic. All democracies go through arguments but in the end resolve to solve problems one way or another. It appears that Indians culturally cannot come to an agreement on anything and therefore drift along blaming fate for everything that is wrong. This has resulted in India still languishing on various aspects of progress. Although the net result of the past two decades of progress looks reasonably impressive, given the talent and resources available in India it is a pity to realize that much more could have been accomplished. What India lacks is strong leadership with a vision and mission that could guide the country in a specific direction of progress.

India Facts:
GDP = $1.2 trillion ($3.3 trillion PPP)
Per capita income = $1,000 ($3,000 PPP)
Population = 1200 million

Russia: Russia is an enigma in this four nation BRIC cartel. A resource rich country, it is still undecided about breaking away from its past of socialism while trying to get rid of the excesses that accompanied it. Russia's influence today is a far cry from the power wielded by the Soviet Union in the past. The one bane of this country is its over-dependence on oil. It prospered in the earlier part of this decade when the oil prices were quoted in three digits, but has sunk far down the charts since the oil prices tanked. This is an odd ball in this group and may explode or expand spectacularly one day.

Russia Facts:
GDP = $1.6 trillion ($2.2 trillion PPP)
Per capita income = $1,200 ($1,600 PPP)
Population = 140 million

Overall, from a perception perspective, when one looks at the developmental stage of a country, this is where I think each country stands in terms of the quality of life in each country in general.

China = looks more like the USA of the 1980s - they are probably 30 years behind the US - the most advanced country in the world.

India = looks more like the USA of the 1960s - 50 years behind the US and 20 years behind China

Brazil = looks more like the USA of the 1950s - 60 years behind the US, 30 years behind China and perhaps 6-10 years behind India

Russia = unknown

So, BRICs should probably be represented more appropriately as

C-------I--B--R(?)

with China way ahead of the pack, India and Brazil bunched up behind and Russia a question mark.

Many of you may have a different take on this. Your comments are welcome.

Soft Infrastructure Development: Role of Private Sector

Sathya — Sun, 15 Nov 2009 02:47:27 EST

The important role that investment in infrastructure plays particularly in the context of an emerging economy is uncontested. Investments in hard infrastructure have seen much mention in public discourses and do need substantial investments as the nation's saunters towards the path of development.

The magnitude of investments in hard infrastructure like roads, railways and port connectivity automatically enhances the interest in the same and allows for greater focus. However, soft infrastructure is the regulatory frameworks, the belief systems, the financial structures and talent pools that form the foundation on which investments in hard infrastructure can yield multiplier effects in the nation's economic scorecard. A popular line of thought holds that soft infrastructure precedes hard infrastructure and investments in soft infrastructure can generate and attract the capital resources necessary to build hard infrastructure.

Developing nations like ours have seen acute deficiencies in some of the soft infrastructural variables. For instance, in synchronizing the talent pool and the labour market pool - We have been unable to convert our human capital surfeit into demonstrable competitive advantage. A prime reason for this is lack of adequate training structures that can attempt to match the needs of the labour market with the supply and provide the same as training. The abject state of neglect of some of our Industrial Training Institutes(ITIs) speak volumes of the mismatch between what the industry demands and what we can provide.

Soft Infrastructure for long has been equated with social infrastructure and the onus on developing the same remained with the governmental and in the public sector. However, we have argue that private sector investments in this sector create a far more transformative impact than what depending on the public sector alone would have. Also, the investments by the private sector in building soft infrastructure need not necessarily borne out of altruistic motives and can directly benefit the private sector in terms of enhancing operational effectiveness, driving legitimacy and providing risk mitigation structures.

Role of Fab India in integrating its suppliers into umbrella organizations on the lines of cooperatives has structure the chaotic supplier ecosystem.(the local handicrafts, weavers and artisans). The long term sustainability and economic and social well being of this community of suppliers has a direct bearing on the economic well being of Fab India. To this end, the company has been providing training, financial assistance and has put in place an umbrella organization in which the main stakeholders are the artisans and weavers who have equity stakes in these organizations.

