Category: Tech Talk

By Atanu Dey

One underhanded way to scare a neoclassical economist out of his wits is to creep up on him and shout monopoly power. Economists regard monopolies with the same mixture of dread, contempt and fascination as biologists regard cancer. They recognize the awesome virulent power of monopolies to wreak havoc on their world of mutually beneficial voluntary exchanges. Monopolies, whether public or private, lead to social welfare losses. At the other extreme, perfect competition leads to maximization of social welfare, subject to some reasonable conditions often approximated in the real world.

In a competitive market, a large number of firms compete amongst themselves to supply the stuff that consumers demand. Each firm strives to reduce its own costs to increase profits, while at the same time reducing prices to lure buyers away from its competitors, and in the resultant shuffle, prices are bid down to the level of costs, thus competing all profits away. Unlike in a competitive market where firms make no economic profits (they make only accounting profits), a monopolist makes economic profits because they are able to dictate the price by controlling the quantity it supplies. By sufficiently restricting supply, a monopoly can charge prices that are way above costs, and thus extract what is called rents, or economic profits.

One feature of the Darwinian world we live in is that there is always competition. It is good to be the king because the king has power. But the more power the king has, the greater is the competition to be the king. Sure, the monopolist is the king in the market, extracting rents and imposing social welfare losses. But somewhere along the way, the monopolist has to pay the king-makers. There is a competition for the market as if to compensate for the lack of competition in the market. The competition for the market leads to welfare losses, a sort of negative image of the social welfare gains from competition within the market.

One parsimonious explanation for not allowing free entry into the market for education is that by retaining monopoly control of the education sector, the government acts as a monopolist. By requiring licensing from the government, and by restricting the licenses, the government encourages competition for the right to serve the market and thus reduces the competition within the market. Restricting the licenses increases their price. This is the rent collected by the government. The licensed firms (schools and colleges) have to recover the costs incurred in obtaining the licenses. They in turn, given the legal protection from reduced competition, have the means to dictate price and the outcome is predictably low quantities (shortages abound), high prices, and rampant corruption.

This is purely anecdotal but is useful in clothing the bare outlines of what I conjectured above. Some institution wants to start a medical college somewhere in India. It applies for a license and is told off the record that the price is Rs 20 lakhs (approximately US$ 50,000) per seat. For the 200-seat license applied for the price is Rs 4,000 lakhs, to be delivered in unmarked bills in a large plain brown envelope. That fee is routed through the licensing bureaucracy with appropriate payoffs to different peoplethe lions share ending up in the appropriate political hands. After all, securing top positions at the bureaucracy is not cheap; and running elections is a costly business.

The firm having paid the whopping fee to operate a medical college, now has to recover its costs. Perhaps its actual cost of training a medical student is Rs 5 lakhs per year. It adds on a special college entry fee of say Rs 10 lakhs (remember to bring in unmarked bills in a plain brown envelope) to the normal tuition fees. The hapless students are forced to pay because seats are limited. The four year medical training which should have cost only Rs 20 lakhs if free entry were allowed into the field now has to pay Rs 30 lakhs, and perhaps gets substandard training. Further down the line, doctors are in short supply and therefore they command some market power and thus are able to recover their costs. The patients suffer but that is why they are patientsthey suffer.

What needs to be done will occupy our attention the next week.

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

Next Week: Doing Education Right (continued)

Continue reading TECH TALK: Doing Education Right: The Rent-Seekers

By Atanu Dey

The absence of universal basic literacy and education is a constraint on present economic performance and future growth. Doubtless, education is costly but the opportunity cost of not having an education is even higher. The old adage about a stitch in time saving nine holds with special force in the case of basic literacy. Heres the argument. At most one generation requires help in becoming literate; the children of literate parents are overwhelmingly literate; and the children of illiterate parents are more likely to be illiterate compared to those of literate parents.

Therefore, the earlier an intervention is made in ensuring universal literacy, the cheaper it is, for a growing population. At Indias independence, of the 350 million about 240 million were illiterate. If a big bang approach had been taken and the entire population were made literate within three or four years, it would have perhaps cost (in todays terms) around US$24 billion, and the problem of literacy would have been solved half a century ago. By going at it half-heartedly and piece meal, many multiples of that sum has been spent over the last half century, and yet the number of illiterates has increased to 350 million. We are forever falling behind by not putting enough resources to solve the problem.

If India had solved the basic literacy issue by the mid-50s, it would have developed more rapidly. It would have had a lower population (population of developed nations grow less rapidly), the aggregate wealth of the country would have been higher, and per capita incomes and wealth would have placed India in the running. Even now it is not too late and it is quite possible to make India fully literate within three years, provided the political will is there. The returns on that investment would have been staggering.

