Desicritics Category: BizTech: Economics

Risk Manager Role With Afghanistan International Bank

Dr Bhaskar Dasgupta — Thu, 8 Jan 2009 00:45:09 EST

Sometime in the dim and distant past, I had registered myself with an India based job site. This was when my father was ill, and I was considering moving back to India. Anyway, I had forgotten all about it, till today when this email landed in my inbox.

Post Title: Risk Manager
Organization: Afghanistan International Bank
Location: Kabul - Afghanistan
Duration: Permanent
No. of Post: 1
Sex: Any
Nationality Any
Salary: 4000 US $ p.m.+ accommodation + travel+ other benefits.
Background: Afghanistan International Bank (AIB), a commercial bank incorporated in Afghanistan and managed according to international best practices is looking for an experienced Risk Manager for its Head Office in Kabul.
Job Summary: Overall Job Purpose:
Due to rapid expansions of its business and operations the banking is looking for a Risk Manager. The position allows the successful candidate to be part of the senior management team of the bank and play a major role in its continued development.
The successful candidate will be expected to build a risk monitoring systems complying with Basel II requirements thus additional experience in market and operational risk management will be a distinct advantage.
Priority will be placed on credit management and the successful candidate will have had experience in:
1. â€¢ Credit Policies & Procedures
a. Credit policy, review and development
b. Acquisition or development of decision support tools for commercial and retail credit
c. Risk rating framework review
d. Underwriting standards development
2. â€¢ Risk Asset Review
a. Review of individual credit risk ratings
b. Credit quality assessments
3. â€¢ Portfolio Management Unit
a. Profitability and risk analysis
b. Pricing policy
c. Develop predictive dynamic monitoring
Qualification â€¢ Master degree
â€¢ Minimum 10 years experience directly related to risk management where at least 5 years in senior risk management capacity.
â€¢ Fully functional in monitoring of documentation, portfolios & exposure limits of the bank.
â€¢ Excellent analytical, creativity and problem solving skills.
â€¢ Posses good presentation and organizational skills.
Interested candidates can send their CVs with recent photo to this address:

Few thoughts crossed my mind.

The package is a bit low for what is a hardship posting for international bankers, so I am curious to know why would they have selected that compensation level.
Its an interesting job all right, but very ambitious. Candidates for this role with the required background and experience will be relatively few globally.
But it is good to read that they are aggressive, and I wish them luck with their hiring.
I researched the bank on the net and I was not really that comfortable to see that the address of the bank related to some house. Here is the address: House no. 1608 Behind Amani High School Wazir Akbar Khan, Kabul. Reminded me of the addresses I would see in the tiny lanes old Bhopal.
One of the unsung success stories in Afghanistan is the steady development of the banking system. Considering that the Mullah's had effectively eviscerated the banking system, in a matter of 5 months, they have passed a series of banking laws, have presence of many international and local incorporated banks, got some good governmental backing from the Ministry of Finance.
Here is an interesting Afghan review report for the IMF. Gives you hope, no? and no, I am not suffering from the curse of low expectations. Give the country a break, it is starting from near zero.

I further quote some numbers on how Afghanistan has progressed since 2001 from this speech. (even though the verbiage could be a bit optimistic and is after all, coming from a US State Department Employee, the figures, even if adjusted, are noteworthy).

Reconstruction and development work remains on track in most of the country and the Afghan economy continues to grow at impressive rates, with licit Gross Domestic Product more than doubling since 2002. Thanks in large part to our colleagues in the U.S. Government, the lives of millions of Afghans have improved considerably: In 2001, just 8 percent of Afghans had access to some form of healthcare; now, more than 80 percent of the population has access to medical care. Almost 11,000 medical professionals have been trained. More than 680 hospitals and clinics have been built and outfitted. For the first time in 10 years, the grain harvest was sufficient to meet consumption needs inside Afghanistan. In 2001, 900,000 children – mostly boys – were enrolled in school; now, there are more than 5 million and more than 1.5 million of these (34%) are girls and young women. Since 2001, there has been a 22 percent decline in mortality rates for infants and children under 5 years of age – we are saving 85,000 more young lives every year. Two years ago only 35 percent of children were being inoculated against the polio virus. Now more than 70 percent of the population – including 7 million children – are inoculated. In 2001, there was a dysfunctional banking system. Now, Afghanistan has a functioning Central Bank with more than 30 regional branches and an internationally-traded currency. There are now 3 mobile telephone companies serving over 3.5 million subscribers – this is almost 11 percent of the population. In 2001, there were 50 kilometers of paved roadway in the country, now there are more than 4000 kilometers of paved roads.

The main thing which struck me was the sheer banality and normality of this advertisement. A very small thing, but something which gave confidence to me that Afghanistan is improving little by little, despite all the gruesome news coming out of Afghanistan and all the efforts by the Taliban to drag that benighted country back into the medieval ages. Sometimes, its good to see the good side of the story as well. I can only wish the country the best of luck and here's hoping that the Taliban are defeated. And if it keeps on hiring professionals of the type in the advertisement, it can only get better.

PS: then I read something like this and feel very depressed.

Technorati Tags: Afghanistan,Banking,Risk Management

Action Sociology: Human Rights with Sanitation

Somik Raha — Sat, 27 Dec 2008 16:34:43 EST

Ever since independence (and from a long time before that), people in India have been appalled with the abuse of the caste system, especially the poor treatment meted out to "untouchables." As usual, well-meaning people think they can change attitudes by passing laws. And so, India has The Protection of Civil Rights Act, 1955, which punishes the preaching and practice of untouchability. Needless to say, the act made little difference on the ground in terms of changing people's attitudes.

There is no dearth of angry activism on this issue in India and outside, and as is the nature of all angry activism, the message is so loud that people close their ears and ignore it. Meanwhile, India's politicians are more interested in maintaining the status quo and milking caste divisions for votes instead of working for the welfare of the "untouchables." In this hopeless scenario, one man is running a silent revolution with a lot of success.

This is the story of Bindeshwar Pathak, whose life transformed as a young man in the 60s, when he was told by the General Secretary of a Gandhian organization that it was Gandhi's unfinished work to remove the profession of manual scavenging from India and liberate the untouchables. The General Secretary told the young Pathak that he had to finish Gandhi's mission and added, "I see light in you." The young man had no clue what this meant, but he read a few books published by the WHO on sanitation, and decided to live in a scavenger's colony for two months to understand them and their problems. People thought he was crazy. He survived, and came back with an understanding that was different from any social activist in this field.

He felt that the discrimination of the untouchables was due to technical reasons. The untouchables, or manual scavengers of toilets, were considered dirty as they dealt with human excreta while cleaning "bucket toilets." Human excreta would be pulled out of such toilets into buckets and then, scavengers would carry buckets on their heads to a location for disposal. If there could be an alternate toilet designed to be self-cleaning, then it would be cheaper for the consumer as they wouldn't need to hire people to clean it. It would also eliminate the need for the scavenging profession.

Pathak started "Sulabh" (which means "easy") to address this. He came up with the two-pit pour-flush toilet which would work in the Indian context. One pit would be in use at a time. Once the pit was full, it would would be closed and the other would be in operation. Over a year, the first pit's contents would turn into manure and could be used as fertilizer in the field. Thus, there would be no need to scavenge and clean these toilets. Sulabh's toilet product turned out to be a great hit, with over a million pieces already sold. Sulabh then channeled their profits toward retraining the untouchables to enter mainstream society - as cooks, beauticians, electricians, etc. Today, Sulabh has a whole array of toilet products to suit your budget.

