Special Economic Zones in India

This past two days I have been in Delhi at a conference promoted by academics and policy makers to talk about Special Economic Zones (SEZ) in India. The idea seems to be the brain child of someone who is really retarded. We have already failed with programs such as EPZ (Export Processing Zones) in India, and to think about adding another layer of bureaucracy to an already existing one is maddening to say the least. None the less I was part of a team that attended this conference. On Day 1 the only three clear speakers were two academics and a Chartered Accountant. The latter had a good presentation about the ground rules of the act. Looks like I have missed a lot while being away from India. One of the key issues that are in the media currently with the SEZ is that of Agricultural land being converted away from agricultural purposes. This is again such a bunch of nonsense. The expert from the Commerce Ministry at the very beginning of his presentation provided statistics that showed that of all the land that was going to be acquired for this scheme, approximately 1% would be agricultural. I do not understand what the brouhaha is about.

Let us for example assume that the idea of SEZs is great and that it is going to be an immense success for India. Now let us also assume that a lot of the land acquired is agricultural land. What is the problem with that? We have been a food surplus nation for several decades, and assuming the land would be more productive with industrial units, what is wrong with using such land for industrial purposes? Shouldn’t we be moving towards productivity and growth rather than the other way around? One of the reasons behind it I think is how the land tax structure works in India. If you own agricultural land then you do not pay tax on it or something like that. In addition you get a humongous amount of subsidies from fertilizers to electricity. So there is a strong incentive from land owners to hold out and protest anything that will take away their future income streams. However, I am not sure it is the land owning agricultural community that is much concerned. After all they will make a lot of money by selling this land to developers.

There is a huge anti-growth and anti-industrialization lobby which I think is promoting this idea under the guise of loss of agricultural land. What is sad is that the media has played up the idea so much that some intellectuals also believe this to be true. With all this brouhaha, a small story in the Times of India Delhi edition was almost missed (Hattip Parth). This is the story of a small village about 50 Kms South of Delhi. Apparently, developers have been buying up land here and obviously land prices have gone up to dizzying heights within a short period of time. The result, the villagers sold their land, made a ton of money, (which they are currently spending building garish three story houses, buying Mercedes cars and fashionable clothing) the developers got the land they need and new malls are coming up in this region to serve the villagers whose demand for consumption goods especially designer brand clothes, has suddenly shot up. No one seems to be complaining that agricultural land was being diverted away in this case. Agriculture had long ceased to be lucrative in this small village. Likewise there are several pockets of land which are simply inviable for agriculture and the land owners could use some good money.

Something similar happened with land acquisition for the National Highways Project. For a change the land owners were offered market prices or higher, and that quelled all dissent for the project. The righteous indignation land owners feel when their land is taken away from them is understandable. This is the result of offering prices that are totally uncompetitive and below the market value. Giver sellers the market price and why would they care. Now the market price would be based not only on the current economic scenario of the region but the expected future streams of income. If, as was being suggested by several people from the government, prices of land would fly through the roof once development begins after acquisition, and this is common knowledge which is why they demand just compensation, land prices will reflect that. Developers who do not want a hold out situation will have to make offers appropriately.

The power of vested interests was very obvious yesterday at the conference where the lot was that of real estate developers and government officials who apparently have huge rents to gain from this project. There were very few academics and other practitioners in the group. It was pretty depressing to me to hear speaker after speaker try to talk in the same platitudes and not say anything substantially important. They kept highlighting the success of China’s SEZ and that being the reason for the large size of the planned SEZs in India. Traditionally the EPZs have been really small units. This time they want to do it big. What is big in this project is just the rents and nothing else and that is stark. I believe each person who attended the conference paid up to Rs.50,000 (~$1300) to be there.

It was obvious that the law itself was flawed and a number of real concerns on the ground have not even been thought about by the Commerce ministry. Everyone is just caught up in the whole melee and excitement of these projects. One legal practitioner even spelt out two separate statements from the act and pointed out that they were in conflict with each other and asked the Commerce ministry guy if they had any answers. The latter clearly had no clue about this contradiction and evaded the question.

