Foreword

There is an economic perspective to everything, and there is an economist’s perspective to most things. The Cambridge economist Alfred Marshall defined economics as the study of mankind in its ordinary business of life.

Economic Express, curated by a fine in­house mind at Mint, Pramit Bhattacharya, under the guidance of one of the finest minds in the country, fortunately in­house again, Niranjan Rajadhyaksha, and featuring the work of some fine economic writers (including the two named above, but not all, unfortunately, in­house) is a manifestation of this.

Many years ago, on one of our trips to an exotic but down­market Mumbai eatery, Niranjan and I stopped by to discuss the business and economic phenomenon of a mundane Mumbai activity – let’s call it feed the cow – unfolding before our eyes. On the pavement before us was a cow. Next to it was a man selling bundles of leaves and shoots. People would buy the fodder from him and feed the cow (cows are considered holy in India). Interestingly, the cow itself belonged to the man selling the fodder. Niranjan and I marveled the many interesting ways economic theories would explain this.

Economics Express has written on cows, of course, but it has also written on food, love, Piketty, sports, riots, gender, and net neutrality. And many other topics – all interesting, and all very erudite because the pieces themselves are an intelligent aggregation of previously published economic research. I hesitate to use the word aggregation because of the connotations it has in the digital age, but this is aggregation and curation at its best – it overlays a veneer of logic on the research, and is wholly original.

That makes Economic Express a fine example of the authoritative, intelligent, and delightful kind journalism we set out to do in Mint (and which I think we do–sometimes).

The popular blog completes a year in April and as a small gift for our readers we are offering an e­book. Enjoy.

Sukumar Ranganathan

Editor

Mint

Chapter 1: The Big Debates

The Economics of Net Neutrality

Date: April 16, 2015

By Niranjan Rajadhyaksha

The raging debate on Net neutrality can be enriched with a dose of economics.

One useful starting point is the pioneering work on platform markets by the French economist Jean Tirole, who won the 2014 Nobel Prize. Platform markets are also described as two­sided markets. Consider the market for credit cards. The credit card company has two sets of clients: the merchant establishments that accept cards, and consumers who use cards.

Each side has a stake in the growth of the other. A consumer will sign on to use a credit card only if he knows that most restaurants in his city will accept it, while the restaurant owners will agree to accept credit cards only if they are sure that they are being used widely in the city. One side reinforces the other: volume growth on one side generates volume growth on the other side. This is akin to what economists describe as a network effect.

A usual market does not display network effects: a farmer who sells his tomatoes to a supermarket has no interest in how many customers that supermarket has. Platform markets thus have unique structures that help shed light on the ongoing debate about Net neutrality. A useful overview of two­sided platform markets was provided by Boston University economist Marc Rysman in the summer 2009 issue of the Journal of Economic Perspectives.

The entire Net neutrality debate can be seen through the prism of such platform markets. After all, the telecom company providing Internet access deals with two sides: content providers and consumers. A fine analysis of digital networks as two­sided markets was made by the splendidly named Nicholas Economides of the Stern School of Business and the Swedish economist Joacim Tag.

Pricing decisions in such two­sided markets involve interesting strategic choices: how should each side be treated? Tirole has shown that the elasticity of demand on the two sides of the platform market matters a lot, as can be seen in one of the slides from his Nobel Prize acceptance lecture.

What this means in practice is that the company in the middle will drop prices in that side of the market where demand is more responsive to price changes and increase prices in that side of the market where demand is less responsive to price changes. Or, the side that has inelastic demand in effect subsidises the side with elastic demand.

Ask yourself why a newspaper is sold below cost to readers while advertisers are charged a premium; or why a software company tries to make the operating system attractive to developers while charging users a stiff price.

Such a differentiated pricing strategy is similar to what is described by regulation economists as Ramsey pricing, or the inverse elasticity rule. It is named after the brilliant Cambridge polymath Frank Ramsey, who made seminal contributions to economics, mathematics and philosophy before he died in 1930 at the age of 26.

The Ramsey pricing rule is that the extra a monopolist will charge above his marginal costs is inversely proportional to the elasticity of demand. The Ramsey pricing insight has relevance to the Net neutrality debate (and this is a good time to flag an issue that will appear later in this article, whether the market for Internet access is competitive or monopolistic).

The debate is not so much about the different pricing strategies on the two sides of a platform market, but strategic decisions by the platform owner (the telecom companies that are gatekeepers to the Internet) to offer differential access to different players on the same side of the market. This can be done either using prices or privileged access or both. There are several nuanced issues involved here. Economists have not been able to agree on whether moving away from the principles of Net neutrality is welcome or not.

In a paper published in 2009, Robin S. Lee from the Stern School of Business and Tim Wu of the Columbia University Law School have defended the zero­price principle, under which an Internet service provider is prevented from charging an extra fee to a content provider to access the customers of the telecom company.

Lee and Wu have argued that the pricing dynamics of the Internet business are similar to those in other two­sided markets, and that the absence of extra fees to be paid by content creators helps the entry of new content creators. Net neutrality nurtures a rich digital ecosystem. That is the basic argument being made by most defenders of Net neutrality in India right now.

Other economists have disagreed with this position. Gernot Pehnelt has argued in a recent essay that Net neutrality can come in the way of the growth of quality services. “In a strictly neutral Internet, low­value, elastic applications such as P2P (peer­to­peer) file sharing or YouTube videos are likely to crowd out quality­sensitive services because the demand for high­value, quality­sensitive applications will decrease if the quality of service cannot be maintained due to congestion.” A more technically rich argument against Net neutrality by Pehnelt can be found in an October 2008 paper, The Economics of Net Neutrality Revisited.

The issue of network congestion mentioned above is important. Defenders of a network that is not neutral usually argue that the extra money the Internet service providers will get from content providers will help fund better Internet infrastructure for the future. So breaking away from Net neutrality actually benefits all users in the long run by giving telecom companies a financial incentive to build better infrastructure.

But some game theorists have questioned this claim. They use a motoring analogy. The Internet is like a highway. The cars are like packets of data. What the telecom companies are in effect saying is that they will pick a car stuck in the gridlock and bring it to the front of the queue, as long as that car driver is ready to pay a premium. The question is: does such an arrangement create strong incentives for the Internet service providers to maintain network congestion so that some are ready to pay to get ahead?

Three game theorists—H. Kenneth Cheng and Subhajyoti Bandyopadhyay of the University of Florida, and Hong Guo of the University of Notre Dame—developed a model of strategic interaction between the various players in the digital economy. One of their main conclusions was that, except for some specific cases, service providers have greater incentives to invest in network infrastructure when there is Net neutrality. Otherwise Internet service providers will have a stake in keeping networks gridlocked.

The three game theorists also say: “Depending on parameter values in our framework, consumer surplus either does not change or is higher in the short run. When compared to the baseline case under Net neutrality, social welfare in the short run increases if one content provider pays for preferential treatment, but remains unchanged if both content providers pay.”

The highway analogy can also be extended in a dynamic setting. It is not just a question of what one content provider does, but how his competitors react. Actually, the best solution for all content providers is to cooperate by refusing to pay for premium access, but they will in fact all defect or cheat by paying a premium. Students of game theory will recognize this as a classic prisoner’s dilemma: all content providers will pay up and then pass the extra costs to consumers when they would actually be collectively better­off not paying an extra charge.

One key issue for regulators is whether moving away from Net neutrality increases or reduces social welfare. In one of the most comprehensive reviews on the economics of Net neutrality, Florian Schuett of Tilbrug University provides a succinct rule: “The crucial condition for a zero­price rule to be welfare enhancing is that consumers value additional content providers more highly than content providers value additional consumers.” Think about it.

A lot also depends on whether the Internet service provider is a monopolist or not (and remember that Ramsey pricing traditionally deals with a monopolist). One influential argument against Net neutrality was provided by Nobel laureate Gary Becker, Dennis Carlton of the Chicago Booth School and Hal S. Sider of Compass Lexicon, in a paper published in theJournal of Competition Law and Economics.

They argue that stiff competition between broadband providers creates “strong incentives to retain subscribers by providing services and pricing models that promote consumer welfare”. And they add that any reduction in such competition can be dealt with under existing antitrust laws in the US rather than overall Net neutrality.

There is as yet no consensus among economists about Net neutrality. But their work does help frame the issues with greater clarity. What is the economics of two­sided markets? Does the zero­price principle add to social welfare? Will a move away from Net neutrality foster or strangle innovation? What impact could such a move have on future investments in network infrastructure? And is the market for Internet access competitive or will a few players have strong incentives to foster network congestion?

Will the elephant overshadow the dragon?

Date: March 5, 2015

By Vivek Dehejia

Now that the World Bank, the International Monetary Fund (IMF), and others have predicted that India’s growth rate will overtake China’s within the next year or two — or, indeed, already has, if one accepts the new methodology of measuring gross domestic product (GDP) in India — it’s an opportune moment to revisit an old but still very pertinent debate: can India actually overtake China?

First, though, for some basic economics: given that India’s economy is still a fraction of the size of China’s, it is entirely to be expected that Indian GDP growth will outpace China’s. The surprise, indeed, is that it has not happened sooner. The reason is what is known technically as the “diminishing marginal productivity” of capital, or, more loosely, diminishing returns to capital. In everyday language, this means that an increase in the capital stock creates more extra output when the capital stock is small, and that the additional output from each additional unit of capital declines as the capital stock increases.

This, in turn, generates what is known as the “convergence hypothesis” in the economics of growth: economies grow fastest when they are poor, and growth rates eventually taper down to a long run or “steady state” level as they get richer. If this property holds uniformly across economies, then, over time, economies starting at different initial levels of income will tend to converge to the same growth rate over time. A more refined version of this hypothesis — known as “conditional convergence” — adds the proviso that this convergence in growth rates must take account of — or, in statistical terms, be conditioned on — underlying structural differences (such as technology, preferences, and so forth) among economies.

The bottom line is that, through the lens of conventional growth economics, there is nothing surprising that India’s growth rate has caught up to, and has surpassed (or shortly will surpass), China’s, since India’s GDP is still much smaller than China’s.

Conventional it may be, but when the notion that India could overtake China was first mooted in the contemporary academic and policy discourse a little more than a decade ago, it aroused surprise, disagreement, and even derision. Following the lead of the late Samuel Huntington, a political scientist most famous in the public sphere for the “clash of civilizations” thesis, most scholars of political economy believed that India’s messy democracy could not match authoritarian China in mobilizing the resources necessary to grow rapidly. The economist Jagdish Bhagwati pithily captured this conventional view when he referred to the “cruel dilemma” between democracy and economic development. The Economist summed up well the conventional wisdom when they wrote in a leader: “A proudly democratic India that grows at 6% a year ... should be congratulated for having succeeded better than a brutal anti­democratic China which grows at 10% a year.” (The Economist, March 5th, 2005).

The first important paper to challenge this orthodoxy was by economists Yasheng Huang and Tarun Khanna. Their basic argument was that rapid growth in China was driven by foreign direct investment (FDI), which transferred little knowledge to the local economy, while growth in India

was driven by domestic savings and entrepreneurship in knowledge­intensive sectors (both manufacturing and services). This, they argued, in the longer run, would prove to be more organic and sustainable than the screwdriver­turning manufacturing driven growth of China.

Shortly after Huang and Khanna, economist James Dean and I articulated a somewhat difference case for why India could overtake China. In a series of lectures in late 2004 and 2005 titled “The Elephant and the Dragon: A Tale of Two Countries”, we challenged the conventional Huntingtonian view that Chinese style authoritarianism was better suited than Indian style democracy to delivering more rapid growth in the medium to longer run. In part, we drew on a nascent empirical political economy literature which showed that, on average, democracies do at least as well, if not better, than autocracies.

An important early article in this new strand of literature upon which we drew was by political scientists Joseph T. Siegle, Michael M. Weinstein, and Morton H. Halperin. This has now blossomed into a veritable cottage industry of articles and books that use empirical methods to try to assess whether the conventional view that autocracies perform better than democracies on economic growth is actually true. The bottom line conclusion from this line of research is that there is no persuasive evidence in favour of the conventional view, and no iron law that says that democracies cannot do as well economically as democracies.

Dean and I also articulated a theoretical argument, harking back to an older literature in political economy most associated with pro­market, anti­socialist economists such as Ludwig von Mises, Friederich von Hayek, and Milton Friedman. The libertarian argument, that free markets and a free society are necessarily intertwined, was well summarized by Ralph Harris, when he said: “It wasn’t a theoretical thing; it was an active thing, that drive for democracy, for freedom. The argument always was that democracy is impossible without a free economy. (That) you need a free economy was a necessary though not a sufficient condition of democracy.” (Harris was an original member of the Mont Pelerin Society, started by Hayek, and founded the Institute of Economic Affairs in London, which provided the intellectual support to Margaret Thatcher’s pro­market reforms during her tenure as British prime minister).

Interestingly, in a recent and much­publicized speech, “Democracy, Inclusion, and Prosperity” (20 February, 2015, Goa), Reserve Bank of India governor Raghuram Rajan gestured towards a similar argument, expanding on the work of political scientist Francis Fukuyama (himself a disciple of Huntington): “…free enterprise and the political freedom emanating from democratic accountability and rule of law can be mutually reinforcing so a free enterprise system should be thought of as the fourth pillar underpinning liberal market democracies.”

The basic argument that Dean and I made was that, in the long run, the glaring discrepancy between an ever freer and more capitalistic economy, characterized by increasing wealth and economic opportunity, and a still repressive polity, characterized by a lack of political freedom, could lead to a political crisis in China. And, if a political crisis were to occur, which would be characterized by widespread social unrest and even violence, China’s growth miracle could quickly unravel.

By contrast, we argued that, in India, democracy provided a necessary “safety valve”, through which putative losers from economic reform could make their voices heard, and that this would make the Indian path toward economic reform and more rapid economic growth more

sustainable and less prone to political crisis or reversal. (Bhagwati had made a similar argument, also invoking the metaphor of a “safety valve”, in a broad discussion of democracy and development, in “Democracy and Development: New Thinking on an old Question”, Indian Economic Review, 1995).

In a sense, this libertarian inspired thesis — that a free market and a free society will tend to evolve together, and that it is difficult to have the one, without the other, for very long — has its own resonance in a strand of political economy literature most famously associated with the political sociologist Seymour Martin Lipset. Lipset, and others associated with modernization theory, argued that democracy in its modern form is an outgrowth of economic growth itself. As economies grow and a middle class is created, pressures for democratic reform will rise within a society, and lead to an eventual freeing up of the political system. This, indeed, matches the historical experience of all rapidly industrializing and growing economies, starting with Victorian Britain and going right up to the East Asian miracle economies.

Oddly enough, China and India are exceptions to this historical pattern, for different reasons. India remains the only major economy to have democratized before it grew rapidly, whereas China proves the enigmatic exception to the rule that rapid economic developments ushers in democratization.

With India now overtaking China — in terms of growth rate, although, of course, not of the level of GDP — a part of the hypothesis that Dean, I and others put forward a decade ago appears to have found a belated vindication. We shall have to wait and see if the obverse side of that hypothesis — an implosion in China, or a belated and disorderly democratization — will ever come to pass.

Spittoons, clotheslines and the absurdity of Indian labour laws

Date: June 26, 2014

by Pramit Bhattacharya

The Bharatiya Janata Party (BJP)­led government seems to have brought in a new sense of urgency in overhauling India’s archaic labour regime.

Labour reform has always been a political hot potato and despite several attempts in the past to amend them, India’s labour laws have remained mostly unchanged over the past three decades. That seems to be changing now, with the Narendra Modi­led BJP appearing keen to bite the bullet of labour reforms. Already, the BJP­ruled state of Rajasthan has approved amendments to three labour legislation—the Industrial Disputes Act (IDA), the the Contract Labour (Regulation and Abolition) Act and the Factories Act—seeking to whittle down the stringent requirements of those laws.

These moves at labour reforms have expectedly earned the BJP bouquets from industrialists and brickbats from trade unionists. The debate on labour laws has been fairly contentious even within the economics profession. There have been sharp differences of views on the extent to which the supposed rigidities in labour laws such as the IDA actually curtail investments, industrial efficiency and employment. Nonetheless, there is considerable agreement among scholars on the need to rationalize India’s labour laws.

While much of the debate on labour laws focuses on the IDA, which requires companies above a minimum threshold size to seek state approval for retrenchments, the rot in India’s labour regime is much wider and deeper.

From independence till the early 1980s, the number of labour laws increased to reach roughly a 100, and many more judge­made laws were added to the roster. Several of these laws actually ended up contradicting each other. In this period, the country’s workforce was divided into two categories: organized and unorganized. The labour regime emphasized protection for the organized minority using distortionary cutoffs to decide which employers fall within the ambit of regulation. It put restrictions on the type of work a worker could be asked to do, and encouraged litigation rather than arbitration. This was a golden period for the labour bureaucracy, trade unions, and their political masters who enjoyed an outsized role in the industrial life of the nation.

A slowdown in growth in the unionized sectors such as textiles, accompanied by rising labour militancy since the late 1970s, made this regime untenable. The turning point was perhaps the Mumbai mill strike of 1982 led by Datta Samant that ended in failure and signalled the collapse of union power. For the first time, the state did not intervene in a major industrial dispute.

A wish to dent Samant’s growing political clout in Mumbai might have caused the governments in Maharashtra and at the centre, led by Samant’s adversary, the Congress party, to avoid intervening in the strike, but there were broader changes under way. Starting from the 1980s, the state reduced monitoring of labour practices, allowing de facto liberalization of labour laws even as de jure rigidities in labour laws remained. Unions lost clout across industries. These

changes were a part of Indira Gandhi’s grand design in the 1980s to raise growth by adopting a pro­business and anti­labour stance in practice even as she maintained her pro­poor and pro­worker rhetoric in public, wrote Princeton University political scientist Atul Kohli in his 2012 book, Poverty Amid Plenty in the New India.

The state was more willing now to relax labour restrictions but chose to retain the jaded laws. Starting from the 1980s, the new labour regime has made minor relaxations in existing laws, reduced monitoring, and allowed de facto liberalization by encouraging informal or contractual employment, which bypass unions. Thus, while India ranks below almost all Organisation for Economic Co­operation and Development (OECD) countries when it comes to flexibility in regular employment, its score is close to the median OECD score when it comes to flexibility in contractual and temporary employment, a 2008 OECD working paper by Sean Dougherty pointed out.

Unsurprisingly, the share of contract workers has grown dramatically in Indian industries, jumping four­fold since the 1980s, according to the conservative estimates of the Annual Survey of Industries (ASI). But that has led to new problems. As contract workers are not part of regular collective bargaining, they are more likely to resort to wildcat strikes and militant action, a 2011 International Labour Organization (ILO) working paper by labour economist K.R. Shyam Sundar said. Several instances of conflicts have arisen where contract workers form a majority and face unequal wages compared to regular workers in similar roles. The July 2012 attack by workers on a manager in Maruti Suzuki India Ltd’s Manesar plant may have attracted most attention but the auto industry in general has been beset by industrial unrest over the past few years. The industry, which saw the greatest surge in the share of contract workers over the past decade, has become a byword for industrial conflict today.

The absence of transparent labour market reforms has ended up creating lopsided growth within India’s organized sector, with companies reluctant to employ regular workers. The unrest among contract workers is one key reason why the new labour regime appears unstable. The fact that India today has a curious mix of improbably stringent laws and extremely lax implementation is another. Such a regime has bred a culture of weak governance, hurting the prospects of both employers and the employed, argued a 2006 research paper co­authored by India’s chief statistician T.C.A. Anant, historian P. Mohapatra, and economists R. Hasan, R. Nagaraj and S.K. Sasikumar.

The absence of transparent labour market reforms also means that several old laws with outdated provisions continue to apply to an industry struggling to modernize, even if many of those laws are honoured only in their breach. As Bibek Debroy, professor at the Centre for Policy Research, argued in a Seminar article, unlike some countries where courts disregard statutes which have not been enforced long enough, our courts do not follow such a principle (known in legal parlance as ‘desuetude’). Therefore, the outdated provisions of our labour laws continue to hold as long as they are not repealed.

To drive home his point about how archaic our labour laws are, Debroy cited sections 20 and 43 of the Factories Act.

Section 20 says, ‘(i) In every factory there shall be provided a sufficient number of spittoons in convenient places and they shall be maintained in a clean and hygienic condition. (ii) The state

government may make rules prescribing the type and the number of spittoons to be provided and their location in any factory and provide for such further matters relating to their maintenance in a clean and hygienic condition. (iii) No person shall spit within the premises of a factory except in the spittoons provided for the purpose and a notice containing this provision and the penalty for its violation shall be prominently displayed at suitable places in the premises.’

According to Section 43, ‘The state government may, in respect of any factory or class or description of factories, make rules requiring the provision therein of suitable places for keeping clothing not worn during working hours and for the drying of wet clothing.’

“It is no one’s case that welfare provisions should not exist,” wrote Debroy. “But are welfare provisions enacted in 1948 still relevant?”

There are countless other absurdities and infirmities in labour laws. The Industrial Disputes Act (IDA) restrains employers from changing the profile of workers. The Contract Labour Act tries to restrict contractual work to non­core activities in an era where outsourcing has obliterated the distinction between core and non­core activities.

