Thursday 18 September 2014

The Roots of Corruption in India

In 2012 I wrote this paper for an Economics class on Comparative Economic Systems . It looks into the Institution development stagnation in India since Independence that has encouraged and led to corruption within the Indian  government machinery.

Monday 15 September 2014

Hey EU, push for Immigration to help stimulate growth.


The latest economic news coming from Europe is worrying (The Economist, "That sinking feeling again"). The growth of the three largest economies stagnated or fell in the April-June Quarter of this year. France, more or less stagnated, Italy's economy  fell into outright recession, and most surprising of all  Germany's economy contracted as well by 0.6%.  This last particular statistic is  the one that has spooked investors the most.
  Through the Euro crisis Germany has always been expected to be Europe's economic safe zone; the work-horse that held up the union; a model to look up to for the beleaguered and financially damaged countries of Spain, Portugal and Greece among others. It's not surprising to see investor's worry in light since  if  even the most fiscally disciplined European economy is in trouble, what hope is there that this slight downturn will not continue in the long-term.

So what happened ?

   Well one possible reason, according to the same  Economist article quoted earlier, could be the mild winter this year. A mild winter could have meant  a lot of  construction activity could take place in the preceding quarter instead of the usual April-June one.  But I think that explanation is slightly myopic.

Apart from the fall in the GDP, one must realize there is another point  that makes the situation more worrying:  The Union is perilously close to deflation. Inflation only rose by 0.4% in the last quarter instead of the widely accepted 2% that is considered to be a comfortable level for stable growth.

While the European central bank debates  whether or not to start quantitative easing, and perhaps other monetary and fiscal measures, I feel there is a more subtle and long-term fault line that is threatening the  future of the Euro. And it is not an easy topic to solve. It is the falling population of Europe.


A falling population leads to reduced demand and ultimately deflation and all the problems that come with it (Krugman,Paul, "Why is Inflation Bad"). Just look at Japan for the last two decades. Continuously falling prices means consumer spending decreases(in hopes that prices will fall further), debt burden becomes higher (the value of the money you have to pay off becomes stronger) and on the supply side wages fall.
  So is Europe in line to suffer as Japan has been  for the past two decades? I believe so, unless the countries of the Union do one thing differently to Japan: open their countries to Immigration.

For countries with falling populations like Europe and Japan (with birth rates of 1.59 and 1.39 per woman, respectively) Immigration is the best way out.
  Japan has always resisted allowing large-scale immigration because of cultural factors such as the need to remain ethnically pure (French, Howard "Insular Japan Needs, but Resists Immigration" ). This I believe  has led to their two decade economic disintegration which will continue as long as they refuse to budge on this issue.

First let me discuss the merits of Immigration according to economic theory. Then I will discuss the massive obstacles that block it.

The benefits to immigration are large. Large scale Immigration sustained for long periods of time leads to a younger population. Young people in developing countries who are not satisfied with the job markets in their own countries are the one's who are usually the one's who want to enter developed countries. Once you have sustained immigration of this young cohort, one important benefit you get is of not  having such a massive strain on the social security, pension and healthcare sector as the proportion of young individuals (who are the main providers of social security) to that of the old population ( who are the main receivers) improves. i.e. The state has an opportunity to improve it's finances.


 But most important of all, Immigrants have the potential to provide economic growth  to host countries. Data shows that 40% of  the Fortune 500 companies in the US were started by immigrants.(The New American Economy Report) ). Another report by the OECD, shows that immigrants have generally spent more time in University than their native born peers(The Economist, "Degrees of Mobility" ). More education has the potential of spreading new ideas, creating more potential for a vibrant, innovative economy to take hold. A vibrant economy means large job creation potential, which leads to increased demand throughout the economy.


Now, as can be expected there is a lot of push-back from the citizens of countries which are popular with hopeful immigrants. The United States, probably the most popular destination among immigrants is a good example. A hotly contested debate has killed off much needed immigration reforms. In the United Kingdom, a number of Draconian immigration rules has come into effect.(The Economist, "The Tories' Barmiest Policy") . The most common complaint has been that Immigrants take away job from  locals. Data shows this to not consistently be true. In the United States and Europe for example, there is  a shortage of skilled workers which can be taken up by skilled immigrants (e.g.. Indian doctors, and computer specialists). This is replacement and not substitution.
 