The only two speakers who made sense in the morning sessions were my Professors who in many clear terms stated that we did not really SEZs for the kind of development they were looking at. They mentioned that the kind of reforms required was clearly outside of the topic of SEZs and that was the need of the hour. Even with the idea of SEZs unless the macro economic problems of land reforms and property rights were sorted out and some of the draconian laws and regulations were removed even with the SEZs we would only face more problems than solutions. This however, was received not too well by the crowd of bureaucrats and rent-seekers.

The afternoon session started off interestingly enough with a simple description of the procedure of the legislation of SEZ and how an individual or developer could jump on the bandwagon. This was followed by something like a panel discussion with government officials, individuals who are running SEZs right now and my poor Professor who was completely ignored for the better half of the hour that he was on the dais. Again the questions from the audience were most depressing and related to things such as size and operational aspects rather than the actual viability of such a scheme.

One of the experts on stage kept insisting that none of the consultants they approached initially felt that such a project was viable and that they had to spend a humongous amount of money to fly to Washington DC to talk to a consultant to even agree to work out a model, and even then they had to pay half the money upfront to persuade him to even think about the project. Now, correct me if I am dense, but if highly trained professionals feel they cannot provide something to this scheme what makes career bureaucrats believe that their project is even remotely intelligent? They had used hard earned tax payers’ money to make these trips to DC and even pay this consultant upfront. What a waste. And this expert kept telling this story as if it was a great achievement. I couldn’t help wondering if we are just a country of morons and idiots.

On the whole it was a depressing day for me. I thought it would be an interesting day with lots of academic debates; and it turned out to be a complete sham in the end. There were about 300-400 participants. At $1300 a person, you do the math at the mammoth waste the whole day was. Not just in terms of money but also in terms of time. That was just day one. Thank heavens I did not plan to stay the second day.

Education Vouchers: A Success Story in Delhi

Education Vouchers are a pet peeve with libertarians at GMU. I am not sure how successful they are in the US, but it is a reality in at least Delhi in India and I am proud of the team from CCS who has made education vouchers come true. This is a story of humble beginnings and huge motivation. Parth who is the idea behind this scheme has a PhD in Economics from Auburn University. He was interested in the Education sector and came back to India to start CCS and this amazing voucher scheme. So the idea began with small campaigns using volunteers. I talked to Parth about it and he mentioned that they had volunteers go out in Vans with loud speakers and talk about the scheme. They also handed out pamphlets, held skits and told jokes about the pathetic state of government run schools in some of the poorest neighborhoods where the children attended the local government school. They explained to them how vouchers worked and, volunteers went back to fill out application forms from people in these neighbourhoods. They anticipated about 400-500 applications and had a whopping response of approximately 120,000 applications. This was way above their expectations. The ingenuity of their scheme lay in how to got the support of local government officials. Since most people were not even aware of the scheme and its implications, they invited the ward inspectors (similar to block level bureaucrats) to a ceremony where they picked 6 children from each of the 82 wards in Delhi through a lottery. The response was overwhelming and they apparently also had people who were not eligible who had applied to be part of the voucher scheme. That is, families whose children were not in government schools had also made out applications for their children. Apparently there were a lot of disappointed people the day the lottery names were picked out by the ward inspectors. That is understandable. Today the first batch of children is going to shift out of government run schools to private schools thanks to CCS. The cost of the vouchers is Rs.3600 (~$40) per year, per student. The campaign has been so successful that Parth has teams working out of other cities in India doing something similar. He has also found a Middle East based research Organization that is funding a huge research project in educational vouchers in India. This is another feather in his cap, because obviously research is more expensive than the actual act of giving out vouchers. What we need right now is more sources of funds and more sponsors. Once citizens really notice what a huge difference vouchers make to the lives of their children I am sure there will be an even more overwhelming response. The success of this whole scheme shows that the power of ideas and tenacity go a long way in achieving results in India. People are ready for change as long as they are made aware of it and part of the scheme. I am proud of Parth and his team who stopped complaining about the pathetic state of education in India and went ahead and did something positive. It makes me even more motivated to come back to India, and do things here. There is tremendous untapped potential in this country, we just need to look for it and find ways to bring in the change. Educational Vouchers were totally unknown, and while the rest of the NGOs and other groups were talking in terms of educational reforms through education of women and blah blah Parth’s success is something we should pay attention to. We expect many more such inventive and innovative ideas from you and your team Parth. Great Job!!!

