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Saturday, May 29, 2010

Interesting readings

C. Raja Mohan in The American Interest on India's strategic directions.

A Reuters report on how Pakistanis are responding to the global backlash against Pakistan.

Writing in the Wall Street Journal, Matt Ridley has some great insights into economic development.

M. K. Venu on corruption in Indian telecom.

Sanjeev Sanyal in the Business Standard on how to think about the role of the university in the city.

When Israel graduated into OECD, it got dropped from the MSCI Emerging Markets index, which helped India gain a bit of weight there.

Economic Opportunities and Gender Differences in Human Capital: Experimental Evidence for India by Robert T. Jensen finds that when the BPO industry brings economic opportunities to women in India, this positively impacts investments in girls - who are more likely to gain body mass and go to school.

The global university and the future of human capital by Andrew Kelly in The American.

Thailand's grief: Thomas Fuller in the New York Times, a set of pictures at, and another one.

How to save the news by James Fallows in the Atlantic magazine: an important article that everyone interested in the future of newspapers should read.

5 Ways Steve Ballmer Can Save Microsoft's Mobile Bacon by Galen Gruman: A careful and thorough guide to Microsoft about how to come back into the mobile phone game.

Robert Samuelson says the story of Greece tells us something about the sustainability of the European-style welfare state. Martin Feldstein has a suggestion for how to achieve fiscal prudence in Europe (and by analogy, in India). Also see Feldstein on the Euro crisis.

Taiwan got their corporate income tax rate down to 17%.

Friday, May 28, 2010

The new econometrics

Lalonde (1986) destroyed the old micro-econometrics as thoroughly as Lucas (1976) destroyed the old macro-econometrics, though it was a more nihilistic destruction (``it just ain't working'') and not a sweet idea as in the Lucas critique. In recent years, these ideas have gained ground, including a symposium in the Journal of Economic Perspectives. Falkenblog has a pithy line: if your result shows up only via coefficient t-stats in 2-stage least squares, but not a graph, it isn't there. As someone who did home-brewn matching back in 1995, I feel pleased about my instincts.

Friday, May 21, 2010

The undersupply of criticism

There is an undersupply of criticism

Freedom of speech, and trenchant criticism, is central to civilisation. Too often, people jump to the conclusion that in communist China there is no freedom of speech, but in democratic India, all is well. This represents an underestimation of how hard it is, to get to freedom of speech.

The people who are supposed to speak up maximise for themselves and not for society. The costs of being a critic -- by being at the receiving end of hostility from a government or a corporation or a powerful individual -- are paid by the individual. The benefits of having a critic mostly accrue to society at large and are not captured by the critic. The individual engages in criticism upto the point where personal benefits are balanced against personal costs. The solution to this optimisation is a point where the production of criticism is too low, from the viewpoint of society at large.

A person speaks up, offends the rich and powerful, gets into trouble. Here is an example of that trajectory - a story by Andy Mukherjee about how Lim Teck Ghee lost his job, and here is contentSutra on these classic threats to freedom of speech. I was at the receiving end of three criminal defamation cases by MCX and MCX-SX (in Bombay, Kolhapur and Surat); these cases only ended after the ownership of MCX and MCX-SX changed in the wake of the NSEL scandal.

I feel there are three interesting angles in this problem, going beyond these simple direct attacks on freedom of speech.

I. Official cooperation that corrupts

A Western researcher invests his entire human capital in China studies. But to produce papers on China critically requires cooperation from the Chinese government. Hence, the incentives which apply at the level of the individual lead to an undersupply of criticism.

Read Emily Parker, in the New York Times, on how the world is engaged in self-censorship when it comes to China. In this context, it is worth reading Have all China scholars been bought? by Carsten A. Holz in the Far Eastern Economic Review (we loved thee well) from April 2007.

For a striking contrast, look back at Sovietology, which was done without cooperation from the communist regime. There, the supply of criticism was plentiful since the unhappiness of the USSR did not influence the intellectuals. I do believe that played a role in shaping the minds of people like Andrei Sakharov or Nadezhda Mandelstam, and that made all the difference.

A critic of China would say: Where is your Andrei Sakharov? One Chinese response would be: Where is your `Darkness at noon'?, for part of the answer lies in the treason of the intellectuals in the West.