Pathak also felt strongly about the problem of open defecation. Unlike those who faulted the "Indian civic sense," he recognized that the problem was that we didn't have enough public toilets. This is also a question of human dignity, especially for women, as they would suppress the call of nature the whole day and only go very early in the morning or in the night. Even so, such trips would make them a target of sexual predators, snakebites, diseases due to defecating in unhygienic environs, etc., not to speak of the health problems that come from suppressing the call of nature the entire day. Again, this was a technical problem waiting to be solved. So, he started the first public toilet in (hold your breath) Arrah, Bihar, a state where people would rather travel on top of trains than buy tickets. Pathak believed people would pay for a clean toilet experience, and he was proved right. The people of Bihar paid and sustained the public toilets. Today, Sulabh has built over 5000 public toilets all over India, including the largest toilet in the world at Shirdi for pilgrims.

Not only do these toilets generate local employment, they also collect raw material for Sulabh's energy innovation - bio-gas and electricity production. You have to see it with your own eyes - yes, your excreta can now be used to produce cooking gas and electricity.

Pathakji also understood that he needed to help the children of the scavengers get the same opportunity as others. Sulabh uses its profits to run a school where children of the scavengers get free education, books and uniforms. They also eat together with children of other communities, and learn Sanskrit, a language they were earlier denied access to. The children in this school are taught all religions so they can celebrate all of India's traditions.

And the story does not end here. Sulabh also has a toilet museum which is now on the tourist maps of New Delhi. They have expanded to eco-sanitation projects that help with pisciculture, among other things. Throughout these projects, Pathakji continued his education to go on for a Phd and a D.Litt, and has coined a new term, "Action Sociology," which he advocates as a way to solve social problems.

Behind all of these efforts is a deep-rooted spirituality. Pathakji's day begins with the entire Sulabh community praying (they sing a universal prayer) and filling their hearts with positive vibrations. When I interviewed him, not once did I sense anger against society for discrimination of the untouchables. At the same time, there was no acceptance of the injustice. Like Krishnammal and Sandhya, and in a completely unique manner, Pathakji has transcended anger and hatred to make a difference, a big difference, through social entrepreneurship. He is indeed a bright light in India who has illuminated our conscience and given us great hope for the future.

You can meet him by going to the Palam Vihar (New Delhi) office of Sulabh International Social Service Organization (although he travels often, he is generally accessible). You can also meet the other heroes of Sulabh and see their toilet museum and a demonstration of bio-gas and electricity from human excreta in the same complex. There are several volunteering and internship opportunities with this organization, if you have the time.

And if you can't visit them, here is a film I made on Sulabh in 2006. I recommend watching it in full-screen mode (press the TV icon) and using headphones.

In case the full screen feature does not work below, you can watch it directly on Blip TV.

Errata: the film says Sulabh has built over 500 toilets, when in fact, the number is ab

Shareholder's Dissatisfaction at Satyam's Board

Ashish — Fri, 19 Dec 2008 10:10:40 EST

If you have been reading the financial papers for the past two days, you would have realized that suddenly something seemed to be happening at Satyam, and if you were more interested, you would have read that suddenly Satyam seemed to be in the eye of a storm regarding issues of corporate governance.

It all started when Satyam announced that it was planning on spending $ 1.3 billion on diversification, and that too, this amount would have been spent on buying Maytas, a company in which the promoters of Satyam hold a 35% stake. This was not a deal that was approved by shareholders, and apparently not even by the board.

The shareholding of the promoters in Satyam is only 8%, with institutions holding a majority, and this action by the promoters saw an incredible reaction on the stock exchange. Immediately after this move, there was a reaction from shareholders, with the ADR on the US market falling by 52%. The next day, financial newspapers unanimously denounced this move as a gross violation of all norms of corporate governance, and in moves that would have scared the promoters, institutions threatened to review whether there is a trust in the management of the company.

Now, this proposed move has been withdrawn, but has left a mark on the management of the company that is difficult to get away; it will take time before the trust quotient can be restored:

Even as Satyam's deal to buy Maytas had to be hastily annulled in the wee hours of Wednesday morning as the company lost 52% on its ADR listed on the New York Stock Exchange (NYSE), a credibility crisis has begun to grip India's fouth largest IT company. "How can we trust the management of this company and its board of directors after it tried to enter into a deal that prime facie would benefit only the promoters who just own 8% of Satyam ? We have to examine whether the management needs to be changed," cried analysts in a reflection of the deep anguish caused by the now stymied move.

"58% of Satyam is owned by FIIs and they had no inkling that such a deal was in the works. There were questions about the future of Satyam after acquiring these companies when it doesn't have any experience in these businesses. It makes more sense to deploy your funds in related businesses or pay your investors," said Sourav Mahajan, analyst with Karvy.

The company is doing fire-fighting, but this is not the US. In the US by now, with company promoters holding 8% and with such a move, there would have a far more critical reaction. Here, institutions typically do not show much emotion even when they hold a majority of the stake in the company; in fact, the public and private displays of reaction is unprecedented. This reaction is obviously not what Satyam was expecting.

However, one expects that with the share buyback announced after this as an attempt to mollify shareholders, there may not be much beyond what has been stated; the only difference being that the management of Satyam (and other companies) would be a bit wiser about what they can do or cannot do. What remains true in this case is that the board of the company proved ineffectual, and needs to be looked afresh.

Book Review: Maria Misra's Business, Race, and Politics in British India

Vinod Joseph — Fri, 19 Dec 2008 01:01:58 EST

I came across this wonderful book while trying to learn a little bit more about managing agency houses which dominated Indian industry prior to independence and for a brief while after that. I heard the term ‘managing agency’ for the first time over 12 years ago while attending corporate law lectures as a law student in Bangalore. ‘Managing agency contracts,’ our highly respected professor told us with uncharacteristic brevity, ‘are banned. BANNED. Companies are not allowed to enter into such contracts any more.’

His eyes conveyed a sense of horror as if managing agency contracts were something very disgusting and dirty, akin to may be the slave trade, as if he could never explain to us youngsters, how horrible a managing agency arrangement was. We students left it at that, not particularly wanting to inquire into something not very relevant for us and add to our workload.

The second time I came across the term managing agency house was when I read Vikram Seth’s A Suitable Boy, the best book about India I have read so far. One of the characters in the book, snooty anglophile Arun Mehra works for a managing agency house. Seth takes some trouble to explain to the reader how a managing agency house functioned and how elitist and exclusive it was, even after India’s independence. However, even Seth does not manage to explain how managing agency houses dominated Indian industry during the British era. Maria Misra manages to do what neither my professor nor Vikram Seth could do (to be honest, they didn’t try to do so), that is, to convey to her readers an image of British India dominated by managing agency houses.

To explain in simplistic terms, a managing agency was a partnership which carried on the business of managing other business enterprises. A typical managing agency would enter into contracts with various companies for managing them. Under Indian company law, as it existed then, shareholders of a company could not challenge or override such contracts, even if they were contrary to shareholder interests. British India was dominated by 60 or so managing agency houses which controlled and managed most Indian businesses.

The usual modus operandi for managing agency houses was to start an enterprise with their capital, execute a managing agency contract with it for a term of twenty or thirty years and then issue shares in the company to investors, who would be stuck with the managing agent. These agencies were run by British businessmen, both English and Scottish, who believed in the racial superiority of the British over Indians, who epitomised the values around which the Empire was built and the ‘white man’s burden’ was discharged. Much more conservative than even the British Indian government, they were at the zenith of their dominance before the beginning of the First World War.

