Category: Tech Talk

Let us summarise the key points so far. My contention is that the next Internet what I call the Emerging Internet — will be built around mobiles, rather than PCs. It will be a window to the Live Web, rather than the Reference Web. Subscriptions, rather than Search, will be the way we will interface with the Live Web. Invertising, and not Advertising will be dominant business model in the Emerging Internet. And to take it one step further, the company that will dominate this new Internet will not be Google or one of the existing players.

If one looks at a bit of history, it is hard to find the leader of one era continue to dominate the next one. IBM dominated mainframes. Its leadership was usurped by Intel and Microsoft as the game shifted to personal computers. Yahoo first, and then Google, have dominated the landscape in the Internet era.

As the scene shifts to mobiles, its more than a change of screen sizes. How the device gets used changes. And so do business models. Microsoft makes its money from software which Google now gives away free. Google makes its money from advertising which helps in new customer acquisition for businesses. But as businesses build relationships with customers, the repeat business for companies like Google will lessen giving rise to new intermediaries, almost the anti-Google (just as Google is in many ways the anti-Microsoft which itself was the anti-IBM).

This may be hard to believe now given Googles dominance. But just 6-7 years ago, Googles current domination would have been impossible to believe. So, times change, and so does market leadership. For a new leader to emerge, many things have to go right and have plenty of luck. It also needs the courage to stand alone and not be tempted to sell out, however attractive the offers. It also needs to create an environment where it creates an ecosystem around itself thus making it a hub for new business activity.

I believe that emerging markets like India offer a great opportunity for giving rise to the new leader because they are where this new world built around mobiles, the Live Web, subscriptions and invertising will first emerge. Because shifts are going to happen on multiple dimensions, it will be hard for the existing leaders to match. Exciting times lie ahead as they have always! Innovation and entrepreneurship-led change is the only constant.

Continue reading TECH TALK: The Emerging Internet: The Next Google

Advertising has become the primary business model on the consumer Internet. Even though display advertising has been around since the early days of the Internet, it is search-linked and context-linked advertising that is now dominant. Whichever way we look at it, companies pay to be in front of users on the Internet. Whether we are surfing content sites or searching for things, advertisers use a mix of text and banner ads to attract our attention. The Internet has made advertising campaigns easy to roll out for a large number of businesses all one needs is a landing page where users click to and a credit card to pay for anything starting at a few dollars. Advertisers are also able to track the clickthroughs thus enabling them to measure the response to their ads. In other words, the Internet has brought efficiency and metrics to advertising.

There will be two issues as the game shifts from Search and the Reference Web on the PC to Subscriptions and the Live Web on the mobile. First, the small screen of the mobile is not conducive to show a lot of advertising content will need to be pushed down to accommodate ads (theres no space on the side), and users may not take too kindly to that. Second, much of the current advertising on the Internet is focused on lead-generation. That is good when users can browse for more information and fill up a form or complete a transaction. The small screen of the mobile will not lend itself well to both at least for the foreseeable future.

On the mobile, as greater control shifts to the user, advertising will need to be re-thought as invertising advertising that becomes information and which the users invite into their lives. To understand this a little better, let us look at the five states of customers.

First, there are existing customers that a business has. These are the entire universe of customers who have done at least one transaction with the business. Second, there are loyal customers, who do repeat business and thus are the more profitable ones. Third, there are the future customers the ones who have yet to do a transaction and whom the business is interested in targeting. They can also be thought of as prospects. Fourth, they are former customers or a competitors customers, who have either exited the relationship with the business or are doing business with a competitor. (There may be some overlap between the third and fourth categories.)

Advertising helps businesses build brand, retain existing customers, and convert prospects into customers. Invertising helps build relationships with existing customers to make them into profitable, loyal customers and prevent them from becoming former customers. In fact, invertising can also help in educating future customers to initiate a business relationship.