The Economics and Public Choice of Harry Potter

Megan McArdle has this interesting point about opportunity costs in the Harry Potter series. The (un)fortunate habit with economists is that they are forever looking for economics in everything. I used to think it happens only to people like Pete and Fred who have been in economics forever, but then I was rudely awoken when I found myself unconsciously applying my economic knowledge to every little thing in my life, when I am shopping, during a recent midlife crisis and while reading Harry Potter. The first four Potter books were plain fun to me. I love fantasy and since JKR follows a Tolkien style narrative it was easy cozying up with a Potter book all night. All that changed with the Order of the Phoenix. Here the plot became very economic to me. It was all about bureaucratic interference and the public choice arguments surrounding it. Bottom line, when the government interferes in education it screws it up. It also clarifies that when there is a shortage of something a black market always springs up. Dumbledore's Army or the DA was a black market of sorts. There was a demand for learning and using magic spells at Hogwarts, and since there was shortage of the same due to regulation, an entrepreneur (Hermione Granger) came along and took advantage of the situation to start a club to learn magic secretly. The power of vested interests also comes out. Fudge's aim was to keep his post and so he mistakenly believed that Dumbledore was after the Ministry and refused to believe the truth about U-No-Hu.

U-No-Hu had a single purpose and since he was like a one man planning commission he planned everything to be in power and become immortal. His band of followers were terrified to bring in any new ideas both because they were afraid of his power and also because they believed that he had tested the limits of magic and knew everything. (the latter is how economies perceive of planning commissions, a bunch of highly intelligent and widely read individuals) However, if he had used non-coercive means to discover the knowledge in the market he would have discovered the secrets behind more powerful magic. The single minded pursuit of immortality blinded him to everything else. Any of us would have told him that he suffered from the knowledge problem. duh!! Sure he had all the information, but he did not know all the subtle stuff which makes up knowledge. He was like a super computer that processed all the data but missed the real stuff. Come to think of it, the whole series reeks of the knowledge problem. Needs more thought!! More on the knowledge problem later.

Entrepreneurial elements always find a way!!

One of the many things that hit me when I first landed in India was the number of unsolicited calls from all kinds of marketing groups selling me all manner of things. It is pretty irritating, especially when you are trying to doze in the middle of the day after a hearty meal, and just as you drift into dream land your phone rings and there is someone at the other end trying to sell you credit cards or insurance or what have you. Here is how some people are dealing with it. This is an excerpt from an article from the Times of India Ahmedabad city edition.

Pesky call trouble? Try this out

Radha Sharma | TNN

Ahmedabad: “This is a public request. If you are an agent selling insurance, loans or personal finance, you are please requested not to waste your money and my time. Thank you!”.
If you too are harassed by the tirade of tele-marketing agents calling you up at the wrong time, you might take a cue from this specially recorded caller tune by critical care specialist Dr Raj Rawal on his mobile phone.
Dr Rawal says the idea was born out of a desperate need to stem the nuisance of being pestered daily by agents selling things he did not want. To his glee, the idea has worked!
“Earlier I used to get 10 such calls a day, now only one of them dares to speak to me after hearing the caller tune,” says Dr Rawal.
High-strung professionals have devised their own novel ways of warding off tele-marketing companies. From ‘leave me alone’ caller tunes to witty dialogues, these harassed professionals seem all geared up with tailor-made answers to beat the tele-marketing nuisance.
Daxesh Mehta, a software engineer, takes refuge in dark humour. “Whenever I get a call from agents selling loans for banks, I tell them I have currently lodged in the jail for defaulting on a huge housing loan,” chuckles Mehta...

How long will it be before an enterprising individual cashes in on this idea? Here is a huge market potential.