On a similar note, a journalist who covers a beat has human capital that's specific to the beat. E.g. a person develops specialised knowledge about telecom and covers telecom. If DoT/TRAI threaten to yank his access, this is career destroying. This puts journalists in a position where it is personally very costly to criticise government organisations which are capable of such unpleasantness. This creates a bias in favour of positive media coverage of the government organisations who engage in such unpleasantness. Similar issues apply with academic researchers also. To be a researcher on NREGS you have to be friends with the Ministry of Rural Development.

As an example, it is hard to do monetary economics in India without cooperation from RBI. Hence, most money/banking economists and journalists in India do not criticise RBI. As an example, on 7 December 2016, RBI blocked two journalists from their press conference that unveiled the monetary policy announcement. This is one episode in which the information spilled out, but such actions against journalists have been undertaken many times before by RBI. This was perhaps a response by RBI to the trenchant criticism by these two gentlemen in previous days. RBI's action hurts the careers of these two brave people. How do you think their employers will respond, if it's known that these two persons no longer have access to meetings at RBI? Most journalists internalise this threat to their careers, and the banking/finance beats of all newspapers are uniformly supportive of RBI.

II. Profit maximising firms have little commitment to enlightenment values

The second dimension of this problem is the difficulties faced by private firms and their employees. Barring Google, all large Western firms have cooperated with the Chinese communist party. When faced with a hostile State, the firm focuses on profit maximisation and forgets about enlightenment values.

I noticed this paragraph in an article Foreign Companies Chafe at China's Restrictions also in the New York Times by Keith Bradsher:
``They say, `Don't show us broken models; we're looking for a completely different way,' and you see a much greater willingness to experiment with completely untested policies,'' said a senior executive at a multinational who insisted on anonymity for fear of retaliation by Chinese regulators.
This highlights the atmosphere of fear which shapes information and opinions about China in the public domain.

In India, employees of RBI-regulated firms do not have the freedom of speech to criticise RBI. RBI controls a large number of levers in a non-rule-of-law environment [example], which are used to punish the people who criticise RBI. This creates fear among practitioners, and people who might in the future work in a RBI-regulated firms tend to practice self-censorship. This yields an environment of diminished discussion which hampers sound decision making by RBI.

III. Blackmail by a surveillance state

The third dimension is related to the larger problems of privacy and protection of the individual. Every critic has personal foibles. A society in which the government has ample information about critics is one in which a critic can be blackmailed by the government. This is one factor generating docility amongst intellectuals in China.

As Janet Reitman says in the Rolling Stone:
... whistle-blowers are almost always complex, often compromised outliers. And while moral outrage surely plays a large part in a whistle-blower's decision to come forward, so may a combination of anger, revenge, hurt feelings, opportunism or financial benefit. The question, ultimately, is whether their questionable motivations or checkered past make their words any less credible.
India is rushing headlong into an environment where the government controls vast amounts of information about citizens (all neatly indexed by a single key, the UID). When cash is replaced by digital payments, the government obtains tremendous amounts of information about the activities of each citizen. Developments like Aadhaar, Digital payments, FIU, etc. should be accompanied by a tremendous emphasis on privacy.

We should think twice about these developments, for they could threaten the foundations of democracy. If information comes into the hands of a capable bureaucracy before there are deep roots in civil liberties, the trajectory of a country could go badly wrong.

Genuine freedom of speech is hard to achieve

We often think freedom of speech is a natural state, particularly for us argumentative Indians. But genuine freedom of speech is actually a difficult state to achieve, since relatively small threats and abuse of power are enough to stifle criticism. We need to, hence, go out of our way to strengthen the position and personal incentives of critics.

Conversely, when a country steps out from dictatorship and tries to become a democracy, this is truly hard. It has taken many decades for India to build up to the existing half-decent quality of public discussion. This soft infrastructure, of the checks and balances of liberal democracy, is hard to achieve. It can easily be choked off if more power is amassed by the State apparatus and enlightenment values lack deep roots.