Misra explains in detail how these managing agency houses refused to change with the times and eventually lost out to multinational and Indian owned firms. Misra’s book is crowded with statistics. Misra tells us that senior assistants at these managing agency houses made INR. 3,500 per month, a huge amount of money for those days. Partners would typically retire with a fortune of around £60,000, whilst senior assistants could squirrel away an average of £30,000. Managing agencies paid their employees more than what the Indian Civil Service paid. The managing agents believed that the ideal businessman was a generalist, who would not be too ‘technical’ and who could take a holistic view of the business and its prospects. Technical people were distrusted.

As technology advanced, managing agents began to lose out on account of their technical incompetence. Misra gives us the example of Gillander, a leading managing agency, ordering railway engine paint which wouldn’t dry in the Indian climate for Duco Paints (an ICI subsidiary). Prudential, an MNC fired its managing agent since it did not understand the insurance business.

Managing agencies had so much contempt for Indians and their lack of ‘character’ that they refused to Indianise even after the Indian Civil Service started to do so. Few Indians were said to have the ‘character’ required to be a manager, with the exception of the Parsis. Indians were said to make good accountants and their rote learning skills gave them an unfair advantage in academic exams, though it was not of much use in real business. Frank Russell, a Calcutta businessman, took the view that Hindus had more brains that Muslims, but did not compare in character or physical courage. N. Macleod, a business witness to the 1913 Public Services Commission said that ‘instead of choosing men who are merely a bundle of bones and book-learning, the selectors should give preference to those men whose physical stature and appearance who be in keeping with the dignified and important position they are likely to be called on to fill in India. There is after all in the administration of Eastern countries, a great deal to be said for the man who looks the part.’

When an Indian businessman by the name Birla invited Basil Eddis of Gillander to join the Board of one of his cotton mills, the offer was coolly declined. When another Indian business house by the name Tata invited Gillander to collaborate with it in the production of steel, the offer was turned down. Misra’s book is filled with interesting anecdotes such as these. The most interesting aspect of the entire managing agency business was that managing agency contracts were void under English law whilst they were enforceable in India – until 1970.

Citibank - The New State Bank of America

Aaman Lamba — Mon, 24 Nov 2008 08:03:44 EST

The United States Government took a giant step towards nationalization of the American banking system by announcing a plan to fund and backstop Citigroup, the beleaguered financial giant that has lost over $160 billion in market cap. The guarantees being provided include an additional capital infusion of $20 billion, loss guarantees up to $306 billion in a layered manner between Citi, the Federal Reserve, and the FDIC.

In return, Citi would issue $7 billion of 8% preferred stock to the government and additional stock warrants of about $2.5 billion. It would also promise not to pay out more than 1 cent dividend on common stock for the next three years. Finally, and most notably, the government would have final approval over all executive compensation and bonuses.

This last point is perhaps the most far-reaching, and as we all know the adage about paid pipers and their tunes, Vikram Pandit is henceforth a Federal Government employee, with hopefully greater job security than he had before this weekend. This mechanism gives government regulators a greater say over banking operations, and potentially opens the door to similar measures being adopted for other banks, or even other industries.

President-elect Barack Obama might end up appointing an auto czar, a music supremo, and perhaps even look to employ Bill Gates as CIO. The corporatization of the state will have an impact on the way it is run, which could work positively, but states have been corporatized for a long time, and this will only accentuate the incestuous relationship between neo-liberalism, corporatism, and statism.

Unfortunately, the victim in this circle jerk will be liberalism. Friedrich Hayek put it well when he noted,

If we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject.... The monopoly of government of issuing money has not only deprived us of good money but has also deprived us of the only process by which we can find out what would be good money.

Consider a humble bank manager in the Midwest a year from today having to evaluate between a loan to a start-up promising to improve productivity by over 20% with more efficient outsourcing automation. He is about to sign on the dotted line when he gets a call or a buzz from his friendly neighborhood Congressman, suggesting it might be a better idea instead to fund the local chapter of the UAW.

Welcome to Citibank, the new State Bank of America.

Swiss Bank Accounts

Blokesablogin — Wed, 12 Nov 2008 09:57:02 EST

This small article in the Washington Post brings yet another angle to the economic crisis that the US is facing. Hopefully, part of the money salvaged from these accounts can reduce the bailout money put up by taxpayers.

According to Transparency International, an anti-corruption agency, the estimated value of Indian individuals' worth of "funds" stashed away in Swiss Banks are to the tune of over $ Trillion. It is not surprising that the poor and rich divide has increased in the past few decades.

Reading these articles makes me wonder what anyone can DO with these "ill gotten" wealth? We all have an expiration date invisibly stamped on us. So, we cannot carry any material wealth along with us. The Reliance story is one of many that shows how money, left behind, creates schisms amongst the most cordial of relations.

Why, then, the insecurity of wanting to stash funds away for whatever purpose? Like the story of Tolstoy reminds us, at the end of the day, all we need is 6 feet of land (not even that if you are cremated!).

I sincerely hope that people who have these mysterious accounts put that money in circulation. If auction houses like Christie's existence are to be validated, many of these account holders use grand sums to buy art and such that have very little value in the "real" world and are "dead" investments. A vacation, on the other hand, would help support the tourism business including travel, stay, food and other activities.

Sometimes, when I see the pro-rich agendas of law and policies, I wonder if it is not a bad idea to ensure the demise of the poor by starving them or working them to death and the few remaining rich can have the earth to themselves- It sounds like a good plan. A perfect epilogue to the small-scale genocides we are reading about world-wide. And someone like me will not be there to write such a blog either!

Ending Coercive Land Acquisition - Creating Options

Somik Raha — Sun, 9 Nov 2008 05:37:45 EST

The reaction by India's industrial titans to the Singur crisis has been unanimous. Big guns like Mukesh Ambani, Narayana Murthy, Azim Premji and others have supported the Tatas and warned that the state would become a desert for investment if the Tatas had to leave, which is now a reality. Even the Prince of Calcutta, Sourav Ganguly, has supported the Tatas. Mamta Banerjee seemed to be the lone voice in support of the farmers whose land had been acquired forcefully without adequate compensation. People have called her stupid and an enemy of the state. Her own party supporters have voiced their disagreement with her opposition. In this backdrop, I am going to take on the perilous task of finding logic in her stubborn stance and also to suggest a long term solution for the future. I ask the reader to bear with me and let me explain my position.

Not our problem alone

Land acquisition issues are by no means limited to India. In the United States, there exists a law called "Eminent Domain," which in plain speak says that Uncle Sam can throw you out of your property if it sees a public good that requires the use of your land. Imagine this: a Civil Engineer (from a reputed university) contracted by the government to come up with the most optimal road plan figures out that such a road would need to pass through your grandmother’s house. The authorities send her a notice that she will be paid a certain amount, which would probably be a little lower than the market price. She refuses. Even after the compensation is hiked some more, she refuses. The authorities invoke Eminent Domain and send the cops to throw her out. As the cops arrive, the poor old lady holds on to whatever she can to prevent being dragged away, all the while crying out that this is where she has all her memories, this is where she lived with her husband until he passed away, and this is where she wants to die. She wants to be left alone. But that cannot be allowed, and the official tells her, "Ma'am, you don’t understand. The most optimal road goes through your house, and therefore, for public good, we must have it." And her cries go in vain (unless civil rights groups get into the game and sue the government for doing this). This story plays out in every society in the world (see box 1, box 2).