A much maligned lot

It was almost like a deja vu. About three years back, I was a much depressed soul around this time of the year. I was part of team that conducted interviews with a sample of small and medium entrepreneurs in a major city in India. The reason for my depression was how the lot was faring. Here was a bunch of young and middle aged, well educated and highly motivated people who wanted to be entrepreneurs and the common story that emerged from most of them was how difficult running a business was within the administrative setup in India. Almost all of them had complaints about bureaucrats in India and most of them had nothing but complaints. I was decidedly angry at the whole system and have been frustrated with the whole idea since then. That was a major turning point in my research career. Today I had the opportunity to be at the other side of the table. I had a two hour discussion with a couple of individuals (I'll call them Mr.A and Mr.B) well placed in the Civil Services in India. The story that came out was as depressing as the ones with the entrepreneurs. Here is a lot of honest individuals who are unable to break out of the vice of the system. They want to bring changes and are as unhappy with the system as I am. One interesting observation that came out of the whole conversation was that they are being unjustly lumped into one lot and branded as corrupt individuals and derided even though there are those that are honest and motivated and driven to do what they are there for. This group is also looking for solutions to end the rampant corruption in the system. There are clear examples of individuals who wanted to do something good and have hit against a concrete wall of vested interests. Apparently, lower cadres follow leadership and under honest and able leaders the system seems to have functioned; however, these individuals are transferred pretty often and once the good leadership moves out of the jurisdiction the lower rungs move back to their old ways. This makes me think that there is something to the system where it is individuals and not ideas that are important. Historically, movements that have been based around individuals tend to die out and those that are based on ideas continue and grow. Why is it so perverse in the case of corruption in Indian Civil Services that power of good ideas has not taken over?

The Economic argument is always that of incentives. In this case as one of them pointed out clearly, monetary incentives are useless because it is difficult to objectively measure the output of some of these cadres. In addition what they can make under the table cannot be competed against by the State. How do you bring in competition in this setup? Approbation is a beautiful tool that can be used effectively in this system. I have long noticed that in the US, local news stations play up 'heroic acts' by individuals. Since the individual is the point of measurement, any small good act by the local cop is played up by the media, and he/she is given a medal in an ostentatious ceremony by some local big shot (the Mayor etc..) Why hasn't the well developed Indian media, who are so easy to point out the misgivings in the government and its departments as willing to shower accolades on the local leader or bureaucrat who has sincerely done something good for the community? There is a clear short supply in this field and there are huge gains to be made by both media and the general public in this field. Adam Smith talks about the power of approbation in the Theory of Moral Sentiments.

The other suggestion that came out was the power of civil societies in retaining good bureaucrats. The public obviously likes someone who is an active leader and who does something tangible and visibly better for the lives of the community members. There is no dearth of societies in India; however, they also seem bureaucratic and there is something to be said about the political nature of even civil societies in India. It is true that bureaucracy begets vested interests and there will be principal agent problems. My colleague from GMU Josh Hill has an interesting argument about the Principal agent problem in the British bureaucracy during colonial times and how approbation works in this setup. This was mentioned by Mr.A a well today that British bureaucracy is tied in with Knighthood. A complete revamping of the system is required in India. However, the problem is circular, the change needs to be brought in by the very same people in the system and that needs at least a few individuals stepping into the fire and suffering third degree burns in the process. No self interested individual is likely to do that however well meaning. Again as Mr.B pointed out, there is something inherently wrong with the system where a person has to sacrifice a whole lot to do what is right.

Are there any practical, workable, implementable economic solutions other than the easy ones my anarchist friends are likely to give me(i.e., get rid of the whole system overnight)? I am strongly inclined to believe that there is a solution from sound economics. Every thing does boil down to self interest and incentives (monetary or otherwise)

Unemployment in India

Every time there is overproduction of a good we need to look at the underlying causes. One of the most repeated questions in India is that of the reasons for the high levels of unemployment and under employment in this country. Individuals holding a post graduate degree and working as clerks in offices and engineers driving cabs are legendary stories. These are not just stories but ground realities. The official unemployment count for the year 2005-2006 is 7% of the workforce. This is a huge number given that the population of India is about 1.1 billion. To alleviate this problem the government is constantly coming up with new schemes of employment for unemployed youth and as is common knowledge most of these schemes come to naught. It was understood as far back as the end of the third plan that projections of employment potential based on the plan targets were not reliable due to lack of knowledge about employment created by every new unit of investment and had to be abandoned. The more recent plan documents are vacuous and do not state any clear strategy to reduce unemployment in the country.