When a country's Immigration policy is lax, you will see not only high-skilled immigrant workers who are usually from more relatively effluent economic background in their native country, turning up,  turning up, but also low-skilled, poor immigrants, who will shack up in slums together in a desperate search for a better life. It is toward these low skilled immigrants from poorer backgrounds at whom the majority of the anger of the native born citizens of a country is aimed at. In theory stringent immigration policy is meant to allow high-skilled and rich immigrants to remain and kick out low skilled workers. But in reality, as is the case with such kind of well meant, stifling??laws, potential high-skilled immigrant workers don't go unscathed by this wrath. In the US for example the yearly cap of work visa's has been limited to 85,000, and every year the requests for these work visa's is oversubscribed. Demand is not being met by sufficient supply. Leading to a shortage of skilled workers in the USA. The rules in Europe are getting equally stringent (Bransten, Jeremy"EU: Netherlands Leading Trend To More Stringent Immigration Rules " )

    And even low-skilled workers don't necessarily turn out to be just cheaper substitutes. A recent case from the state of Alabama highlights this fact. (give example of tomato pluckers in Alabama.(Guarino, Mark "Anti-illegal immigration bill stokes backlash in Alabama fields" ). The US state of Alabama and Arizona enacted stringent anti-immigration laws in 2011 with the express aim of combating illegal immigration. One of the rules allowed the police to  check for documentation during routine traffic stops. This  led to a mass exodus of immigrants and Alabama's farmers said they would suffer because they would have to hire American laborers to help out on the farms, who, the farmers said  would demand hire wages and were also unreliable ). A it turns out, they were not only reliable, but also unwilling to work. This meant a huge shortage of farm laborers which in turn meant fruit that could not be plucked and which eventually rotted.(Neiwert, David "Alabama Harvests The Bitter Fruit Of Its Harsh New Immigration Laws: Tomatoes Dying On The Vine"  ).

   Also, a study by the Center for Business & Economic Research at the University of Alabama estimated that the new rules would lead to 70,000 to 140,000 unemployed and that this growth in the number of unemployed would lead to $ 1.2-$5.8 billion in lost revenue.and an additional $57 million to $264 million in lost state and income tax collections.(Serrano, Alfonso "Why Undocumented Workers Are Good for the Economy").  Perhaps in light of these losses, the anti-immigration bill was mostly gutted in 2013 through a lawsuit.

    What the Alabama example shows is that sometimes even low-skilled laborers fill empty positions where the pay is too low for the likes of the native born population. But it probably is a better alternative to the one that the Immigrant has back home. Just goes to show that  Immigrants whether legal or not help to keep the economic machine running. Low-skilled Immigration occurs probably because immigrants find there is opportunity as well as a need for them in a growing economy. If an economy suddenly spluttered you would see an automatic decline in the number of immigrants. No-body wants to enter a fiercely competitive job market and struggle. There is no need and point in bringing in too much regulation. The mechanism of demand and supply will automatically sort out a majority of issues.

 Temporary steps to improve growth are one's like improving quantitative easing (as in the United States) or increasing the sales tax (as in Japan) but these can never remove long-term fault line continues to stare the politicians in the face: The declining population of the West, especially Europe. The only concrete solution is the easing of Immigration policy.  Bold politicians are needed to confront the angry backlash that may come from left groups and a large proportion of their local voters, and  go on to  carry out the required Immigration reform. But such politicians, at least according to the economist (The Economist, "That sinking feeling again") are lacking.

  






 
   

Monday 8 September 2014

Three Economic Books That all Indians Should Read (For Now )


There are a lot of great books on economics out there, and I’m sure the world would be a better a place if every single individual alive were able to read them. Imagine, all the best idea’s in economics familiar with everybody. I’m sure the world would be a more intelligent place. They’d be fewer people who were driven to enforce ideas because of ideological convictions and more people who looked at decisions  an ideas with a rational and logical mindset.   The more a population is made up of these kind of rational characters, the better classical and neo-classical economic theory works (since it’s underlining assumption is that the individual is rational) and the better and more predictive the world of business runs. Wishful thinking? Probably. But in any case in the past few months I’ve come across three great books discussing macro-economic ideas that I think  all Indians should read to better understand the  basic frame-work of liberal economic policy that I believe is very much needed to underly all economic decision making in the country, so as to improve the condition of our country and it’s people.