Both at the micro and at the macro level, return on investment (ROI) in education is positive. In other words, the net present value of the increase in the lifetime income of the person is greater than the cost incurred in educating the person. National spending on education is akin to investing in productive assets such as roads, ports, factories and power plants.

One immediate implication of the positive ROI in education is that it makes sense to borrow the money required for education as long as the ROI on education is lower than the interest rate which in most cases it is if the labor markets are not distorted and if there are no information failures.

The other implication is that higher education does not require public financing if the credit market is complete. In the case of a person whose parents can afford to pay for his college education, clearly the credit market is complete: the person implicitly borrows from the parents for the education and the returns accrue to the family. It is easy to see that the ROI must be positive, because it is universally true that people systematically educate their children.

That has an important public policy impact: public financing of higher education is not required; all that is needed is to make credit available to those who face a credit constraint. Give loans to all those who seek, and qualify for, higher education, and which loans are repayable over a suitable period upon employment. Thus, for example, IITs and IIMs can be entirely self-funded instead of being subsidized by the public. More importantly, by removing the subsidies and allowing the capital markets to provide the credit required, the market for education will efficiently provide adequate supply to meet the demand.

Which brings us to the question: if the market can solve a severely supply-constrained education system, why is the market not allowed to function in the education sector? Lets look at that the next time.

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

Tomorrow: The Rent-Seekers

Continue reading TECH TALK: Doing Education Right: Thinking ROI

By Atanu Dey

The education system is embedded in the bigger socio-political order of the economy. To a large degree, the larger system dictates the characteristics of its subsystems. In its broadest terms, the government of India is an extractive and exploitative system created specifically for that purpose during the hundred years of its existence as a British colony before it became politically independent. The British, as a colonial power, created a system designed to control every aspect of the economy to maximize their extraction. The challenge of administering such a large population required a certain small percentage of the native population to be educated in a very specific way. Therefore the total and absolute control of the education system was a necessity.

Even after British left, the structures they had created for controlling the economy in general, and the educational system more specifically, remained intact. The new political leaders saw it was beneficial for them not to deviate from the old colonial goal of imposing an extractive and exploitative government on the people. By continuing to control the education system, they were able to impose a degree of control over the population that would be unthinkable in a free society.

Universal primary education was especially neglected because it would have given rise to universal literacy. Universal literacy is not a good thing if the status quo is to be maintained in a regime which allows freedom of the press. It is safe to allow a free press if two out of three people cannot read. Freedom of the press is not meaningful in a society of illiterates. We should note in passing that whether literate or not, people can hear and speak. So while the press was allowed freedom in a largely illiterate society, radio was absolutely government controlled, consistent with the aim of an exploitative and extractive system.

To be perfectly clear, whether a system is judged to be a failure or not depends on the objective that the system was created to serve. The Indian education system is definitely successful because it does meet the objectives that the British created it for, and which the successive Indian governments have implicitly endorsed: control the supply of education and dictate to the finest detail the nature of the education provided and to whom. Universal primary education, or even universal literacy, was never its goal. To fault the current educational system on its inability to meet the needs of a developing society is to miss the point that it was meant as an instrument for extractive purposes.

If the preceding picture painted hastily with broad brush strokes is reasonably accurate, then it implies that for the education system to serve the needs of a developing nation, the objectives of the system will have to change. Since the same structure cannot serve an orthogonal set of objectives, the whole system will have to be redesigned. If there is one thing I would like to convey in this brief series, it is this: change the system radically if it has to serve a different objective. It should be evident that anything less than a radical re-thinking of the system would be a pointless waste of time.

The current educational system has an objective dictated by the British and which the governments of independent India inherited: To choose from within the huge population a small subset and educate them so that they will serve the needs of the government. That objective should have been replaced with something like this: To develop the human potential of every citizen in the broadest sense, so that the individual is best able to serve his own interests and the interests of the world he lives in. In other words, the citizens are not seen as serving the interests of the government but instead the governments objective is to serve the people.

The alternate objective would require liberalizing the education sector from government control. We will go into some specifics of the liberalization of the sector later in the series.

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

Tomorrow: Thinking ROI

Continue reading TECH TALK: Doing Education Right: Changing Objectives

By Atanu Dey

Education matters immensely when it comes to the health of an economy. There is a positive correlation between years of schooling and the GDP per capita. Lets look at the numbers that are indicative of the generalization. In 2001, school-life expectancy and the ppp GDP per capita for Ethiopia were (4.3 years, and $675); for Indonesia (10, and $2,844), for China (12.4, and $4,065), for South Korea (14.6, and $17,048), Japan (14.3, and $25,559), and the US (15.2, and $32,764).

