Friday, November 30, 2007

Lament loss of Traditions?

The economist and emotionalist in me sometimes head off against each other. One area where this happens very often is with traditions. This summer as I traveled into some very small villages in Tamil Nadu, I observed several practices that we used to follow, but don't anymore because we have become modern and live in cities. The economic explanation is that the practices that have the most demand will continue while those that have least demand will be shelved. This also comes out of Hayek. However, Hayek also lays heavy emphasis on tacit knowledge. In the Constitution of Liberty and Law Legislation and Liberty, he talks about practices that are based on tacit knowledge, and that even the articulation of some of these rules implies shifting emphasis on other aspects of the tradition. So, following something without knowing the meaning or the reason behind it is not actually wrong or bad.

This is fine as long as we do not talk about what practices live and which ones die out. It makes perfect economic sense that only the ones that are very relevant to the current structure of economic systems will continue and the ones that are not very relevant will fall into disuse. However, emotionally it is not very appealing, since we grow up with certain traditions and would like to hold on to them for ever. I think this is where economists disagree with other social scientists. Where as economists think in terms of relative prices and keep the emotional aspect at bay at least professionally (this is good since its more credible), other social scientists are all about emotions.

So should we lament the loss of traditions? As an economist no!! As an emotionalist sure!! Is that hypocrisy?

Wednesday, November 28, 2007

Cell Phone unbundling

Verizon has announced that it will unbundle its phone service. When this goes through customers can buy an unlocked cellphone and buy the service separately much like how it is in India and other parts of the world. This is great news for the markets and consumers. Makes more competition possible and I am pretty confident will bring prices down. I always believed that cell phone companies here charge a lot more for plans in part to cover the cost of all the free phones they give away. That is why customers are locked into a two year contract. If customers can choose to buy cell phones independent of service then they will have a wider choice in carriers and will be able to switch companies if they are dissatisfied with the service. The only problem I forsee is that Verizon works on CDMA technology while several other carriers use GSM. That would limit carrier switching to some extent. In any case, this is a great move towards more competition in the cell phone markets.

Sunday, November 18, 2007

I love the market and competition

When I first came to the US calling cards were really expensive. It cost almost 25 cents per minute, there was a 3 minute round off, my minutes were valid only for a month and there was a $1 user fee for every $5 card not including taxes. In addition it would take forever to connect to the toll free number and be able to call home, and the connection was completely unreliable. Reliance entered the market in Nov 2004, and this is what their plan cost. 13 cents per minute, no expiry of minutes, no user fee, just the federally mandated taxes (25 cents for every $5 which were removed in 2006), 1 minute round off and most important the connection was instantaneous and crystal clear. Fall 2006, Airtel, another company entered the market and offered 8 cent per minute calls, Reliance immediately retaliated by offering 7 cent per minute calls, and even lower for those who called within the Reliance network in India. Since then these two companies have been offering all kinds of deals for the holiday season (there are several holiday seasons in a year in India). So I got double the minutes when I first signed up with Airtel. Then they gave me extra minutes every time I recharged my calling card. Not to be outdone Reliance has been making great offers and easier access as well. They have created a club membership for high volume callers and offer special deals for them. They give away free minutes as well. They know that if I am unhappy I will switch companies, and reputation plays a big role here. I can effectively persuade every new student who comes into my radar to stay away from the company I don't like. After all, that is how I switched to Reliance and knew about Airtel. Even now, the reason its 7 cents instead of 2 cents per minute is because of telecom regulations in India. I have been enjoying this price war and gifts war. Guess who is winning?? Yours truly!! I love the market!!

The perception of Entrepreneurs

The choice of political and legal systems affects the way individuals perceive entrepreneurs. For example in Socialist countries economic activity is either by the government or through monopoly privileges granted by the government. Thus entrepreneurs in these countries do get rich without having to be tested in the market. This creates resentment among people in the market against the haves who seem to have stuff by depriving the have-nots. The truth is it is the government that is depriving them of opportunities to a better standard of living. However, the rhetoric is that of a benevolent government (wonder why that hasn't changed at all even after all these years of public choice), thus all the miseries of the economy are the fault of the entrepreneur.

Reliance is a big conglomerate in India. It is known to have snagged plum deals through dubious and illegal methods during the period of heavy industrial licensing in the 80s in India. In fact as a good entrepreneur all Dirubhai Ambani was doing was respond to incentives set by the prevailing policies. This is a great public choice story. He found a way to bribe and do favours for politicians in return for monopoly rights to produce several products. Since this was done at the expense of other entrepreneurs who were not entrepreneurial enough to snag the monopoly contracts, Ambani was hated by many people. Once liberalization kicked in, the Reliance group was in a great position to take advantage of new opportunities and diversify even further. Reliance is growing bigger, there is a family feud, the company has been split, but it is still creating jobs for a million people or more in their different organizations across India. People take their money and complain that they are depriving the poor of India. What they do not see is the number and variety of products that are available in the market due to them.

I am not endorsing the illegal practices of Reliance. However, as a good economist I can see that all they did was act on an available opportunity. The perception of entrepreneurs in a Socialist country is affected by the legacy of the government. Being entrepreneurial is coveted in a country like the US, while in India (at least until the software boom hit) the most coveted job is to work for the government. Even today, millions of people are willing to bribe government officials just to get that job with the government where there is no accountability, there is job security come what may, and they can earn money under the table with promising and motivated entrepreneurs.