The role of ITC's e-choupal initiative in creating a vibrant farming community, improvement and creation of efficient sourcing structures including information transparency and the elimination of middle-men resulting in economic profits directly moving towards the farmers has been well documented.

Another of ITC's initiatives - social forestry by its paper boards business has directly managed to impact the lives of over 70,000 tribal. The tribal have benefited from the economic gains from the high yielding plant varieties supplied by ITC which with its investment on R&D has provided high yield, disease resistance and a shorter harvest cycle - resulting in more guaranteed cash flows for the tribal. For ITC these initiatives have helped in securing supplies for its paper business, helped obtain legitimacy and the same time has helped it become net carbon positive with over 100,000 hectares of plantations.

While both the above examples have been on the supply side, an example of an organization which has innovated on soft infrastructural investments on the demand side is Selco-Solar. Working out of Karnataka, the company has increased the adoption of solar energy systems particularly in the rural areas with deficit power supply. The company in addition to working on product innovations has also worked on financial innovation and intermediation between banks and the rural customers working efficiently to ensure access to capital is not a limiting factor when the rural poor try to adopt solar energy in a quest to enhance productivity. Some of the beneficiaries of Selco's efforts have been the Beedi producers in Puttur(D.K), Areca nut farmers in Sirsi and the silk farmers of Bellary.

In summary, investments in soft infrastructure are drivers of economic and social growth along with investments in hard infrastructure. Soft infrastructure systems precede hard infrastructure and are engines of social transformation. What has for long considered a domain of the governmental action can and should be opened up to private participation and investment - for reasons not necessarily altruistic.

(This Article is the conclusion of a detailed study done by the author as a part of his coursework at the Indian Institute of Management, Bangalore)

Nationalization of Indian Banks and the Financial Crisis

Somik Raha — Fri, 30 Oct 2009 16:34:52 EDT

If one reads media articles of the day, it is shocking to hear the praise given out to Indira Gandhi for nationalizing India's banks in the 60's on account of India's stability in the world economic crisis. While many like the Wall Street Journal have criticized these views, their arguments have been on the minor premise (that India is better off with liberalization) rather than the major premise (that we can judge a historical decision from the outcome).

At the fundamental level, a kindergarten error of thinking is committed every time someone says, "Oh, look how terrible/wonderful the outcome is. Hence, what a terrible/wise decision was made!" The inability to distinguish between decisions and outcomes is a malaise that we have to watch out for. The first cardinal principle of decision-making is that one cannot judge a decision from the outcome.

To make this clear, consider the example of drunk-driving. Almost everyone agrees that it is a bad decision to drive drunk. If I am to drive drunk, and get into an accident, that would be a case of "bad decision-bad outcome." If I am to drive drunk, and still get home safe, that would be a case of "bad decision-good outcome." If I am to drive sober, and get home safe, that is a case of "good decision-good outcome." And it could be that if I drive sober, I might still get into an accident. That is an example of a "good decision-bad outcome."

The fundamental point is that if we know the outcome, then we don't have a decision to make. Decision-making is hard because the future is uncertain. The actual outcome is a result of so many variables that disentangling which action led to the outcome is like trying to catch one's shadow. Decisions should only be judged by the process used to make the decision. Was the decision-maker consistent with her preferences?Did she use the best information available to her? Did she create enough creative alternatives? Did she use sound logic to tie together her information, preferences and alternatives to get to clarity of action? More fundamentally, was the frame of her decision restrictive, or did she challenge the assumptions of her frame? Finally, was there commitment to action? These are also known as the six elements of decision-quality.

To bring home the point that nationalization may have little to do with India's survival in the economic crisis, here is a competing explanation.