People all over the world are generally nice and compassionate, and most people feel bad about a story like this, but they ask desperately, "What alternative do we have for building YOUR-FAVORITE-PUBLIC-GOOD?" There is an alternative that ought to be taught in high schools for its utter simplicity. It has to be understood that the only legal power of a government is the power of coercion. And every single time coercion is used for public good, it has unintended consequences. Note all the controversies of land acquisition that have come to light, from the Narmada Dam project in the West, NanoCity in the North, Singur in the East and now Reliance might make the same mistake in Maharashtra. In India, the police knows no better than to use their guns on protesting people, often killing many. The legal costs rise and big businesses get discouraged by the reaction. In the United States, as business after business got stung by the backlash to eminent domain, a path-breaking and simple alternative emerged.

Create Options

This alternative has its roots in one of the most powerful insights that the wise have shared about decision making: you can always create OPTIONS. Taking this insight literally, let us try creating options for land acquisition (not the unrealistic't know a financial meltdown until the train hit them but the decision analytic variety whose math is simple enough to be understood by an English major with a minor effort). Let’s say Reliance plans an oil pipeline that needs contiguous areas of land. If any one of the landowners in the path of the pipeline hold out, the project will not take off, leaving Reliance with several non-contiguous pieces of land and a large hole in their pocket. In an alternative scenario, instead of buying any plot of land, Reliance could choose to buy an option from the landowner. The option will give Reliance the right to buy the land at the prevailing market (or agreed upon) price within a period of three years (for instance). This option can be valued easily using simple decision analysis tools and would be an order of magnitude cheaper than acquiring the land itself. Reliance could then plan multiple pipeline routes and try to acquire options on each of the routes. The moment they have all the options on a particular route, they can exercise the options on that route and acquire all the contiguous pieces of land.

There are several benefits to this approach. First, as Reliance is a private party, they are not required to reveal the purpose of the acquisition. They can send out agents who don't even need to reveal that Reliance is behind the acquisition. The government, on the other hand, is required to reveal the purpose of their acquisition, resulting in landowners realizing that they can make a lot of money if they hold out. The cost of acquisition will now be based on a good deal between the private party and the landowner. Second, as exercising the option is a legal right, there is no necessity for state coercion on the individual landowner. If someone holds out even after selling an option, that will be considered contractual fraud, and we have a legal framework in place to deal with that. The government no longer needs to deal with mass protests, the police no longer needs to open fire on hostile crowds, and entrepreneurs no longer need to sink large sums of money in legal costs. Third, if some people (tribals/farmers/middle class people) have a strong connection to their land and don’t want to leave it, all they have to do is not sell the option to their land. There should be no legal authority on the part of the government or the industry to force them to do so, and any forcible or fraudulent activity on the part of the entrepreneur would be subject to our existing legal framework that prohibits fraud and coercion. Human rights organizations can shift their focus from protesting to educating the tribals/farmers, while respecting the choice of these communities to accept or reject the education.

Creating options is not a new idea, and you have likely already used it in your life. We shall define an option as "the right to a future decision." A little consideration should reveal that insurance is a very good example of an option, where you buy the right to a lower medical expense should an emergency arise. The price of the option here would be the insurance premium you need to pay each year, which is a fraction of the coverage cost that the insurance company is legally obligated to pay should the situation arise. If you have played in the stock market, then you might be familiar with "call/put options" which is the right to buy/sell a stock at a predetermined price.

Who's Doing Non-coercive Acquisitions with/without options?

If this method is so simple, why hasn’t it been tried already for land acquisition? Strange as it may sound, this has been tried – it just hasn’t been spoken about as most private firms don’t want to talk about their land acquisition strategy. I’ve heard from a reputed professor at Stanford that Disney used options to acquire most of the land they needed for their theme park at Anaheim, California, after which people got wise to the purpose behind the acquisition and hiked up the selling price. Even then, Disney saved a fortune in legal fees by using this method. (For other companies in the US, see Box 2)

The intelligent reader may point out that what works in the United States may not necessarily work in India. To which I wonder what is so special about the Indian DNA that it would not like to save lives and lower costs when it could. In any case, options has been in use in India for a long time, without us explicitly recognizing it. If you've tried buying land in India, chances are you've been asked to pay a "roka" as North Indians would call it. The "roka" is an advance that a buyer would pay a seller after which the seller would stop showing the land to others. The "roka" is an option, a right to buy the land within a specified time. "Roka" options are quite common in the real-estate market and are probably referred to with different words in different parts of the country.

Finally, I have anecdotal evidence that after Larsen & Toubro (L&T) had completed acquiring land for the third Howrah Bridge in (hold your breath) West Bengal, neighboring land owners who had been skipped were upset at missing the pie, and begged L&T to consider buying their land too. It seems that landowners in West Bengal also like good deals, like landowners anywhere else.

Challenges

There are some legitimate challenges to applying this solution, especially in places like West Bengal. The business climate in the state is highly interventionist, with entrepreneurs unable to operate without the blessings of the prevailing local political party. In such a situation, talking about free markets is a travesty. The current government needs to realize that it cannot replace coercive prevention of industry by coercive adoption of it. It needs to start with the fundamentals and shrink to a minimal form of government. But then, what will happen to the party ranks? Instead of employing cadre into what amounts to an organized land mafia, they can be encouraged to become social entrepreneurs who combine the best of capitalism (freedom) and communism (caring for the community) while leaving the worst out (greed and coercion respectively). While this might take some time, a first step for India would be people from all walks of life coming together to demand the revoking of Article 300-A so that no government has the right to take away private property through any argument of public good. In today's society, we should realize that governments claim almost any economic activity as a public good, and eminent domain laws become a vehicle for individual abuse.

While economists would welcome the strengthening of property rights, they may raise several objections to entirely scrapping Eminent Domain laws in India. First, they will point out that there are "actual public goods" that a government must provide (e.g. roads, wildlife reserves, forested lands). How is the government to do so without laws that resemble eminent domain? Second, private parties cannot freely purchase agricultural land in India. We would need laws that allowed for land use changes, and we still need to consider if such a change is in public interest. Third, individuals sitting on vast natural resources ought not to have the right to refuse their commercialization - this is an argument for eminent domain laws. Fourth, there are thousands of land holders who have title to a small amount of land. This makes it infeasible for private parties to negotiate with so many, hence, the government is a good intermediary. Finally, you would need a sophisticated buyer and seller to be able to use options.