Not just that, there is a correlation between growth and educational attainment. Consider one measure of the educational level of an economy, the literacy rate of adults (defined as those above the age of 15 years). In 1970, adult literacy rate in China was 54 percent, compared to Indias 34 percent. The ppp GDP per capita income of India in 1970 was $1,034, nearly double that of Chinas $571. Yet, twenty years later, China surpassed Indias annual per capita income: India $1,587, China $1,617. The adult literacy rates in 1990: China 78 percent, India 49 percent. By 2001, China had 86 percent adult literacy rate and a ppp GDP per capita of $4,065, and India languished at 58 percent and $2,319.

There are many reasons for modern Chinas meteoritic rise from its humble beginnings. But one of the most important factors must be their youth literacy rate, which is defined for the population between 15 and 24 years of age. In 1970, Chinas youth literacy rate was a whopping 83 percent, compared to Indias 46 percent. It is more than a little depressing to note that more than half of Indias youth were illiterate, leave alone educated, as late as 1970. By 2000, India was just at 73 percent, not even at the level at which China was 30 years before. Now China has achieved nearly universal youth literacy. The lesson is unavoidable: compared to China, Indias prospects are dim if education has anything to do with economic prosperity and potential.

It is important to note the sequence of development. Literacy preceded economic growth for China, as it does for every successful development story. Note that China was more literate than India in 1970 even though it was poorer than India. Thus poverty does not automatically condemn a population to illiteracy. It is a matter of choice: like individuals, countries can also choose to invest in education.

I deliberately chose China as a counterpoint to India in this narrative. I can tell the same story of how Singapore transformed itself from a mosquito infested swamp to a developed economy within a single generation. But then the usual objection is that Singapore is a tiny city-state and a behemoth like India cannot transform itself. It is a just-so argument, supposed to be compelling enough that no reason has to be advanced why the Singapores tiny size in the context of development is relevant.

But another just-so argument is introduced when India and China are compared. It says that China cannot be compared to India because India is a democracy. Again, no reason is provided why democracy prevents policy makers from choosing to invest in education. However, one can argue that Indias political structure has something naturally to do with Indias dismal failure in educating its population. I describe India as a pseudo-democracy, something that has the superficial trappings of democracy but just below the surface it is anything but.

Democracy, if it means anything at all, is more than mere head-counting. It has something to do with informed choice of the population at large, which in turn depends on the populations ability to understand the issues, which finally rests on the ability to read, write, and carefully consider the alternatives that confront them. As it happened, when India achieved political freedom from the British, the population was told that their emancipator knew best and all they had to do was vote for them, and the government so constituted would magically take care of their every wish. How that transformed India from being the darling candidate for becoming a developed economy in the 1950s to actually being a laggard in economic development we shall briefly note the next time.

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

Tomorrow: Changing Objectives

Continue reading TECH TALK: Doing Education Right: China Comparison

By Atanu Dey

Education is one of Indias biggest challenges. It is not about building the best schools though that will help. It is about creating a platform to educate 200 million of our young. If India is to to benefit from the demographic dividend, then we need to get our education system in order quickly. My colleague, Atanu Dey, looks at how we can get education right. — Rajesh

The fractal nature of the generalization that education matters holds across time and space. Irrespective of the granularity of analysis, education aids development through the intermediate step of economic growth. At the finest level of detail, an educated individual anywhere in the world is more productive than an uneducated one. At the broadest level of analysis, the modern world is more productive arguably because it is more educated compared to the world that existed before. A cross-sectional study of the world today, or at any earlier time, reveals that the general level of education of the population is a good predictor of the success of the population.

The observed positive correlation between the macroeconomic variables of the level of general education and economic well-being has microeconomic foundations. There are two avenues, private and public. An educated person is simply more likely to make better-informed private choices regarding his or her production and consumption. Aggregated over the lifetime of the individual, that translates into greater individual production and therefore individual income. Individual incomes aggregated over the entire population determine the macroeconomic health of the economy. At the public level, an individual indirectly contributes to greater economic development by making informed choice among various public policies. An educated population is more likely to endorse enlightened public policy.

Indias present economic standing both in its limited successes and its myriad failures is to a large extent a reflection of its education system. It takes justifiable pride in the successes of its handful of elite institutions of higher education in turning out world-class super-achievers. But that exceptional success of the few is overshadowed by the dismal failure of the educational system as a whole. At the primary level, the enrollment is around 90 percent but studies have revealed that even after five years of schooling, around 50 percent of the students fail basic reading tests and are unable to perform single-digit subtractions. Ninety percent of Indian children drop out by the time they reach high school.