Goverment versus individual, Singapore versus India: Examples

A few years ago, the Singapore government got unhappy about some remarks by a Morgan Stanley analyst named Andy Xie. They forced the firm to sack him. The offending text -- from a personal email that he wrote -- was:

The dinner was turned into an Oprah with PM Lee Hsein Long (sic) at the center. The topic was on the future of globalization. People fawned him like a prince. Of course, he is. There are two reigning princes in the world that the Davos crowd kiss up to, Jordan and Singapore. The Davos crowd are Republican on economic issues and democratic on social issues. Somehow they manage to put aside their moral misgivings and kiss up to Lee Hsein Long and Abdullah. 
I tried to find out why Singapore was chosen to host the conference. Nobody knew. Some thought it was a strange choice because Singapore was so far from any action or the hot topic of China and India. Mumbai or Shanghai would have been a lot more appropriate. ASEAN has been a failure. Its GDP in nominal dollar terms has not changed for 10 years. Singapore's per capita income has not changed either at $25,000. China's GDP in dollar terms has tripled during the same period. 
I thought the questioners were competing with each other to praise Singapore as the success story of globalization. Actually, Singapore?s success came mainly from being the money laundering center for corrupt Indonesian businessmen and government officials. Indonesia has no money. So Singapore isn't doing well. To sustain its economy, Singapore is building casinos to attract corrupt money from China.
On a related note, see this treatment of attempts by the Singapore government to make difficulties for Far Eastern Economic Review. Or, this strange treatment about a GDP forecast.

It is useful to compare this against a story from India from September 2001. At the time, Joydeep Mukherjee worked on India rating for Standard and Poors. He gave an interview to Outlook magazine which harshly criticised the Indian government, with text such as:

On paper, India has liberalised its investment policies a great deal. In practice, it has not. Attitudes have barely changed. The visible barriers to foreign investment have been reduced but not the 'invisible' ones. The hassles, time-consuming procedures, and petty license and permit-raj that thrives at the local level are still a huge obstacle. India has made some progress towards `one-window approval' but there is no `one-window bribe' that can finally clear a project and allow the promoters to proceed without repeated requests for more bribes, and unlimited delays.
Foreign investment is seen by local officials and politicians as one more source of illegal income and thus receives all the attention that predators give to easy prey.
Argentina, Brazil, even Egypt are way ahead, and let's not even talk about China. Botswana gets more foreign investment than India. In a competitive world, you have to meet global standards to win. Indians are not ready to accept this. They are used to inferior Indian standards developed over 50 years of economic isolation from global currents. It does not matter if policies toward foreign investment are better today than they were a decade ago in India. What matters is how they compare with policies in other countries. The ghost of the East India Company is alive and well in modern India, which still has a schizophrenic attitude towards opening up to foreigners. Politicians in other countries take credit for bringing foriegn investment to their country because it creates jobs and wealth. Which Indian politician is willing to publicly defend a foreign investment project in India when it comes under attack from the swadeshi and the leftist crowd? They are happy to seek bribes from foreign projects but will not speak in their favor when needed.
It is not just cowardice but also the reality that India is still in two minds about dealing with foreigners. Other countries have made up their minds, which is why they are getting more foreign investment.
The public sector has become a milch cow for politicians, bureaucrats, and corrupt businessmen. It collects money from the country at large through taxes and distributes a growing share of it to these three groups. This unholy trinity is blessed by ideologues of the Left and the Right, allegedly because it is good for the poor or good for India's soul. Privatisation threatens the core of this system, which is why it has been successfully delayed and now made almost irrelevant.
Joydeep's arguments were well-known to people in India but they were harsher and more direct than what most analysts say about India in public. Many people in the Ministry of Finance felt that these words were indiscreet for someone analysing India for a rating agency, who had special access to the policy establishment by virtue of working on India rating. It was felt that an implicit quid pro quo -- of access to policymakers and information in return for silence in the public domain -- had been violated.

The government reacted by complaining directly to the top of the agency. The government did not ask for his sacking but complained about him, saying that his publicly aired views were inappropriate. It was the Ministry of Finance that complained, not the prime minister or someone in the political world. As a result, Joydeep was taken off Indian rating. He was not sacked.

The actions by the government were undertaken by the senior officials, both bureaucrats and Minister, of that time. Subsequent Ministers and bureaucrats simply worked with S&P, and its analysts, and the original disputed matter did not resurface as an irritant. The institutional ties between the government and the international financial market were maintained, regardless of the problems that arose between any individual analyst and government officials.