While economists agree on the need to simplify and rationalize labour laws, they disagree on the extent to which rigidities in acts such as the IDA have harmed industrial growth and employment.

The empirical evidence on the impact of the IDA is also rather weak. One of the most widely cited empirical studies on labour rigidities is the 2002 state level study by Timothy Besley and Robin Burgess of the London School of Economics. The duo found that across Indian states, ‘pro­worker amendments to the Industrial Disputes Act are associated with lowered investment, employment, productivity and output in registered manufacturing.’ This study was later cited in several influential publications including those published by the World Bank, to highlight the case for labour reforms. A 2004 research paper by economist Sudipta Dutta Roy arrived at diametrically opposite findings, which suggested that the job security­related amendments to the IDA in the 1970s and early 1980s had no discernible impact on employment.

Both these studies, however, suffered from serious methodological problems, pointed out Aditya Bhattacharjea of the Delhi School of Economics in a 2006 research paper. The methodology used by Besley and Burgess misclassified amendments to the IDA, Bhattacharjea showed. The econometric specification used by the duo was also problematic, Bhattacharjea argued. Dutta­Roy’s estimates were confounded because of other developments that took place around the time the job security­related amendments were made.

Bhattacharjea argued that the reality of labour markets differs significantly from what appears on the statutes, given that implementation is lax, and enforcement is often weak. Anant et al also make a similar point in the 2006 paper cited earlier. They argue that despite de jure rigidities in labour laws, Indian firms have enjoyed de facto flexibility in labour laws, and especially so in the post­liberalization era.

Still, even those who question the labour rigidity argument acknowledge that the Indian labour regime is a tottering house that has been crumbling under the weight of its own contradictions.

Most scholars agree that a move towards a more minimalist labour regime, with greater flexibility and better enforcement can serve the interests of both employers and the employed better. Even though there is disagreement on the precise impact the IDA has had on Indian industry, it is nobody’s case that a plethora of outdated rules should be used to regulate the labour market of Asia’s third­largest economy.

As Debroy argues elsewhere, the reason for labour rigidity lies in the multitude of laws and the great scope for corruption such laws provide rather than in that one Act alone. “What makes organized labour markets rigid?,” asks Debroy. “Contrary to popular perception, it’s not just the Industrial Disputes Act of 1947. The 45 central statutes, assorted rules, orders and regulations, and 29 inspectors are much more responsible and this inspector raj also plagues the small­scale sector. Flexibility requires harmonization, standardization, friendly inspections, and reduced avenues for bribery and corruption. Other than inspectors, no one should object to such reforms, least of all the Left. By equating labour market reforms with the ‘hire and fire’ of IDA, we therefore do a disservice to the cause of labour market flexibility.”

The great Gujarat growth debate

Date: April 11, 2014

By Pramit Bhattacharya

“In a democracy, statistics is politics,” one of my teachers in graduate school once said. His words never seemed as true as it does today, with political parties using and abusing statistics to drive their campaigns.

In the 2014 election campaign, the war of statistics has been fiercest when it comes to the state of Gujarat, given that Narendra Modi has used his governance record in Gujarat as his trump card in the parliamentary elections. The debate on Gujarat’s ‘growth model’ now seems to be drawing an ever­widening circle of academics. Not all appraisals have been flattering.

In a sharply worded critique of the ‘wild euphoria and exuberant optimism about (Narendra) Modi’s economic leadership’, Maitreesh Ghatak of the London School of Economics and Sanchari Roy of the University of Warwick questioned Modi’s role in driving Gujarat’s economic performance in a 13 March opinion piece for the Guardian . The duo pointed out that while Gujarat’s growth record has been impressive; it has been so even before Modi took charge at the helm of the state. Besides, other states have done better than Gujarat when it comes to growth. And when it comes to broader development indicators, the list of states outranking Gujarat is even longer. The extended version of their essay, published by Ideas for India reserves praise for Bihar instead, since the state seems to have turned around after long years of stagnation.

“Though Modi’s stock is rising high, evidence for the success of Modinomics is unconvincing. For those frustrated with the status quo and hoping for a magical turnaround of the Indian economy if Modi comes to power, it may be wise to think about lessons from the stock market. At some point all bubbles burst—and the numbers have to add up,” the duo concluded in the Guardian piece.

Rebutting such arguments, Arvind Panagariya, a Columbia University economist and a long­standing admirer of Narendra Modi, argued in a 29 March Tehelka article that Gujarat’s growth has been both faster and more inclusive under Modi. Citing research by Ravindra Dholakia of the Indian Institute of Management, Ahmedabad, Panagariya argued that the claim that Gujarat had always grown fast was false. “The growth rate trend in Gujarat was below the national average in the 1960s, above it in the 1970s and below it yet again in the 1980s.”

In a counter­punch delivered a few days ago, Ashok Kotwal and Arka Roy Chaudhuri, respectively professor and Ph.D. student at the University of British Columbia, wrote that Gujarat presents a perplexing case that has done much better than many states on growth but has performed much worse in terms of developmental outcomes.

“Despite the fact that Gujarat grew faster than most other states during the decade of 2001­11, its per capita expenditure is not only not at the top of the chart but has slipped further to the 12th position. Equally surprising are its ranks in, one, the extent of poverty and, two, female literacy: they are smack in the middle of the list at 14th and 15th respectively, showing no improvement

by 2011­12 despite fast growth. It does show some improvement in its ranking for ‘Infant Mortality Ratio’ from 19th to 17th, though the record of being in the lower half of the class is still disappointing for such a fast growing state,” wrote Kotwal and Chaudhuri in the Indian Express.

The debate over the ‘Gujarat model’ of growth and development is not entirely new though. Nearly three years ago, the pages of the Economic and Political Weekly (EPW) were witness to a spirited debate on the pros and cons of the ‘Gujarat model’ between Indira Hirway (of the Centre for Development Alternatives, Ahmedabad) and Neha Shah (of the L J Institute of Management Studies, Ahmedabad) on one side, and Ravindra Dholakia and Amey Sapre (both from the Indian Institute of Management, Ahmedabad) on the other. That battle has now widened, attracting more scholars from home and abroad.

In a 2011 EPW paper, Hirway and Shah argued that the fruits of rising prosperity in Gujarat had been thinly spread in the past decade. While the share of capital in total output was rising, the share of labour was falling. Despite rising labour productivity, wage growth was anaemic in Gujarat, the duo pointed out, using Annual Survey of Industries (ASI) data. As a result, Gujarat’s developmental outcomes have suffered even in the face of high growth, the duo argued. Dholakia and Sapre pointed out that the findings change if one considered a broader definition of ‘workers’. Hirway and Shah responded that Dholakia and Sapre had clubbed both blue collar and white collar workers together, and that camouflaged the depressed wages of factory workers because managerial staff typically tends to receive higher wages and bonuses. The duo also pointed out that casual wage rates for informal workers in Gujarat was among the lowest in the country. Other researchers have also drawn attention to the surprisingly low wage growth in Gujarat in the past few years.

The Gujarat growth debate throws up two key questions. First, has growth actually been faster during Modi’s tenure than earlier? And second, has high growth has translated into superior development outcomes?

The answer to the first question is a definitive no. There is very little evidence to suggest that Gujarat’s growth accelerated under Modi. Panagariya’s argument that growth in Gujarat has not been high throughout independent India’s history may well be true but it is also true that Gujarat’s growth trajectory has been higher than India’s at least in the post­liberalization era. In fact, Dholakia, whom Panagariya quotes to buttress his case, argued in a 2006 research paper that economic growth in Gujarat accelerated in the early 1990s itself after the Indian economy was liberalized. Gujarat’s performance was not spectacular in the 1980s but it picked up dramatically in the 1990s. It is not so difficult to divine why this happened. Economic liberalization pulled up growth across states, and the effect was greater in case of open economies such as Gujarat, which were more closely integrated with the global economy. The growth acceleration therefore happened a full decade before Modi took charge.

If credit is at all due, it should be due to P.V. Narasimha Rao and Manmohan Singh!

One of the problems in relying on trend growth rates of states is that the estimates are often subject to major changes depending on which years are chosen as the initial or final years. This is a problem with any time series but the problem is aggravated in the case of state domestic product (SDP) data, which witness sharp annual fluctuations. In a 2013 EPW paper, R. Nagaraj of the Indira Gandhi Institute of Development Research (IGIDR) and Shruti Pandey of the EPW

Research Foundation (EPWRF) used two alternative methods to track the trajectories of two state economies that have been in the limelight: Gujarat and Bihar. The duo examined the changes in the rankings of the two states vis­à­vis others as well as the change in their respective shares (when expressed as a proportion of the national economy). Both Gujarat and Bihar’s rankings have remained fairly stable since the early 1990s. Their shares in the national pie also remain almost the same, the duo found.

Using the physical quality of life index (an average of literacy, infant mortality, and life expectancy rates), Nagaraj and Pandey showed that even on social development parameters, the relative rankings of the two states have not altered much over the past decade. “The findings reinforce earlier research that reported a divergence between Gujarat’s economic performance (which is almost at the top of the table) and its social development (which is close to the national average).”

Does all this mean that Modi did nothing at all over the past decade?

That would be stretching things a bit too far. First, he has at least ensured that Gujarat has continued its growth momentum except in the years following the global financial crisis of 2008.

Second, the Modi administration’s interventions in the power and farm sector have had a major impact on rural areas. Gujarat’s agricultural performance was superior to most other states even in the 1990s. In the 2000s too, Gujarat maintained its growth advantage. But what the averages actually hide is a remarkable turnaround of the resource­poor and drier regions within Gujarat (such as Saurashtra) during this period. Calling the superior growth performance of such semi­arid regions an ‘agrarian miracle’ in a 2009 EPW article, water policy expert Tushar Shah and economist and CACP chairman Ashok Gulati attributed the miracle to the state government’s aggressive agricultural development programme focusing on watershed management, improved extension services and rural infrastructure. The commissioning of the Sardar Sarovar Project (SSP) also aided farm growth by raising the irrigation cover.

Finally, the data does not reflect on qualitative aspects of changing governance. For instance, it can be very difficult to quantify improvements in things like law and order.

Be that as it may, the key takeaway from the Gujarat growth debate is that both Modi’s achievements (on growth) and failures (on all­round development) are perhaps exaggerated because of legacy effects.

Perhaps the most balanced take on the subject was that of Prof Y.K. Alagh, the chancellor of the Central University of Gujarat and a former Union minister. Alagh argued in a 2013 Mint opinion piece that while there was nothing new about Gujarat’s manufacturing prowess, maintaining a high agricultural growth rate over the past decade is indeed credit­worthy. Agreeing with most other scholars on the subject, Alagh said that Gujarat’s performance on social inclusion is weak despite its impressive growth performance.

The economics of Jawaharlal Nehru

Date: May 29, 2014

By Niranjan Rajadhyaksha

Jawaharlal Nehru was an economic modernist. He believed that rapid industrialisation was the most effective way to win the battle against mass poverty. This was in stark contrast with the medieval Gandhian economic vision centred on household production.

Nehru, who died 50 years ago this month, was just one among several important nationalist leaders who were enthusiastic about modern industry. B.R. Ambedkar had argued in one of his earliest articles that the solution to surplus labour in agriculture was in the growth of modern industry. M. Visvesvaraya created a national plan in 1934 that aimed to double national income in a decade, led by a massive increase in industrial investment.Subhas Chandra Bose was Congress president in 1938 when he set up a National Planning Committee to examine how India could industrialise rapidly once it got political independence. V.D. Savarkar told Indians to embrace the age of the machine. All these leaders believed that the state should take the lead in the push towards industrialisation.

It was left to Nehru to actually put much of this into practice after he became the first prime minister of independent India. Economic modernization was an essential part of his overall vision of an India that could hold its own in the world after centuries of foreign domination. In his The Idea of India, a classic study of Nehruvian India published in 1997, the political scientist Sunil Khilnani wrote: “Discussions on national progress were now being formulated in the technical vocabulary of economics...Nehru’s intention had been to subordinate the civil servants to the superior rationality of economists and scientists.” Nehru also invited some of the greatest economists from around the world to participate in the formulation of the landmark Second Five­Year Plan that was launched in 1956.

The statistician P.C. Mahalanobis built on a model developed by Russian economist G.A. Feldman to provide a theoretical core to the Second Five­Year Plan. An early discussion of the technical details underlying the Indian plans is available in a survey by economists Jagdish Bhagwati and Sukhamoy Chakravarty in the September 1969 issue of the American Economic Review. A clear analysis of the economics of Nehruvian planning was written in 1997 by Ajit Karnik of Mumbai University, who taught me growth models at university.

The theoretical debates about Indian planning models are numbing. Here, I try to focus on four broad principles in the Nehruvian economic strategy to show how Nehru was a hostage to the development economics consensus of his times, both in terms of its insights as well as its policy flaws.

First, the development economists of the day said that the basic challenge for a poor country such as India was to increase its stock of productive capital as well as absorb modern technology. This was in line with what many other nationalist leaders believed in the decades preceding independence. The Estonian development economist Ragnar Nurkse had put capital accumulation at the very centre of his 1953 book, Problems of Capital Formation in Underdeveloped Countries. A.K. Dasgupta, a renowned scholar who taught Amartya Sen, also argued that the primary challenge was capital accumulation, drawing inspiration from classical rather than Keynesian economics.

Second, the speed at which capital could be accumulated depended on the domestic savings rate. The West Indian Nobel laureate W. Arthur Lewis had succinctly presented the problem in terms of how a poor country can raise its voluntary savings rate from 5% to 20% of national income. In short, the main focus of the development strategy was on increasing savings to create resources for asset creation. The Harrod­Domar model that was popular at the time also sought to explain economic growth in terms of the savings rate and the productivity of capital. It is interesting that you will struggle to find subsidies or entitlements in the Nehruvian plans to lift India out of poverty.

Third, the government was to take the lead in industrialisation. This was very much part of the development consensus of those years. The early success of the Soviet experiment had, unfortunately, enchanted many intellectuals. But there was a deeper historical learning as well. The Russian economic historian Alexander Gerschenkron had argued in his theory of economic backwardness that countries that had not yet industrialised did not have to wait for the right conditions to appear. Gerschenkron had studied the development experience of Europe in great detail. He said that institutional innovation was the way forward for those who were late into the game: Germany had used investment banks to push its initial industrialisation, while Russia had used the state (he was referring to imperial Russia before the communists took over).

The Nehruvian plans had a similar logic of using the state as an entrepreneur as well as providing capital to private industry through special development banks in the absence of deep financial markets. This is the famous quest of controlling the commanding heights of the economy. A more technically correct explanation would be that Nehru wanted the state to dominate the production of capital goods and intermediate goods so that the Indian economy has enough strategic depth to withstand any future attacks on its political autonomy. It is a theme that still resonates in some parts of the Indian policy establishment that worries about the growing role of Chinese equipment suppliers in Indian power and telecom sectors. But it was eventually the shortage of food in the late 1960s that forced India to compromise on its foreign policy in return for wheat shipments.

Fourth, there was a deep suspicion of foreign trade. Some scholars believe that this was the reaction of a country that had initially been colonised by a trading company, while others argue it was a more practical response to the declining terms of trade for underdeveloped countries thanks to falling commodity prices after the end of the Korean War. Much of this export pessimism was based on the work of two economists: the Argentine Raul Prebisch and the Briton Hans Singer. There was no export strategy in the Nehruvian plans—a flaw pointed out in 1963 by a young economist named Manmohan Singh. The main focus was on import substitution: make at home rather than buy abroad. This not only meant that India failed to take advantage of an expanding world economy, but also that it remained dependent on foreign aid to fund its essential imports. The decision to go into a cocoon was perhaps the biggest economic flaw of the Nehru years.

The Nehruvian economic development strategy had its critics as well. The unsung prophet B.R. Shenoy—who was a student of the libertarian economist F.A. Hayek—wrote a famous dissent note in the memorandum of the panel of economists advising on the second plan. Shenoy made two very significant points: the dependence on deficit financing would be inflationary and the

growing role of the government could eventually undermine democracy. Shenoy also more or less predicted the balance of payments crisis that hit India in 1957.

The Mumbai economists C.N. Vakil and P.R. Brahmananda (the latter was also my teacher) also warned that ignoring the production of what they called wage goods—essentially food and textiles—would lead to inflation as money incomes went up. Their model also took monetary expansion into account, unlike the government plans. Meghnad Desai said in an interview a few years ago that India would have been better off if it had taken the Mumbai critique more seriously. The British free market economist P.T. Bauer was worried about the dependence on bureaucrats rather than the market to set prices; in fact he brilliantly described many such national development plans as being “priceless”—a fatal flaw in economics.

To be fair to them, the planners had also accepted the fact that there was an inflationary bias to their plans, as higher production of capital goods would create money incomes while there would be a shortage of consumer goods to satisfy the new demand; and it was assumed that the Reserve Bank of India would passively fund the budget deficits by creating new money.

Was the Nehruvian economic strategy a success? It was in the initial years. The Indian economy had essentially been stagnant in the five decades before India became a sovereign republic. The economy grew at an average rate of 4.09% between fiscal years 1952 and 1965. The growth crisis came later.

It was the first economic boom that India had seen in nearly a century. Industrial output grew much faster than the overall economy, the first step towards a growing role for industry in the Indian economy since deindustrialisation began in the late Mughal period. The government also managed to run a tight ship. Fiscal deficits were low. A look at the financing pattern of the Second Five­Year Plan shows that Nehru’s economists had assumed that at least part of the ambitious investment programme would be financed by revenue surpluses as well as profits from the railways.

The longer­term report card is far less impressive, as is now well known. The Nehruvian economic model had already run out of steam by the time of his death. India was left with an inefficient industrial structure, too much government regulation of its economy, an inability to compete in the global market and inadequate supply of consumer goods. It also put India at the mercy of foreign aid givers—ironical because Nehru believed a strong economy was essential to protect Indian political autonomy.

Many other Asian countries switched their economic development strategy after 1965. India failed to do so. It became a laggard. Nehru was too impressed by the ability of governments to manage complex economies. He failed to see that the enlightened bureaucracy he hoped for would end up as the corrupt inspectors of the licence­permit raj that C. Rajagopalachari and Minoo Masani of the Swatantra Party had presciently warned against very early in the planning era.

Nehruvian planning failed to meet its grand hope despite an encouraging start. But important parts of the vision are still relevant in India today: the central role given to economic growth in the battle against mass poverty, a relentless focus on capital accumulation, a higher savings

rate to fund asset creation, strategic depth to the industrial structure and fiscal conservatism. All this is a far cry from what recent profligate governments that claim to follow Nehru have done.

The science of human behaviour and modern policymaking

Date: October 9, 2014

By Sumit Mishra

In his book ‘The Theory of Moral Sentiments’, Adam Smith wrote: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” What he wrote in 1759 can be traced as the foundation of behavioural economics, a field that lies at the cusp of psychology and economics.

A wide set of our choices are driven and limited by our cognitive ability, attention and motivation. We all are habitué in missing the deadlines; we get impatient and often procrastinate. Over the last decade or so, these behavioural aspects of human behaviour have been incorporated into mainstream economics.

Insights from behavioural economics can help us answer several important questions. They can help us understand why attendance rates remain low in schools (often because of poor course design), why some people choose to defecate in the open (often because they find toilets disgusting), how farmers are slow to adopt a new useful technology (often because there may not be enough know­how about this new machine or equipment).

Take the example of open defecation, practised in large parts of rural India in spite of toilets being available on the premises of households. There could be many reasons for this. Someone may find defecating in the open more convenient. It could be that there may not be enough awareness about the health benefits of using toilets. Others may find toilets filthy and feel claustrophobic.

What could be the behavioural response to this problem? One way to address this problem is to spend more on information, education and communication (IEC). A recent survey by the Research Institute for Compassionate Economics (RICE) found that 84% of the respondents had never heard of any village­level meeting on sanitation; and less than a third had ever seen a poster or any other form of message about toilets. The other possible solution that can overcome the behavioural problem is construction of better designed toilets.

To better utilize the insights from behavioural economics, a recent issue of the peer­reviewed journal Review of Income and Wealth explores some of the central issues in designing policies focused on developing countries.

In one of the research papers, Sendhil Mullainathan of Harvard University and Saugato Datta of the non­profit organization ideas42 offer seven core principles in designing a behavioural intervention which depends on the nature of problem.

First, designing incentives for self­control can have powerful effects. For instance, consider the problem of low productivity among workers in India. In a study on data entry operators in India,

Supreet Kaur of Columbia University, Michael Kremer of Harvard University and Mullainathan found that the workers chose a payment mechanism that laid a penalty for missing targets.

“Such commitment contracts could also help tackle the widespread problem of absenteeism among public­sector workers in developing countries such as India, where 25% of government schoolteachers are absent from work on any given day,” Mullainathan and Datta say.

Secondly, we should find solutions to avoidable self­control problems. For instance, farmers face enormous financial distress before the harvest season because of which they borrow large sums of money. If farmers spend more judiciously in the post­harvest season or have access to commitment savings accounts, this would solve the self­control problem.

Thirdly, it is important to remove the hassles involved in securing benefits of public programmes. They quote a study in Morocco which showed that nearly 70% of households who were helped with the administrative steps needed to get a piped water connection signed up for piped water, compared with just 10% of those who did not receive similar help.