Lets take these arguments one by one. First, it is a 20th century idea that governments are responsible for public goods. There is ample evidence of societies that did fine in the past without government intervention in every sphere of life. As evidence in our present time, look at all the public goods in India and you will find those are the services that are most lacking in creativity and innovation. In the United States as well, the government builds roads as a public good. This is one sector which has seen so little innovation that you now have cars that are built to touch 200 miles per hour and roads that can only handle 65 miles per hour. Think about all the private toll roads you've been on in India and compare them to the government maintained roads, and the difference should immediately be apparent to you. India is full of examples of social entrepreneurs who have given up on the government's ability to provide public goods and provided solutions themselves, either as a for-profit or as a non-profit. Sulabh International builds public toilets(shauchalayas) that are financially sustainable and pay for their construction cost quickly, while generating employment. See Box 3 and Box 4 for further examples. Second, I agree that private parties should be allowed to freely purchase agricultural land and the land owner should have the right to decide how the land should be used. If the current land owner feels it is important that the land use should not be changed, this can be specified in a contract at the time of sale. The argument is often made that good agricultural land should not be used for non-agricultural purposes. If we truly believe that, then we should immediately proceed to demolish all the government (and other) buildings in Kolkata, which has some of the best agricultural soil you could find being on the banks of the Ganga. Third, it is possible to grant an individual the right to their property while one could also construct rights for what lies below the property and separate the two. Once this is done, there is an incentive for entrepreneurs to find ways to drill for oil or a similar natural resource without disturbing the landowner who is at the surface. Fourth, the argument of "too many land owners" is a terrible one, as the government does no better, and arguably worse, than a private negotiator. In fact, a private negotiator would not have the advantage of guns and would have to be polite and stay within legal boundaries. Perhaps, this is an area where an entrepreneur could provide negotiation consulting services. Finally, the argument of sophisticated buyer and seller is an argument for education, although the Indian market is already using "roka" options without doing sophisticated decision analysis. Companies that need help modeling options can hire decision consultants just like they hire tax consultants. I admit that companies will have an advantage in pricing methodology over individual landowners. However, this is a good reason for the creation of a friendly social venture that offers pricing services to individual land owners. On the topic of decision education in India, there is much that needs to be done. (See Box 5)

Philosophical, Economic and Traditional Reasons

Options should be used for both philosophical and economic reasons.

Philosophically, even if everyone around me says that murder and theft is the best way to get what I want, I refuse to do it, and I will argue that India, with its deep spiritual tradition of acceptance of all religions, systems and ideas, should stand firmly behind non-coercion. Just as the tool of coercive land acquisition is the use of a police force with guns, the tool of smart non-coercive land acquisition is options. Economically, let us be clear that while using options has lowered the cost of land acquisition for many, the method itself is not going to guarantee that industrialists will get the land they want, which is no different from the case of using coercion as we have just seen the Tatas getting thwarted even with government support. If both methods cannot guarantee success, and the coercive one consistently creates more headaches, takes lives and increases costs, then we ought to throw our weight behind the non-coercive methods.

Finally, traditionalists might point out that in the Indian tradition, the individual must sacrifice for the family, the family for the community, the community for the state and the state for the world (a maxim approved by Sri Krishna). While this is a noble spiritual idea, it is not what is followed today. On the other hand, a more accurate maxim for the practice of the modern day is, "the individual must be coerced to sacrifice for the family, the family for the community, the community for the state for the world." Every spiritual tradition in India recognizes a supreme internal freedom asks its followers to acknowledge and become aware of it. It is but natural that India lead the world in giving expression to this internal freedom in our external environment. We can start by recognizing that individual sacrifice is a decision to be made only by the individual, and coercion has no place in a society that wants to call itself free.

Almost every country in the world has a legal mechanism that resembles Eminent Domain laws. In the United Kingdom, New Zealand and Ireland, these laws are referred to as "Compulsory Purchase," while Canada and South Africa call it "Expropriation." India used to consider right to property as a fundamental right under Article 19(1)(f). This meant that your land could not be taken away except under the Land Acquisition Act of 1894, or a similar state law, which allows the use of forcibly acquired land by the Government "in the interests of the general public or for the protection of the interests of any Scheduled Tribe". The Land Acquisition Act of 1894 empowered the Central and the State Governments to acquire lands that they felt was necessary for a "public purpose". Public purpose was defined so broadly that even land use by state-owned corporations was included, thus turning this law into an all-powerful mechanism for the British. While this British baggage continues to this day, in 1978, the right to property was shifted out of fundamental rights so as to make it harder to challenge land acquisitions by the government, and Article 300-A was introduced which said that "no person will be deprived of his property save by authority of law." In other words, the state/central government can take your land away if Parliament or State Legislatures make a legislation/order/rule to do so, in exchange for compensation determined under the Land Acquisition Act by the Collector. You can challenge the action of the government in a court if you think the government has acted unfairly, and in most countries (except authoritarian ones like China), this leads to protracted legal battles, civil rights headaches for the government and spiraling legal costs for the industry involved. The Land Acquisition Amendment Bill (2007) is an effort to reform the 1894 law, but how much band-aid can one put on a gaping wound? Senior Advocate Bishwajit Bhattacharyya recently outlined in the Statesman (Oct 29, 2008) how even passing a law under Article 300-A has been successfully challenged in court. How many people have the resources to take on the government when their rights are violated?

At this time, the United States probably has the worst eminent domain laws on the planet. In 2005, a controversial Supreme Court ruling upheld (by a 5-4 vote) the government's use of eminent domain powers to take private property from one owner and transfer it to another owner under the pretext of economic development. This ruling was criticized publicly by many noted people, including Bill Clinton. Justice Sandra Day O'Connor, who voted against the law in the famed Kelo v. City of New London case, warned that this new addition would "wash out any distinction between private and public use of property." For the first time in US history, governments could use eminent domain powers to declare ordinary private use of property as a "public use." In a report by the Castle Coalition (a network of homeowners and activists in the US determined to stop the abuse of eminent domain), there have been more than 5,000 instances of abuse since the Kelo decision. This figure includes cases where private property owners have threatened the use of eminent domain on reluctant sellers to agree to their price or risk having their property taken away by force. This situation is quite comparable to India where the government acquires lands for private parties under the argument of "economic development."

The report also goes on to debunk the myth that eminent domain laws are needed for economic development by citing several projects that did not use eminent domain. Walt Disney's construction of Disney World, The Rouse Company's construction of a new city in Howard County, Maryland and Focus Property Group's creation of a 3000-acre community called Mountain's Edge are some of the examples. Disney World is particularly interesting to us as they used options quite heavily. Further Reading: http://www.castlecoalition.org

Box 3: Social Entrepreneurs in India, a powerful force for public good
Arvind Eye Hospitals in Madurai (and other cities in South India) treats patients who cannot pay; free of cost and make up their money from people who can. Exnora in Chennai (and now several other cities) has created a system of garbage cleaning where an erstwhile scavenger now collects garbage from each home and dumps it in the proper place, for a fee. LaserSoft Info Systems in Chennai employs "disabled" people and puts them to work in the field of banking software. The Sangini Mahila Seva Cooperative Society is for, of and by sex workers in Kamathipura, Mumbai's oldest red-light district, where sex workers gain access to banking services and rise out of destitution. A similar and older initiative has been quite successful in Kolkata's Sonargachi district. The popular Lijjat Papad is made by a social venture, Shri Mahila Griha Udyog, founded by Sarvodaya members. This is an organization focused on creating a dignified work environment for women in a decentralized manner, and its success should inform case studies in any serious business school. Most Indians are familiar with "utterly, butterly delicious" Amul butter. Amul stands for Anand Milk Union Limited, a social venture inspired by Sardar Vallabhai Patel, which is privately run as a cooperative to give milk farmers a good deal and provide high quality milk products to society. Anandwan is a social venture in Maharashtra founded by the late Baba Amte, and run as a self-sufficient rehabilitation center for people afflicted with leprosy. Anandwan has incorporated environment-friendly processes into the local lifestyle without your tax money.