I feel that what worked was the stated and unstated rules, in a democratic framework, which shape the behaviour of the MoF staff. In India, negative information about the country is routinely debated in public and is not a shame or a state secret. Hence, Indian officials only think of criticising foreign analysts on questions of fact: highlighting errors or inappropriate statements. They don't simply ask them to avoid all negative statements about India.

At an individual level, MoF staff continued to meet Joydeep informally, without fear of disgrace or embarassment, as might have been the case in an authoritarian system. The issues raised in the controversial magazine interview remain relevant and have not been buried.

Wednesday, May 12, 2010

Israel graduated into OECD

Israel graduated into OECD. Theirs is an interesting saga.

In 1977, they liberalised the capital account, and got themselves into a mess. This opening of the capital account was then reversed.

In the 1990s, they got back to this issue, and by this time, the `impossible trinity' was better understood. By 2003, all capital controls had been removed, alongside a shift to a floating exchange rate and inflation targeting. Capital outflows were liberalised as well, so their typical configuration involves large capital inflows alongside large capital outflows, which avoids one-way pressures on the exchange rate.

The next few `accession candidate countries' for OECD are Estonia, Russia and Slovenia. Here is the list of existing members.

Addressing the problems of Rupeezone

While everyone is pondering the ways in which Eurozone is not an optimal currency area, I found myself worrying about the ways in which Rupeezone is not an optimal currency area. In the Financial Express today, I have a column: Addressing the problems of Rupeezone.

Here are interesting materials on Greece which set the stage for this:
This is an interesting demo of how economics happens today: an interleaving between journal articles, newspaper columns and blog posts.

Monday, May 10, 2010

Comments are now moderated

An employee of Unicon Investment Solutions started spamming this blog on a big scale (over 50 commentspams a day). So, sadly, comments are now moderated. Blogger: you really must have a mechanism to shutoff a given person from posting comments.

Friday, May 07, 2010

Interesting readings

Pratap Bhanu Mehta in the Indian Express on the problems of getting to an effective State.

Can the courts help get us out of the mess that is Indian labour law? A report in the Indian Express says that the courts are inclined towards penalising striking workers of Indian Railways for the pain they have caused commuters of Bombay. Similar principles can help put the fear of large financial penalties upon political parties contemplating disruptive activities also. As an example, the courts have stopped the Shiv Sena from producing noise pollution at Shivaji Park in Bombay.

Anne Applebaum gets a taste of India (on Slate).

Integrating into the world economy is about removing government-induced barriers to movement of ideas, goods, services, capital and people. It involves a lot of little pieces - such as reducing the hassle of getting a visa to come to India. [also see]. It involves better connecting up with Bangladesh and India. It involves getting away from a deeply ingrained notion that the colour of the skin matters, that Indians and foreigners should be treated differently. See this editorial in the Financial Express on the capital controls against FDI by foreigners in the business of cigarettes.

DNA forgot to show the author's name for this excellent piece titled Make RBI/MoF's forex market interventions more transparent. Ila Patnaik in the Financial Express on the choice between inflation control and exchange rate targeting.

Rajkamal Iyer and Jose Luis Peydro have a column on voxEU where they talk about contagion with weak banks in India. Interesting new derivative contract launches: box office futures approved at CFTC, and futures and options on cheese launched at CME.

The nice new McKinsey report on India's urbanisation.

Vikas Bajaj in the New York Times on Walmart's work in Indian agriculture.

A great animated image showing the growth of information for one Indian town (Ludhiana) on Open Street Maps (OSM). Till late 2007, there's nothing there, but after that, almost every month we see the data growing. [back story]

M. R. Madhavan on new laws in higher education, in the Indian Express. Jessica Wallack in the Financial Express on the Right To Education Act. Richard Levin of Yale on universities in Asia.

Reading in a digital age by Sven Birkerts on The American Scholar.

On Poland's sorrow: the speech that Lech Kaczynski was to read at Katyn. I was astounded and delighted when Russia announced that it would start opening the archives on Katyn. For the first time, I see the Putin regime in a slightly less pessimistic way. Roger Cohen in the New York Times says that Poland is an inspiration to all of us: a piece that every Indian and Pakistani must read. And read Nina Khrushcheva on Project Syndicate.