So far, businesses have not had the means to do invertising and build relationships. This is where the mobile comes in with its reach, its ability to handle subscriptions and provide new content to users as soon as it is published. Brands and businesses can encourage users to subscribe to content channels published by them think of these as infostreams. Users can subscribe to these infostreams by simply sending an SMS from their mobiles a capability available on every mobile. To unsubscribe, users can send yet another SMS. This ability to start and stop infostreams shifts control to the users and ensures a spam-free environment.

Think, for a moment, about the relationships one would like to have wherein we are as interested in knowing whats new as the business as in letting us know. The neighbourhood kirana store, the bookshop, the multiplex, the phone manufacturers, deals from the supermarkets these will form the anchor for the invertising-centric business model of the Live Web. They will all be willing to pay a relationship fee to maintain an open communication channel to customers.

Tomorrow: The Next Google

Continue reading TECH TALK: The Emerging Internet: From Advertising to Invertising

In the early days of the Internet, Yahoos directory service was the way we surfed the Web because it was still indexable and classifiable by human editors. But the Web grew too fast for this to last. The first-generation of search engines like Altavista, Lycos, Webcrawler and Excite mirrored the pages on the Web and provided textual search capabilities on the documents. It was good for a short while until spammers figured out how to infiltrate the system. For a while, it seemed we would need to go back to maintaining bookmarks and remembering URLs to go to different sites. And then along come Google with its PageRank technology which enabled search based on the importance of pages as measured by incoming links. Search was back in vogue and has stayed that way ever since.

Search engines are the primary way to navigate the Reference Web. We no longer bookmark sites or even try and remember their URLs; we Google everything. This becomes possible because we trust Google to have made a copy of everything that has been created and appropriately ingested it with its algorithms. Search works very well with the PC screen most of the space is taken up by the results with some relevant ads thrown around. This works great for us, the search engines and the advertisers.

As the Live Web starts to occupy a greater importance in our lives, Search on a PC will no longer be the dominant form of interaction. Instead, I believe it will be Subscriptions delivered to a mobile screen. Let me explain.

The Live Web is about events and incremental information. There are a number of things we would like to know as soon as they happen. In this context, the best way to be alerted is to set up an alert. So, when we want to track something, we can set up a Subscription to that site. All that the site needs to do is to publish its new content via RSS and then ping a central server whenever it gets updated. That central server can also track who all have set up subscriptions for that particular site and therefore can be immediately notified. The mobile is the perfect device to send out an alert to since we can be pretty sure that the user will see the message almost immediately.

In emerging markets like India, access to the PC is still limited, but mobiles (and SMS for now) can reach over 150 million users. Also, even those who access the PC dont do so all the time a majority go to a cybercafes once in a few days. The mobile this becomes the ideal device to send people information about the Live Web.

Search does not become irrelevant for the Live Web. In fact, we will still use Search for things we cannot Subscribe to in advance. My point is that Subscription will be the dominant way we interact with the Live Web just like Search is the primary way we interface with the Reference Web.

With this change in behaviour and device, the business model will also morph.

Tomorrow: From Advertising to Invertising

Continue reading TECH TALK: The Emerging Internet: From Search to Subscription

Much of the Web that we see around us is the Reference Web. The content is mostly static. Pretty much anything digital will be accessible to us at our fingertips if it is not already so. It is like being in a large digital library. Millions of websites have aggregated all kinds of information and made it available for anyone to use mostly for free. More than a decade of enhancements in publishing technology have also made it simple for users to add to the treasure trove thats already out there.

For a long time, the Reference Web was mostly about text and images. This is now changing. Bandwidth improvements are now making it easy to access multimedia content. YouTube has become the worlds largest repository of short-form video content. Most of the media houses are now also starting to make available their video libraries. The longer form of video content TV shows and movies are also slowly getting out on the Internet, as content owners realise that the costs to make them available are small compared to the potential for monetisation (largely through advertising).