Of the ten percent who do get post-secondary education in Indias around 300 universities (comprising of 17,000 colleges), their results are disheartening. India produces around two and a half million college graduates, including 400 thousand engineers annually. But the quality is so poor that only a quarter of them are actually employable. Stark statistics reveal the oversupply of raw graduates and the undersupply of employable graduates. Infosys, an IT giant, last year sorted through 1.3 million applicants only to find around two percent were qualified for jobs, according to a recent report in The New Yorker.

That India is not an economic success today is significantly attributable to its failed education system. More importantly, its prospects of even moderate economic success in the future are bleak unless the educational system is urgently fixed. The fatal flaw in the system most likely arises from its near-complete government monopoly control. Practically all aspects of the system suffer from political and bureaucratic meddling. Who can run schools and colleges, what is to be taught, who is going to teach, how much they are to be paid, who is going to learn, how much fees must they be charged, what will be tested and howevery minute detail of the enterprise is rigidly defined and mindlessly enforced. Consequently the system has degenerated to become ineffective, inefficient, and irrelevant.

In this series of brief articles, I present a personal perspective on what is wrong with the Indian educational system, and why. I believe that if we have to fix the system, we have to necessarily first understand the system and what ails it. To the extent that the problem is understood, it is tractable. I hope to present the broad outlines of a solution as well.

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

Tomorrow: China Comparison

Brain-dead thinking is not just the prerogative of the people in power in the government. Consider the admissions process for Cathedral and John Connon School in Mumbai. Cathedral is, arguably, one of the best schools in Mumbai. So, to get admission for a five-year-old, one has to apply when the child is a one-year-old. There is a small window after the child turns one during when the parents are expected to submit the application. Think about it again: the application needs to be made four years before admission.

I realised this a couple of months late. I went to the school last year (I think it was in September) when I should have gone in May or so for admission for Abhishek (who had just turned one in April) in 2010 or thereabouts give or take a year. I was denied entry by the watchman saying the time for collecting the form had passed. I asked to speak to someone appropriate so I could explain that I had not realised that forms needed to be submitted so many years in advance. But there was no way they would let me in.

Thats not all. The watchman also told me of a workaround. All I had to do was to submit a letter stating that I was not in Mumbai during that period (with some documentary evidence, presumably) and I would then be able to get the form. Presumably, I was not the first person they were giving this unsolicited advice to.

As I walked away from the school that morning, I could not but be disappointed by the experience school which has given some of the citys finest alumni. How could I look Abhishek in the eye and tell him that I lied to try and get him into a school? And why should one have to get to that? Because of a brain-dead admissions process created presumably when one had to wait a decade to get a telephone connection.

The India that we want to build is being corroded by ourselves. We can bask in the glory of the 9% growth rate, the rising Sensex, the $200 billion forex reserves, the glitzy malls coming up all around. Or we can, as a society, start and fix whats wrong at the grassroots in our neighbourhood which is really the core for a Sustainable and Livable India of tomorrow. For now, most of us arent even thinking of the second option.

Dubai now is about scale and size. They are trying to attract the worlds best with their custom-created vertically-focused cities (Internet City, Media City). They recognise their limitations and are working around it to create a region which combines brainpower and capital. The oft-quoted answer for why Dubai and Singapore can do it and we cannot is that they have lots of money and their populations are small as compared to India. But we are barking up the wrong tree.

Once upon a time, Dubai and Singapore were just spots on a map. It is someones Imagination that has created the modern-day wonders we look up to. And that is perhaps the biggest differentiator. Imagination and the ability to envision a future that doesnt exist today is what has and will set apart the winners from the also-rans. Of course, Imagination has to be combined with Capital and Execution but the starting point is the ability to make big plans and dream big, along with the ability to learn from others who have faced similar situations in the past.

Take the way we construct our roads in India. Even after all these years, we cannot build them right to withstand the monsoons. Of course, ask any person on the street and the response will be that the municipal corporations is hand in glove with the contractors so building (the same road) becomes an annual ritual. And we sit by idly and watch as the money is wasted again and again.

I write this because even as India needs new cities, we have to worry about our existing cities. There are tens of millions living in these cities. Can we create a better lifestyle for them actually, ourselves? Or will we just accept the traffic jams, the inadequacy of the schools and playgrounds for the children, the lack of green spaces, and take things they way they are because we cannot imagine anything better? Can we imagine the equivalent of a Snow Park (see the Mall of the Emirates in Dubai) in the desert that urban life in India threatens to become?