The nationalization of banks has been hated by many. My personal experience is with the State Bank of India. My grandparents and parents had an account with the SBI. I thought opening my first account would be a breeze. Accompanied by my parents, I walk in to the office. There, I find that the person who opens accounts is late. The gentleman comes into the office, taking his own sweet time, and then asks me what I want. When I tell him I am here to open an account, he says, "Oh, well, it can't be done today. We are busy over the next two weeks because of several holidays. If you come after that, I should be able to help you." I took my two feet and my business right out of the SBI and into HSBC, where it took fifteen minutes to open the account. While HSBC is not exactly the perfect bank, they understand one thing very clearly - I have a choice, and they have to work hard to give me value if they want my business.

Government banks are not liked by the general public, and if anyone can help it, they bank with the private ones. The problem with India is not that we have too many private banks, the problem is that we don't have enough. Most of the private banks serve the middle class. Very few entrepreneurs have dared to enter microfinance or microventure markets.

Now, you might ask, how may we explain the fact that India escaped the financial crisis? Didn't nationalization help there? To answer this, we have to first understand why the crisis happened in the first place. First, in the 70s and 80s, the US government pushed private banks to give more loans to people in lower income groups. The banks, instead of doing this sensibly, started giving out loans to people who couldn't afford them. The logic was, "housing prices always increase, so if there is a default, we can always seize the property and sell it in the market." Well, that didn't happen. While this kind of silly logic is not surprising, what is surprising is that the finance industry is supposed to have the tools to protect itself agains such a risk. What happened? It turns out that in addition to being pushed by the government to take risk, the conventional tools of finance systematically underestimated the risk (using models borrowed from quantum mechanics that have little validity in the real world). Once a few people get Nobels in economics creating complicated equations that explain the market, no one dares to challenge it. If some one (like Nassim Taleb) does, they get shouted out. The entire financial industry engaged in the same set of dangerous practices, using the same methods and tools that made them feel they were safe. There was no diversity in the system. And so, when the system collapsed, all of them went down together.

In India, on the other hand, bankers have traditionally mistrusted statistics and finance. They understand common sense - if the borrower cannot afford the loan, then no loan should be given out. If the borrower is a police officer, lawyer or politician, there are high chances that they have no intention of repaying, so don't do business in these three categories (I am not saying I agree with these rules, but I am saying that most bankers in India follow some version of this). This mistrust of finance and statistics and reliance on common sense is a huge factor is saving our economy. I suspect that if we did a study, we might find that some private banks that used traditional financial models were badly affected by the crisis.

What is the problem with statistics and finance? Classical statistics is dogmatic about restricting itself to past data and will not allow one's beliefs about the future to come in. For instance, a newspaper report that says Gurgaon's water table will vanish in five years should immediately send shock waves in a banker's mind - all loans under process in Gurgaon should be under review. It doesn't take much to figure that if there is no water is five years, that property will be worthless.

Traditional statistical models will pick this up much later when defaults actually start showing up in the data, by which time, it may not be possible to save the bank. Finance, to the extent that it relies of classical statistics, faces the same problem. Taleb, in his book,The Black Swan, gives the excellent example of the statistical turkey, who is fed for a thousand days, and as each day passes, its belief about getting the next meal increases. Guess what happens on the 1001st day - Thanksgiving! The day before the turkey gets slaughtered, its belief about the future should be the highest given it has the most data with no deviance. That is the problem with all models that are exclusively focused on the past.

There is another big problem with finance. It takes the decision maker out of the decision, and is focused on things like "objective market price." There isn't any. For a trade to happen, two people have to be happy - the buyer and the seller, and both walk away thinking they got a good deal. There are only personal selling and buying price limits that each individual decision maker can place on what they sell or buy. A market is not something we create, but what results when people are left alone. All attempts at gaming or predicting the market have blown up in a spectacular way.

The lesson that Taleb and others have pointed to is simple - stay away from centralization. Let there be diversity. That is what protects us. It is not that hard to understand - if we all have the same genetic make up, then a disease that affects one type of people will wipe all of us out. Thankfully, we are different, and therefore, there are many who are not affected and reserve the strength to help those who are.