The content in the world wide web is primarily designed for accessing on a big screen and hence the PC is the window into that web.

In contrast, the Live Web is the Web that is incremental in space, time and topics. I also think of this as the Now-Near Web (the N3 Web). It is about here and now, the real-time event stream. It is just getting created and used. This is a Web that needs to have almost instantaneous publishing and distribution capabilities. It is about knowing what my friends are doing now, it is about knowing the traffic on the route that I am about to take, it is about knowing whats happening in my neighbourhood today evening.

The data-enabled mobile is and will continue to be at the core of the Live Web. Because the Live Web is about immediacy, there is no other option. Mobiles are two-way devices enabling us to publish as well as consume, both text and rich media. As wireless data networks become faster and cheaper, use of mobiles for sensing the world around us will grow.

If the underlying plumbing for the Reference Web is in the form of HTML documents being pulled by users, then it is RSS being syndicated to users that is at the heart of the Live Web. And this means the primary way we interact with the two Webs will be different shifting from Search to Subscription.

Tomorrow: From Search to Subscription

Continue reading TECH TALK: The Emerging Internet: From Reference Web to Live Web

The epicentre of innovation is shifting. One of my core beliefs is that it is going to be the emerging markets like India and China that will give rise of the next set of global technology companies. These companies will create solutions for a mobile-centric world. Mobiles will be the dominant form of Internet access devices in the developing markets.

Even though the idea of the mobile Internet has been around for a long time (since early 2000), much of the focus has been on usage in the developed markets where many alternatives already exist. Also, at that time, neither were the devices good enough nor were the networks fast enough. Today, mobiles masquerade as handheld multimedia computers (see the campaign for Nokias N95). Wireless data networks are near ubiquitous because they are layered on an ever-expanding mobile infrastructure. For consumers in emerging markets, the mobile has rapidly become the centre of their lives, an extension of their body.

This new world is very different from the wireline-centric broadband world dominated by thick desktops with Intel chips inside. True, people have the best of mobiles and there is as good a wireless infrastructure in many of the developed markets also. But there is a key difference the mobile is for the most part an adjunct to the desktop in the developed world. In emerging markets, the mobile is the primary, if not the only, interactive device that people own. This Mobiles First and Only Mobiles environment and lifestyle is going to very different from that of the developed markets. For example, SMS and not email becomes the dominant form of asynchronous communication. The Contacts on the phone and not the IM Buddy List is at the centre of social interactions.

I have seen the Internet since its early days in 1994-5 from my base in Mumbai, India. For the first five years, I was in the thick of things as an Internet entrepreneur managing a growing set of portals for the global Indian community. For the past two-and-a-half years, I have been working in the mobile space imaging and creating a platform (and investing into an ecosystem of companies) which reflects my belief that the services we will see on the Internet that is being created in emerging markets are going to be very different from the ones that we read about in a media dominated by the activities of companies in the developed markets.

Behind the PC to Mobile shift, there are four key elements to my philosophy about this Emerging Internet that I want to elaborate on in this Tech Talk. First, even as the PC Internet has been wonderful in helping us navigate the Reference Web, it is the mobile Internet will help us build sensors into the Live Web. Second, what search was to the PC Internet, subscriptions will be to the mobile Internet. Third, advertising as the dominant business model on the Internet will give way to invertising on mobiles. Finally, this new world will first be visible in emerging markets like India and in this new world will rise the next Google.

Tomorrow: From Reference Web to Live Web

By Atanu Dey

The liberalization of the education sector in India, that is, by allowing free entry especially for-profit firms will result in increased supply of educational services. Here I will explore the predictable consequences of this. We begin by recognizing that education is not an undifferentiated homogeneous good; there are distinct levels within it, from basic primary education to post-secondary and tertiary levels. Each level has different pay-back periods for the return on investment. Furthermore, different people have different abilities to pay for the various levels of education.