Tomorrow: A Choice Not Made

Take a look at Dubai airport from the air to see how to do it right. (The design is probably not just limited to Dubai but most good airports in the world.) There is a terminals area in the centre away from the check-in and arrivals area. The terminals area thus has plenty of parking space for aircraft on all its sides. Every aircraft thus can be connected to an aerobridge. The terminals area itself is connected to the arrivals / departures area with an underground tunnel. The arrivals area is on the lower level, while the departures area is one level above.

Now take a look at the hodge-podge that is Mumbais airport. In the infinite wisdom of the planners, we built common runways but had two separate terminals for domestic and international travelers which for years were connected only by getting on the crowded roads. A couple years or so ago, wisdom dawned and they finally used the inside roads to ferry passengers back and forth between the two terminals.

The new domestic terminal that has been created for some of the airlines (replacing the old one) forces every traveller to be carted in a bus. There is no provision for any aerobridge. Which era are we willing in? The terminals area and the arrivals / departures area is in one cramped building limiting growth. A significant part of the airport has been overrun by squatters limiting the expansion of runways.

We pay a price every day for these kind of inefficiencies in the system. Many of these decisions could have been done right the first time around and we did not need to be rocket scientists for that. We just had to look at best practices that people have followed before us. But being one of historys oldest civilizations, we think we have all the answers. Luckily, the rest of the world doesnt seem to think so.

Tomorrow: Imagining Chaos

Every time one visits a Dubai or a Singapore, one is astonished by how well they are developing the infrastructure in these cities. Then, back in one of Indias cities and all one can do is groan in sheer frustration. With little or no planning, we have let things slide. The focus on quality of life is completely absent. Yes, cities are the magnets, the engines of growth. But read a story like this in the Wall Street Journal and one is left wondering if we have any people with a heart left amongst our planners:

India’s economic growth in the past several years has brought new wealth and a higher standard of living to many in this metropolis of 18 million. But it also has created suburban sprawl that is adding more people to a rail network that has seen few new trains or tracks added in the past 30 years.

Indian officials have a new term to describe the 2.5 times capacity crowds that now ride at peak hours: Super-Dense Crush Load. That is, 550 people crammed into a car built for 200.

The result is what may be the world’s most dangerous commute. According to Mumbai police: 3,404 people, or about 13 each weekday, were killed in 2006 scrambling across the tracks, tumbling off packed trains, slipping off platforms, or sticking their heads out open doors and windows for air.

The toll has been increasing as daily ridership has increased to more than six million people a day. Last year’s tally was up 10% from the year before. Accidents are so common that stations stock sheets to cover corpses.

And this is just the beginning. Projects start late, take too much time, and have capacity constraints even before they are launched. Corruption is only one part of the problem. At the core is perhaps the fact that we just dont think right. We refuse to learn from the best examples the world over. We think we can reinvent the wheel into something better. So, we try and innovate in our solutions when all that is needed is smart copying.

Consider for example how we have built our airports.

Tomorrow: Dreams in the Air

Recently, I went on a 3-day mini-vacation to Dubai. This was my second visit there the first one having been in 2000. Coming after Atanu Deys series on Creating Indias New Cities, I could not but reflect on what could have been in India. A simple story will illustrate how far we are in India from even getting the basics right.

In Dubai, we needed to visit a friend in a place called The Meadows. We got into a cab and even though the driver had never been there, just by following the signs on one of the highways, we got to the exact location of my friends house. We did not have to stop the car to ask anyone. The signs were clear as was the exact address. Meadows x, Street y, Villa z.

A couple of nights later, on a visit to Delhi, I needed to get to the place I was staying for the night City Club. The address I had was: DLF City Phase 4 in Gurgaon. By the time I finished my meeting, it was well past midnight. My cab driver took me to Phase 4, and there we were stuck. Not only was the address incomplete (no street name), but there werent even people on the road we could ask. Compound that with the dimly lit streets and we spent 40 minutes trying to find the place. I even called the City Club and their directions were near Galleria Market which is near Iffco which isyou get the idea.

It is easy to find fault with the government, but I cannot understand why a private organisation like DLF could not (a) create street names (b) provide signage (c) light up the roads a little at night. After all that has been spent in creating the residences and offices, this would have an incredibly small expense.

To compound matters, the next day I had a similar experience finding Sector 3 in Noida. After the DND Expressway, there is one signboard for Sector 3 which says go straight. At the next intersection, there is no mention of Sector 3! One is left with no option but to navigate by instinct or stop the car and ask people on the street.

And thats where I think lies the root of the problem. This is what I call brain-dead thinking, and it is too obvious around us. More on that later. First, let us go back to Dubai.

Tomorrow: Make No Plans