Saturday, November 17, 2007

Are we a racist country?

I saw The Big Fight on NDTV last week on the topic Is India racist? Set me thinking about the whole idea. Some of the ideas expressed in the debate were terrible. One guy especially kept saying that we are racist because we have terms such as Mallu, Tam, Bong etc. I have never heard this argument before, neither has anyone called this racist. I call myself a Tam or Gult based on the crowd I am with. Most people I interact with do not think these are racial slurs. These are simply shortened names for people belonging to a certain region of the country. So instead of saying Malayalee we say Mallu and so on and so forth. Since when did identification with a region become racist. The Professor on the panel had an interesting point to make when the Sardari jokes (similar to Polish jokes in the US) issue was brought up. Everybody at one time or other in their life has made a Sardarji joke. There was a time in the 80s when there were ethnic tensions with the Sikh community that these jokes were offensive, but now they are acceptable again. Harijan as a word was acceptable in the last century, but you can no longer call people Harijan, you need to refer to them as Dalits. Thus whether something like this is a slur or not is a decision made by the people in general and not something that is definitive.

However, the basic question remains. Is India racist? We have had the caste system in operation for several centuries now (in all its modified twisted form today). Is the caste system a form of racism? I believe that we are a highly prejudiced nation. I am not sure that amounts to racism. The population in India can be divided into two major races, the Aryans and the Dravidians according to me. There is reverse discrimination against the upper castes these days and people belonging to different regions believe they are superior to the others. Discrimination can also stem out of prejudice and preference.

My take on this is that probably 1% of the population is really racist, most Indians are just prejudiced especially along caste and regional lines.

Sunday, November 11, 2007

Never make students angry!!

This past week has been a frenzy of activity. Last week General Musharraf declared a State of Emergency in Pakistan, suspended the Constitution and threw judges, lawyers and dissenters in jail. For a country that has become used to rule by the military, there has been a surprising revolution. Students have taken to the streets demanding restoration of the Constitution and Rule of Law. This is the last group any leader wants to go against. Most modern revolts have been Student organized and led. the young people are no group to anger in any country. If they decide to protest they can bring the administration down. The Pakistani people have gone through several corrupt leaders and even put up with the General in spite of his coup. Now, the general has gone over the edge and students have risen up in revolt. I am proud of my Pakistani friends across the border. They are fighting for a just cause, the restoration of the rule of law. Ali my Pakistani friend here has done nothing this past week but work hard towards organizing a peaceful protest against the Emergency Rule in Pakistan.

All it takes is one man to stop the tanks!

Saturday, November 03, 2007

Why do we trust the AICTE

The All India Council for Technical Education (AICTE) is the regulatory body for Technical Schools in the country. They set the standards and accredit insitutions based on those standards. As is to be expected out of an institution like that it is highly corrupt and hinders educational institutions rather than aiding them. Government schools have a terrible reputation in India. Even the poorest parent wants their children to go to a good "private school". There seems to be a paradox here. On the one hand they want to be in private schools because they are better and on the other hand they want to be in AICTE approved colleges. Why is this approval so important to people? It is true that government jobs become totally unavailable to those who have a degree from a private un-accredited college. However, the private sector is more than willing to take up the slack. TCS and other business houses have their own educational institutions and do not care about accredition. The market has indeed catered to the growing demand for certain kinds of educational institutions. When the tech boom hit, several thousand small computer training institutes sprang up almost overnight. In a similar way, when the MBA craze hit, we saw MBA schools in every street corner in big and medium cities. Quality of such institutes is clearly visible through their placement record and through a simple survey of students who go there. If people think a certain school is overpriced for the education they provide they would choose a different school. Why do we need a meddlesome regulator telling us which ones are the good schools and which ones the bad? In addition I am sure getting accredition is a long process with at least a dozen forms to fill out, a few different bureaucrats to please and several archaic practices to follow. As a simple cost benefit analysis, the costs are most definitely very high and so several institutes prefer to remain un-accredited. Its not that the public know this. Why is there this blind faith that an accredited institute is somehow better than an un-accredited school?

Friday, November 02, 2007

Why do we put up with this?

The number of onerous laws the US imposes on its trading parties is increasing every year in my opinion (eye ball estimates). Why are exporters from other countries putting up with such laws that restrict trade and also increase the landed price of the products they are exporting? I am sure there are many missed trades because the cost of trading with the US is too high for some exporters. They just find other markets. It is one thing for the market to impose restrictions through competitiveness, it is an entirely different game for governments to impose such restrictions just because they have certain quality standards. Lets do a thought experiment, and assume that there was no regulation and that this market was allowed to function freely. There would emerge some system of quality control on its own. The argument of activists is to prevent something bad from happening. This assumes that the law makers know better than markets and that they have complete knowledge. This completely assumes away the knowledge problem. Restrictive practices prevent more than just a certain kind of harm. They also prevent innovations in the market. The imposed restrictions may not be the most efficient form of quality control in the market. Back to the question in the title. Why do we put up with this? Well!! If there are trades despite such restrictive policies, it implies that the benefits from trade outweigh these costs. No one, including the US is forcing these traders to export to the US . The exporters are free to exit the market or not enter it if they believe that these laws impose terrible costs on them. Here I am making an assumption that there is relatively free exit options. If there is a high degree of uncertainty they will make shorter contracts that will give them the option to exit quickly if they start losing money.