Lets graph the ability to pay along the x-axis, with the very poor at the left and the very rich on the right. On the y-axis, lets graph the level of education, with basic primary at the bottom and specialized tertiary (Ph.D level) at the top. The top right quadrant of this diagram represents rich people and higher education, the lower left quadrant poor people and basic education. Recall that higher education has a short payback period and the payback is both private and social, that is, it has positive externalities. So the rich will pay for both higher and basic education if the capacity increases. Basic education, however, has long payback periods and most of the returns are social, and therefore poor people will under-invest in basic education given their shorter planning horizons.

Firms will profitably supply to the two right quadrants because the demand and the ability to pay, both, exist. The left top quadrant is also served by the for-profit firms. For the poor, who have basic education but are unable to pay for higher education they desire, if credit (educational loans) were available them, they would be able to pay for higher education and firms will supply to that need. That leaves the left lower quadrant: if the poor have public support (grants), they would be able to pay for basic education and thus the for-profit firms will supply to that market as well.

By allowing the private sector firms into education, the capacity for greater human capital increases and thus the economy itself grows larger and the growth rate increases. This increases the revenue base for the needed public support of basic education for the poor. Universal primary education can be a reality if the government raises the resources from a larger economy and allows the private sector to efficiently provide the education. Note that the funding is public but the provisioning is left to firms that compete in the market.

Guaranteeing universal basic education is a must for ensuring equality of opportunity. Even the poor, if given the opportunity, will be adequately prepared to continue on to higher education if they so wish. While for basic education the poor needed a grant, for higher education the poor will need a loan. Banks can easily enough provide these if the funds are efficiently spent on acquiring suitable higher education which again depends on the availability of wide range of choices. And the choices will exist if the education sector is liberalized.

India is stuck in a low-level equilibrium: a US$50 billion education market and a GDP of US$500 billion. It is possible to move to a higher-level: a US$150 billion education market and a US$1.5 trillion GDP, if education were freed. But those who extract their annual US$100 million today from the low-level equilibrium by controlling the education sector, will not allow the liberalization of the education sector for then they will lose the rent. Year after year, they extract the rent but keep the economy effectively shackled.

Let me stress this: education is an amplifying mechanism for economic growth and development. If we fix our education system, what we will get for our efforts is going to be far greater than what we put in it. In todays dynamic world economy, the returns to education are staggering, and so also are the losses that accumulate from a dysfunctional educational system. If need be, we should even borrow money, people, ideas from others to fix our system.

If I were a billionaire industrialist, heres what I would do. I would get a few of my fellow billionaires to create a corpus of funds say US$200 million for a Golden Goose strategy. With the money, I would simultaneously buy out all the politicians of every party so that they will en masse vote to liberalize the education sector. It will be a one-time cost for us billionaires. But that would lay the foundation for an India with such formidable growth that we would recover our investment in short order.

But alas I am not a billionaire and nor are you. We, as the saying goes, are up a creek without a paddle.

Write to atanudey at gmail.com if you have questions or comments.

Continue reading TECH TALK: Doing Education Right: Consequences of Liberalisation

By Atanu Dey

By liberalizing the education sector I mean that it has to be made totally free of government control and involvement. Whoever wants to provide educational services must be free to do so, be it domestic or international, for profit or not for profit, at the primary, secondary, or tertiary level. What would be the expected benefits of doing so?

The supply of educational services will increase, the quality will improve, and prices will come down. These are all everyday first-order efficiency effects of letting markets work. The second-order effects will be increased productivity, increased production, and better allocative efficiency within the sector. The third-order effects will arise from the increasing returns to scale associated with the production of education. Finally, there are very important forward and backward linkages that bind the sector with the overall economy. One of them is the use of information and communications technology (ICT) tools. It will give a boost to the IT sector in a way that is unthinkable in any other endeavor.