Although it is laudable that the government is thinking about the unemployed, they are way off base when it comes to having diagnosed the problem. The root of the problem of unemployment and under employment lies elsewhere in the education system. Here are two reasons

1. Highly subsidized technical and higher education
2. Emphasis on technical skills such as scientists and engineers since the first five year plan
   

Highly subsidized technical and higher education:

One of the most fundamental concepts taught in introductory economics courses is that of costs. Due to scarce resources individuals allocate their scarce resources based on a value scale. The most valuable use will be on top of the chart and the least valued will be all the way down. In the case of higher and technical education in India, both of these are highly subsidized. Thus the students (or the parents in most cases) do not bear the full cost of their technical education. If they had known the full cost of the education, its value in their scale may have been at a different point. Thus, this subsidy has lead to an over production of higher and technical education. Since there is no commensurate demand from the market, the overproduction leads to unemployment. In addition all the money for the subsidy comes from consumers in the form of taxes. Thus, in the absence of the subsidy (and the resultant taxes) some of them may have been able to afford higher education and others not. Thus spending even more of tax payers’ money on employment schemes does not attack the problem but just the outward manifestation of it or the symptom. It is true that even in medicine for the most severe diseases the symptom is first treated; however, when the treatment fails to work usually further diagnostic tests are conducted to ascertain the actual problem and once it is diagnosed the correct treatment is undertaken. In the case of government sponsored programs the symptoms have been treated for several decades now without a proper analysis of the underlying causes.

Read Who actually paid for my education?

Emphasis on technical skills such as Scientists and Engineers since the first five year plan

A newly independent India in the early 1950s wanted to industrialize fast and that was the aim of the first three five year plans. The emphasis was on building a heavy goods public sector that would absorb Scientists and Engineers. Thus was born the obsession with technical education and liberal arts education completely lost its appeal. Since private enterprises were few and far between a government job was a coveted position, and these jobs were in the technical sector. Naturally, individuals flocked towards the technical schools. In addition, these were also subsidized and so were affordable to the common man. However, in the 60s and 70s there was distinct shift in the nature of planning. But the masses failed to see this shift and continued towards technical education. This is a clear case of knowledge that was gained in one period having become institutionalized by the next period. The collective understanding of a generation was passed down to future generations, and the shift out of the sciences is yet to occur in India. However, with liberalization new avenues in Computer Science and Management have opened up and some of the population has drifted that way. Nevertheless, excessive demand still lies in the Sciences. In addition decades of neglect of the liberal arts has led to a completely deteriorated liberal arts education in the country. The latest fancy at least in the upcoming middle classes and elites is to get a basic engineering degree here and go abroad for higher education and better avenues. The subsidized fee structure, in addition to the lingering romanticism of a planning era long gone, have contributed to the increasing levels of unemployment among educated and well qualified individuals.

Planning in India

These past few days I have been reading a lot on National Planning in India. I have read a few books now and one of the common themes that seems to run across the board is that the early planners were not really for protection of industries or anything like that. They seem to have been oriented more towards letting markets take care of themselves except for a few major areas such as ordnance, railways, and the like. Slow growth was a conscious policy to aid rapid industrialization of the economy. Local administration was given the responsibility to submit and carry out plans. However, as is always and everywhere the system deteriorated soon due to political factors and special interest groups. The Planning Commission when it was formed was supposed to be non-political, but Nehru chaired it and made it his own fiefdom. In addition, there seems to be a lot of healthy criticism against planning and a broad minded approach towards the whole idea. However, sometime after the third plan all that seems to have changed towards centralization, and a more totalitarian regime. It is interesting to read older documents and books that are intellectually based on sound economics and the then prevailing mainstream economics which was Keynesian, neo-classical and very pro socialist than current texts which are ideologically biased left irrespective of the economics. There is much to read and learn about India and a lifetime will not be sufficient.

Save Power!!

Global Warming is the current hot topic. Here's one way to save power!! My initial thought that this was a joke, a sarcastic slap against the global warming fear mongers. Then I went and read up their 'About Us' section and realized that these guys are serious. All that aside, I love the idea and concept of it even though I am a little skeptical about how much power it would actually help save. In any case, this is a showcase of the power of ideas and free unhampered markets. If there is a need for something (however silly or outrageous), free markets find a solution. Here is what nOnoscience thinks about the idea.