Wen Liao in the Financial Times on the analogy between the problems of Bismark's Germany and what China faces today. The phrase 'great chain of production' that she uses seems reminds me of the phrase 'Greater East Asia Co-Prosperity Sphere' used by Japan in the 1930s. Also see Jonathan Holslag on Project Syndicate about the limitations of China's charm offense.
There's quite a bit of concern about China's economy: See Gordon G. Chang in World Affairs Journal, and Takatoshi Ito on Project Syndicate.

Laszlo Bruszt, Nauro F. Campos, Jan Fidrmuc and Gerard Roland give us fresh insights into why India evolved as we did after 1947, and what will happen in China when the communist regime collapses.

Cory Doctorow in Publishers Weekly on the dangers that publishers face by cooperating with closed systems like Apple's iPad or Amazon's Kindle. A great deal of information and creative output is being produced today in the form of video files. I was not aware of this earlier: there are terrible patent problems hobbling this field. It is as scary as some corporation owning the English language.

Harald Hau on how financial markets in the crisis: he thinks it was more about missing markets than market failure.

William Kerr and Ramana Nanda on what governments can do to fuel entrepreneurship.

Malcolm Gladwell has a great story in New Yorker magazine on spycraft. I have a one track mind: it made me think about monetary policy.

Did you know that women have the power to shake the earth? [Statistical testing scheduled for 26 April]

Thursday, May 06, 2010

Investigation in New York

The first and foremost function of government is law and order, the proper functioning of police and judiciary.

US authorities have built up an impressive track record for getting hold of the bad guys after an attack. In the case of the bombing attempt at Times Square, investigators got the attacker 53 hours after the attack, and in the nick of time before he'd make it to Dubai. The New York Times is doing a great job of telling the story:
With such high quality investigative capabilities, each time an attack takes place against a US target, a part of the terrorist network gets lit up and taken out. This also exerts a deterrent effect. I am reminded of first Iraq war: Iraqi soldiers were so intimidated by the rapid and accurate return fire based on gun-laying radar, that they often refused to switch on their field artillery. Effective responses are a powerful deterrent.

When such police capabilities were not put into place, there is a greater temptation for policemen to ask for restrictions of human freedom in order to make their life easier. As an example, open wifi networks are banned in India but are legal in every other democracy that I can think of: This is a testimony to the incompetence of the police. It reminds me of the police having banned mobile phones for many years in J&K. High quality investigation is hard work, and interfering with personal freedom is easy. It is only in a police state that a policeman's job is easy.

For a contrast to the investigation in New York, the court threw out the claims of the police on two suspects in the Bombay attacks. Also see Mustafa Plumber and Sukanya Shetty, reporting in the Indian Express. This speaks well for the honesty and independence of the courts, but badly for the capabilities of the police in tracking down the actual perpetrators.

In a positive development, the Indian Supreme Court has blocked the use by police of narco-analysis and brain-mapping. In my mind, these have been a mixture of ineffective snake oil and torture. See reportage
by Rahul Chandran and Jacob P. Koshy in Mint, and by Vinay Sitapati in the Indian Express. Also see this editorial in the Indian Express.

Monday, May 03, 2010

The cutting edge of Indian financial reform

In recent years, there has been an upsurge of difficulties in Indian finance, rooted in the `financial regulatory architecture' - the block diagram of which agency does what. A lot of what is found in India's present block diagram is rooted in obsolete legislation.

On the SEBI/IRDA problem about ULIPs, Vivek Kaul is writing a series of good pieces in DNA: Why IRDA seems an industry lobby and not a regulator, Guess what got SEBI's goat?. Also see Jayanth Varma in Financial Express. Deepak Shenoy has a good post showing why ULIPs are bad for your health.

Jayanth Varma smells a rat when insurance companies, banks and NBFCs in India have been exempted from IFRS. And, see his Indian example of rules versus principles.

Shobhana Subramanian in the Indian Express on FSDC.

Ila Patnaik in the Indian Express and T. K. Arun in the Economic Times both come at the idea of unification of all financial supervision into a single agency. On this subject, you might like to also see an old piece of mine in Business Standard.

Sunday, May 02, 2010

The bogey of exports growth

There is a lot of talk about rupee appreciation in recent weeks. It is claimed that rupee appreciation is bad for exports growth and that RBI must trade in the rupee-dollar market so as to force the exchange rate back to (say) Rs.50 a dollar. I wrote a piece in Financial Express yesterday, about the real effective exchange rate, exports growth, and the Chinese exports miracle.