Fourthly, small monetary incentives can bring in bigger change. Take the case of low rates of immunization in India. Abhijit Banerjee and his colleagues at the Massachusetts Institute of Technology (MIT) conducted an experiment in which they offered parents a half­kilo bag of lentils for each immunization done in 134 villages in Rajasthan. They found this small incentive worked very well; the immunization rate almost doubled by the end of the experiment.

Fifthly, reminders that take care of the problem of inattention are especially effective in driving behavioural change. Consider a farmer who tends to forget to spray pesticide on his crops; an SMS service that disseminates information on pesticide schedule could work well as a reminder.

Sixthly, a large number of public programmes intended for the poor do not succeed because of poor advertisement. This could be mitigated by better framing—presenting information about these schemes in such a manner that intended recipients notice them. People notice the negative effects more than positive ones. In case of open defecation, posters and radio ads could be designed which show the ill­effects from not using a toilet.

Seventhly, linked to last point, information should be framed or designed to fit the mental model of recipients; people often ignore those messages which do not conform to their beliefs.

“An education campaign in Kenya, where many teenaged girls were getting pregnant by older men, sought to reduce such pregnancies by urging girls to shun premarital sex. However, this reinforced the idea of marriage as a desirable goal, and girls viewed getting pregnant as the most efficient way to find a husband. The programme, therefore, actually led teenaged girls to actively seek out older partners for unprotected sex. On the other hand, a campaign that simply provided girls with the information that older men were more likely to be HIV­positive reduced the number of girls who got pregnant by older men by two­thirds. It succeeded because it addressed the fundamental cause of such pregnancies, which was the perceived desirability of older men as sexual partners.”

Is there evidence on how behavioural interventions are perceived by policymakers in developing countries? Antonio J. Trujillo and his colleagues at the Johns Hopkins University set out to

explore the viewpoint of important stakeholders in the process—policymakers. They interviewed 520 policymakers and development practitioners about health policy prescriptions made by behavioural economics in developing countries.

It seems there is a broad consensus among policymakers on the need for policies which induce changes to overcome present bias (the tendency to be myopic), spread awareness about habits and disseminate information in innovative ways. However, opinion is divided on the effectiveness of monetary rewards in bringing about behavioural changes.

Pinning hopes on behavioural interventions could be an exercise in futility, some argue. The sharpest criticism came from George Loewenstein, a behavioural economist at the Carnegie Mellon University, and Peter Ubel of the Sanford School of Public Policy, Duke University. The duo pointed out that behavioural insights into health policy could be wrong.

They write, “Prevention is certainly a worthy goal; it is much better to prevent a case of lung cancer than to treat it. But efforts to improve public health, even if enhanced by insights from behavioural economics, are unlikely to have a major impact on health care costs. Studies show that preventive medicine, even when it works, rarely saves money.”

Already, enthusiasm for the much­fancied Nudge Unit in the UK, a behavioural insights team in the government, is diminishing quite rapidly,Tim Adams of the Observer noted. “Though nudge­economics remains seductive, what once seemed like a panacea has come to look a bit more like a series of sticking plasters,” wrote Adams.

Finally, it is important to distinguish between behavioural insights that are local from those which are generic in nature. We should be asking whether a set of incentives that worked in, say, Akola is going to work in Anand.

It is dangerous to jump to policy conclusions from field experiments in economics that have not been validated elsewhere. As long as we are careful about which lessons to learn from behavioural economics, it can still provide important inputs to policymaking.

Sumit Mishra is a research scholar at the Indira Gandhi Institute of Development Research, Mumbai.

The minimum wage juggernaut

Date: May 2, 2014

By Pramit Bhattacharya

A move to raise the federal minimum wage in the US by roughly 30% to $10.10 per hour failed on Wednesday after Republicans in the Senate opposed the move. The move, backed strongly by US President Barack Obama, may yet be revived. But irrespective of its fate in Washington DC, several states in the US are already moving ahead to raise the minimum wage floors in their respective states, the New York Times reported.

The US is not the only economy to see a vigorous push to raise the wage floor. In a historic decision last month, German Chancellor Angela Merkel introduced the country’s first minimum wage at $8.5 euros per hour. Later this month, Switzerland will be voting on whether it too should be setting a national wage floor for the first time in its history.

The case for a minimum wage seems to have been strengthened because of the growing discontent over inequality in the Western world, especially after the great financial crash of 2008. While political rhetoric has played a part in driving the minimum wage campaign in the Western world, the role of rigorous empirical economics has been pivotal in overturning long­held theories about the minimum wage, and its supposedly harmful effects on aggregate employment.

Before the French economist Thomas Piketty enthralled the world with his audacious attack on the edifice supporting neoclassical economic theory to argue that capitalism may have a natural tendency to perpetuate inequality, it was an economist of Indian origin, Arindrajit Dube, whose empirical research challenged the conventional economic wisdom about the minimum wage. Dube, along with fellow economists T. William Lester and Michael Reich, authored a widely cited research paper in 2010 that showed that raising minimum wages had no discernable impact on employment after accounting for other factors that determine employment levels in a particular region.

Dube, an associate professor of economics at the University of Massachusetts, Amherst, used data on contiguous county pairs across state borders during the time when one state had raised minimum wages to isolate the impact of the minimum wage increase on employment from other influences. Dube’s path­breaking research has helped shift the consensus within the economics profession on the issue of minimum wage, and led him to testifying before the US Senate committee on health, education, labour and pensions.

Of course, the debate on the impact of minimum wage increases is not settled yet. But the very fact that the weight of empirical evidence seems to tilt against conventional wisdom on minimum wages is significant. The textbook economic model of labour markets has held for long that at an aggregate level, firms will hire fewer workers if wages are pushed up artificially. Higher the minimum wage, bigger the job losses, the story went. For long, this was held to be an inviolable principle. A section of economists still supported the minimum wage in the past, on the grounds

of fairness and the right of workers to a ‘living wage’ despite conceding that such standards may lower aggregate employment.

The new findings have challenged the basic contention about wage hikes leading to job losses, shifting the grounds of the debate, and adding a powerful weapon in the hands of minimum wage proponents. A few weeks back, the National Restaurant Association (a lobby group for restaurants, the largest employers of minimum wage workers) issued a statement opposing a minimum wage increase with signatures from 500 economists, including four Nobel laureates. The progressive Economics Policy Institute struck back with another letter advocating the hike, signed by over 600 economists, including seven Nobel laureates. Bloomberg Businessweek called the exchange an ‘arms race for economists’.

The first empirical challenge to the textbook model of minimum wages sprang from two renowned labour economists, David Card and Alan Krueger, whose case­study of a minimum wage hike in New Jersey in 1992 showed that it actually had raised the number of jobs. Two other economists, David Neumark and William Wascher, studied the same example using what they claimed were more accurate methods to show exactly the opposite: the minimum wage hike had reduced employment. Almost a decade later, the two sets of researchers examined each others’ methodologies, and toned down their respective findings to argue that the hike may not have had as much impact as they had thought earlier. The two sets of researchers continued to differ on the direction in which employment moved, though.

It is in such a context that Dube’s work holds appeal. Dube argues that both the case­study and cross­sectional approaches favoured by earlier researchers are flawed because they ignore other important factors (such as the stage of the business cycle) which have a large bearing on employment numbers, and which vary from region to region. Dube’s paper combines both approaches to show that employment effects of minimum wage hikes in the US are not very significant. In a more recent paper co­authored with Lester and Reich, Dube points to evidence suggesting that raising minimum wages may actually improve labour market outcomes by lowering turnover rates of low wage workers, who have greater incentive to stay in their jobs when they are paid a decent minimum wage. The textbook model does not work because of labour market frictions, Dube argues. Dube is of course cautious enough to point out that there can be too much of a good thing: beyond a point, minimum wage hikes can begin to hurt. He advocates indexing of minimum wages to inflation to ensure predictability of minimum wage hikes.

Many readers will be familiar with the work of one of Dube’s students at Amherst, Thomas Herndon, and two of his colleagues, Michael Ash and Robert Pollin, who produced that devastating critique of Carmen Reinhart and Kenneth Rogoff’s work on debt last year. The trio’s paper shook the world of macroeconomics by challenging Reinhart and Rogoff’s celebrated hypothesis that beyond a threshold level, a country’s indebtedness pulls down growth. But it was Dube’s empirical analysis that showed that the causality could run the other way: it is slow growth that leads to accumulation of debt and not the other way around, Dube’s research suggested.

After the Reinhart­Rogoff controversy broke, Dylan Mathews of the Washington Post wrote a very interesting profile of the unconventional economics department at Amherst which is producing such offbeat econometric results.

Both Piketty and Dube seem to represent a new generation of post­Marxist economists whose rejection of Marxist economics have not turned them blind to the faults of capitalism or of economic policies as they exist today. Unlike an earlier generation of Cold War era scholars, which felt compelled to either defend antiquated Marxist notions about inequality or to attack them, the newer generation feels free to eschew such rhetoric and get their hands dirty with data. Dube, a Ph.d from the University of Chicago, considered the high temple of conservative neoclassical economics, for instance tells Mathews in the piece cited above that he is not particularly interested in ‘labels’ and never aimed to be a ‘good Chicago economist’.

The willingness of policymakers to embrace the heterodoxy among the rising stars of economics today perhaps springs from the disappointment of the great financial crash of 2008. Many feel that the origins of the financial crisis lay in the intellectual capture of policymaking by one dominant school of thought.

Chapter 2: Economics in daily life

How economists view love, marriage and Valentine’s Day

Date: February 13, 2015

By Pramit Bhattacharya

Can the dismal science of economics throw light on the seemingly irrational phenomenon of love? For a long time, economists did not consider love to be within the ambit of their study, and ignored it altogether even as they used the economic lens to study other esoteric subjects such as crime and fertility. The neglect of love ended in the 1970s, when the Nobel winning economist Gary Becker for the first time laid out a framework to analyse love and marriage in a series of research papers.

Using simple economic tools and high school algebra, Becker showed how seemingly irrational life choices and decisions could in fact be explained by rational choice theory. Becker’s analysis was based on two simple principles. First, given that marriage is almost always voluntary, either by the couples or their parents, the theory of preferences can explain marriage and couples (or their parents) can be expected to derive more satisfaction (or higher utility) from being married than from remaining single. Second, Becker held that a market in marriages can be presumed to exist since many men and women compete as they seek mates. Each person tries to find the best mate subject to market conditions.

Based on these two principles, Becker draws out a theory of marriage that says that each person will tend to pair with someone with whom the chances of maximizing their household production of goods and services are the highest. The set of household goods and services include tangible goods the market provides as well as non­market goods such as shared pastimes, or the joys of raising children. The couple’s level of satisfaction is determined both by market and non­market earnings. But, given that time and effort spent on raising market earnings can diminish non­market earnings, each couple uses economic principles to allocate the scarce resource of time.

Becker argued that the division of labour within the family is driven by the differences in market earnings, which in turn are determined by the marginal productivity of the two partners. The partner with a higher wage then specializes in the production of market goods and services, while the partner with the lower wage specializes in the production of non­market goods and services. Other things being equal, a high­earning male is more likely to marry a low­earning female and vice­versa. Of course, if women are perceived to have a comparative advantage in the production of non­market goods (such as those involved in raising children), it is likely that the marriage market equilibrium will tend to have many more pairs where men rather than women are the sole wage earners.

While spouses are likely to differ in market earnings, both theory and empirical evidence suggested likes tend to attract more when it comes to other attributes such as education or physical attractiveness, wrote Becker. He argued such attributes as education or beauty are complementary inputs in the production of non­market goods and services whereas wage

income could be substituted by one partner for the other. The lack of complementary attributes could well explain a significant chunk of separations among couples, Becker hypothesized.

The gains from marriage are determined by how the division of labour occurs. If a lot of effort is expended on policing whether a partner is performing his or her assigned role, then the net gains to the couple will be relatively less (the gains are essentially reduced because of transaction costs). The gains also depend on whether a sizeable fraction of the output generated after marriage can be jointly shared. Love accentuates the gains from marriage because each partner then cares about the satisfaction (or utility function) of the other. Consequently, with love, transaction costs are lowered and the gains from marriage increase. Love also increases the likelihood of increased production of shared family goods, thereby raising the gains from marriage further.

Becker was among the first economic imperialists who extended the reach of economics to analyse complex social behaviours that were considered the exclusive domain of sociology. Social scientists initially ignored, then mocked, and finally began accepting some of Becker’s key insights into the nature of marriage. Later work by economists and sociologists have refined, extended and, in some cases, revised Becker’s framework.

A 1997 review essay by economist Yoram Weiss of Tel­Aviv University succinctly summarizes some of the key economic insights into marriage. Weiss lists four key economic reasons for marriage. First, division of labour after marriage tend to raise joint gains. Second, with imperfect credit markets, marriage can solve credit intermediation problems, with one partner investing in the other. For instance, if both partners work but one has a greater ability to earn, it may be profitable for the partner with the lower ability to earn to fund his or her partner’s education while he or she takes care of home expenses. Such arrangements are indeed common in the modern world. Thirdly, marriage leads to the production of shared family goods (more technically, public goods, which are non­rivalrous and non­excludable). Finally, marriage leads to risk­pooling when two partners have uncertain but different sources of income.

An influential 1999 study of cohabiting couples by sociologists Julie Brines and Kara Joyner extended Becker’s framework of married couples to analyse the behaviour of people living together. The duo analysed data on both married and cohabiting couples to find that although there was some evidence pointing towards specialization among married couples, the evidence was weak.

There was no evidence to suggest specialization among cohabiting couples. On the contrary, live­in relationships tended to be durable when both partners shared equally in domestic work. Unlike married couples who have a more collectivist approach, cohabiting couples tend to display a more individualist streak. Hence, cohabiting couples tend to balance their individual interests by basing their behaviour on the principle of equality.

More interestingly, the chances of a break­up were far higher among cohabiting couples than among married ones when women earned substantially more than men. In contrast, the chances of a break­up are much smaller when a wife begins to earn more than her husband. While cohabitation seems to be based on the premise of equality and rejects traditional gender

roles, it is not immune to them, the study suggests. It is marriage that seems to withstand unorthodox economic power relations better.

“Cohabitation draws part of its appeal from an image that promises greater flexibility and experimentation,” wrote Brines and Joyner. “In short, it bespeaks few ‘rules.’ For a relationship to persist, however, some operating principle must mediate the tension between the interests of the parties involved. For husbands and wives, the marriage contract helps to manage these interests, encourages joint investment, and permits some flexibility around the norm of male providership…. For cohabitors, uncertainty and implied contracts intensify the tension between the interests of the two partners and place greater stress on a bargaining principle that is difficult to adhere to over time. Thus, we find that breaking the rule in an arrangement ‘without rules’ is more disruptive than any comparable violation in marriage.”

As Weiss pointed out in her essay, economics alone is not enough for marital analysis. Very often non­economic considerations do play a dominant role in romantic relationships. Yet, economics can provide valuable insights into the nature of relationships, which together with observations from other disciplines such as sociology can feed into a unified theory of relationships.

The power of economics stems from its ability to explain how rational calculations underlie seemingly irrational behaviour. Even romantic melodrama, such as a lover fasting outside his beloved’s house, can be explained by rational choice theory. Such an act is a powerful way of signalling commitment, according to the Nobel economist Michael Spence.

Do Valentine’s day gifts also satisfy the test of economic rationality? Neil MacArthur and Mariana Adshade use game theory to show why it is best to avoid such gifts, especially if a couple is already committed.

“Valentine’s Day, essentially, is a game in which each person who is in a relationship must choose between two strategies; buy a gift for their significant other or do nothing to celebrate the day,” the duo writes.

Given that there are two players, each with two strategic options, there are three possible outcomes that can happen on the day. The first outcome is that both buy gifts, and are satisfied to learn that their partner is committed to the relationship. But that satisfaction comes at a huge cost as most Valentine day gifts are over­priced. The second outcome is that one partner buys a gift and the other does not. One need not explain the consequence. Suffice to say that break­ups tend to spike up in the second half of February, according to Facebook data. The third outcome is that neither gifts.

“The best strategy would be for couples to ignore the holiday altogether, but they won’t because there is just too much pressure to conform to the holiday traditions from both inside and outside the relationship. From a game strategic perspective, participating in the holiday just leads to suboptimal outcomes,” the duo argues.

Why Twitter is a polarizing platform

Date: December 25, 2014

By Sumit Mishra

In his 2012 book Patriots and Partisans, historian Ramachandra Guha wrote a lengthy harangue about Internet trolls. Using numerous conversations over email and letters, Guha pointed out the general disdain for diversity of opinions among his correspondents. Guha found support from several others in India’s public life who have been at the receiving end of vitriolic abuse for holding an opinion that may differ from the views of the majority, or from that of a vocal minority.

Over the past few years, such abuse has shifted from personal email conversations to public platforms such as Twitter and Facebook. Twitter has largely hogged headlines for being an efficient communication platform for idealistic protesters, such as those involved in the Arab Spring of 2011, but the darker underbelly of the social networking site has not received the attention it deserves.

While the importance of social media as an instrument of change cannot be denied, new studies show that there has been a steady rise in intolerance to diverse viewpoints on social media platforms such as Twitter, leading to what is known variously as echo chambers and information cocoons.

A recent study by Emma Pierson, a statistics student at Oxford University, showed how opinion regarding the shooting of a black youth at Ferguson in the US was sharply segregated among two equally vocal groups, with little dialogue between them.

A more detailed study by economists Yosh Halberstam of the University of Toronto and Brian Knight of Brown University using 500,000 tweets from more than 2 million Twitter accounts during the 2012 US presidential election campaign arrives at broadly similar conclusions. They present strong evidence to answer two important questions. One, do people with similar characteristics tend to form groups on social networking sites? Two, what is the nature of inter­group interaction on Twitter?

The results of the study show that not only do people engage a lot more with other Twitter users of similar political view, diffusion of news and gossip also happens more among like­minded Twitter users.

Here’s how they do this. The study sampled the set of Twitter users who followed at least one of the candidates for the House of Representatives. It is worth mentioning that following someone on Twitter does not mean endorsement or friendship, unlike on other platforms, say, Facebook. So, Halberstam and Knight infer the political affiliation of voters from the number of candidates of a particular political party they follow. To illustrate the point, consider a voter following more number of Democrats than Republicans and another who follows more Republicans. While the former is bracketed as conservative, the latter falls in the category of liberals.

Halberstam and Knight use a simple measure to capture similar attitudes or preferences. They construct a homophily index, which is nothing but the proportion of like­minded connections within a political group. They also determine ideological segregation as the difference between exposure to own­group and the exposure to other group. The greater this difference, the higher is the likelihood of a voter to follow other voters who follow the same or similar set of people.

Using these two measures, they show that voters are more likely to interact with other voters with similar political affiliation. Social media may appear much more democratic than traditional media but the Halberstam­Knight results suggest that social media dialogue is often a dialogue among the converted.

To be sure, social networks can be effective tools of mobilization, especially in non­democratic societies. Recent research by economists Daron Acemoglu of the Massachusetts Institute of Technology (MIT), Ahmed Tahoun of the London Business School and Tarek Hassan of the Booth School of Business establish statistically that Twitter activity led to a surge in anti­establishment protests in Egypt. Yet, the evidence put forward by Halberstam and Knight suggests that democratization through such networks may be limited in mature democracies.

There are, of course, certain methodological issues related to studies based on data from social networking sites such as Twitter. With a glut of big data, large numbers of studies are now available describing behaviour of social media users. Are these results enough to arrive at the conclusion that there is indeed information­segregation on online networks? Computer scientists Derek Ruths of the McGill University and Jürgen Pfeffer of Carnegie Mellon University in a recent Science journal article question the empirical work based on Twitter data.

Ruths and Pfeffer raise valid questions on the usability of such data. Their main concern is that we have no idea about the representativeness of the sample. Does the Twitter­universe represent the true population behaviour, given that social networking sites are dominated by people of a certain age and income class group? If the samples are not representative, the results may be biased. Statisticians term this as sample bias. Ruths and Pfeffer argue that none of the studies that use Twitter data correct for the bias.

Ruths and Pfeffer also argue that rapid changes in algorithms that Twitter and other networks use make it difficult to obtain valid real­world inferences from the data. Finally, a number of Twitter accounts are either spam or bots. Is there a mechanism that weeds non­human accounts from these datasets?

These problems notwithstanding, a more serious issue is that of estimating political affiliation based on Twitter followers. Ruths and his colleague Raviv Cohen caution that it is difficult to correctly determine the political orientation based on Twitter timelines if the users themselves don’t self­report their affiliations.

To circumvent these issues, Halberstam and Knight rigorously validate their results. They compare their own political affiliation measure with estimates derived from Gallup surveys and the two measures turn out to correlate positively. They also calculate the political views from the fraction of voters subscribing to a particular media outlet. The odds that liberal voters subscribe

to right­leaning channels like Fox News are found to be very low. These address some of the issues that Ruths and Pfeffer have about the use of Twitter data.

While the Halberstam­Knight results are not the last word on the subject, the evidence they present should make us introspect on the nature of social media platforms, and the wide chasm between what they had promised to be and what they have turned out to be.

In Principles of Political Economy, the 19th century political philosopher J.S. Mill had remarked, “It is hardly possible to overstate the value, in the present low state of human improvement, of placing human beings in contact with other persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar.”