Increase in the supply of education is a natural outcome of removing all barriers to entry. Domestic and foreign institutions will invest in educational institutions. One can imagine corporations such as Tata, Reliance, Harvard, and Stanford opening shops in India, all eager to make a profit. This is no different from a large number of automotive companies starting manufacturing in India to supply the domestic market. The effect is predictable: an increase in the variety and therefore expanded choice for the consumers.

No longer will one have to fight to get into a good school or college. Instead of a sellers market, we would have a buyers market where the consumer is king and therefore the producers will be ever eager to reduce their costs and deliver a quality product. The best part is that with competition, even the incumbents the public sector institutions will wake up from their lack of competition induced slumber. Competition for students will force institutions to be nimble on their feet and therefore provide education that is relevant. No longer will the education system be producing graduates the majority of whom are unemployable.

Think about the waste of resources that accompanies the current supply-constrained system. Just one example: each year hundreds of thousands of students spend incredible amounts preparing for the entrance exam for IITs. That is directly unproductive use of time and money. That spending would be sufficient to fund a dozen IITs every year. Or think of the estimated US$10 billion that Indians spend in getting an education abroad.

In todays world, an educated population is more valuable than any natural resource. Yes, India has a large population with favorable demographics. But only the private sector has the resources to provide the investment required for educating them. The operative word is investment. Firms dont invest unless they expect to make a profit. And yes, there is profit to be made from providing education because education itself has positive returns and therefore people will pay for education.

Servicing such a large domestic population necessarily implies a very large installed base. That results in the industry learning by doing, and the economy gains what is called a comparative advantage in producing educational services. Which means that education in India will have a quality/price ratio that would attract foreign students. That would make India the education capital of the world, if India plays its cards properly. Indias income from producing education could dwarf what it earns from IT and IT enabled services today.

Which brings us to a very important point. Producing education will be massively dependent on the use of IT to reduce costs and improve quality. Private firms will use it intensively and effectively to produce education. Meaning that instead of a few computers sitting around in a dusty room in your average school, you will find the best technologies being used in schools and colleges. Students will be learning to use the IT tools while learning other things. More importantly, one will not have to worry about the much lamented digital divide: whoever attends an educational institution will become a digital native.

And who, you may ask, will be attending schools and colleges? My answer is: everyone. If India liberalizes the education sector, then everyone rich poor, minority, majority, this caste, that caste, this religion, that religion, you name it will be able to get an education. Only problem will be: the politicians will have to figure out some other way of dividing the country. But that is their problem, not ours.

In the next bit, I will explore why everyone will be able to attend school if they so wish.

Write to atanudey at gmail.com if you have questions or comments.

Continue reading TECH TALK: Doing Education Right: Freeing Education

By Atanu Dey

Consider this list: cars, scooters, telephone service, airline ticket, seats in schools and colleges, electricity, and railway tickets. Think of the year 1980. Notice the common feature of the list: shortages. Now consider the list in the year 2007. Notice some things on the list are no longer scarce. It cannot be mere coincidence that only those items which the government has released it stranglehold on are no longer scarce. Could it be possible that if the government lets go of its vise-like grip of schools and colleges, that shortage of educational services will also be a thing of the past?

Given sufficient time, shortages have a way of entering into our worldview so that we simply start considering them as normal and acceptable. Today the power supply where I live in Pune failed for over two hours. It is remarkable that I have accepted that power in India is unreliable and dont work up a sweat (only figuratively speaking, though.) It is part of our survival mechanism. We adjust to unreasonable situations. Thats how it is, we explain, and cope with it. We have become inured to the mad struggle that people go through to get their children into schools and colleges. We forget how astonishingly unnatural it is that something as basic as a good education involves almost superhuman effort.

Chronic shortages do not occur naturally. You can have acute sporadic shortages due to shocks to the system. But chronic shortages have to be carefully engineered and the machinery that creates shortages has to be kept in good working order. Otherwise the natural tendency for a market is to close the gap between the quantity demanded and the quantity supplied. This is a fundamental truth about the world of humans.