                 1.       Why Nations Fail, (Daron Acemoglu and James A. Robinson, 2012) is a discussion of just that. And the conclusion of it’s authors ? That the long term success or failure of a nation depend’s primarily on the quality of it’s institutions (the informal and formal laws and rules of an economy)


    Giving very concrete historical examples from Europe, South America, Africa and the United States, the authors reject the other various hypotheses that have come about trying to explain the disparities  in individual and state wealth across the world, such as cultural differences or Geographical differences, a theory proposed by Jared Diamond in Gun’s Germ’s and Steel. A good example that they give to counter these other explanations  is by showing  the difference in trajectory between South America and North America in terms of economic growth. South America had huge resources such as gold and minerals etc. Which could be exploited, and duly were by the Spanish. The Spanish created institutions of authoritarian rule so that they did not have to share the spoils of South America with the Native Indians. In fact the Spanish rule actually forced them to become slaves. The South American Story is an example where the authors say, institutions were of an extractive nature (What they call extractive institutions).  A situation of taking, and not creating scenarios for growth.

The opposite happened in North America.This was because firstly, there were no real resources to exploit in North America. Secondly, the citizens living in North America revolted against the first  real colonists and rulers of North America, the United Kingdom. The reasons were varied and included high taxes (the rejection of which was made famous by the Boston Tea Party incident). In revolting they were fighting for freedom and liberty of the repressive institutions of the United Kingdom. They decided they were going to rule themselves, in a manner opposite to that of how they had been ruled which presumably had been in a very authoritarian, freedom-stifling manner, and so they created a constitution that focused on liberty and individual rights. The rest is history.

  But in South America, no such fight for liberty came about. No similar constitution calling for freedom. The path of North and South America diverged because of this difference. A difference that has lasted all these centuries. 

  For Acemoglu and Scott, it is the countries institutions that determine if a nation manages to remain stable or not. A more liberal, democratic and secular nation is so because of it's institutions which need to be strong and liberal to make a country and it's people equally free and democratic and voice opinions that dissent against violent and discriminatory authority. As important, these institutions  need to continously evolve and allow space for particular processes like creative destruction to get rid of the defunct and anarchic  and allow the growth of the new and more efficient, and more in with the times,  whatever form that may encompass.

    Which means, according to Acemoglu and Scott that the phenomenal growth rate of a  country like China, unless it's leaders decide to give more freedom  to its people in the form of more political and economic reforms, as well become more flexible in allowing creative destruction to replace  the status quo with better systems of accountability and transparency  in terms of institutions  the present  phenominal growth in China  will come to a stand still. This theory is yet to be vindicated . But the overall lesson of the book has important lessons for Indians. There is a large section of people in India  who believe that coming out with law after law banning or restricting something (Like not allowing alcohol advertisments, not allowing dance bars, attempting to ban pornography....the list is very long ) will bring about some form of cultural morality among the population. Why Nations fail rehects that hypothesis, believing that the institution of trust, honesty,  ethics that naturally come about in a  free population will determine what path a nation will head toward: Prosperity or Poverty.


      2. Why Growth Matters (Bhagwati and Panagariya, 2013) – Most Indians who dwell on economics and keep track of the political and economic events in India will  know very  well, the archaic and horribly restrictive laws that control trade and business activity in India to almost kafkesquian levels. This book is definetly good in listing and  detailing all those rules and laws that are cause for  economic growth in this country not reaching it's full potential. For example, there are the restrictive labour laws that do not allow women to work night shifts,   the  Right to Education Law wrongly emphasizes more on inputs such as the area in square feet of a school, teacher to student ratio, and ignores output such as the development of stronger arithmetic, writing and reading ability of children.
     Most important of all,  the book gives an important way of thinking about economic development  that anyone with leftist and socialist leanings should read and understand. The main jist of the idea is that before we can redistribute the economic pie of the country, we need to make that pie bigger. The way Bhagwati and Panagariya discuss this is in the form of what they call track I and track II reforms. Track I reforms are the base reforms that need to be implemented to make the economic pie larger, such as the liberalization of trade (For e.g. the removal of excessive import duty that unnecessarily chokes private enterprise), or the easing of prohibitive regulation(e.g. the monumental and unnecessary amount of check-lists that one needs to complete to open a factory). This makes small scale business come out into the open as they do not need to fear the burden of unnecessary costs that are billed on them due to an erratic, obscure, and punitive business climate. Which in turn means that they can be taxed. The more businesses you are able to tax, the more revenue you get.
   