“Such communication has always been, and is peculiarly in the present age, one of the primary sources of progress,” wrote Mills.

Mills’ words ring true even today. Twitter could have been the platform for free interaction Mills wanted. However, herd behaviour seems to rule the roost on Twitter, and there is little possibility of change anytime soon.

Sumit Mishra is a research scholar at the Indira Gandhi Institute of Development Research, Mumbai.

Does Cable TV empower women?

Date: November 28, 2014

By Sumit Mishra

In a popular Indian soap opera, Sasural Simar Ka, the protagonist, Simar, recently faced a unique test. Simar was told she would have to quit her job if her husband didn’t like the laddoos she made for him! Given that these kinds of subplots are common in a typical Indian television programme, it is hard to believe that watching TV leads to emancipation of Indian women. Yet, that is precisely what Robert Jensen of the University of Pennsylvania and Emily Oster of the University of Chicago seemed to have found in a 2009 study that made the case for positive effects of cable TV on attitude towards women in rural India.

Five years later, a new study by Vegard Iversen of the University of Manchester and Richard Palmer­Jones of the University of East Anglia has challenged the findings of the earlier study. Iversen and Palmer­Jones contend that exposure to cable TV may not have any desirable effect on attitude towards women. Instead, the reported gains in women’s empowerment in the Jensen­Oster study may be because of other factors such as women joining self­help groups.

In the Jensen­Oster study, conducted between 2001 and 2003, women were surveyed in 180 villages of these states: Delhi, Haryana, Bihar, Goa and Tamil Nadu. During this period, 21 out of the 180 villages got new cable TV connections. Using this dataset, the paper argued that the introduction of TV led to a decline in spousal violence and fertility and an improvement in female autonomy.

Jensen and Oster used son preference and acceptability of domestic violence as the measures to make their case. Their study suggests that in villages with new cable connections, “women are less likely to report that it is acceptable for a husband to beat his wife, and less likely to express a preference for sons. Behaviour traditionally associated with women’s status also change: women report increased autonomy (for example, the ability to go out without permission and to participate in household decision­making) and lower fertility”.

What is the underlying mechanism that explains why this would happen? According to Jensen­Oster, “the program offerings on cable television are quite different than government programming. The most popular shows tend to be game shows and soap operas. For example, among the most popular shows in both 2000 and 2007 (based on Indian Nielsen ratings) is Kyunki Saas Bhi Kabhi Bahu Thi (Because a mother­in­law also was once a daughter­in­law), a show based around the life of a wealthy industrial family in the large city of Mumbai. As can be seen from the title, the main themes and plots of the show revolve around issues of family and gender”.

Most of us know that themes of the popular soap operas on cable television are hinged towards conservative families and espouse traditional values. So, the theory that TV programmes will bring gender­friendly change appears far­fetched. Broad numbers also seem to belie that claim: the latest census reported a decline in child sex­ratio from 927 girls per 1,000 boys in 2001 to 918 in 2011, even as cable TV spread rapidly in the country. So, the Jensen­Oster findings do

appear odd given what we know about social attitudes towards women and the nature of TV programmes.

Besides, there is no other empirical evidence to show that cable TV programmes universally succeed in inculcating so­called pro­social behaviour (behaviour beneficial to society). Even the case studies that demonstrate positive effects of cable TV on female autonomy are very context­specific. For instance, Eliana La Ferrara of the Bocconi University and her colleagues measured the impact of novellas in Brazil on fertility. The paper corroborates Jensen­Oster findings— introduction of pro­social TV programmes did lead to a decline in fertility. However, there is an important difference between the two studies. The Brazilian soap operas portrayed families that were much smaller in size than in reality. In contrast, the Jensen­Oster study fails to establish a plausible link between programme content and behavioural change.

Given the counterintuitive nature of the findings, Vegard Iversen and Palmer­Jones decided to replicate the Jensen­Oster study. The duo reconstructed each of the measures used by Jensen­Oster: acceptability of beating, female autonomy and son preference. Their reworking of the Jensen­Oster analysis shows that the introduction of cable TV had no impact on the gender attitude for households with illiterate women. They also contend that the effect of cable TV may show up just because Jensen­Oster omitted a crucial variable in the analysis (joining a self­help group could have been a reason for change in female autonomy, for instance).

What this suggests is that a more complex process may be at work than the more appealing and straightforward hypothesis of cable TV being the main agent of social change. A lot depends on how viewers think about the stories and characters shown therein.

A 1991 study by Michael Brown and Michael Cody of the University of Southern California on the very popular TV programme Hum Log suggested that while the viewers identified with the characters, there was very little change in attitude towards women.

“One of the lessons learned from Hum Log is that the intended effects of ‘prosocial’ television content are not simply dependent on degree of viewers’ awareness and involvement but on viewers’ perception of the positive and negative television role models used to create that awareness and involvement,” wrote Brown and Cody in their Hum Log study.

To make a case for TV’s impact on gender dynamics requires more detailed information on the content of the TV programmes. In the absence of credible causal links between TV programmes and gender equality, it may be better to continue to focus on the more traditional ways of achieving gender parity—better laws, improved access to educational facilities and generating awareness about employment opportunities—as Jensen himself shows in another study.

Sumit Mishra is a research scholar at the Indira Gandhi Institute of Development Research, Mumbai.

Holy Cows or Cash Cows?

Date: February 19, 2015

By Pramit Bhattacharya

Do Indian villagers purchase cows because they hold them sacred, or do they make economic calculations while investing in cows? Over the past couple of years, several economists have mined data on livestock costs and returns to answer that question, leading to a lively debate on the issue.

The debate was ignited by the surprising findings of a 2013 National Bureau of Economic Research working paper authored by three economists, Santosh Anagol, Alvin Etang, and Dean Karlan. Anagol and his co­authors analyzed data on costs incurred and incomes generated by those owning cows and buffaloes in two districts of Uttar Pradesh to come up with startling results: cows and buffaloes generated large negative returns for their owners, at negative 64% and negative 34%, respectively, once labour costs were factored in. The authors concluded the villagers did not behave according to the central tenets of capitalism, and offered a variety of explanations, including cultural and religious ones, to explain the seemingly irrational choice.

As an earlier Economics Express column pointed out, the findings of the study were challenged by two other economists, Orazio Attanasio and Britta Augsburg, in a 2014 NBER working paper. The duo pointed out that the surprising findings of the 2013 study had a simple explanation: drought, which affected milk production, and hence the returns to cattle adversely in the year of study.

“In computing the return on cows and buffaloes, the authors used data from a single year,” Attanasio and Augsburg wrote. “Cows are assets whose return varies through time. In drought years, when fodder is scarce and expensive, milk production is lower and profits are low. In non­drought years, when fodder is abundant and cheaper, milk production is higher and profits can be considerably higher. The return on cows and buffaloes, like that of many stocks traded on Wall Street, is positive in some years and negative in others. We report evidence from three years of data on the return on cows and buffaloes in the district of Anantapur and show that in one of the three years, returns are very high, while in drought years they are similar to the figures obtained by Anagol, Etang and Karlan (2013).”

The latest economists to join the debate are Esther Gehrke and Michael Grimm, who argue in a recently published research paper that low average returns to cattle investments mask huge variations in returns among owners. Villagers with large cattle holdings and those with more productive breeds have significantly higher returns compared with those owning only a few cattle of poorer breed. Just as weather drives variations in returns across years, economies of scale drive variations among cattle owners even in the same year. Raising more cattle lowers average costs for big farmers, driving up margins. Gehrke and Grimm say raising more cattle or more productive breeds is an expensive proposition for most small farmers, which is why they are trapped in a low­level equilibrium, and earn low returns on investment. “Overall, we believe that the findings give little reason to speak of a paradox of cattle accumulation,” Gehrke and Grimm say.

Gehrke and Grimm’s conclusions raise one obvious question. If investments to cattle are subject to increasing returns, why don’t rich Indian farmers rear cattle on a large scale? The answer perhaps lies in the absence of a ready market for milk and other dairy products. The lack of ready buyers or the absence of modern storage facilities tends to deter such investments. Indeed, in areas such as north Gujarat, where such constraints have been taken care of by well­functioning milk co­operatives and the availability of regular power, a new generation of cattle farmers have taken to large­scale cattle farming, as a recent report by Harish Damodaran published in The Indian Express pointed out.

The current debate over the rationality of cattle investments in India evokes an old debate on the same issue nearly half a century ago, which involved some of India’s leading economists such as M.V. Dandekar, who helped define India’s first calorie­based poverty line, and K.N. Raj, the doyen of Keynesian economists in India. At that time, many commentators, in India as well as in the West, viewed India’s huge stock of low­productivity cattle as a sign of economic inefficiency. Indian farmers were thought to purchase cows because of religious considerations (cows are held to be sacred by most Hindus) rather than economic calculations. One of the most influential studies to dispute such a view was a 1966 research paper by the American anthropologist Marvin Harris.

Harris argued that cows had many unique functions in India, such as their use in ploughing activities, which required farmers to retain their own draught animals for such activities. Harris went so far as to argue that restrictions on cow slaughter were tied to economics, and that religious norms that led to such restrictions were actually grounded in sound economic rationale.

In a scathing attack on Harris on the pages of the Economic and Political Weekly, Dandekar rubbished Harris’ thesis as an elaborate defence of cow worship “garbed in pseudo­science”. Harris had argued Indian breeds were under­sized precisely because other breeds could not survive the atrocious conditions (including lack of proper feed) they face here. Dandekar objected that Harris was avoiding the central economic question: could more milk, traction and dung be produced by fewer but better­fed animals than was the case then? Dandekar argued that the answer was in the affirmative, and that the practice of cow worship actually stood in the way of a more rational utilization of India’s bovine resources.

Raj took a more empirically grounded view of the matter than either Harris or Dandekar did in his 1969 research paper on the subject. Raj pointed out that while Western observers commented on India’s large cattle to land population and attributed it to spiritual values, India’s cattle to land ratio was actually similar to comparable developing countries such as Pakistan, where the majority did not subscribe to Hindu spiritual values. Raj also showed that the large inter­state variations in the nature of bovine population could be explained by economic considerations.

In three Indian states—Kerala, Bihar and Uttar Pradesh—where pressures on land were the highest, farmers seemed to be compelled to choose between having male animals for draught purposes (for preparing land for farming) and female animals for milk, wrote Raj. In Kerala, draught requirements were relatively less important because it had relatively less land under food grain cultivation, which required such land preparation. The pattern of bovine population

therefore was markedly different in Kerala as compared with Bihar and Uttar Pradesh. In Kerala, cows outnumbered bulls by far while the converse was true for the two north Indian states.

“It is interesting to observe that it is in the Indo­Gangetic valley (particularly in the States of Uttar Pradesh and Bihar), where Hindu orthodoxy is deeply entrenched and the sentiment against the killing of cows is strongest, that the pressure of human and bovine population on resources makes it most necessary to get rid of cows in preference for bulls for traction purposes and she buffaloes for milk,” wrote Raj. “It is also significant that two of the States where cows are preferred relatively to bullocks (namely, Kerala and Kashmir) have higher percentages of non­Hindus among their population than any other State. Obviously, religious sentiment has not much to do with the actual preferences of the people and the treatment meted out to cows in India. The recurrent agitations against cow slaughter appear to be based on such sentiment and on the desire of political parties to exploit it for their own purposes, in either case not on any realistic understanding of the economic interests and actual behaviour of the people who would have to support the unwanted cattle.”

The only role religion played in the cattle economy was in determining the method of getting rid of unwanted cattle. Rather than sending cows to slaughter houses, north Indian farmers preferred a method of slow death through deliberate starvation.

“How does the table get turned so dramatically against the cows in Bihar and Uttar Pradesh? Obviously, killing must be taking place, but perhaps the main technique adopted for getting rid of the cows is infanticide and deliberate starvation. For it is clear that, in the cattle population below 3 years of age, the number of female to male animals is much higher than in the adult cattle population in both Bihar and Uttar Pradesh,” wrote Raj.

Raj also pointed out that while cattle farmers living close to urban settlements were likely to keep more and better breeds of cattle because they could sell dairy products in nearby markets more easily, villagers in remote areas were likely to invest in fewer, less productive, and cheaper cattle as the milk generated would largely be used for self­consumption.

The latest findings by Gehrke and Grimm seem to complement Raj’s insights in explaining why so many Indians farmers invest in low­yielding cattle. Evidently, economics rather than religion dictate such choices.

Who will win the Economics Nobel this year?

Date: October 3, 2014

By Pramit Bhattacharya

Who will win the Nobel Prize in economics in 2014? No one knows. But a recent Thomson Reuters analysis predicts five leading contenders for the top honour in economics this year: Philippe M. Aghion and Peter W. Howitt for their contributions to growth theory, William J. Baumol and Israel M. Kirzner for their study of entrepreneurship, and Mark S. Granovetter for his pioneering research in economic sociology.

The first four names are well known in economics while the fifth is not actually an economist. Granovetter is a sociologist but his research appears to be the most interesting among that of the five contenders listed by Reuters. The caveat here is that the Reuters list is merely indicative, based on a quantitative analysis of the number of citations of each scholar in the discipline. The Nobel committee is unlikely to be influenced by quantitative metrics alone though the Reuters analysis claims that most scholars it has identified have eventually ended up winning the Prize.

Granovetter’s research on social network effects, which have now become quite a rage in academic economics, demonstrated for the first time that ties people shared with mere acquaintances could often have more material impact on our economy and polity than the ties that people shared with close friends and associates. Granovetter distinguished between the two, and called the former weak ties as opposed to strong ties one shared with family, relatives, friends and close associates at work. In his seminal research paper, The Strength of Weak Ties published in the American Journal of Sociology in 1973, Granovetter pointed out that weak ties often have a far greater impact on our lives than we tend to acknowledge.

For instance, Granovetter’s survey of the labour market showed that an overwhelming majority of those who reported getting a job through contacts had limited social interaction with the contacts who had tipped them about the job, or had introduced them to their prospective employers. Granovetter concluded that acquaintances are more helpful in providing useful career leads rather than close friends and associates because they move in different social circles, and hence have access to information which we, or our friends lack.

The power of weak ties can also explain whether a community can mobilize itself for organized political action or not, Granovetter argued. Granovetter noted that his findings challenged the typical economist’s conception of the so­called perfect labour market, and showed that the generally accepted view that cohesive communities are most capable of organized action may not be entirely true. Weak ties, which were hitherto thought to be indicative of alienation, were indispensable to individuals’ opportunities and to their integration into communities, Granovetter showed.

Granovetter’s research on how behaviour and institutions are affected by social relations has tended to weave a middle ground between the under­socialized accounts of economists and the over­socialized accounts of sociologists. In his widely cited 1985 study, Economic Action and Social Structure: The Problem of Embeddedness, Granovetter posited that social relations and

trust played a significant role in economic decision making, which under­socialized narratives of rational choice under perfect information ignore. In the real world, information is imperfect, and the transactions between buyers and sellers are dependent as much on their rational interests as on their respective histories. Trust in economic interaction is based not on abstract faith in market determined prices but on specific knowledge about those whom we are dealing with, Granovetter argued.

At the same time, Granovetter criticized the over­socialized view of the world which allowed individuals little autonomy and held that social norms and values are dominant determinants of economic decisions. Granovetter further argued that new institutional economists such as the Nobel laureate Oliver Williamson, who recognize the impact of social norms and networks in their work have tended to ignore analysis of social structure of institutions, and have instead laboured to show how those institutions arose as the efficient solutions to economic problems. According to Granovetter, a more appropriate approach would be to accept that all economic behaviour is embedded in inter­personal relations.

“What looks to the analyst as non­rational behaviour may be quite sensible when situational constraints are fully appreciated… That such behaviour is rational or instrumental is more readily seen, moreover, if we note that it aims not only at economic goals but also at sociability, approval, status, and power,” wrote Granovetter.

A Nobel prize for Granovetter will be a powerful signal to the economics profession that it needs to revisit its priors and embrace a more realistic view on economic choices. After the financial crisis of 2008 gave a rude shock to mainstream economics, many experts have identified the insularity of the discipline as its bane. While other social sciences have absorbed insights from economics in their research, the economics profession has been slow to open up and learn from other disciplines. There are some economists who are beginning to challenge the status quo, and a Nobel prize to a virtual outsider will only help catalyze change within the discipline.

There are earlier precedents when the Nobel committee has chosen persons outside economics departments for the prize, although a sociologist has never won it till date. The political scientist Elinor Ostrom, who shared the Nobel in 2009 with Williamson, is the most recent example. Ostrom challenged conventional wisdom by showing that common property resources can be managed successfully by user associations.

Will it be Granovetter’s turn this time? We will know on 13 October.

Social Networks, Gossip and Innovation

Date: September 12, 2014

By Sumit Mishra

In 1929, Hungarian writer Frigyes Karinthy’s short story Chains set into motion the theory of social networks. Karinthy’s characters believed any two individuals could be connected through, at the most, five acquaintances.

In his story, the characters create a game out of this notion. He wrote: “A fascinating game grew out of this discussion. One of us suggested performing the following experiment to prove that the population of the Earth is closer together now than they have ever been before. We should select any person from the 1.5 billion inhabitants of the Earth—anyone, anywhere at all. He bet us that, using no more than five individuals, one of whom is a personal acquaintance, he could contact the selected individual using nothing except the network of personal acquaintances.”

Almost a century later, we are discovering the power of networks everywhere—in job searches, in finding a restaurant, or in buying a new cellphone. What was considered to be the stock­in­trade of sociologists is now a new lens through which economists view development.

Networks are seen to solve co­ordination problems and provide a cushion to individuals in case of market failures, especially in rural areas where formal institutions are often absent.

In a recent The National Bureau of Economic Research (NBER) research paper, Erica Field of Duke University, Seema Jayachandran of Northwestern University, Rohini Pande of Harvard University and Natalia Rigol of the Massachusetts Institute of Technology (MIT) suggest that socially networked women may do better in business than others.

In their study, they selected customers of SEWA (Self­Employed Women’s Association), a women’s bank in Ahmedabad, for a business counselling programme. The sample was divided into two categories: one set of women attended the programme alone and the other set comprised customers who were invited with a friend.

Field and her colleagues write, “Involving a friend led participants in our two­day training program to double their demand for loans and significantly expand their business activity, resulting in higher household income. Those who belonged to more restrictive social groups were particularly sensitive to peer involvement. Thus, programs designed to empower women through business training or by giving them loans or cash may be more successful if they harness peer support as part of the program design, particularly when working with clients from restrictive social backgrounds.”

Members of historically disadvantaged groups can also benefit from forging new ties.

Rajnarayan Chandavarkar, in his fine history of industries and labour market networks in Mumbai (then Bombay) during the British Raj titled The Origins of Industrial Capitalism in India,

notes that known connections and kinship networks benefited a number of people looking for jobs in the city.

But he also pointed out, “It should not be supposed that such segmentation was always rigidly maintained within neighbourhoods, caste or religious ties or network based on kinship or village. Moreover, the social connections which shaped them were diffuse and varied in origin and substance.”

The emergence of Kathiawadis in the diamond business in Mumbai perfectly illustrates how new connections are forged as an industry grows.

The story goes that in 1970s Palanpuris, the dominant group in the industry, supported Kathiawadi enterprises when they got an opportunity to widen their market. Cambridge University economist Kaivan Munshi, in his study (mintne.ws/WOjhXi) on networks within the diamond industry in Mumbai, observed an unusually high number of Palanpuri firms with branches abroad in 1979, thereby allowing Kathiawadis to establish their businesses. The Palanpuris assisted Kathiawadi enterprises financially, as a result of strong ties the two groups had developed over years.

Do networks always operate seamlessly, allowing everyone to forge ties and learn about innovations? The answer depends on the context. ‘Wisdom of crowds’ may sometimes be a case of herding or blatant copying of what others are doing. We should be more careful in interpreting whether it’s interaction or mere imitation that drives individual behaviour, several studies point out. In a study on the take­up of Bt Cotton in three villages: Aurepalle in the Mahbubnagar district, Andhra Pradesh and Kanzara and Kinkhed in the Akola district of Maharashtra, Annemie Maertens of the University of Pittsburgh finds that farmers, instead of observing their neighbours’ experience with the new cotton seeds, were merely imitating the more progressive ones.

Most small farmers typically followed a large landowner who had already adopted the improved seeds.

The most influential node in a social network is not always the richest person in an area.

In a recent NBER working paper, Abhijeet Banerjee of MIT, and Arun Chandrasekhar and Matthew Jackson of Stanford University show that village gossips may be most effective in spreading information about new seeds or new technology. Gossips sit at the heart of informational networks that ensure messages are spread rapidly, but they are not often local community leaders.

Do networks always work to advance the common good? Not necessarily.

Christopher Barrett of Cornell University cautions: “...one must guard against an overly romanticized view of social networks and common knowledge, since communities can equally prove exploitative or dysfunctional. The more bounded the network, meaning the greater the role of strong ties—also known as “social closure” in the sociology literature—greater the power conferred on individuals in position of internal authority.”

He further adds “...there is no reliable rule of thumb for telling the difference ex ante between those communities whose social structure proves hospitable to promoting innovation and those that prove inimical.” This is where underlying institutions become so important.

Sumit Mishra is a research scholar at the Indira Gandhi Institute of Development Research, Mumbai.