Colonial Past

It is common knowledge that India was exploited by the British during its Colonial period. The story is really interesting and came out in the class on Indian Economy that I am sitting in right now. What seems extremely surprising to me is that there doesn't seem to be commonly circulated and discussed literature on this topic. Rough estimates show that if the amount of monetary exploitation through revenues and such were put in current terms it would amount to about $700 billion approximately in current value. I am slightly skeptical about this figure until I am shown hard facts about it. It is an interesting aspect of studies on India, and I am storing this away in some deep recess of my mind to be pulled out later when I have more time to think about working on it.

Entrepreneurial Discovery

Lacchu had an interesting point in this post about cyberspace. Although I do not agree with the idea that we need more government interference in cyberspace I am all for the idea of spontaneous development of new ideas and laws in cyberspace. For example the idea that email servers can have nomination services like bank accounts do is very appealing. In the case of the soldier Yahoo was right on two counts. Firstly, it is true that they delete accounts after 90 days of inactivity. I have had my personal accounts deleted the same way. Secondly, I am not sure I want my parents to read my emails in case I die suddenly. For the same reasons I am highly critical of letters of famous people published after their deaths. If they are published the publishers must secure permission while the persons were alive. I certainly do not want my letters published however (in)famous I become. They are my property and as a person who believes in protection of private property I am strongly against family and friends reading the dead person's emails and letters. That is why the idea of nomination appeals to me. I wonder why email server guys have not thought of this already! It would take just one other line in the sign up page!! The discovery has been made, but who is going to be alert to this opportunity and exploit it first? Yahoo!! Google!! anyone listening?

Indian Books

I just walked down the aisles of the library yesterday and today to find out what kinds of books they have. They have some really amazing international publications in addition to Indian ones. The Indian ones, especially the ones published by Oxford University Press are really cheap. You can get a good hardback for as little as $12. The lack of articles in popular journals about Indian economic reforms is more than adequately compensated by the number of books that have been written on the subject. The analysis runs mostly from the extreme left to somewhat left of centre. I have not found any central or even slightly right of centre arguments in the books I have perused till now. The biggest drawbacks of most of the literature however is that there are a lot of statements without any kind of substantiation. Arguments are made from legends and folklore and popular rhetoric which would hardly stand up to any serious academic scrutiny. There are no references in most of the books. It is disheartening, because there are some really interesting counter arguments to be made if any of their arguments are true, and to be able to do that I have to go find sources to authenticate both their statements so that I can prove that they are either right or wrong and move on with my analyses. It is somewhat frustrating, but then it has only been three days since I started work and hopefully by the end of summer I will at least have an interesting question, and a knowledge of where to look for the answer, if not the answers themselves.

Bad Business!!

Economic and Political Weekly is one of the most popular weeklies for academic papers in India. It is an academic and policy oriented journal for the Social Sciences. In one of the recent issues the editorial reads ‘Crony Capitalism’ to the Fore. Intrigued I continued reading and was shocked by the whole editorial. The editor states that successful business houses in India are now venturing into the political arena and caring none for the ‘aam admi’ (common man). They are also being bolstered by the upward mobile and very socially conscious emerging middle class of the country. He talks about big business houses displacing smaller traders and small farmers of the economy and goes on to say that these individuals are now beginning to lobby towards more conducive environments for businesses. If he had simply stated the same all would be fine. What was shocking to me was that he lamented the fact that big businesses were growing in the country. Sure, it is true that there is a huge and growing gap between the haves and the have-nots in the country, but contrary to popular rhetoric the cause is not businessmen but regulation. The problem lies with improper administration of the reforms. That highly intelligent editors of such popular journals miss such simple economic concepts is shocking to me. To give the editor credit, he also pointed out vested interests of politicians in the current government and that is a valid criticism. But, how come he does not talk about the strong farmers’ lobbies from the northern states that have been keeping agricultural prices artificially high and do not want to let go of subsidies? What about the lobbies of out dated and loss making Fertilizer Companies that have substantial subsidies in tandem with the agricultural subsidies? His selective amnesia is apparent when he also fails to mention the monopoly privileges granted by the then ruling government which was the reason for industrial lobbies during the license raj which led to the concentration of production of certain goods within certain big industry names. It is disheartening to see the path of such editorials.