What do you do with all that new revenue ? you invest in track II reforms  which are more distributive in nature. A national health policy or a national education scheme giving free education to those who pass the 8th grade to incentivise them to complete thier K-12 education are examples of track II reforms.
 
The important lesson here for left leaning socialists is that a government as poor as India's  can't just redistribute to the poor without first  getting some money. The most effective  way to gain that money is by taxing businesses, but first you have to win thier trust that you will not harm them and keep a stable regulatory environment for them in the mid to long term period.

   That will make them come out of the shadows of the black market, where, in india at least, the majority of small businesses (by far the largest employers in terms of total numbers) reside. 

 
3. The Price of Inequality (Joseph E. Stiglitz)- In India we talk about the government and public sector having too much power; discretionary as well as  monopolistic. But Stiglitz argues that other extreme is possible and does occur in the United States. He argues that in the US the businessmen have too much power, He lays accusations particularly at the  1 %, made infamous by the occupy wall street protests. These are the people right at the top of the income scale. He accuses them of being  corrupt, not in the most obvious way, but through lobbying and donations that they give to politicians to influence legislation that Stiglitz claims  helps them and the big businesses that they own and run at the expense of the  rest of the 99%. 

     Stiglitz lays the  blame on the influencing and lobbying power of  the 1% for the many loopholes in the business regulatory environment especially on taxes. These loopholes, Stiglitz claims are created so that these businesses can duck paying taxes. For example, companies have the ability of to park business profits for a few months in tax havens like the Cayman Islands for a few months and then bring it back in the guise of FDI (which according to US law isn't required to be taxed). Another problem ( for which, I must point out Stiglitz does not propose a very clear solution) is the way the judicial structure is implemented. He argues that in the US the businesses with deepest pockets win. Why ? Because cases  can drag on for years and years, and therefore Stiglitz argues that those who are likely to get financially exhausted are more than likely to lose most of the time. Only the larger can pay out billions in litigation fees and fines. Therefore they are the ones that win a lot of the time. They are the ones, according to Stiglitz, that break  most of the rules in the first place.  And because they are able to pay-out the most, they are hardly affected by punitive punishments. It's the small and mid-level business that get affected the most.

 Now I don't agree with the many proposed solutions Stiglitz has to offer. His solutions to solve this monopoly of business are  too simple, raw and socialist for my tastes. In fact as an Indian I cringe a little when I read some of his solutions which are basically stronger business regulations and higher taxes and strong capital controls. I don't like these restrictive kinds of solutions because they are similar in restrictive intensity as the regulations that the Indian government follows at present. And if you want to see the problems that any restrictive controls create for business and finance, please come to India. I'm not denying the problem that Stiglitz is trying to bring our attention to; Just that the solutions need to be more proactive and intelligent  and create efficiency and not ineffiency in all transactions related to business.
  Despite this major flaw of not providing too viable  a solution, I think that this book has a lesson for India.

  In India it is clear that government needs to relinquish it's hold on a number of industries and business regulation overall. But again,  what Stiglitz warns us about in this book is the other extreme: When private business gets too much freedom. Something that is far from occurring in India. However, what is important for Indians to realize, and this book helps to do so,  is that there will always be a fine line that our law makers and regulators will have to tread on.
 
   Assuming the political situation will remain stable,  our law makers and regulators will continue to make mistakes; creating laws that  sometimes lean too much to the left and at other times too much to the right. But if the general trend is to try and keep it on this very thin, centrist line, India should be in a good long term position. Of course, Let's not get ahead of ourselves, we've got a long way to go before we need to worry about this.

  Why ? Well, below is a graph showing the ideal trajectory  the country should take with regard to Private business Freedom and (my guess) of where we are right now. If you agree with me then you know we have a very long way to go before we need to worry about private  businesses becoming the  bad guys. Our government machinery is taking up that position right now.