Chapter 3: Economics in the field

What economists can learn from sportsmen

Date: October 31, 2014

By Niranjan Rajadhyaksha

The staid world of central banking is a far cry from the excitement of the sports field. However, some central bankers have very effectively used sporting metaphors to explain what their job entails. This is just one of the ways in which sports can tell us something about economics.

Bank of England chief economist Andrew Haldane recently used a neat cricketing analogy to explain the complexities of central banking. He said that interest rate decisions are akin to batting in the famous corridor of uncertainty, when it is not clear whether the batsman should go on the front foot or the back foot. This is the sort of disciplined bowling that the Australian fast bowler Glenn McGrath had mastered.

Batsmen are in a dilemma. Playing forward allows a batsman to reach the ball before it swings but there is a risk of misreading the movement. Playing back allows the batsman to watch the ball till the very last moment but there is a risk of being forced into a hurried shot. A central banker faces a similar predicament when it comes to economic data: should he react early or wait till the last minute? Both strategies come with inbuilt risks.

Much of central banking practice depends on such subjective decisions such as these. Former Bank of England governor Mervyn King once proposed the Maradona theory of interest rates. He was especially referring to the second goal scored by the Argentine legend Diego Maradona against England in the 1986 football World Cup quarter­final. Maradona ran alone with the ball from 60m inside his half till the English goal, beating five defenders on the way. King pointed out that the extraordinary element in this goal was that Maradona ran in a straight line while the defenders expected him to swing to the right or the left. He confounded their expectations. That is often what central bankers do to take the markets by surprise.

The rational expectations revolution in monetary theory after the 1970s, which is now under attack, was based on the assumption that discretionary fiddling with interest rates has a minimal effect on real economic activity, because rational economic agents learn to anticipate the effects of central bank policy. The classic statement on this is the 1976 paper by Thomas Sargent and Neil Wallace.

Stimulus policies do not work in the long run. A surprise move is another matter: it has real effects precisely because it is unexpected by consumers and companies. Maradona could teach contemporary central bankers a thing or two on how to run in a straight line when others are expecting you to swerve one way or the other.

Expectations are central to modern monetary economics. Charles Plosser, head of the Federal Reserve Bank of Philadelphia, used an example from ice hockey to explain how central bankers go about their job.

“Hockey great Wayne Gretzky was once asked about his success on the ice. He responded by saying, “I skate to where the puck is going to be, not to where it has been.” He didn’t chase the puck. Instead, Gretzky wanted his hockey stick to be where the puck would be going next. He scored many goals with that strategy, and I believe monetary policymakers can better achieve their goals, too, if they follow the Gretzky strategy. Good monetary policymakers, like good hockey players, must be forward­looking in their actions. Setting policy that is appropriate for where the economy is today, or has recently been, is not likely to deliver the kind of economic outcomes we desire. Anticipating where the economy is headed is important because monetary policy actions affect the economy with long and variable lags. The major impact of policy often comes only after several quarters, or sometimes several years.”

However, sporting analogies are not useful only to illustrate the art of central banking. The structure of sporting rules can help us understand how people behave in response to different sets of incentives, something that both game theorists and institutional economists have concerned themselves with. Douglass C. North has famously defined institutions as the rules of the game. One lucid examination can be found in his wonderful 1993 Nobel lecture “Institutions are the humanly devised constraints that structure human interaction.” North says that these can be formal constraints such as rules or constitutions or informal constraints such as social norms or conventions. “Together they define the incentive structure of societies and specifically economies,” says North.

Players react to the rules of the game: that is what both economists and sportsmen know. One of the most delightful analyses I have read about how the rules of a sport matter comes from John Rawls, arguably the greatest political philosopher of the 20th century. In a letter published in Boston Review in March 2008, Rawls recounted a conversation he had many years ago with the legal scholar Harry Kalven, Rawls’s colleague at the University of Chicago. The most important part of the letter is worth reproducing here in full.

“First: the rules of the game are in equilibrium: that is, from the start, the diamond was made just the right size, the pitcher’s mound just the right distance from home plate, etc., and this makes possible the marvelous plays, such as the double play. The physical layout of the game is perfectly adjusted to the human skills it is meant to display and to call into graceful exercise. Whereas, basketball, e.g., is constantly (or was then) adjusting its rules to get them in balance.

Second: the game does not give unusual preference or advantage to special physical types, e.g., to tall men as in basketball. All sorts of abilities can find a place somewhere, the tall and the short etc. can enjoy the game together in different positions.

Third: the game uses all parts of the body: the arms to throw, the legs to run, and to swing the bat, etc.; per contra soccer where you can’t touch the ball. It calls upon speed, accuracy of throw, gifts of sight for batting, shrewdness for pitchers and catchers, etc. And there are all kinds of strategies.

Fourth: all plays of the game are open to view: the spectators and the players can see what is going on. Per contra football where it is hard to know what is happening in the battlefront along the line. Even the umpires can’t see it all, so there is lots of cheating etc. And in basketball, it is hard to know when to call a foul. There are close calls in baseball too, but the umps do very well

on the whole, and these close calls arise from the marvelous timing built into the game and not from trying to police cheaters etc.

Fifth: baseball is the only game where scoring is not done with the ball, and this has the remarkable effect of concentrating the excitement of plays at different points of the field at the same time. Will the runner cross the plate before the fielder gets to the ball and throws it to home plate, and so on.

Finally, there is the factor of time, the use of which is a central part of any game. Baseball shares with tennis the idea that time never runs out, as it does in basketball and football and soccer. This means that there is always time for the losing side to make a comeback. The last of the ninth inning becomes one of the most potentially exciting parts of the game. And while the same sometimes happens in tennis also, it seems to happen less often. Cricket, much like baseball (and indeed I must correct my remark above that baseball is the only game where scoring is not done with the ball), does not have a time limit.”

Human behaviour sometimes depends on the structure of rules. In a paper published in the American Economic Review in 2002, Mark Duggan and Steven D. Levitt showed how the rules in Japanese sumo wrestling provided incentives for corruption. Their research showed that those who have already qualified for the next level tend to lose far more bouts than the records suggest. Wrestlers who had seven wins in a season had an unusually high winning percentage against wrestlers who had eight wins. The two economists said that sumo wrestlers with eight wins collude with those who have seven wins because they have nothing to lose. They are quite prepared to throw a match for money. The results of this paper got international fame in Freakonomics, the bestseller that Levitt later co­wrote with journalist Stephen J. Dubner.

Another fascinating example on why rules matter comes from US college basketball—more specifically why rules need to be changed if the behaviour of players has to change. College basketball was losing audiences in the early 1980s because teams were too defensive. The administrators in the US National Collegiate Athletic Association decided to introduce a rule suggested by one Danny Biasone, who saved the National Basketball Association from a similar crisis in the 1950s.

Biasone invented the shot clock. “Like many revolutionary ideas, his was simple. He divided the 2,880 seconds in a 48­minute game by the average number of shots per game, or 120. He arrived at an average on one­shot taken every 24 seconds. By the new rule, if the team on offense failed to shoot the ball within 24 seconds of taking possession, the whistle would blow, and the other team would get the ball… The idea rescued pro basketball and ushered in the new era,” write economists Wayne A. Leighton and Edward J. Lopez in their book, Madmen, Intellectuals and Academic Scribblers: The Economic Engine of Political Change.

You need to change the rules of the game in a structural crisis. It is something that economic reformers have known very well.

Something similar to basketball happened in cricket, with one­day cricket emerging in the 1960s in response to endless pad play in five­day games. The change in rules changed cricket forever. Of course, behaviour does not change in response to new rules alone. Some players transform the game within the existing rules. I can think of no better example than what Sachin Tendulkar

and Sanath Jayasuriya did in the 1990s. The standard strategy in 50­over games was to play safe in the first 10 overs, so that wickets were in store for the final assault. These two brilliant cricketers turned this wisdom on its head when they began to open the batting for their respective teams. The main assault has been in the first 15 overs ever since.

Think of it as a brilliant entrepreneurial insight, revealing new possibilities even within the existing rules of the game.

Why individual milestones are prized so much in cricket

Date: March 12, 2015

By Sumit Mishra

Cricket­watchers often quibble about how batsmen become defensive as they approach a personal milestone, and how this strategy does more harm to the team than any good. In 2004, India was playing a Test series against Pakistan and in the first Test match at Multan, Rahul Dravid, India’s captain, declared after India had piled 675 runs. The declaration immediately turned controversial because Sachin Tendulkar was batting on 194—six runs away from what would have been a record double ton in consecutive matches for India—when the declaration was made.

The match was eventually won by India but the entire country went into a frenzy debating whether Tendulkar should have been allowed to reach the milestone or not. Dravid’s decision was more of an aberration, and new research shows that captains usually take into account personal milestones of team members while taking a call on declarations.

A forthcoming research paper in the American Economic Review sheds light on this conflict that exists between a team’s objective of winning the game and the individual player’s ambitions of scoring more runs, breaking records and so on. Romain Gauriot, a PhD student at the Queensland University of Technology, and Lionel Page, a professor at the same university, show in the research paper that: one, batsmen often keep scoring runs at the cost of a team’s prospects and two, captains often allow the batsmen to achieve their objectives (of scoring a hundred, for instance) before they make a declaration under such circumstances. Both these strategies happen simultaneously to lower the odds of Test match victories.

To evaluate players’ strategy, the duo performed two different tests­ one for the captains and the other for the batsmen. Using data for runs scored by batsmen in 1256 One Day International cricket matches for the period spanning fourteen years, 2001 to 2014, Gauriot and Page find strikingly defensive strategy adopted by the batsmen when they approach the half­century and the century milestones. They remark that this harms team prospects even if it bolsters the individual’s record.

“Such an adjustment of the batsmen’s strategy has a cost for the team in terms of the chances to win the match,” Gauriot and Page write. “Any decrease in risk taking will come with a decrease in the expected final score and therefore in the team’s chances. By decreasing their risk taking, batsmen are trading a smaller chance for the team to win the match for a higher chance for them to reach this personal milestone.”

So, how does the captain respond to batsman’s apparently ‘selfish’ strategy? The authors use another dataset comprising of 2,069 Test matches from 1884 to 2014 to show that captains delay the declaration when a batsman is about to reach his milestone sometimes foregoing significant odds of winning the match. To illustrate this, let’s consider the Antigua Test played between England and West Indies in 2004. West Indies had already scored almost 600 runs by day two but their innings dragged on well into the third day until Brian Lara (captain as well as the top scorer of the match) had reached the record­breaking four hundred runs. The match

could have been won by the West Indies had a declaration been made at the end of day two of the Test match.

Such behaviour by captains is common even when it comes to the milestones of other players. To understand the cricket captain’s behaviour, it is important to pay attention to the theory of an employee’s relationship to a firm, articulated by the Nobel winning economist George Akerlof.

In a 1982 research paper Akerlof argued that the standard neo­classical economic framework is inadequate to explain the interaction between a firm and its employees and proposed that a sociological model could explain the firm­employee behaviour better. This thought basically suggests that the firm­employee relationship is not a simple equation where rewards are simply determined by workers’ efforts. These efforts are themselves dependent upon the prevalent norms and the culture of the institution where the employee works.

“Persons who work for an institution (a firm in this case) tend to develop sentiment for their co­workers and for that institution; to a great extent they anthropomorphize these institutions (e.g., “the friendly bank”),” wrote Akerlof. “For the same reasons that persons (brothers, for example) share gifts as showing sentiment for each other, it is natural that persons have utility for making gifts to institutions for which they have sentiment. Furthermore, if workers have an interest in the welfare of their co­workers they gain utility if the firm relaxes pressure on the workers who are hard pressed; in return for reducing such pressure, better workers are often willing to work harder.”

In the context of cricket teams, the behaviour of captains “may be the tell­tale sign of an implicit norm whereby they are expected to care about each player’s individual rewards”, write Gauriot and Page. “Such a norm can be efficient if it leads to higher level of effort and team cohesion in line with Akerlof’s gift exchange mechanism”.

Chapter 4: Political economy

The Piketty cheat-sheet: Six must reads on Thomas Piketty

Date: July 4, 2014

By Pramit Bhattacharya

Months after its English translation was first published, the French economist Thomas Piketty’s book on inequality, Capital in the Twenty­First Century, continues to make news, and to win rave reviews from other economists. Here, we bring together the best writings on Piketty by six foremost economists of the world, which give a broad overview of Piketty’s work, and the debate it has ignited.

The latest prominent economist to lavish praise on Piketty’s magnum opus is the University of California emeritus professor of economics, Pranab Bardhan. In a recent review for the Economic and Political Weekly, Bardhan points out that the main contribution of this book is “the massive amount of historical data that Piketty and his associates have collected on inequality for several countries, and the broad patterns that they have deciphered in terms of historical changes”.

“In particular, the Kuznets presumption that has prevailed in Economics for many decades that inequality goes up in the initial stages of development and then mercifully starts declining is found by Piketty to be limited by the short range of data Kuznets looked into, and highly misleading about historical trends when seen in the larger perspective that is provided in the Piketty book,” writes Bardhan. “Instead it shows that the wealth­income ratio and the associated inequality was high in industrially advanced countries until about the World War I, then declined and stabilized in the period 1910­70 (possibly on account of the disruptions of wars, depression, high taxes and postwar growth), and has been rising remarkably since then (definitively in terms of inequality of income, and probably of wealth as well, but the data are a bit more spotty for the latter).”

As Mint’s executive editor, Niranjan Rajadhyaksha pointed out in an earlier Economics Express post, Piketty has empirically challenged two hoary truths in economics that took root more than five decades ago. The first is the observation by the US economist Simon Kuznets that income inequality initially increases and then falls in the course of a country’s economic development. The second is one of the stylized facts on economic growth proposed by the British economist Nicholas Kaldor about the shares of national incomes going to labour and capital remaining stable over time. Data collated and presented by Piketty shows that inequality has been rising in the developed world over the past few decades once again even as the share of national income going to capital has spiked.

In his review of Piketty’s book, the Nobel laureate Robert Solow argues that pre­Piketty explanations of the widening chasm between the rich and poor within economies—erosion of the real minimum wage, the decay of labour unions and collective bargaining, globalization and intensified competition from low­wage workers in poor countries, technological changes and

shifts in demand that eliminate mid­level jobs and leave the labour market polarized—do not offer a convincing explanation even when all these effects are taken together.

“…they seem a little adventitious, accidental; whereas a 40­year trend common to the advanced economies of the US, Europe, and Japan would be more likely to rest on some deeper forces within modern industrial capitalism,” wrote Solow. “Now along comes Thomas Piketty, a 42­year­old French economist, to fill those gaps and then some.”

Solow summarizes Piketty’s central argument about the rich getting richer because returns to capital have been, and are likely to be, higher than economic growth as follows:

“Suppose it (an economy has reached a “steady state” when the capital­income ratio has stabilized. Those whose income comes entirely from work can expect their wages and incomes to be rising about as fast as productivity is increasing through technological progress. That is a little less than the overall growth rate, which also includes the rate of population increase. Now imagine someone whose income comes entirely from accumulated wealth. He or she earns r percent a year. (I am ignoring taxes, but not for long.) If she is very wealthy, she is likely to consume only a small fraction of her income. The rest is saved and accumulated, and her wealth will increase by almost r percent each year, and so will her income. If you leave $100 in a bank account paying 3 percent interest, your balance will increase by 3 percent each year.

This is Piketty’s main point, and his new and powerful contribution to an old topic: as long as the rate of return exceeds the rate of growth, the income and wealth of the rich will grow faster than the typical income from work. (There seems to be no offsetting tendency for the aggregate share of capital to shrink; the tendency may be slightly in the opposite direction.) This interpretation of the observed trend toward increasing inequality, and especially the phenomenon of the 1%, is not rooted in any failure of economic institutions; it rests primarily on the ability of the economy to absorb increasing amounts of capital without a substantial fall in the rate of return. This may be good news for the economy as a whole, but it is not good news for equity within the economy.”

Not all economists have been convinced by Piketty’s explanation though. The most prominent sceptic is the New York University economist, Debraj Ray. Ray agrees with Solow on the fact that Piketty has come up with a fairly robust description of historical trends in inequality in the developed world but finds Piketty’s explanation based on the divergence between the rate of return to capital (r) and the rate of economic growth (g) unconvincing. In a blog post, Ray points out that such an explanation (r>g causing widening inequality) is problematic because we are then trying to explain one endogenous variable with other endogenous variables. Also, what is driving inequality is not the mere fact that the rate of return on capital is greater than the rate of growth but the implicit assumption in Piketty’s argument that owners of capital save more than others. It is this assumption that is driving Piketty’s main result, Ray argues. If the propensity of the rich to save were lower, or they choose not to save in the form of dividend­paying capital assets, Piketty’s thesis would not hold true, Ray argues.

In a sharp rebuttal of Ray’s critique, one of the world’s foremost experts on global inequality, Branko Milanovic finds Ray’s critique abstract and ahistorical. Milanovic argues that Ray’s

criticism would hold if indeed capitalists saved lesser than others and spent most of their wealth on consumption.

“If we had a capitalism where capitalists were poor or a capitalism where capitalists would spend all of their capital incomes on booze and trinkets, yes, Debraj’s critique of Piketty would be right,” writes Milanovic. “But it just so happens that these are not the features of contemporary, nor of any other known, capitalism at least over the past 200 years.”

The problem of endogeneity that Ray raises is germane to the discussion on Piketty’s work but even the neo­classical economic models that Ray cites approvingly suffer from a variant of the same problem. As the American economist James Galbraith points out in his sharply worded critique of Piketty, the problem of adding up different kinds of ‘capital’ has not been successfully resolved in economics yet.

The problem in adding up different kinds of capital using financial values based upon a rate of return that is itself determined by the stock of capital remains a fundamental contradiction within economics, and one that Piketty’s analysis too suffers from, Galbraith argues.

Both Piketty’s tome, and standard economic theory have tried to pretend that problem does not exist, writes Galbraith:

“The basic neoclassical theory holds that the rate of return on capital depends on its (marginal) productivity. In that case, we must be thinking of physical capital—and this (again) appears to be Piketty’s view. But the effort to build a theory of physical capital with a technological rate­of­return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s, notably Joan Robinson, Piero Sraffa, and Luigi Pasinetti.

Piketty devotes just three pages to the “Cambridge­Cambridge” controversies, but they are important because they are wildly misleading. He writes:

“Controversy continued . . . between economists based primarily in Cambridge, Massachusetts (including [Robert] Solow and [Paul] Samuelson) . . . and economists working in Cambridge, England . . . who (not without a certain confusion at times) saw in Solow’s model a claim that growth is always perfectly balanced, thus negating the importance Keynes had attributed to short­term fluctuations. It was not until the 1970s that Solow’s so­called neoclassical growth model definitively carried the day.”

But the argument of the critics was not about Keynes, or fluctuations. It was about the concept of physical capital and whether profit can be derived from a production function. In desperate summary, the case was three­fold. First: one cannot add up the values of capital objects to get a common quantity without a prior rate of interest, which (since it is prior) must come from the financial and not the physical world. Second, if the actual interest rate is a financial variable, varying for financial reasons, the physical interpretation of a dollar­valued capital stock is meaningless. Third, a more subtle point: as the rate of interest falls, there is no systematic tendency to adopt a more “capital­intensive” technology, as the neoclassical model supposed.”

“In short, the Cambridge critique made meaningless the claim that richer countries got that way by using “more” capital…. And Solow’s model did not carry the day. In 1966 Samuelson conceded the Cambridge argument!”

“Notwithstanding its flaws, Piketty has succeeded in making everyone ponder on the right questions,” writes Lawrence Summers, the former US treasury secretary and Harvard University president in his review of Piketty’s work.

“Piketty provides an elegant framework for making sense of a complex reality”, writes Summers. “His theorizing is bold and simple and hugely important if correct. In every area of thought, progress comes from simple abstract paradigms that guide later thinking, such as Darwin’s idea of evolution, Ricardo’s notion of comparative advantage, or Keynes’s conception of aggregate demand. Whether or not his idea ultimately proves out, Piketty makes a major contribution by putting forth a theory of natural economic evolution under capitalism.”

“Does not the rising share of profits in national income in most industrial countries over the last several decades prove out Piketty’s argument?, writes Summers. “Only if one assumes that the only factors at work are the ones he emphasizes. Rather than attributing the rising share of profits to the inexorable process of wealth accumulation, most economists would attribute both it and rising inequality to the working out of various forces associated with globalization and technological change. For example, mechanization of what was previously manual work quite obviously will raise the share of income that comes in the form of profits. So does the greater ability to draw on low­cost foreign labour.”

Even if the deep forces underlying economic inequality are not so clear yet, there can never again be a question about the phenomenon or its pervasiveness after Piketty’s seminal contribution to the subject, Summers writes.

The Tsetse fly and tales of the rise and fall of nations

Date: July 11, 2014

By Sumit Mishra

In their widely cited book Why Nations Fail, economist Daron Acemoglu of the Massachusetts Institute of Technology (MIT) and political scientist James Robinson of Harvard University sketched a riveting narrative on the rise and fall of nations centred on the quality of political institutions. Since the publication of the duo’s magnum opus, several scholars have expressed reservations about the primacy assigned by the duo to political institutions over rival explanatory candidates such as geography or cultural norms. The latest attack comes in the most recent issue of the American Economic Journal Macroeconomics.