One effect of persistent shortage is low quality. Lacking the discipline enforced by the customers freedom of choice, suppliers dont have an incentive to ensure quality. The consumer is happy to receive even shoddy goods and services because it is a struggle to get anything at all. Take it or leave it, is the basic attitude of the producers in a sellers market.

In summary, it is misguided government policy that lies at the root of our dismal education system. The policy change required is to allow the private sector unfettered access to the education market. Will the private sector supply educational services? An unqualified yes because there is money to be made. Currently around 10 percent of GDP is spent on education, which amounts to around US$60 billion. Half of Indias population is below 25 years of age. That defines the addressable market for educational services. If the supply of educational services were to meet the suppressed demand, the annual spending on education will be many multiple times the current level.

Which brings up one of the most important matter associated with education. There is an implicit ban against for-profit educational institutions in India. Why this is so is hard to understand. For-profit producers of other goods and services are not banned. Indeed, it is clear to see that for-profit organizations produce most of the critically important goods and services. The only caveat is that these for-profit firms have to face competition. Thats the bottom line: allow all firms to enter the market, regardless of whether they are for profit or not. The market forces will regulate the firms so that the supply rises to meet the demand, the quality improves, and the prices reflect the underlying costs.

One final point: what about the poor? First, for education up to the secondary level, those who are unable to pay for their education should be publicly supported through vouchers which are redeemable at private schools of choice. Second, for post secondary education, those who are unable to pay should be given loans. Recall that post secondary education has a short payback period and the return on investment in education is positive. So the loan recovery with interest is not a problem.

In the remaining two pieces, I will explore the consequences of liberalizing education in India.

Write to atanudey at gmail.com if you have questions or comments.

Continue reading TECH TALK: Doing Education Right: Scarcity

By Atanu Dey

Imagine for a bit what it would be like if education were provided by private sector firms. Can it be done? Would a socially optimal amount, variety, and quality of education be provided? Would there be market failures? If so, how can those market failures be corrected? Can one devise mechanisms to correct those failures?

The answer to whether the private sector can provide education is clearly yes because around the world for a very long time private firms have provided education very successfully. Both private sector for-profit and not-for-profit business models exist. Education, at some level of description, is a service like any of a very large variety of goods and services provided very efficiently by the market. The generalization that markets work holds quite meaningfully in the specific case of education broadly.

It may be worthwhile to briefly expand on what markets work means, say, in the context of a good such as computers (both hardware and software.) Basically, there is a demand for computers, or in other words, people are willing to buy them. Firms supply to the market to make a profit. They innovate to increase the variety of the goods to increase their revenues, and figure out ways to reduce their costs so that they have greater profits. Like the large number of profit-seeking firms on the supply side, on the demand side, a very large number of consumers also enter the market with the generalized desire to get the most bang for their buck. The competition that arises from the self-interested behavior of consumers and producers ruthlessly forces unfit computers (and therefore the firms that make them) out of the market and relentlessly drives up the quality and variety, while prices constantly fall.

It is a Schumpeterian world out there red in tooth and claw. But out of the dance of creative destruction, emerges things that no onehowever smart or wisecould have ever predicted. Let me stress that: no one knows what amazing stuff the market will deliver, who will make it, how it will be made, how much it will cost, how it will be improved upon and by whom. Nobody knows, and that includes government bureaucrats or politicians, regardless of how strenuously they claim to know. The inescapable fact is that every innovation, every object that you use, every service that you enjoy, arose overwhelmingly in the private sector, through the risk-taking, imaginative, innovative, entrepreneurial spirit of individuals driven by a basic desire to make a buck.

So is there no role for the government? Yes there is. First, it has to ensure what is called a level playing field, to set the rules, to resolve disputes, and maintain such institutions that are necessary for supporting the functioning of the market. Second, in case of market failures (which we will not go into here as this is not a text book on basic economics), to do what it can reasonably do without making the problem any worse. If the government cannot do better than the imperfect markets can, then it is better for us to live with the results of the market failures.