Wednesday 13 August 2014

Why Foreigners are Good for India

There certainly has been a correlation between the opening of the Indian economy in 1991 and economic growth. Why ? The allowance of foreign firms to any previously closed market gives access to goods that did not exist previously. There were only three cars varieties  in India in the 70's. Slowly as foreign firms were allowed, the consumer got greater variety. now he can buy a Hyundai, Toyota, Ford and so on. Similarly, entries of Foreign firms in other areas gives consumers better access to "wealth". Here I do not consider  wealth as what it is commonly perceived as i.e. money. But as access to valuable resources.
   Thanks to phone companies like Nokia and LG the average labourer who lives on 400-500 Rs. a day, can own a mobile phone. similarly Televisions with international channels like CNBC, National Geographic, etc. give him access to information and ideas that would have been difficult to come by previously. What foreign entrants bring to a previously closed economy is not only new technology, but also higher human capital, as well as investment capital.The same could be said of foreign entrants in multi-brand retail. The cap on FDI had created vast inefficiencies and monopolies within the retail industry. The existence of middle men within the supply chain in the agricultural industry who jack up prices of farm produce is well known. Farmers can sometimes be paid 20% of what the final consumer pays. Today, the spoilage of 20-30% food produce before it reaches it's final selling point is the norm. The reason is due to the lack of infrastructure such as cold storage units (to preserve food) and of barriers too trade, such as 'Nakas'.
   But, there are gains to be made in other industries too. The entry of the Swedish Furniture giant, Ikea, would change the furniture industry in India. What does Ikea bring to the Indian furniture market ? Firstly, it would bring the technology of mass production at cheap prices. Secondly it would present itself as an important, and large scale consumer of raw materials, such as cloth, wood, plastic etc.  from local producers, which it would require to manufacture it's products, hence giving more opportunities for local producers to grow, financially. Thirdly, it creates more job opportunities. According to a study by price water cooper (2011), every 50000 square feet of development leads to employment of 200 people on average (source:IIMB). This is certainly a plus for a country, 46.5% of whose people are below the age of 25.(CIA Factbook) and will soon be entering the job market. But it is also argued, especially by trade federations in India  that entry by Foreign players will lead to the displacement of the so called mom-and pop stores that are so common-place in India, and subsequently cause the unemployment . Firstly, the potential of that happening will only occur if there is a sudden entry of such firms in a short period of time. In the short-term, there is certainly a potential of large levels of displacement. If, as discussed earlier, these firms make the overall supply chain more efficient, then some inefficiencies(including inefficient employees) might be discarded,  But in the long term, employment levels might return to normal and in-fact increase even more. This is because of the multiplier effect. The multiplier effect is a concept used in economics which explains that an investment of say, x amount would lead to total gains greater than the initial x amount invested. At the ground-level in multi-brand retail, if a foreign firm were to set up stores, this initial investment would  be complimented by investment by other firms(domestic and Foreign) in other avenues such as infrastructure, processing, transport etc. to secure the opportunities of business created by that initial firm, and subsequently opening up employment opportunities  Including for  those who might have been displaced by the entry of foreign competition. It must be noted that in discussing the "long-term", the human pain of sudden disruption is ignored. But it is highly unlikely that there will be sudden disruption. The underlying fact is that doing business is still hard in India. Special mention should be made of the GAAR in this regard. The looming fear of such a policy make's foreign businesses wary. They will enter cautiously, Even with relaxation of the FDI cap, major policies that hinder business still remain, the failure of the government to impose a uniform Goods and Services tax is one example. The relaxation of these barriers to trade will not come immediately but in the time span of years. Enough time for those who might get negatively affected by the entry of multinational retail brands, to prepare for change.

Tuesday 6 May 2014

Immersing myself in Christianity. Involuntarily.



An agnostic's time at Clemson

                                                           

Thursday 17 April 2014

Thursday 10 April 2014

We Cannot Trust Any Lok Sabha Opinion Polls





If the argument from Timothy Ferris' 'The Science of Liberty' is to be believed, the collective wisdom of the average citizen is a good predictor of results. That would mean that any opinion poll would be able to correctly predict the result of a general election before hand. If this is considered to be true then one would assume that the BJP would clearly lead in the 2014 polls. But this may not necessarily be the case. The reason is due to unreliable opinion polls.

          Why are opinion polls so unpredictable, particularly in India ?