In a research paper published by the journal, Areendam Chanda of the Louisiana State University, Justin Cook of the University of California­Merced and Louis Putterman of the Brown University deliver a body blow to Acemoglu­Robinson’s central hypothesis, and present evidence to show that migration and the related increase in human capital have in fact influenced the evolution of economies over the long run.

The central theme of Acemoglu­Robinson’s book and their previous work is those inclusive institutions—the ones that support free trade and enact laws that protect private property—are the key drivers of a fortune of a nation. Acemoglu and Robinson with their colleague, Simon Johnson of the MIT Sloan School of Management—AJR hereafter—documented the “reversal of fortune theory” in a 2002 research paper. Their theory in a nutshell is this: the former colonies that were relatively richer in 1500 turned poorer by the twentieth century because the European colonizers put extractive institutions in place which ensured the siphoning off of the native wealth.

Chanda et al find no evidence of nations transitioning from poverty to a state of prosperity by adopting better institutions. They argue that the reversal in fortunes that AJR point to holds true only for societies which experienced a large number of people migrating from more prosperous lands to the new, sparsely populated countries in 1500. To illustrate the argument, they cite the case of the Kongo Kingdom in Africa which was fairly prosperous during the fifteenth century. After Diogo Cao discovered this in a voyage in 1493, what began as a healthy trade relationship between the Portuguese and the Kongo Kingdom soon turned into slave­trading. When the demand for slaves in Portugal spiralled out of control, the Kingdom started becoming unstable. By the beginning of the eighteenth century, prolonged civil­wars culminated in the complete collapse of the Kingdom. The modern day countries that once were part of the Kongo Kingdom are among the poorest in the world. On the other hand, Europeans migrated to sparsely populated Canada, New Zealand, Australia and the US, bringing to these lands higher levels of human capital; these countries are among the most prosperous in the world and we can see a persistence of fortune for the people who migrated from Europe to these countries. One may be concerned that these extreme examples in the sample of countries could lead to a bias in the findings. Chanda et al present statistical evidence by excluding these extreme cases in their analysis and find their results to be robust.

Critics of Why Nations Fail have two key arguments. First, the definition of inclusive institutions used by Acemoglu­Robinson is too loose according to critics. Second, some critics argue that characteristics other than the quality of political institutions such as geography and cultural norms explain economic prosperity of nations better.

The emeritus professor of economics at the University of California, Berkeley, Pranab Bardhan presents the most clear­sighted argument questioning the nature of institutions and finds Acemoglu­Robinson’s inclusive institutions to be too simplistic. Bardhan explains that the mere presence of private property laws does not signify inclusiveness; instead such laws protect the landed class from the landless thereby creating exclusion in an economic sense. Bardhan also cites the counter­example of China to question the primacy of ‘inclusive institutions’. Even without the presence of any Acemoglu­Robinson style inclusive political institution, China has prospered in the last three decades, and is likely to become wealthier in the future, Bardhan points out.

China and India—which between them represent more than a third of humanity —pose the biggest challenge to the Acemoglu­Robinson thesis, economist Arvind Subramanian argues. “India is too economically underdeveloped given the quality of its political institutions, and China is too rich given its lack of democratic institutions.”

The primacy of geography over institutions can be seen in works of Jared Diamond who has devoted his research towards explaining a geography­centric nature of economic development. Diamond argues that the focus of Acemoglu­Robinson’s work is too narrow . He points towards cultural norms and geographic factors to be more important predictors of prosperity or failure of modern nations. In his book

Guns, Germs and Steel, Diamond offers a controversial explanation for European dominance. He argues that Europeans were equipped with superior technology—guns and ships—and they brought deadly germs with them which killed natives in the Americas. He also argues that countries which were early adopters of inclusive institutions were also the ones which had longer history of agriculture. This is why, he contends, Europe has remained more prosperous than Africa.

Context matters when we are trying to explain why a country becomes rich or ends up being a basket­case. A 2012 research paper by the economist Marcella Alsan of the Stanford University explains how the presence of the deadly Tsetse fly caused agricultural productivity and technology adoption to remain low in regions of Africa; population density too remained low and slavery was more likely in these regions.

As the example of Tsetse fly driving poverty in Africa suggests, a complex interplay between history and geography and that between historical events and culture end up shaping the trajectories of nations. Although it is tempting to attribute long­run development to political institutions, it is difficult to make such a causal argument when these institutions are themselves products of historical events, calamities, terrain and so on. As Chanda et al remind us, “whether causality runs from institutions and schooling to income, from income to institutions and schooling, or mainly from early development to income, institutions and schooling simultaneously, is an open question”.

The economist who beat Thomas Piketty

Date: November 7, 2014

By Sumit Mishra

Most economists will remember 2014 as the year of Thomas Piketty. But last month, a lesser­known academic from the University of Sussex beat Piketty to win the inaugural New Statesman SPERI prize in political economy.

The list of nominees for the prize, introduced this year by the New Statesman magazine and the Sheffield Political Economy Research Institute (SPERI), included not just Piketty but also other well­known names such as the heterodox economist and bestselling writer Ha­Joon Chang. Ultimately, it was Mariana Mazzucato of the Science Policy Research Unit (SPRU) at the University of Sussex who won the prize for her work on state­led innovation.

Like Piketty, who has challenged conventional economic wisdom on inequality, Mazzucato, too, has challenged mainstream economic thought on entrepreneurship and innovation. Her research shows that the credit for many important innovations in society goes as much to the public sector as to private firms. When it comes to taking really big risks that can transform society, the comparative advantage lies with state­backed entities rather than private entrepreneurs backed by venture capitalists, Mazzucato argues in her writing.

Entrepreneurship and innovation are still among the relatively less understood topics in economics. Joseph Schumpeter, one of the foremost scholars on entrepreneurship, had defined entrepreneurship as the activity that successfully transforms an invention into an innovation. He contended that the process employs “a gale of creative destruction” to replace the existing market structure with a new one. Mazzucato’s work synthesizes Keynesian economics of greater government spending with Schumpeterian philosophy that stresses innovation as a key engine of growth.

The government, in Mazzucato’s universe, is visualized as one which not only sets up the rules for businesses but also actively engages in entrepreneurial activity. The standard argument in mainstream economics posits that governments can only incentivize entrepreneurial activity through taxation, subsidies and so on. But it is the private sector that engages in innovation. In her work, Mazzucato has shown that this dichotomy should be done away with, and points to the public sector roots of innovation by private firms.

When we think of innovation, almost always companies like Google Inc and Apple Inc come to mind. They only seem to confirm the conventional wisdom about innovation being the fiefdom of private enterprises. But a closer look at the facts suggests that such a conclusion may not be entirely true. Apple, for example, was funded by a state­sponsored programme in the US known as the SBIC (Small Business Investment Company). Similarly, Google’s famous search algorithm was financed by an NSF (National Science Foundation) grant. LCD and lithium­ion battery are other notable examples of state­supported technologies. That the state has played an important role in the story of technological advancement and economic growth is something we should know more about.

In her widely acclaimed 2013 book The Entrepreneurial State, Mazzucato attempts to dispel some of the myths regarding innovation­led economic growth. The first myth according to Mazzucato is that innovation and growth follow from research and development (R&D). A broad set of studies suggest that the presumed relationship between R&D spending and growth is at best ambiguous—some findings suggest a positive relationship whereas other studies find no significant change in growth as greater R&D investment is made. In his firm­level studies based on data for firms in the UK, the late Paul Geroski and his colleagues show that large companies enjoy their status due to higher spending on R&D and advertisements. Hans Lööf of Royal Institute of Technology, Sweden, and Almas Heshmati of IZA (Institute for the Study of Labor), on the other hand, did not find a robust relationship between R&D and firm­level growth.

The second myth Mazzucato busts is about the importance of small firms for innovation, and by extension, for growth and employment. Two main arguments are often made in favour of small firms. Firstly, a large number of small firms entering a market enhances competition and promotes entrepreneurship. Secondly, since small firms are largely labour­intensive, they boost employment. The biggest challenge to this argument comes from a 2009 study by economists Chang­Tai Hsieh, of University of Chicago, and Peter Klenow, of Stanford University, which finds that Indian firms tend to be less productive than the ones in the US due to misallocation or misuse of resources by too many small and low­productivity enterprises. A recent National Bureau of Economic Research working paper, by Shanti Nataraj of Rand Corp., Leslie Martin of Melbourne University and Ann Harrison of Wharton School, complements the Hseih­Klenow findings. The paper shows that the policy of de­reserving space for small­sector enterprises between 1997 and 2007 led to greater employment and wage growth. Younger factories outdid the old ones and large firms outperformed the smaller ones, the empirical analysis shows.

“Rather than giving handouts to small companies in the hope that they will grow, it is better to give contracts to young companies that have already demonstrated ambition,” suggests Mazzucato in her book. “It is more effective to commission the technologies that require innovation than to hand out subsidies in the hope that innovations will follow.”

The next myth Mazzucato attacks is the overblown case for the venture capitalists. There is no doubt that venture capitalists play an important role by funding projects during the incubation phase. However, they may often be very selective in their investments and eschew risky projects. Mazzucato’s research shows that venture capital (VC) investments tend to be concentrated in limited areas of high growth and low technological complexity. Although VC funds are supposed to last for a specific period (ten years), they usually exit much earlier, making it difficult for long­gestation ventures to depend on them. Mazzucato argues that the government should therefore step in with its resources when an innovation is costly, has a long gestation plan, or involves risks that private funders can’t stomach.

Mazuccato’s work has revived the ideas first expressed by the philosopher Karl Polanyi, who argued for the primacy of the state in creating a network of knowledge and markets in his 1944 book, The Great Transformation. Writing at about the same time as Schumpeter, Polanyi stressed the role of the state in promoting and pushing for greater innovation. The Nobel­winning economist Joseph Stiglitz, in the introduction to a reprint of Polanyi’s book, explains that Polanyi’s main focus was to create a balanced approach where government interventions work in tandem with a growing market system. This neither fits with the theories of free­market nor with those of classical Marxists. Polanyi contended that “the road to the free

market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism”.

Mazzucato has helped bring Polyani’s ideas centre­stage. Here’s how she describes the process, “Whether the state is making an investment in the internet or clean energy in the name of national security or in the name of climate change, it can do so on a scale and with tools not available to businesses (i.e. taxation, regulation). If a central hurdle to business investment in new technology is that it will not make investments that can create benefits for the ‘public good’ then it is essential the State do so—and worry about how to transform those investments into new economic growth later.”

Mazzucato’s research offers several important lessons. We need to perhaps pay more attention to building the right set of institutions and organizations within the government that are willing to invest in high­growth, high­risk areas. A clear framework for risk­reward relationship should be in place to cover for the uncertainty in returns. This will require reforms that move away from relying entirely on market forces for innovations to a mixed strategy.

The well­known economist Albert Hirschman wrote in The Rhetoric of Reaction about three obstacles posed by conservatives to such reforms which entail a greater role for the state: perversity (a reform will end up having unintended consequences), jeopardy (reforms are costly) and futility (a reform is literally impossible given that problems cannot be solved). Economic progress depends on how we deal with these three reactions and Mazzucato’s framework offers us a refreshingly new approach.

Do expert ministers lead to better policy outcomes?

Date: January 16, 2015

By Vivek Dehejia

One of the earliest and loudest critiques of the Narendra Modi government, and a critique that is still heard repeatedly, is that Modi’s council of ministers is weak on individuals with the presumed technical competence to run their respective ministries.

The fact that Smriti Irani, the education minister, doesn’t have a university degree, for instance, is widely held as a black mark against her. On the other hand, observers have praised the induction of new ministers seen to have relevant expertise in the fall expansion of the council of ministers. For example, Jayant Sinha, a former fund manager, has been hailed as being a good fit as junior finance minister. Most recently, the appointment of economist Arvind Panagariya as vice­chairperson of the Niti Aayog was widely praised, given his pro­reform credentials.

All such arguments implicitly make the assumption that

field­wise technical competence is a requirement, or at any rate a valuable component, in successfully managing a ministerial portfolio. Or, put another way, that individuals with technical expertise are better policymakers than those who lack such expertise. Is this really true?

Such arguments take the view that the chief constraint on good policy management—and let us, henceforth, confine ourselves to economic policy—is the selection of an individual, or individuals, with the necessary technical competence. This is what may best be described as an institutionally thin, technocratic conception of policymaking. By contrast, historical, journalistic and anecdotal accounts often stress individual­specific political acumen—unrelated to domain technical expertise—as decisive in pushing through good policy outcomes.

Let us make the question more concrete, and bring it home to India. The Congress government is widely credited with ushering in the first phase of economic reforms after the 1991 crisis, sweeping away the worst excesses of the licence­permit­quota raj, and paving the way for a globalized, modern economy. Until recently, it was commonplace to credit then finance minister, Manmohan Singh—a PhD in economics from Oxford—for the success of the reforms programme. Yet, after Singh’s failure as prime minister to jump­start the second generation of reforms during the 10 long years of the United Progressive Alliance (UPA) rule, most would now discount Singh’s role in the earlier period and credit instead the political savvy of P.V. Narasimha Rao, prime minister from 1991 to 1996, in shepherding the reforms programme against bitter opposition from the Left parties and others.

Surprisingly, there is little serious academic research exploring the relationship between the technical competence of individual policymakers, and the nature and quality of policy outcomes—perhaps because conventional political economy stresses the role of the classic three Is of ideas, institutions and interests—and discounts the role of a fourth I, the individual. One exception is the important work in the 1980s and 1990s by political scientist Jean Blondel, who found that specialists (those with prior expertise in their ministerial portfolios) were far less common in European governments than generalists (those with no relevant prior experience).

Interestingly, specialists tended to be concentrated in economics­related areas such as the finance ministry.

As it happens, there is good, recent economic research that speaks about the broader question at issue and goes beyond Blondel’s early work. Economists Mark Hallerberg and Joachim Wehner, in a 2013 research paper, deploy a new data set on the educational and occupational backgrounds of economic policymakers (by which they mean prime ministers or presidents, finance ministers and central bank governors) from 1973 to 2010, spanning a range of advanced and emerging economies.

A principal finding of the research, entirely in keeping with common sense, is that, other things equal, governments are more likely to appoint technically competent economic policymakers during times of economic or financial crisis. Their motivating example—the nearly contemporaneous appointments in November 2011 of Lucas Papademos and Mario Monti as prime ministers of Greece and Italy, respectively, when both economies were in a tailspin and facing serious risk of bankruptcy—fits this finding perfectly. The rationale is that, in a time of crisis, those in power need to signal both to markets—domestic and international—as well as voters that they have a grip on things, and appointing a technocrat serves to signal exactly this. In this sense, the appointment of Singh as finance minister by the Rao government fits this signalling idea perfectly.

A second finding is that left­leaning governments, other things being equal, tend to appoint more technically competent economic policymakers, especially during times of stock market turbulence. The reason is that leftist governments, which may have ties to trade unions and the like, need to convince markets that they are serious about the economy, and appointing a respected technocrat is, again, a way of signalling this.

India’s recent history is a case in point. The UPA government, given its proclivity for creating large social welfare schemes and its reliance on social activists as advisers, was clearly on the left, and it featured a PhD economist as prime minister, also as planning chief, and appointed a PhD in finance and former International Monetary Fund chief economist—Raghuram Rajan—as central bank governor. The appointment of Rajan, in particular, succeeded in assuaging markets at a time when growth was faltering and inflation was rising.

A third, unsurprising, finding is that new democracies in Eastern Europe and elsewhere, other things being equal, appoint more technically competent economic policymakers than established democracies in the West. This, too, matches common sense. A new democracy must prove to markets that it understands economics, can run a sensible monetary policy and so forth; an established democracy has a track record of economic management and a rich institutional memory to tap into, making the selection of any particular individual with technical competence less important.

A final finding to which I wish to draw attention to concerns the institutional structure within which economic policymakers are appointed and this can often be crucial. The study finds that, other things being equal, presidential systems are more likely to appoint technically competent finance ministers than parliamentary systems. Thus, for instance, in the US, the president may appoint anyone of his choice as treasury secretary, provided that individual is confirmed by Congress, and thus may pick a PhD economist or someone with relevant private sector

expertise, if he or she wishes. By contrast, in a Westminster parliamentary system, the finance minister must sit in one of the two Houses of Parliament, and this constrains importantly the choices available.

In theory, in a Westminster system, it is possible to circumvent this limitation to some extent by appointing a technocrat, and then getting him or her into the Upper House, which may be appointed or indirectly elected. In India, we have experience of exactly this model, as Singh, both as finance minister and then prime minister, sat in the Rajya Sabha. Indeed, his one and only attempt to get elected from the Lok Sabha was a dismal failure. The current finance minister, Arun Jaitley, also sits in the Rajya Sabha. He, too, unsuccessfully contested a seat to the Lok Sabha in the April­May 2014 general election.

In other Westminster countries—such as the UK and Canada—this work­around is more difficult, as, by convention if not the letter of the law, the prime minister (along with other key ministers) is expected to sit in the House of Commons, not the House of Lords (UK) or Senate (Canada). Famously, the last British prime minister to sit in the Lords, Alec Douglas­Home, disclaimed his peerage four days after becoming prime minister in 1963, to contest a seat in the Commons.

The bottom line is that when observers praise the appointment of a technically competent economic policymaker for good economic policies which subsequently are put into place under his or her watch, they may be confusing cause and effect. In the Indian case, it would be more accurate to say that Singh became finance minister in 1991 because Rao wanted to push ahead with economic reforms, rather than saying that reforms took place because of Singh.

This piece of common sense wisdom, as it turns out, is entirely consistent with the nascent academic literature on the topic.

The alchemy of Hindu-Muslim riots in India

Date: December 5, 2014

By Pramit Bhattacharya

Twenty­two years ago, a mosque in Ayodhya was demolished by militant Hindus. Indian society and polity have never been the same since. The demolition of the Babri Masjid on 6 December 1992 sparked nationwide riots, and helped the Bharatiya Janata Party (BJP) emerge as a national force. Since then, the segregation of Muslims, especially in urban India, has only increased, and Hindu­Muslim differences have formed the backdrop of many heated political exchanges and electoral contests.

Despite the profound influence of communal conflicts in shaping Indian society and polity, empirical research on the subject is rather sparse. Two recent research papers, published earlier this year, partly address this drought. They offer equally provocative but substantially different narratives about Hindu­Muslim conflicts in India. The first study, by economists Anirban Mitra of the University of Oslo and Debraj Ray of New York University provides evidence (mintne.ws/1vQqoNH) to show that increase in the levels of Muslim affluence is a key driver of Hindu­Muslim conflict. The second study, by political scientists Gareth Nellis, Michael Weaver and Steven Rosenzweig of Yale University, provides evidence to show that the election of a Congress legislator in state assemblies has a statistically significant impact in reducing the likelihood of riots in a typical constituency.

Both studies rely on a unique database of communal riots in India, prepared by two outstanding scholars on Hindu­Muslim conflicts in India, Steven Wilkinson and Ashutosh Varshney, both of whom do not see the Congress as the peacekeeper Nellis et al do. The two US­based political scientists, who separately wrote influential books on communal violence in India in the early 2000s, compiled a database on Hindu­Muslim riots spanning the 20th century based on interpretive assessments of The Times of India news reports. One big reason for the lack of empirical research on communal conflicts in India was the paucity of reliable data. The academic literature on the subject has grown since the publication of the Wilkinson­Varshney database. The database has its limitations but is the most consistent source for analysing historical trends in Hindu­Muslim rioting.

Based on data from 1979 to 2000, Mitra and Ray show that Hindu­Muslim violence rises in response to an increase in the average income levels of Muslims across regions. Similar increases in levels of Hindu income have little impact on rioting. The effect holds even after controlling for literacy, inequality within the groups, and urbanization levels for each region. The authors also point out that the strength of the BJP across regions does not explain differences in levels of rioting. Mitra and Ray argue that envy and Hindu insecurity could be a key driver of inter­religious conflict. Muslims are poorer on average than Hindus. In a society with rigid social hierarchies, where everyone knows their place, a rise in Muslim prosperity allows them entry into domains and social circles that were hitherto closed to them. This upsets social conservatives and fuels violence. In their support, the authors draw on earlier ethnographic research on riots in cities such as Varanasi and Meerut, where Muslim businesses were systematically targeted by Hindu goons, allegedly at the behest of business rivals.

Nellis et al offer an alternative reading of riots in India. While Mitra­Ray emphasize economic forces behind communal conflict, Nellis et al emphasize the role of politics in shaping and containing such conflicts. They analyse data between 1962 and 2000 to show that the election of Congress legislators in close elections contained riot incidents by about 10% over this period. They focus on assembly constituencies that faced close contests and then compare differences in rioting in constituencies where the Congress won to those constituencies where the Congress lost elections to arrive at their findings. They also argue that rioting polarizes voters and harms the electoral prospects of the Congress party in ensuing elections, while it has the opposite effect on the fortunes of its principal rival, the BJP, which gains vote share following such polarization. Unlike Mitra­Ray, Nellis et al do not seem to control for other determinants of riots such as the levels of literacy, urbanization, residential segregation and incomes, which have been identified by other scholars as key determinants of riots. This should not matter as long as their key assumption—that outcomes of close elections are completely random—holds true.