Here then is the basic recommendation that one is forced to make: let the private sector supply educational services in India. The government must not be in the business of providing education at any level. Let the market have a go at it. The government of India is not capable of providing education. It has demonstrated its incapacity over decades, and there is no reason to believe that it is even theoretically up to the job. Education is too critically important for the future of India for it to be left to the government. In todays world, more than ever, education is a dynamic service. It requires innovation, creativity, entrepreneurial talent, risk-taking ability and human resourcesall of which are sorely missing in the government. It is government control of the sector which has had the unfortunate consequence of Indian education to resemble what Keynes characterization of education as “the inculcation of the incomprehensible into the indifferent by the incompetent.”

Lets imagine what would happen if private sector firms were allowed to provide education, next.

Write to atanudey at gmail.com if you have questions or comments.

Tomorrow: Scarcity

Continue reading TECH TALK: Doing Education Right: Markets Work

By Atanu Dey

Alistair Cooke in his weekly radio broadcast on BBC Radio 4, A Letter from America, once explained the theory of public choice to his listeners as the homely but important truth that the politicians are after all just the same as the rest of us. It is an accessible, though incomplete, definition of what public choice is about. You could read James Buchanan, who in 1986 won the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (popularly known as the Nobel Prize in Economics) “for his development of the contractual and constitutional bases for the theory of economic and political decision-making. But Cooks version is adequate for our needs to explain why the Indian educational system is a disaster.

Politicians and bureaucrats are motivated by self-interest, and the will to power and control is deeply ingrained in them, perhaps more so than in the average person. Monopoly control of any market or institution is heady power. Controlling the educational sector is gives them an enormously powerful lever for controlling the economy. It is therefore quite understandable that the opposition to relinquishing that power would be formidable. The greatest challenge that India faces in reforming its educational system arises from this, not perhaps so much from a lack of understanding of what needs to be done, or how it is to be done. It is hard to overestimate the power of vested interests amassed against doing what is rational in education.

Here we look into what needs to be done, and leave aside for the moment the question whether it will be done, and if so how it is to be done. What needs to be done can be stated in one word: liberalization. The system is in chains.

In a socialistic economy, the state controls everything with the stated objective to reach the commanding heights of the economy, as the Indian leaders have always loftily boasted of achieving. What actually happens is that the state commands and controls and flies the economy into a very deep ditch. Remember USSR? Its gone. A land lavishly gifted with natural resources and industrious smart people reduced to rubble. We have not fully learnt from their failures of the shackling of their economy. But there is a small possibility that we could learn from the successes of the limited unshackling of our own economy.

It is of course possible for governments to efficiently produce goods and services. The question rather is whether it is probable. The evidence is strong at least in the case of the Indian government that it is highly improbable. The list of government failures is too lengthy to list here. But a few instructive examples which illustrate the general idea are worth considering.

Telecommunications was the governments sole preserve. The waiting times were measured in years, the prices were high, the quality poor. When the private sector was allowed entry, the prices dropped, quality improved, demand soared, supply expanded, and best of all, the public sector incumbents started performing as well. The same story can be told about the air transportation sector.

It is important to stress that the problem is one of government control of the sector, not whether it is served by private firms or not. Even if there are no public firms in a sector, government can control the sector by restricting entry (think license) of firms into the sector, thus limiting competition. The resulting low quantities (think permits and quotas) support high prices therefore high profits. The competition for acquiring licenses is part of the rent-seeking game that is played by the politicians, bureaucrats and private sector firms. It is a nice little game (racket?) where all the players win, and the only losers are the poor consumers and the economy.

Lets look at the education sector against this backdrop.

Write to atanudey at gmail.com if you have questions or comments.

Tomorrow: Markets Work

Continue reading TECH TALK: Doing Education Right: Incentives Matter