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 boston.com, 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%.

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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.

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The importance of the Standard Chartered IDR

I have a column in Financial Express today on this. You might like to also see this older blog post.

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The Exchange Rate Regime in Asia: From Crisis to Crisis

A new paper.



Also see the stock of papers from the NIPFP DEA Research Program.

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The undersupply of criticism

There is an undersupply of criticism

Freedom of speech, and trenchant criticism, is of course 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 on this score. This represents an underestimation of how hard it is, to get to freedom of speech.



The heart of the problem is: 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.



Most people think about this in a simple way: 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. The organisation `Freedom House' produces an annual measurement of Freedom of the Press. Their 2010 results show India at rank 72nd in the world (alongside Hong Kong) with a score of 33 and classified as `Partly Free'. The BSST countries do better with South Korea (rank 67), South Africa (rank 70) and worse with Brazil at rank 88 and Turkey at rank 106.



I feel there are three larger dimensions to this problem, going beyond the 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.



I have seen many similar examples of official control leading to incentives for researchers to not speak up. For example, for all practical purposes, it is hard to do monetary economics in India without cooperation from RBI. It is not surprising that most monetary economists in India do not criticise 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. The retribution which has been applied in the past is quite mild. But not much is required in order to scare people from speaking up; to get to the outcome where people working for RBI-regulated firms 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). We should think twice about this, for it could threaten the foundations of democracy.

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.

Goverment versus individual: Singapore versus India

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.

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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.

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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:

• A money too far by Paul Krugman, in the New York Times.
  
  


• A response by Greg Mankiw on his blog. He refers to this AER article from 1986 by Christine Romer, and this article by Christopher Hanes in AER in 1993.
  
  


• A response by Paul Krugman on his blog.
  
  


• A blog post by David Beckworth.
  
  


• On the subject of labour mobility, Casper van Ewijk and Michiel van Leuvensteijn have an important column on voxEU making the link between labour market mobility and the transactions taxes which governments impose on real estate transactions.
  
  


• Here is a column by Feldstein on these issues back in 1998.


• Greek lessons for India, in the Business Standard, by Suman Bery.

This is an interesting demo of how economics happens today: an interleaving between journal articles, newspaper columns and blog posts.

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