Still, geography and history do have an important role in generating and sustaining communal conflicts. A 2008 research paper by Duke University economist Erica Field and her co­authors suggests that living arrangements of communities can have a large bearing on rioting. Field et al contrasted neighbourhoods in Ahmedabad that witnessed violent rioting in the post­Godhra riots in 2002 with those neighbourhoods that remained peaceful in that period. They found that the violent neighbourhoods were typically low­income mixed neighbourhoods, where Hindus and Muslims lived cheek by jowl. The mixed neighbourhoods were typically in the mill areas of Ahmedabad. Textile mills had been the engine of economic growth in the city till the mid­1970s and employed both Hindus and Muslims. As in Mumbai, mills also offered subsidized accommodation in tenements (or chawls) for their workers. Many continued to live there even after the mills had shut down, but could not sell their tenancy rights.

“As a result, mill neighbourhoods had among the highest religious diversity in 2002, and were also the ones in which real estate markets functioned the most poorly...workers and ex­workers remained in more integrated neighbourhoods even as the distaste for, or fear of, living among other religions rose on account of external events,” Field et al write.

In a 2011 research paper, Ward Berenschot of the University of Amsterdam points out that even within mill areas of Ahmedabad, there was considerable variation in rioting in 2002. He contrasts a peaceful neighbourhood against a violent one in the mill area of Ahmedabad to show that local leadership and patronage networks play a large role in explaining riots. In the violent neighbourhood, the local BJP legislator called the shots, and neighbourhood goons owed allegiance to him. They could therefore be used to foment trouble. The peaceful neighbourhood Ramrahimnagar had a unique history: both Hindus and Muslims had come together many years ago to form a joint committee and evict the local slumlord. The patronage networks in Ramrahimnagar centred on that multi­ethnic committee, and hence the committee could play an effective role in preventing violence.

The role of civic association, highlighted by Berenschot, corroborates the central thesis of Varshney, who had pointed to the importance of civic engagement in preventing riots in his seminal work on the subject, Ethnic Conflict and Civic Life. Varshney did not see the Congress party as a pacifying agent across the country. According to Varshney, communal harmony in Congress­held districts depended on “whether the Congress ideology of a composite nation or groups subscribing to a communal view of the nation dominated local wings of the party.”

Varshney also showed that the BJP was not uniformly anti­Muslim. In Lucknow, where economic interests of Hindus and Muslims were intertwined, the party did not attempt to polarize voters across religious lines.

Wilkinson in his 2004 book, Votes And Violence, also doubted the role of the Congress party in promoting communal harmony. Wilkinson emphasized the role of inter­party competition and the ruling party’s reliance on Muslim minority votes in determining whether or not state governments act to suppress Hindu­Muslim violence.

“Despite Congress’s official claims to always protect minorities, the party’s status as the dominant catchall party for many years and its often weak party discipline has meant that at one time or another Congress politicians have both fomented and prevented communal violence for political advantage,” wrote Wilkinson.

Nellis et al challenge the conclusions of Varshney and Wilkinson with their new research. Wilkinson argued that state governments matter more than local legislators. But Nellis et al argue that the local legislator matters more both in fomenting and controlling violence. Surprisingly, their results suggest that the ability of a Congress legislator to contain ethnic violence does not depend on whether the state government is headed by a Congressman or not.

Given the complex interplay of factors determining Hindu­Muslim conflicts in India, it is unlikely that the last word on the subject has been said yet. If further research corroborates the findings of Nellis and his co­authors, this should indeed lead to a reappraisal of the role of the Congress party in post­independent India, as the authors suggest. If Mitra­Ray’s conclusions are found to be more credible, it can help identify potential flash points well in advance.

The political economy of the mainstream media

Date: June 5, 2014

By Sumit Mishra

While delivering an address in memory of Mahadev Govind Ranade on 18 January, 1943, B.R. Ambedkar caustically remarked about an apparently biased media: “The condemnation is by the Congress Press. I know the Congress Press well. I attach no value to its criticism. It has never refuted my arguments. It knows only to criticise, rebuke and revile me for everything I do; and to misreport, misrepresent and pervert everything I say. Nothing that I do pleases the Congress Press. This animosity of the Congress Press towards me can, to my mind, not unfairly, be explained as a reflex of the hatred of the Hindus for the Untouchables.”

The role of the media in the recently concluded Lok Sabha elections in India has been widely debated. Each political group believes that reportage, in general, is skewed in favour of the rival group. Even when there is a fair amount of press freedom, the government may manipulate the press by maintaining a patronage relationship with the media. It is, therefore, important to understand the underlying mechanism of media slant and its impact on political outcomes.

In his superb book Thinking, Fast, and Slow, Nobel laureate Daniel Kahneman put it succinctly how biases (he terms these biases as ‘availability heuristics’) not only inform our opinions but also shape some of the important actions (voting and community participation, for instance). He writes, “People tend to assess the relative importance of issues by the ease with which they are retrieved from the memory—and this is largely determined by the extent of coverage in media.”

Much of the peer­reviewed research in economics is devoted to questions of distribution and allocation—inequality, growth and development. However, there has been a recent shift, with a surge of available datasets, towards empirical analyses of issues that are considered to be the preserve of other social sciences like sociology, political science and anthropology.

There is now a rich set of evidence that answers two major questions on media bias. One, why media slant exists in the first place and what are the conditions that foster the bias? Second, how does the bias affect voting behaviour and, by corollary, electoral outcomes?

In recognition of the growing importance of the economics of media, the American Economic Association awarded the prestigious J.B. Clark Medal this year to the Chicago University economist Matthew Gentzkow for his path­breaking research on the economics and biases of the mainstream media. The Clark Medal for under­40 economists is considered the second most prestigious award after the Nobel Prize in the economics profession.

In a recent research paper, Gentzkow and his colleagues explain that bias can persist when the management of a media outlet has a proclivity towards gaining political mileage instead of being driven by simple profit­making incentives.

Earlier work by psychologists such as Mark Lepper, Lee Ross and Charles Lord Matthew showed that subjects with strong preferences on political issues become even more biased when presented with new information.

In a 2005 study on the market for news published in the American Economic Review, Harvard University economists Sendhil Mullainathan and Andrei Shleifer presented a theoretical model to show that competition compels media to cater to the prejudices of the readers. Media consumers prefer news and opinion which align most closely to their prior views. Therefore, the duo contended that the news market will have an incentive to present news confirming partisan beliefs.

The theoretical literature makes a gloomy prognosis: media bias distorts information and voters are more likely to make mistakes if opinion is shaped through such sources.

A number of empirical investigations in different settings reveal the answer to the second question: whether media slant affects voting behaviour and electoral outcomes. A 2007 research paper by economists Stefano DellaVigna, of the University of California, Berkeley, and Ethan Kaplan, of the University of Maryland, found a significantly positive impact of the entry of Fox News on the vote share of the Republican Party in the US. The conservative channel was introduced sequentially in the states of the US between October 1996 and November 2000. The gain to the Republicans owing to the introduction of Fox News varied from 0.4 to 0.7%. However, they add the caveat that the Fox News effect could very well be a temporary learning effect for the informed voters and may be permanent for only non­rational voters.

In a similar study, economist Dean Karlan and political scientist Alan Gerber from Yale University and Daniel Bergan, political scientist at the Michigan State University, conducted an experiment where they randomly assigned individuals in Washington DC to receive either a free subscription to the Washington Post or a free subscription to the Washington Times. They found that those who opted for Washington Post were more likely to vote for the Democrat candidate in the elections.

Access to independent media also has a significant impact on the electoral outcomes. Ruben Enikolopov, of the Barcelona Institute for Political Economy and Governance, and his colleagues found evidence that wherever independent TV channels existed in Russia, as opposed to regions where only a state­owned channel was accessible, the voter turnout decreased by 3.8 percentage points on an average; incumbent vote share fell by 8.9 percentage points; and the major opposition parties gained about 6.3 percentage points.

Gentzkow and others show, using data from US newspapers from 1869 to 1928, that incumbents did not affect press freedom. However, they also found substantial political influence on media in the states affected by the Reconstruction (The Reconstruction era was the post­civil war period of socio­political turmoil in the southern states of the US). In 1869, all southern states were governed by the Republicans.

However, with escalating racial tension, Democratic votes share kept increasing over the decade, and by 1877, all the state legislatures were under the Democrats. Each of these political parties required the support of favourable media to enact their policies. Gentzkow et al

caution that, “The Reconstruction episode is a reminder that incumbent influence may play an important role when stakes are high and constraints are weakened.”

In Argentina, coverage of political scandals was found to be negatively associated with political advertisements, showed economists Rafael Di Tella, of the Harvard Business School, and Ignacio Franceschelli, of the Northwestern University, in a 2011 research paper.

Political scientist James M.Snyder Jr, of the Massachusetts Institute of Technology and Riccardo Puglisi, economist at the Universit´e Libre de Bruxelles, studied the coverage of 35 scandals in 200 newspapers across the US and found that a Democratic­leaning newspaper published relatively more scandals involving a Republican politician.

Studies under various settings show that political influences can lead to media bias, and in turn help political parties reap electoral rewards. Careful empirics rather than mere name calling can help us understand the determinants as well as the consequences of media capture even in the Indian context. The quality of debate on critical issues of public policy is after all determined to a large extent by the extent of independence in the media.

The political economy cycle in India

Date: April 18, 2014

By Pramit Bhattacharya

One common complaint during this election has been that the election commission (EC) has to be consulted before the government and its regulatory agencies take any routine decision. Decisions relating to gas price hikes and bank licences all had to be cleared by the EC, whose over reach poses a threat to the economy, goes the complaint. However, a Mint report this week showed that the economy slows down anyway before the polls while government intervention is opportunistic just ahead of elections.

The analysis of key economic variables over the past three decades suggested that new project additions dry up each time there is a Lok Sabha poll, as businessmen turn cautious and wait to gauge what the future policy environment will look like. Industrial credit dries up as a result, and consumption of key materials such as steel and cement falls.

Policy uncertainty may not be the only reason for the decline in consumption of raw materials such as steel and cement though. Cement consumption declines ahead of elections as builders divert funds to illicitly fund political campaigns, research by economist Devesh Kapur and political scientist Milan Vaishnav shows.

Government spending (and the fiscal deficit) goes up in an average election year, which tends to fuel inflation rather than spur growth, suggesting that the extra public expenditure ahead of polls is often wasteful.

A recent analysis of the Union government’s budget documents by Deepa S.Vaidya and K. Kangasabapathy of the Economic and Political Weekly Research Foundation shows that the extent of ‘fiscal manipulation’ shoots up sharply ahead of parliamentary polls. The duo analyze the discrepancy between the budget estimates of revenue and expenditure numbers and the revised estimates (and actual) since 1991 to find that the revenue receipts tend to be overestimated and total expenditure underestimated in almost all budget years. In other words, there is a regular tendency to understate deficit numbers. But in interim budgets, the deviations are much larger and sharper, the duo found.

“This suggests that finance ministers could be using manipulative strategies while presenting interim budgets, perhaps to gain some political mileage,” wrote Vaidya and Kangasabapathy. “In the interim budgets, the revised estimates place the borrowings and other liabilities at as high as nearly 46% over the budget estimates, due to which revenue and fiscal deficits soar by nearly 77% and 46%, respectively, compared to 11.9% and 7.9% in regular budgets.”

Although India’s interim budget this year appears to be an exception to the earlier trend of increased government borrowing in an election year, even this year the actual numbers may disappoint.

“P. Chidambaram’s budget, his only interim budget in the last 25 years, seems to be an exception compared to the five interim budgets analysed,” wrote Vaidya and Kangasabapathy in

the aforementioned paper. “While this may be due to his specific focus on fiscal consolidation, the subsequent fiscal performance figures available up to January 2014 along with some of the adjustments he made to achieve fiscal consolidation suggest that the actuals for 2013­14 when available may not be as rosy as the revised estimate figures Chidambaram presented. Furthermore, such adjustments might also pass on a large burden to the budget estimate for the regular budget of 2014­15, due after the elections.”

In many developing nations the fiscal deficit spikes up during an election year, studies show. “The overall fiscal deficit ratio (in low income countries) increases by about 1 percentage point of GDP during the election year, and this is mainly driven by the observed increase in government current spending,” wrote Christian Ebeke and Dilan Ölçer in a 2013 International Monetary Fund working paper. “In the post­election years, there is certainly an attempt to rebuild the eroded fiscal buffers, but it does not appear large and balanced enough to generate any significant statistical impact.”

Ever since the economist William Nordhaus first wrote about the political business cycle, a growing body of evidence has validated his hypothesis about opportunistic behavior by governments, keeping the election in mind. In its simplest form, the theory suggests that an elected government will conserve resources during the initial phase of its term only to splurge just ahead of elections.

Over the years, several researchers have noted that governments may not necessarily step up overall spending ahead of elections but may direct additional spending towards special interest groups. In India, that is what seems to hold true for state governments, which are usually far more resource­constrained than the Union government. Analyzing data for 14 Indian states between 1960 and 1996, World Bank researcher Stuti Khemani found little evidence of fiscal profligacy in an election year. But Khemani found evidence of manipulation of fiscal instruments to target narrow interest groups, such that there is no effect on the overall fiscal deficit number.

“In election years in the Indian states, there is evidence of small manipulations of fiscal instruments to target benefits to narrow interest groups, such that there is no net effect on the overall fiscal deficit,” wrote Khemani in a 2004 paper. “Tax collection from specific producer groups is lower and public investment spending is higher, while spending on what are generally regarded as more populist categories is lower.”

Government intervention in countries such as India may also take the form of manipulating the interventions of state­run enterprises, such as the public sector banks. The amount of farm loans given by state­owned banks was 5­10 percentage points higher in election years than in years following an election, a 2008 research paper by Harvard University economist Shawn Cole found.

“In election years, more loans are made to districts in which the ruling state party had a narrow margin of victory (or a narrow loss) in the previous election. This targeting does not occur in non­election years,” Cole wrote. “Politically motivated loans are costly: they are less likely to be repaid, and election year credit booms do not measurably affect agricultural output.”

One of the most interesting research papers on electoral cycles that I read recently is a February 2014 study by political scientists Brian Min and Miriam Golden. Using data from the

power corporation of Uttar Pradesh, India’s most populous state, Min and Golden showed that electricity line losses tended to spike up just ahead of state assembly elections, as political parties deliberately redirected power to unbilled users. “Political factors appear to affect line losses in ways that technical and economic factors alone cannot explain,” the duo wrote.

A recent research paper by economists Megan Sheahan and Christopher B. Barrett of Cornell University, Yanyan Liu of the International Food Policy Research Institute and Sudha Narayan of the Indira Gandhi Institute of Development Research highlights the importance of political personalities in determining whether government funds are directed where they are needed or are abused to build patronage networks.

The authors study allocations in sub­districts of Andhra Pradesh under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and find little evidence of patronage effects before 2009: neither swing localities nor support bases of the ruling party (Congress) received disproportionately higher funds. But the trend changed after the 2009 elections, and in subsequent years the scheme was used as a tool for patronage.

“…evidence of widespread patronage in the post­election years is best understood within the changing political climate immediately after the 2009 election,” wrote Sheahan, Liu, Barrett and Narayanan. “Recall that YSR, the figurehead of MGNREGS in AP, was killed not long after his re­election and that a struggle for power in the following years ensued. Evidence of patronage during this time suggests that this disorder prompted politicians to use MGNREGS funds to secure their place in the AP political hierarchy moving forward, grounded in how their constituents voted in the most recent election.”

Is there an institutional fix to the problem of political opportunism in government spending? There does not seem to be any easy solution but political scientists argue that as a democracy matures, citizens become more willing to trust elected representatives to plan and take steps for the long­term growth and development. Short­term transactional politics to please or appease special interests then assume less importance, and politicians become more willing to address broader concerns. Perhaps Indian democracy is still a work in progress in that respect.

While the level of democracy in a single year has no measurable impact on economic growth in the subsequent year, its democratic experience over a long stretch of time is positively associated with growth in subsequent years, wrote political scientists John Gerring, Philip Bond, William Barndt and Carola Moreno in a 2005 research paper. Over a long horizon democracy delivers superior growth performance, the authors argue.

Chapter 5: Gender Economics

Why rice eaters are from Venus and others from Mars

Date: May 23, 2014

By Pramit Bhattacharya

A recent research paper published in the prestigious Science journal seems to have created a stir by suggesting that people from rice­growing regions tend to be more inter­dependent and less individualistic compared to others.

The study, co­authored by social psychologist T. Talhelm of the University of Virginia, with colleagues from the University of Michigan, the Beijing Normal University, and the South China Normal University, found that ‘rice­growing southern China is more interdependent and holistic­thinking than the wheat­growing north’. A history of cultivating rice, which requires farmers to pool resources and co­operate with each other to improvise irrigation channels, makes people from the rice­growing regions less individualistic and self­centred, the researchers contend. People from wheat­growing regions are less culturally attuned to co­operate with others and hence tend to be more individualistic.

The researchers used psychological tests to measure attributes such as individualism and loyalty to friends. For instance, one test of individualism involved asking the people sampled to draw a diagram of their social networks, including them and their friends represented by circles. A prior study found that Americans draw themselves about 6mm bigger than they draw others, Europeans draw themselves 3.5mm bigger, and Japanese draw themselves slightly smaller. In this study, people from rice­growing regions drew themselves smaller than those from wheat­growing regions. Talhelm and his co­researchers also examined divorce rates to find that rice­growing regions have significantly lower divorce rates compared with their wheat­growing counterparts, even after controlling for other variables such as the level of affluence.

“China’s rice regions have several markers of East Asian culture: more holistic thought, more interdependent selfconstruals, and lower divorce rates,” the researchers conclude. “The wheat­growing north looked more culturally similar to the West (western countries), with more analytic thought, individualism, and divorce.”

In a similar (unpublished) study conducted in India, Talhelm found even sharper differences between India’s rice­growing south and wheat­growing north than in China, Mint columnist Samar Halarnkar wrote recently, based on an email interaction with Talhelm. “People in the wheat parts of India were more likely to think analytically and punish their friends for bad behaviour,” Talhelm wrote. “People in the rice parts of India were more likely to think holistically and not punish their friends for bad behaviour.”

Talhelm is not the first researcher to link deep­rooted socio­cultural traits with historical cropping patterns and cultivation techniques. A long and illustrious line of social scientists has stressed

the importance of rice cultivation in particular, and cultivation practices in general, in shaping social outcomes.

In a 1974 Economic and Political Weekly article, Pranab Bardhan, the California University emeritus professor of economics, first pointed to the possible role of rice cultivation in producing more gender­equal outcomes in the eastern and southern parts of the country compared with the wheat­growing parts of north­west India. Bardhan argued that the greater skew in sex ratio and lower chances of female survival in the north and west of India were perhaps because women were less valued economically in these parts of the country.

“In all the states of East and South India (except Karnataka) the predominant crop is paddy which—unlike wheat and other dry­region crops—tends to be relatively intensive in female labour. Transplantation of paddy is an exclusively female job in the paddy areas; besides, female labour plays a very important role in weeding, harvesting and threshing of paddy,” wrote Bardhan. “By contrast, in dry cultivation and even in wheat cultivation, under irrigation, the work involves more muscle power and less of tedious, often back­breaking, but delicate, operations (of which transplantation is an example). Could it be that, in areas with paddy agriculture, the economic value of a woman is more than in other areas—so that the female child is regarded less of a liability than in, say, North and North­West India?”

At that time Bardhan had posited his hypothesis as a ‘wild guess’ but later researchers found merit in his insights. Their research showed that higher female participation in the agrarian economy of East and South India was a key reason for the better status of women in these societies. In an important 1993 research paper published in the American Sociological Review, sociologist Sunita Kishor showed that rice cultivation was a strong predictor of the sex ratio across Indian districts, and that its positive impact on female survival rates was independent of the contemporary female labour force participation rates across the districts. The explanation for this, which other researchers have written about, is perhaps that contemporary values about women in a society are not shaped by how much they work or earn today but by cultural norms shaped over a long stretch of time in that society. As Talhelm notes in his research paper, people from rice­growing regions exhibit traits of a ‘rice culture’ even when they are not rice cultivators any more.

As I had shown in an earlier piece using maps from census 2011, the difference in sex ratios between the North and West on the one hand and the South and the East on the other is quite stark even today. The differences in the child sex ratio between these two halves of the country are even more dramatically different.

A few years before Bardhan’s paper, it was the pioneering feminist economist Ester Boserup who provided substantive links between agricultural production norms and gender inequality. In her seminal 1970 work on women’s role in economic development, Boserup argued that gender inequality differed widely within the developing world because of historical differences in agricultural practices. Where women had greater role in farming activities, such as in Africa, they also enjoyed greater freedom and better life prospects. Boserup observed that societies which practised shifting cultivation and eschewed the use of the plough in the past had fairer gender outcomes. Other researchers have corroborated Boserup’s thesis in a wide variety of settings since then.

Research by the Harvard University economist Alberto Alesina using long time­series data and ethnographic evidence shows that traditional agricultural practices influenced the evolution and persistence of gender norms across societies.

