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Saturday, October 28, 2006

In Defense of Swaminomics

Atanu Dey writes about “Demographic Cognitive Dissonance” in this post, where he jabs at Swaminathan Aiyar’s article in the Times of India on probable demographic dividends that India may reap in the years to come compared to that green, fire-breathing neighbor, China. I like Aiyar but this is not about that.

I am in agreement with the core argument in the post but am unclear about how it’s in conflict with Aiyar’s viewpoint. But, before I get to that, I must express some issues that I had with the basic framework of Atanu’s arguments:

First, Atanu uses the terms cognitive dissonance and stupidity synonymously. Oh, the error in judgment! Cognitive dissonance refers to the incompatibility between two sets of beliefs or actions, between what you already know and new information or interpretation. For example, in the case of someone who buys an expensive car and later discovers that it is not comfortable on long drives, dissonance exists between the individual’s beliefs that he/ she has bought a good car and that a good car should be comfortable. Stupidity? I think not. Again, in the case of Bush, Atanu assumes cognitive dissonance by assuming knowledge of Bush’s original intent, revision of his beliefs and the conflict between these two. He then takes a leap and labels this dissonance stupidity. Unscientific, wrong and even politically incorrect. Atanu rejects the use of hypocrisy at the start of his article but that’s exactly what he means, not cognitive dissonance.

Second, I did want to point out that Aiyar is an economist. The sort that has a master’s degree, consults for the World Bank, is a correspondent with the Economist and works as the Chief Editor of the Economic Times. Since the article expresses some lack of clarity on why Aiyar’s column is called Swaminomics ( as well as whether Aiyar is in actual fact, an economist), I thought it necessary to point out.

And yes, Reaganomics:

“One cannot be sure, of course, since there was “Reaganomics” and Mr. Reagan, a minor actor and later a major POTUS, did not even act as an economist in movies, leave aside be one. Just adding “-nomics” to your name therefore does not reveal what your day job is”.

When Reagan came into office, the Fed stepped on the money supply leading to a temporary recession. Reagan knew what was happening, understood that the only way to curb inflation was to accept a temporary recession. He supported Volcker and did not try to intervene. I don’t think any other president in the postwar period would have stood by without trying to interfere, to intervene with the Federal Reserve. Remember those famous words that Shultz often mouths – If not now, when? If not us, who? The number of pages in the Federal register halved during Reagan’s time, a stark symbol of Reaganomics - the small government belief that emerged as an economic imperative and political ideology. Reaganomics itself may be up for debate, but its legacy can be traced throughout economic policy in the U.S. Thus, to dismiss it as a trivial suffix is ludicrous, almost bizarre.

And oh lord, this notion that you need economists to implement an economic policy defeats the function of CEOs, economic aides and…even Reaganomics. But, lack of specialized knowledge might explain the confusion on cognitive dissonance (OK, I’ll let it go!).

And finally, the article spews –
“Crediting Lalu with improving the railways is silly at best”.
Doesn’t that Lalu has boosted revenues by 15.5% without raising fares or turned around and made an estimated profit of $2.5 billion in 2005-06 count for anything? Low hanging fruit perhaps. But, nobody was picking until now.

Anyway, as Atanu says, enough about Lalu.

First off, I completely agree with the arguments in the article -

"…what matters is the per capita GDP (which is another way of stating the income of the average person) and to some extent the per capita GDP growth rate, not the GDP nor the GDP growth rate…"

What I am in disagreement with is that Aiyar’s article is in conflict with the key arguments in the post. It’s not. Aiyar offers a description and a description alone of how increased population levels may benefit the Indian economy in the long run. Atanu offers numbers to support this argument – clearly, a complementary one, not a substitute.

Aiyar does not propagate procreation for the demographic dividends that it yields and he definitely does not propagate it amongst India’s resource-constrained or indigent (Lalu’s not middle class and I can’t discern which part of the article manifests this sentiment). The human argument is that Aiyar’s too much of a believer in human rights and choice to support such propaganda one way or the other. The economic argument, of course, is that he states that demographic dividends are realized post a fall in population growth rates. He merely offers that although the overall population rates in India have declined, the rate of such decline is relatively low compared to China because “fertility rates remain high in the backward states of Bihar and Uttar Pradesh”. Therefore, we could reap demographic dividends for a longer period of time:

“In many countries, the demographic dividend lasted four or five decades. In India's case it could last much longer, maybe a century.”