Box 4: Environmental Social Entrepreneurship in the US
The Nature Conservancy (http://www.nature.org/) is a US charitable institution that acquires forested land using existing land acquisition laws as a private party in order to conserve it. Aimed at preserving bio-diversity, this organization has been voted as one of the most trusted national organizations in the US in online polls. Their work has led to the creation of several national parks. The Proactive Carnivore Conservation Fund is a private initiative by an organization called Defenders of Wildlife that finds innovative solutions to prevent people from killing wildlife (such as compensating farmers for the livestock they lose to wolves in return for sparing the wolf's life). The Property and Environment Research Center has an instructive article by the founder of this project, Hank Fischer, at http://www.perc.org/articles/article319.php

Box 5: Decision Education
It is a pity that most business schools in India either skip Decision Analysis or teach it as "Decision Tree Analysis," which is like stripping all the philosophy from yoga and teaching it as a bunch of stretching exercises. There is only minimal benefit in doing so. This is not just a problem in India but also in the United States (as you can see from the massive financial crisis). What is even more pitiable is that people need to wait till they get to a university (there are only a few that teach this as a philosophy) to learn good decision making. To remedy this, the Decision Education Foundation (www.decisioneducation.org) teaches high school children the basics of good decision making. Perhaps it is time to start a chapter of the foundation in India.

Here is a very brief introduction to the philosophical foundation of decision analysis (DA). DA does NOT help you predict the future or maximize the chance of the best outcome. For that, you are better off going to an Indian astrologer or a financial engineer (though I wouldn't trust the financial engineer - I recommend the book "The Black Swan" for people who call themselves statisticians or financial engineers). DA is an amoral method that helps you stay consistent with your preferences, information and alternatives. DA disabuses you of the notion of "objective decision making," making it clear that you can only judge the quality of your decision, not someone else's. Even more fundamentally, the quality of your decision must be judged before the outcome, as you cannot judge a decision from the outcome. If you knew the outcome, you wouldn't have a decision to make. Another fundamental tenet is the principle of sunk cost - the past matters only for learning, not for accounting.

Chandrayaan-I: Money Down the Drain or Time to Celebrate?

B Shantanu — Wed, 22 Oct 2008 12:56:56 EDT

A few hours ago, ISRO put “Chandrayaan-I” into transfer orbit around the earth, heralding its “Mission to Moon”.

This is a proud moment for the team at ISRO working tirelessly for the last several months, sometimes right through the night.

It is also be a proud moment for India’s indigenous space research programme and more broadly, India’s indigenous R&D efforts - the seeds of which were planted barely a few decades ago.

But questions are being asked…and doubts are being raised.

“Was this the best use of the country’s limited resources?”, “What will this mission really achieve?”, “Will it have any impact on the problems that we are facing today e.g. poverty, hunger, malnutrition?”

At a fundamental level, such questions assume that this is a zero-sum game and there is a constraint on funds for developmental projects. I do not agree with that…India’s main developmental challenge is inefficient (I would even go to the extreme of saying extremely inefficient) utilisation of resources rather than lack of funds.

Having said that, the answer to these questions is neither simple nor straightforward.

While the launch will cost money (although relatively speaking it will be a small amount: Rs 386 cr./~$80m), the benefits are more difficult to compute. How do you put a value on India’s credibility and prowess in R&D research? How do you put a value on the indirect gains that will accrue (in terms of geo-politics)?

How can you quantify the benefits and the advantages of being at the vanguard of space research and exploration? and how can you emphasize the importance of R&D and activities targeted at the next decade?

Many would remember that the same - and similar - questions were asked of ISRO’s focus on remote sensing satellites in the past two decades… The question - and the “answer” - was eloquently articulated in this article in the New Scientist:

But why is India, a country that still has so many development problems on the ground, aiming for the heavens? To Indian scientists, the question is not only patronizing of their scientific aspirations, it betrays an ignorance of the Indian space program’s greater purpose and successes against the odds….

Take, for example, India’s six remote-sensing satellites — the largest such constellation in the world. These monitor the country’s land and coastal waters so that scientists can advise rural communities on the location of aquifers and where to find watercourses, suggest to fishermen when to set sail for the best catch, and warn coastal communities of imminent storms. India’s seven communication satellites, the biggest civilian system in the Asia-Pacific region, now reach some of the remotest corners of the country, providing television coverage to 90% of the population. The system is also being used to extend remote health-care services and education to the rural poor.

In addition…

The “super-cyclone” that hit India’s eastern coast on Oct 29, 1999, could have killed thousands but for an INSAT satellite that tracked its course every half hour identifying areas that needed to be evacuated.

What does ISRO have to say about the benefits of the Mission to Moon? In their own words:

The Study Report of the Task Team was discussed in April 2003 by a peer group of about 100 eminent Indian scientists…After detailed discussions, it was unanimously recommended that India should undertake the Mission to Moon, particularly in view of the renowned international interest on moon with several exciting missions planned for the new millennium.

In addition, such a mission will provide the needed thrust to basic science and engineering research in the country including new challenges to ISRO to go beyond the geostationary orbit.

Further, such a project will also help bringing in young talents to the arena of fundamental research. The Academia, in particular, the university scientists would also find participation in such a project intellectually rewarding.

Needless to say, “If you want to do space exploration, the Moon is where you have to start.”

Asked about the relevance of the Mission to Moon for a “poor nation” like India, G Madhavan Nair had this to say in a recent interview:

How do you handle criticism from a section of the people that a poor nation like India shouldn’t be wasting money on projects like Chandrayaan?

We have faced this question in the early phase of the programme. We are convinced that we are doing more service to the society than the money spent on the programme. But to doubly assure ourselves, we asked a school of economics in Chennai a couple of years back to make an assessment. The report they submitted was really mind-boggling. They found that what we have given back to the society in terms of products and services is something like one and half times more than the cumulative investment made on the entire space programme. Leave alone the infrastructure, the technology, the human resources and the various laboratories we have developed, if we add all that it is certainly more than five times spent on the programme.

Plus there are clear commercial gains.ISRO already has a subsidiary called Antrix (from “Antariksha” = space) which provides services for commercial launch of satellites and payloads into orbit. These services leverage ISRO’s “frugal engineering” to provide a compelling cost advantage in the market for satellite launch services. Last year’s Antrix’s turnover was shy of $240m on which it made a profit of ~ $35m. Chandrayaan itself is carrying 6 payloads for other agencies which would explore the lunar surface over the next two years.

A successful launch will help further commercialisation of these services and add to our credibility. It will increase our launch and space mission capabilities and help us play a prominent role in international negotiations and strategic discussions on space related matters. It would also help ISRO recruit talented engineers and scientists.

There may also be spin-off benefits in related areas of defence research (e.g in development of ICBM capabilities). Besides the cost of the Mission (of ~$80m) is only a fraction of ISRO’s annual budget, is spread over mutliple years and some of the investment is in facilities that will be re-used for other services and launches (e.g. the Indian Deep Space Network at Byalalu, near Bangalore, established at a cost of $20m - which will also serve future satellites). And all this is done within an annual budget that is less than a tenth of NASA’s (according to this report, in 2006, ISRO’s annual budget was less than 3% of NASA!).

All in all, the Mission to Moon gives great bang-for-the buck.

Yes, it would not directly put food in hungry mouths…yes, it would not directly put any money in the pockets of the impoverished…but the gains that accrue have a huge geo-strategic significance and will help India’s ascendancy on the world stage – not to mention providing a booster shot to indigenous R&D efforts.

We would do well to cheer it.

From the Rig Veda:

“O Moon! We should be able to know you through our intellect. You enlighten us through the right path.” Today, Chandrayaan has set out on this right path.

त्वम सोम पर चिकितॊ मनीषा, त्वम रजिष्ठमनु नॆषि पन्थाम ॥

Tvam Soma para chikito manisha. Tvam rajishtamanu neshi panthaam. Rig Veda (Hymn 91)

For the more curious amongst you, here is the link to the home page of the Mission, link to FAQs and an informative booklet [~700k pdf file]. There is even a YouTube video on the Mission (I don’t think it is by ISRO though)!

To close, here is an uplifting extract from Newsweek on how India’s vision might just show the way for mankind’s next giant leap:

India’s investment in Earth observation satellites over the years comes to only about $500 million per satellite, about a tenth of the cost of its Western counterparts. After introducing a satellite service to locate potential fish zones and broadcasting the sites over All India Radio, ISRO helped coastal fishermen double the size of their catch. For the government’s Rajiv Gandhi National Drinking Water Mission, begun in 1986, satellites have improved the success rate of government well-drilling projects by 50 to 80 percent, saving $100 million to $175 million. Meteorological satellites have improved the government’s ability to predict the all-important Indian monsoon, which can influence India’s gross domestic product by 2 to 5 percent.

Next, ISRO plans to roll out satellite-enabled services to hundreds of millions of farmers in India’s remote villages. In partnership with NGOs and government bodies, it has helped to set up about 400 Village Resource Centers so far. Each provides connections to dozens of villages for Internet-based services such as access to commodities pricing information, agricultural advice from crop experts and land records. ISRO’s remote-sensing data will also help village councils develop watersheds and irrigation projects, establish accurate land records and plan new roads connecting their villages with civilization as cheaply and efficiently as possible. One ISRO partner—the M.S. Swaminathan Research Foundation—has used satellites to conduct 78,000 training programs for more than 300,000 farmers in 550 villages, teaching them about farming practices like drip-and-sprinkle irrigation, health-care awareness programs for diseases like malaria and tuberculosis, and information about how to access government services. Using satellites to guide reclamation of 2 million hectares of saline and alkaline wastelands is expected to generate income of more than $500 million a year.

…and here is a great account of how far we have come in 45 years:

The launch of a US-made Nike-Apache Sounding Rocket from Thumba, near Thiruvananthapuram, on Nov 21, 1963, marked the beginning of India’s space odyssey…

…Recalling the incident, R. Aravamudan, who has been associated with the Indian space programme from the very beginning, says: “There were no buildings yet in the range (Thumba Equatorial Rocket Launching Station -TERLS). Our first office was in the bishop’s house and the St. Mary Magdalene church building there.”

“Once the rocket was launched, there was no telemetry or radar tracking, only photography from three stations of the vapour cloud. The orange vapour trail was visible from all over Kerala and parts of Tamil Nadu. This created great excitement. Since the common public had never seen such a sight before, it also gave rise to some hilarious newspaper reports.”

…”We had to make use of public transport as there were no official vehicles yet and no canteen. So, our day began with a quick breakfast of idli sambar at the Railway Station Canteen, which was the only place where we could get food to our taste.

We would then pack some snacks and lunch from the same canteen and go to the bus stand to catch a mofussil bus to Kazhakkutam. We would get down at the bus stand there and walk about a kilometre or so to the range. The whole trip took about an hour.

“The range (TERLS) was quite large in area and the only means of transport within the range was by bicycle. Those like (A.P.J. Abdul) Kalam, who could not cycle, had to hitch rides with others.”

*Somewhat* Related Post: Of Vimanas and Time Travel

Recommended Reading: G Madhavan Nair’s interview in Outlook.

Bubbles and The Current Financial Crisis

Ravi Kulkarni — Tue, 21 Oct 2008 14:36:55 EDT

"Bubbles! Bubbles!... My bubbles!"
-a cartoon character from Finding Nemo

Is there an end to the current financial bloodbath that is plaguing the world markets? Like a recursive nightmare, you wake up from one nightmare to find yourself in the middle of another. I am still in the middle of my productive career, and I don't find it amusing that my life savings go down 5% everyday. I just can't imagine what it must be for those who are staring retirement in the face or who have already retired. The only light I see at the end of the tunnel is the proverbial headlight of an approaching express train.

Folding banks, closing auto dealerships, collapsing companies, massive layoffs, government defaults; the looming specter is stunning. Many pundits are saying that this will be a mild recession and we should be back on track in a couple of years. In particular let me quote the following:

'Standard & Poor's chief economist David Wyss expects a mild recession that ends next spring. "Gradually we will regain confidence in the market. Lower oil prices and a falling trade deficit will help," he says. "This is a financial panic, not an economic one." '

I don't know what weeds these people are smoking. A lot more bad news awaits us. What we are seeing today is a result of 60 years of unbridled growth and reckless spending. The dominoes are falling and there is no telling when or where they will stop. They blame it on many factors: corporate greed, extreme leverage, wall street excesses, mortgage crisis and so on.

I remember reading this article by S Gurumurthy of RSS. Though the article itself has been ridiculed by the economists and intellectuals in various forums, and there are some factual errors in the numbers quoted, I felt there was an element of truth in it. This article was written in 2002 or thereabouts. Common sense tells me that I can not continue to spend more than I have. A day will come when the bill collectors come calling. This is true for individuals and also true for institutions. But there is a white elephant in the room everyone seems intent on ignoring.

I laughed out loud when President Bush doled out money to people as a stimulus package. The trouble with the economy was not that people were not spending enough; it was that people have spent way too much and they can no longer finance their profligate ways. During the last several years rate of personal savings by Americans has turned negative. The so-called stimulus package only inflated various bubbles a little more. Besides it encouraged people to be even more reckless with their money.

Since the 1940s, America has managed to build a huge economy based on consumer spending. It starts with how money is created (primarily through bank lending, see here). Every time someone borrows money (say to pay for a new car), the system creates a little bubble and new money is injected into the system. This money is supposed to be taken out at a later stage when the loan is paid off, but people keep spending money all the time so the money is never really destroyed except during serious economic contractions. This is not specific to the US economy, most of the modern economies have grown in this way.

This bubble creates other bubbles. Consider this: when there is more economic activity, the governments have more tax revenue and therefore bigger budgets. The current political wisdom tells us that the money should be spent immediately on populist and not-so populist schemes such as the earmarks. After all, one must get elected again in a few years. Once a particular expense head has been created by a government, it seldom goes away. Many economists argue that deficit financing is good for the economy. Wars and natural disasters have contributed by further expanding the budgets. Among certain quarters, there is almost a macabre glee whenever natural disaster such as an earthquake or a hurricane hits.

Without intervention this unstable system will seek some stability through cyclical economic downturns and many of the bubbles will gradually deflate. There have been downturns in the American economy, such as the recession of 80s and 90s, hyper inflation of 70s, stock market crash of 1987 and dotcom crash of 2000. Every time the government intervention has been short sighted with no attention paid to long term consequences of these actions. None of these events convinced the political leaders, financial leaders and individuals that they must spend less than they have or else...

If you remember the dotcom bubble of the 1990s, many people believed that the stock market will never go down. Ditto with housing markets of early 2000s. Similarly for too long, investors all over the world have nursed a belief that dollar is a safe haven and Americans will never default. This has caused them to send money to America in unrealistically large amounts of money through real estate investments, government bonds and lately purchases of assets of large financial institutions. This has significantly contributed to the financial bubble.

To keep this bubble inflated, governments and institutions have to spend more money and foreigners have to keep pouring their savings into American economy. To encourage these events, the lowest pillar that is bearing the weight of all these bubbles, our friend Joe, must keep spending. The trouble is that Joe can't spend any more money because his account is overdrawn. Nobody is willing to lend him either.