And Atanu’s calculations of 25 years (I used the CIA factbook figures for India and China's per capita GDP (PPP) as USD3300 and USD 6800 respectively and obtained a lower estimate but that’s close to nitpicking) is well within this time frame. So, not sure how the arguments are in conflict.

Most important, I am shocked that Atanu has such a bleak view of human life. To state that the rich enjoy that “the higher the numbers of the poor, the lower their wages, and consequently the higher the standard living for the non-poor” is offensive writing that alienates rather than includes. It’s worse if this is a jab at Aiyar – his columns on the Uttar Pradesh Sodic Soils project and the use of community empowerment to reduce poverty in general are a far cry from this base view of human life, living and longing.

As an academician, I could never subscribe or espouse this rule of “keeping your mouth shut and be suspected a fool, rather than open it and remove all doubts”. Self-expression is integral to sound pedagogy and although I recognize that there’s a thing as responsible journalism, I am not sure expressions as these argue the case very effectively.

But, then again, I am no economist. So perhaps this whole post is moot.

Wednesday, October 04, 2006

Got Mail?

Just yesterday, my husband and I were discussing medium risk business ventures likely to be most profitable in the sub-continent. My husband, quoting the ills of the Indian postal system which is not only one of the largest networks in the world, but also one of the most inefficient, fervently supported the idea of turning franchisee for one of the private-sector couriers such as FedEx Corp. or United Parcel Service Inc. And it seems people have fast caught on to this idea. Today, private-sector couriers such as FedEx Corp. and United Parcel Service Inc. have grabbed more than half the delivery business nationwide in India.

And the inefficiency of India Post only helps. To illustrate, the average employee in the U.S. Postal Service handles more than 15 times as many pieces of mail a year as the average Indian postal worker. Further, the U.S. postal service is profitable, reporting an operating profit of more than $1.5 billion last year, while India Post lost $300 million.

What is of note is that India Post is not alone. An article in today's Wall Street Journal, "Snail Mail: As Economy Zooms, India's Postmen Struggle to Adapt - Beaten by Private Couriers, And Unable to Downsize, State Tries to Diversify - Selling Cashews and Aloe Vera," notes:

State-owned phone company Mahanagar Telephone Nigam Ltd. used to have a monopoly on much of the phone service in India. Today it is battling with an onslaught of internationally financed competitors that have driven the quality of service up and rates down on everything from local to long-distance to cellular service to Internet connections. State-run airlines Air India and Indian Airlines have been under attack for more than a decade and the industry has just become more competitive with six new carriers starting operations in the past two years. The banking sector is still dominated by the giant State Bank of India but the country's growing middle class is taking most of its business to the high-tech private banks, such as HDFC Bank Ltd. and ICICI Bank Ltd. leaving the state banks with the least-profitable businesses and worst borrowers.

And these are important constraints in India's growth maximization problem. Even as outsourcing dollars help to change the face of the Indian economy and its consumers, such change is moderated by political realities, chief among which is a succession of unstable coalition governments that oppose layoffs and privatizations. For example, when the current Congress led coalition first came to power in 2004, one of the first things it did was close the Disinvestment Ministry which oversaw privatizations. Contrast this to the closing down of unprofitable organizations and auctioning off of many of the U.K.'s largest state-owned companies in the 1980s despite violent strikes and opposition from the left.

These convoluted politics explain why India Post is forced to maintain its 550,000 employees with full benefits and run a vast network of post offices, most of them unprofitable. What's more, politicians keep India Post from raising postal rates, so it loses money on almost every postcard and package it handles (see the figure above reproduced from the WSJ article).

Moving forward, India needs to figure out a clear role or exit strategy for its state owned institutions that are clearly inconsistent with its model of economic growth. Me, I am considering investing in that UPS franchise in Hyderabad.

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