The credit crisis is a sign that people have understood the true nature of our economy. Money in my pocket is better than money in yours. Nobody trusts the bogus credit ratings of individuals and institutions anymore. At some level one can blame the banks for lending to one and all, but the blame must be shared by everyone; legislators for not providing enough oversight; bankers for not ensuring the borrowers have capacity to repay; borrowers for being greedy.

Americans have a total debt of about 120% of the GDP. The companies collectively have a debt of 160% of the GDP. Total American debt reached 53 Trillion dollars. That's about $176,000 of debt for each resident of the country. People and institutions have leveraged way beyond their means to pay back. To paraphrase Nouriel Roubini, now "the housing bubble, the mortgage bubble, the equity bubble, the bond bubble, the credit bubble, the commodity bubble, the private equity bubble, the hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression".

The casino culture has taken over the American financial markets. Short selling of stocks is the most obvious and glaring example of the gambling that savvy stock market players indulge in. There is also the futures market for commodities. For example the much maligned speculators who have presumably driven up the price of oil and other commodities. In the 1990s new instruments of financial trade called derivatives were created. These are the CDOs, the CDSs and many others from the alphabet soup, which Warren Buffet famously called financial instruments of mass destruction. That bubble is now worth 55 Trillion dollars. To put it in perspective, it is more than the annual gross product of the entire world. This is nothing but suicidal gambling by large financial institutions hedge funds, and wealthy individuals with no added benefit to the society at large. This is another bubble that is waiting to burst and who knows what happens then.

If my hypothesis about the economy is correct, then there are three ways this crisis will resolve itself. Firstly the obvious one, in which there will be a catastrophic crash of markets and institutions all over the world. This will be too chaotic for anyone to predict the sequence of events accurately. The consequences are too horrific even to contemplate, but humanity will survive. It may take a decade or two to recover to some semblance of normalcy.

Second way is that the current patchwork of interventions will work and somehow the world markets will be stabilize. However, I think this only be temporary and we will come back to the same situation sooner or later, perhaps with a bigger bubble, because we not really addressing the underlying causes.

Third way is when our leaders act responsibly, the markets respond in a sane manner and people correct their ways. Government will stop wasteful spending, wall street will stop being greedy and people will start saving more responsibly for their retirement and their children's education. If by some miracle this sequence of events comes to pass, then it will still take a couple of decades for us to come back to stability. The reasons are obvious, the the bubbles are simply too large and they can't be deflated in a short time. However the likelihood of this happening are extremely remote. Consider:

Law makers are short sighted and often ignorant
Government likes to keep borrowing to spend even more money and has zero credibility with the main street having spent all of its political capital waging pointless wars
Washington is full of wested interests, but none protecting Joe's interests
Wall Street has a short memory and within a few years it will retrace the history
Regulators have no credibility as they are either corrupt or ideological but almost never right

This problem is not unique to America. I am only using her example because I have lived here for the last 8 years or so and seen what is happening first hand. I am sure similar things are happening in many other countries as well.

The situation is rather bleak, but people change only when there are catastrophic events that overtake them, or a JFKesque leader guides them. Is Obama the JFK of our generation? I sincerely hope so, but I am very skeptical.

What are the lessons for India in this crisis? Unfortunately I don't believe India will escape it unscathed. The only silver lining is that India is not yet that highly leveraged that it will suffer as deeply as the US. However, India is following the path that US took in the '50s and '60s. We can yet avoid it by ensuring that the truly important issues are addressed and never compromised in the name of capitalism. These issues are, savings for retirement, ensuring universal health care and providing good education to all those who want it. Most importantly we should not build our future on bubbles.

Pakistan's "Macabre" Economics vs. Micawber's Economics

Desh — Mon, 13 Oct 2008 13:25:42 EDT

Ali Khan recalled: "General Beg called me for a cup of tea. He said, 'Don't you realize we are on the brink of economic collapse? I can change that by selling what we are good at. I can offer this country a lot. Six, eight, ten billion dollars.' I laughed. I said, 'You can't be serious.' The general said, 'I am very serious.' He then mentioned selling our bombs to Iran. He said, 'Nisar you can argue with me but that's not your job. You tell Nawaz Sharif that this is a good idea. It's the prime minister's position to decide.'
[ Deception: Pakistan, the United States and the Secret Trade in Nuclear Weapons by Adrian Levy]

It was 1988. The US was leaving Afghanistan and dollars were drying up quickly. Pakistan had almost completed the Nuclear acquisition and perfected the technology. With nothing much to export, General Aslam Beg now had set his sights on what was Pakistan's greatest achievement hitherto - the Nukes.

Iran did not however get the Nukes directly though - because it was after all a radical Shia regime (it did get the P1 and P2 class reactor technology subsequently).

The beneficiary and the payer became Saudi Arabia. It could not bother with the technology, so to arm their Chinese CSS-II missiles, Pakistan gave them what was required and saved the country from economic collapse.

Aid was Pakistan's "monetary and fiscal policy". When it was absent, then it was Nuke and military sales.

THAT is the reason why the Army has never let a democratic government last in that country.

2008 - twenty years since Beg decided to sell nukes to escape the begging - now the situation has turned full circle! But in the last few years, Iran and North Korea have become hot places and in full glare. For the last few years, the US was feeding the Pakistani coffers so the market saturation of countries who wanted Nukes on the sly did not matter. Now even the US doesn't have enough to give. Afghanistan's poppy sales is also no longer feeding the coffer of the Army. The breakdown is virtually total!

Such is the economic turmoil in Pakistan that it’s inflation has shot up to 25 per cent, and forex reserves are plunging to an all time low. With a total of $8.1 billion forex by September, the real reserves are estimated to be just $3 billion after accounting future liabilities.

Reports suggest that it is barely enough for Pakistan’s one-month imports, and if assistance is not provided immediately, the situation would turn for worse. There is a huge gap of $7 billion to cover in a projected current account deficit of $14 billion for the financial year ending June 30, 2009.

The rating agency Standard & Poor has cut the rating on Pakistan’s sovereign debt rating to CCC+, which is barely above the default level.

Now, barring these "Sources of Income" - Pakistani leaders and Army had never planned for other sectors to become any replacements! But even these are now under strain and almost non-existent.

The worst nightmare of the world is now unfolding - a nuclear state is going down and the extremists who planned and executed the most spectacular terrorist act in the history of modern world are bold and unflinching in their mission - to prevail. US is on the border and executing more and more missions in to the territory of Pakistan and bombing as well.

At such a distance and lacking any knowledge it is difficult to predict or even say for certain - but my instinct says clearly that at this very moment a fight is going on in stealth-mode and it is for identifying and "securing" the Nukes of Pakistan.

Pakistani leaders meanwhile are back to their old game - asking for aid. Obviously the question before US and others is - is another round of aid the best way to deal with this situation. Should more money be given - knowing it will be wasted on the generals and on infrastructure that is and was planning the next move. Or should the world buy time?? Until nukes can be secured.

In the coming months, the world will deal with many difficult variables - financial collapse of the world's economic system will be just one part of the entire deal. International warfare - military and economic - will be FAR more significant a misery to face our generation.

Meanwhile, in South Asia, Pakistan's masses will pay for the private passions and hatreds of their leaders. As the economic misery unfolds, many new reasons and villains will be created by the current lot of Pakistani political, religious and social leaders - but none would even look at the most obvious - to ask a simple question:

For all that I consume, what do I sell to the world?

Mr. Micawber says in the classic David Copperfield on economic wisdom:

"Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

The next world war (or its variation - "Clash of Civilizations") will not be won with bombs but by sheer economic expertise. Economics is not rocket science. Then why put it in the hands of your rocket scientists?