“We find that, consistent with existing hypotheses, the descendants of societies that traditionally practised plough agriculture, today have lower rates of female participation in the workplace, in politics, and in entrepreneurial activities, as well as a greater prevalence of attitudes favouring gender inequality,” wrote Alesina in a 2011 research paper co­authored with economists Nathan Nunn and Paola Giuliano.

To check whether differing agricultural practices influenced gender outcomes by directly shaping cultural attitudes about the role of women or whether they influenced the formation of institutions and market norms which may have been less conducive to the participation of women in those societies, Alesina and his colleagues investigated the trends in female labour participation rates across second­generation immigrants in the US. Even among this group of immigrants in the US who faced the same set of institutions today but whose ancestors practised agriculture differently, the labour­force participation rates for females are significantly lower for immigrant groups with a history of using the plough as against those who practised shifting hoe cultivation, the researchers found.

Perhaps gender inequality is a difficult nut to crack precisely because its roots lie so deep in our agrarian past.

Talhelm’s research does not focus specifically on gender but on wider societal norms. Nonetheless, the linkages he identifies are similar to what social scientists engaged in gender research have identified. Agricultural practices in the distant past seem to have a profound impact on contemporary differences in cultural norms and gender attitudes.

It is likely that the last word on this subject has not been said yet, but Talhelm’s fascinating work will perhaps drive greater research into how exactly past­production technologies affect contemporary social outcomes.

At the very least, Talhelm’s provocative findings will provide you some food for thought the next time you are savouring that plate of fried rice!

Why manufacturing can be an effective tool for gender empowerment

Date: September 5, 2014

By Pramit Bhattacharya

Ever since the Rana Plaza factory collapse in Bangladesh last year, the garment industry in general, and the Bangladesh garment industry in particular, has faced severe criticism from human rights groups and anti­globalization activists over the way it treats workers. This has led large buyers as well as countries such as the US to either restrict or boycott garment imports from Bangladesh.

Several voices of reason have argued that such import curbs can end up hurting precisely those for whom such measures are meant: garment workers, who will be left without a job, and have to return to a life of back­breaking poverty. But such voices of reason have usually been drowned out by the hysteria of activists, who tend to dominate the discourse on the subject. The dominant narrative, fed by anecdotes and shaped by activists, tends to focus largely on the ‘exploitative’ wages and working conditions, and completely ignores the improvements in the lives of millions of workers, mostly women, because of factory jobs.

In a ground­breaking new study on the impact of the garment industry on the lives of Bangladeshi women, economists Rachel Heath of the University of Washington and A. Mushfiq Mobarak of the Yale School of Management show how far the dominant discourse has become out of tune with reality. Heath and Mobarak compared the lives of Bangladeshi women living close to garment factories with those living far away, and also to the years before the factories were set up in those villages. They provide hard evidence to show that the setting up of factories not only changed how women viewed their own future but also reshaped societal perceptions about them. Girls exposed to the garment sector tend to delay marriage and child birth, and also tend to study more than their peers in other villages, the study shows.

While many credit Bangladesh’s improved female literacy rates to a state­sponsored conditional cash transfer program to encourage female schooling, the authors provide evidence to show that the garment sector has had a much greater impact than the conditional cash transfer program in boosting female literacy rates. “The demand for education generated through manufacturing growth appears to have a much larger effect on female educational attainment compared to a large­scale government conditional cash transfer program to encourage female schooling,” write Heath and Mobarak in their recently published research paper. Since the better paying garment jobs are usually bagged by numerate and educated workers, it acts as a powerful signalling device for parents, who are now motivated to invest in their child’s education.

“Our estimates suggest that roughly 14.8 percentage points of the national gain in girls’ enrolment could be attributed to the growth in this export industry (garments),” write Heath and Mobarak.

Painting garment factories as hell­holes that condemn workers to a life of unmitigated misery may make for a sharp critique of the modern world and its globalizing ways but it tends to overlook the counter­factual: how lives for these workers would have been, in the absence of factory jobs. One of the few studies that tried to answer that question was by P. Hewett and S.

Amin, which found that garment workers had better living conditions and higher income levels than their peers living traditional lifestyles. The study also found little evidence to support the claim that garment workers suffered more serious health problems than non­workers. The differences in health outcomes, or minor ailments were more likely the effect of urbanization than of factory work, the study argued.

Heath and Mobarak’s study provides even more compelling answers to the same question by showing how women’s lives have been altered dramatically because of the presence of garment sweatshops. Their study also succeeds in identifying the possible mechanisms through which garment jobs bring about improvements in the lives of people in Bangladesh. For instance, the duo show that gains in female education are less likely to be driven by a wealth effect (when family members are engaged in garment work, and there is more money to fund everyone’s schooling) and more likely to be driven by the combined effect of two disparate drivers of female education: one, an overall increase in the status and bargaining power of women in society because so many of them now have regular jobs, and second, the changing returns to education and basic skills because of the advent of factories.

The evidence presented by Heath and Mobarak underscores the importance of the workplace in the empowerment of women, and in improving gender outcomes. It holds essential lessons for countries such as India, which has among the lowest proportions of working women in the world, and which has been facing an uphill battle against patriarchy and sexual offences.

One of the forgotten lessons from the industrialization of economies in East and Southeast Asia is the profound impact it had on the lives of women who flocked to the newly built factories of those countries throughout the 1960s and 1970s. The share of women in manufacturing crossed the halfway mark in most of these economies before declining as old labour­intensive industries such as textiles and garments gave way to new age capital intensive industries such as electronics. Still, the share of women in regular jobs in these economies today far exceeds what it was half a century ago, as the 2012 World Development Report pointed out.

The feminist economist Stephanie Seguino of the University of Vermont has argued in her writings that the growth of export oriented units in the newly industrialized Asian economies relied heavily on women because they were seen as cheaper, and more pliable workers as compared to men, and that gender wage inequality has been a key driver of growth in these economies.

The actual record on the gender gap in wages in these economies has been mixed, with economies such as South Korea and Hong Kong closing the gap while others such as Singapore and Taiwan have failed to do so. But such comparisons again tend to ignore the counterfactual: on how life for these women would have been, in the absence of factory jobs. It is possible that the low costs of hiring women workers was a key driver of manufacturing growth but it is also likely that these manufacturing jobs helped alter gender norms and improve gender outcomes in these countries.

As the Cambridge University economist Joan Robinson famously quipped, “The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.”

The evidence presented by Heath and Mobarak show that even low wage sweatshop jobs can be transformative in communities which practised only subsistence farming not so long ago. The study highlights how manufacturing can disrupt traditional hierarchies and catalyze social change by igniting new aspirations and by introducing new benchmarks of success.

Other studies show that there are several indirect benefits reaped by the community when more women start working in mills and factories. Research on Mexico by Princeton University economist David Atkin shows that women working in manufacturing jobs have significantly taller children than their peers. Atkin suggests that women in manufacturing end up having greater bargaining power within the household and that leads to better decisions for their children.

A 2014 research paper by Anitha Sivasankaran of Harvard University shows that women working in manufacturing jobs in Tamil Nadu tend to marry later, findings that match those reported by Heath and Mobarak for Bangladesh. Sivansakaran also highlights additional benefits to workers and their families.

“A longer duration of employment also translates to reductions in desired fertility,” writes Sivasankaran. “Further, there are strong spillover effects within the family, as age of marriage increases for younger sisters and school dropout rates decrease for younger brothers.”

Sivasankaran, like Heath and Mobarak, identifies greater autonomy and bargaining power of women as the key change agents. Industrialization has often been seen as a dehumanising force that displaces communities and disrupts old social ties. Greater recognition of industrialization’s impact on reshaping gender relations can change the way we perceive factories and factory jobs.

Chapter 6: Health and Nutrition

The economic case for universal healthcare

Date: January 23, 2015

By Sumit Mishra

Over the past couple of decades, India has had an impressive record of lifting millions out of poverty. But its record in improving health outcomes has been much less impressive despite years of rapid economic growth. As a recent Mint article pointed out, India’s disease burden is much higher than other emerging economies such as China, Indonesia, Brazil, Mexico and Sri Lanka. Even poorer neighbours such as Nepal and Bangladesh have a better record in health care compared to India.

The new national health policy announced by the government a few weeks ago promises to usher in a new era in this regard. According to many scholars, poor health in India is largely a result of poor policy and low public investments both in preventive health facilities such as drainage and sanitation networks and in curative medical care facilities such as primary health centres. The new policy addresses a lot of what has already been laid down in the report of the high level expert group set up by the previous government in 2011 which recommended universal health care in the country based on 10 core principles including universality, equity and community participation.

There is a huge body of economic research that points to the limitations of the market in addressing the health care requirements of a modern society. One of the first economists to point out imperfections in the market for health was the Nobel laureate Kenneth Arrow. Arrow along with his colleague Gerard Debreu had helped set up the theoretical foundations of modern market­based economics. But Arrow astutely observed that the characteristics of the medical care market differed fundamentally in several ways from the usual competitive markets economists studied. In a seminal 1963 research paper, which was later included in the list of the 20 most influential papers of the last century by the American Economic Association in 2011, Arrow anticipated the field of information asymmetry in economics by pointing to the lack of knowledge among consumers regarding what they are buying.

Information asymmetry is one of the biggest hurdles to a well­functioning competitive market for health but not the only one. The nature of demand for health services is unpredictable (health shock in a household is a random event). Moreover, there are supply­side anti­competitive norms which cannot be wished away (registered medical practitioners are few in number, and medicines are sometimes prohibitively priced).

The solutions to such market imperfections have been a matter of debate among scholars for a long time, with some favouring a targeted public health care programme, others advocating a universal state­funded health care system and still others arguing for well­designed insurance policies to cope with health risks.

In India, as in many other developing countries, targeting poses a gargantuan challenge for a state, which is not known for its capacity to identify the poor correctly. Even if a consensus on the poverty line is reached politically, it is difficult for the Indian state to identify households that fall below that threshold accurately. As with the food subsidy programme, targeting errors are likely to be widespread, with deserving households missing out and not­so­deserving households gaining from such a move.

Insurance seems an attractive market solution at first glance but the market for medical insurance suffers from two well­identified market failures—adverse selection and moral hazard. The problem of adverse selection appears when insurance premiums go up because only a few high­risk buyers are chosen for insurance, driving out other willing buyers of the market. Similarly, a lot of people who choose insurance have little or no incentive to keep their bills low, a problem of moral hazard. Since these bills are reimbursable and hospitals want their costs to be minimized, a lot of people who require high­cost health care are driven out of the market.

The American public health researcher and journalist Atul Gawande documented precisely such market failures in his coverage of the medical care market in the US. “There are the physicians who see their practice primarily as a revenue stream,” wrote Gawande in a widely cited New Yorker article. “They instruct their secretary to have patients who call with follow­up questions schedule an appointment, because insurers don’t pay for phone calls, only office visits. They consider providing Botox injections for cash. They take a Doppler ultrasound course, buy a machine, and start doing their patients’ scans themselves, so that the insurance payments go to them rather than to the hospital. They figure out ways to increase their high­margin work and decrease their low­margin work. This is a business, after all.”

An insurance­driven health system is also a hospital­driven one, and ignores needs of preventive health care which can save lives and health costs of millions living in unsanitary and unhygienic conditions. Most deadly diseases in India such as malaria and tuberculosis are communicable and require investments in public health to drive better hygiene. As the health economist Monica Das Gupta pointed out in a 2005 Economic and Political Weekly article, preventive health services provide public goods of incalculable benefits for facilitating economic growth and poverty reduction. India’s high disease burden is largely owing to the fact that unlike other Asian economies, India did not invest in an integrated public health system involving food safety, water management, waste disposal, vector control, sanitation systems, health education and health regulations, Das Gupta argued.

There are other reasons as well that necessitate a broad­based universal health programme. An important one is the presence of high inequality in terms of access to health services. Princeton University economist Angus Deaton, in his book The Great Escape, notes, “in cities like New Delhi, Johannesburg, Mexico City, and Sao Paulo, first­world, state­of­the­art medical facilities treat the wealthy and powerful, sometimes within sight of people whose health environment is not much better than that of seventeenth century Europe.”

In a 2008 study published in the Economic & Political Weekly, economists at the Centre of Development Studies estimated state level health inequality and argued that the poorest section bear the greatest burden of badly designed health policies. The lack of reliable public health services and the unaffordability of health insurance compel the poor to spend heavily on private medical care when faced with health shocks, driving many people into the lap of poverty.

According to a 2011 research paper by Soumitra Ghosh of the Tata Institute of Social Sciences, out­of­pocket health expenditures account for nearly one­sixth of India’s poverty burden.

Growing incomes can of course partly take care of rising health expenses but there is no linear relationship between income gains and gains in health. An influential 1975 study by the great demographer Samuel Preston showed increases in income can only explain partially the gains in global life expectancy between 1930 and 1960 and the major chunk of these gains and conquest of diseases could be attributed to better public health systems—medical facilities, new drugs, universal immunization and improved sanitation.

The case for universal health care is also strengthened by the recent examples of developing countries such as Thailand and Rwanda. Thailand has made tremendous advancement in providing health care to its citizens. What Thailand did was pretty simple. In 2001, it combined its existing targeted health programmes into one universal programme providing a safety net for all the citizens. Not only dedicated funding was put in place, a strong monitoring and evaluation mechanism ensured that programme reaches the poor.

“The result of universal health coverage in Thailand has been a significant fall in mortality (particularly infant and child mortality, with infant mortality as low as 11 per 1,000) and a remarkable rise in life expectancy, which is now more than 74 years at birth—major achievements for a poor country,” the Nobel Prize­winning Indian economist Amartya Sen wrote in a recent opinion piece in The Guardian newspaper. “There has also been an astonishing removal of historic disparities in infant mortality between the poorer and richer regions of Thailand; so much so that Thailand’s low infant mortality rate is now shared by the poorer and richer parts of the country.”

The more remarkable example, however, is that of Rwanda. In 2003, the constitution of Rwanda was amended and right to health became a fundamental right. Through public action and a community­based public health system called Mutuelle de Santé, Rwanda has been able to bring down mortality sharply. A Lancet journal study led by the physician Paul Farmer shows that doubling of life expectancy in the country could be attributed to better health policies in Rwanda.

Even within India, states such as Tamil Nadu and Kerala have shown it is possible to have superior health outcomes with a well­funded and well­designed public health system.

The lessons for India are fairly clear. Apart from having more skilled health workers and greater decentralization of services, we need to invest in preventive health care services, and institute nudges so that people use such services.

India’s battle against hunger and malnutrition: The story so far

Date: November 14, 2014

By Pramit Bhattacharya

Noting the wide disparities in living standards between different countries of the world, Nobel­winning macroeconomist R.E. Lucas commented in a widely cited research paper that one could not but help looking at such figures without thinking of them as possibilities.

“Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s?,” Lucas asked in the paper. “If so, what, exactly? If not, what is it about the nature of India that makes it so? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.”

Lucas wrote these words in 1988. Since then, India has experienced more than two decades of rapid economic growth. The challenge for India has been to translate such growth into rapid improvements in development outcomes. As a Mint analysis showed, we are only a few years behind China when it comes to most income­based indicators. But we are decades behind in development indicators.

The wide divergence in development outcomes between the two economies begs the question: Is there something India can do which a China, or a Brazil, or a Mexico has done to eradicate poverty faster and improve lives of millions of under­nourished Indians? Or is there something that a state such as Tamil Nadu has done, which Jharkhand can replicate? Once one starts thinking about these questions, it is indeed difficult to think about anything else. No wonder then that a large number of development economists in India have been preoccupied with assessing how effective India’s welfare services are, how they vary across states, and researching how the Indian state can intervene more effectively in improving the lives of the impoverished.

While there are a myriad welfare schemes the Indian state sponsors, its most important anti­poverty instrument has been the Public Distribution System (PDS) to distribute subsidized foodgrains. For a long time, the PDS has been considered a classic example of inefficient state intervention but a growing body of evidence suggests that the PDS is reviving, and is reaching the poor more effectively than before. Over the past couple of years, empirical studies by a number of economists have shown that PDS leakages have fallen over time even as its coverage has expanded. As a recent Mint analysis showed, the poorest income classes are consuming more cereals and at a lesser price compared with the rich today thanks to the improvements in PDS.

Improvements in the PDS could be among the key factors driving India’s recent gains in its battle against malnutrition, according to a recently released International Food Policy Research Institute (IFPRI) report. The report draws on a 2013 government survey which shows that the proportion of underweight children has fallen 12.8 percentage points since 2005 to 30.7%, and attributes the decline to factors such as the rural health mission, the expanded coverage of the Integrated Child Development Services (ICDS), the rural employment guarantee program and improvements in PDS. While we do not have enough disaggregated data so far to really

ascertain which factor has played the biggest role in the decline (more on this below), there is enough evidence already to indicate a real turnaround in the PDS.

The results of large­scale sample surveys by Reetika Khera, an economist at the Indian Institute of Technology (IIT) Delhi, showed that the PDS had improved considerably in several major Indian states, and survey respondents rated the PDS more favourably than earlier. “The revival of the PDS can be traced, in large part, to a renewed political interest which manifests itself in state initiatives such as expanded coverage, reduced prices, computerisation of stock management, etc.,” wrote Khera in a 2011 research paper.

More recent research based on the official consumption surveys conducted by the National Sample Survey Office (NSSO) point to the same trend. A May 2014 research paper by Andaleeb Rahman, an economist at the Indira Gandhi Institute of Development Research (IGIDR), shows that even states with dysfunctional food distribution systems in the past such as Bihar and Jharkhand have turned around over the past few years.

“Responding to a stream of criticism on the functioning of the PDS, quite a few state governments took important initiatives to improve it,” wrote Rahman. “These included changes in grain entitlements (Bihar, Tamil Nadu, Andhra Pradesh and Rajasthan), universalisation of the PDS (Tamil Nadu and Himachal Pradesh), expanded coverage (Bihar, Andhra Pradesh, Chhattisgarh, Tamil Nadu and Rajasthan) and a better monitoring service (Chhattisgarh, Tamil Nadu and Andhra Pradesh) with a greater commitment to providing foodgrains to the poor. A reduction in price (Andhra Pradesh, Chhattisgarh, Jharkhand, Odisha, Rajasthan and Tamil Nadu) has also helped increase the PDS offtake. Some states (Jharkhand, Tamil Nadu, Bihar and Andhra Pradesh) prepared their own list of below poverty line (BPL) households and issued ration cards accordingly. Many states have increased the commission for fair price shop owners to lower the incentive for them to cheat and sell grains in the open market.”

The impact of these reforms was three­fold. First, people in the poorest income classes who did not have ration cards to avail of PDS entitlements have much greater access to them now. In 2004­05, 55% of the bottom­income decile had either an above poverty line (APL) card or no card at all, and this proportion declined to 30% in 2011­12, research by Rahman showed. This led to the second impact: greater consumption of PDS grains. In 2004­05, 24% and 11% of households reported consumption of rice and wheat from the PDS, respectively. In 2011­12, the numbers increased to 46% and 34% for rice and wheat, respectively. Thirdly, greater reliance on the PDS has meant that the implicit income transfers (based on district level differences between market and PDS prices) have gone up across states. States such as Bihar, Punjab, Jharkhand, Uttarakhand, Odisha, and Assam, which reported negligible income transfers in 2004­05, saw an exponential rise in such transfers since then.

The faster reduction in poverty India has witnessed over the past few years is at least partly because of the improvements in PDS, according to research by Himanshu and Abhijit Sen, economists at the Jawaharlal Nehru University (JNU). The impact of the PDS on poverty reduction doubled in 2004­12 as compared to the previous decade.

While there is a broad consensus on improvements in the PDS, three questions remain unsettled. Is the pace of improvement in PDS fast enough, and can laggard states such as Bihar and Assam reach the efficiency levels of a Tamil Nadu or Himachal Pradesh soon?

Secondly, do improvements in PDS only mean greater implicit income transfers, and if so, will it be more efficient to switch to direct cash transfers? Third, does greater access to foodgrains automatically translate into nutritional gains?

The second and third questions are actually related to each other. If PDS entitlements enable better nutrition only to the extent that it boosts the purchasing power of the beneficiaries, then it makes sense to explore cash alternatives which can do the same. Himanshu and Sen argue that in­kind PDS transfers are more nutrition friendly than cash transfers but the evidence they provide only suggests that calorie intake of households with greater PDS access is higher. Given that adequate calorie consumption is not the perfect indicator of nutritional standards, increased calorie intake at the household level does not establish nutritional gains. The intra­household distribution matters for one: women and children often receive less food than adult males. Also, often malnutrition results from the absence of micro­nutrients, which calorie measurements ignore.

As an earlier blog post pointed out, conflating hunger and malnutrition has led to a cluttered debate on the issue. Poverty and the lack of appropriate food do play a major role in causing malnutrition but the causal links are not straightforward, for most of India’s population. A child requires very small amounts of food, several times a day. Poor and lower middle­class families are often unable to spend the time and energy involved in arranging for the child’s meals even if they can afford the cost of the food.

Besides, two key reasons for India’s malnutrition burden are not related directly to food. First, the absence of sanitation and adequate hygiene is a major driver of malnutrition, research by Dean Spears shows. Secondly, a large share of India’s malnutrition burden arises because of the high proportion of low birth­weight babies, who start life with a nutritional disadvantage. Given the low social status of women in Asia, most women suffer from nutritional deficiencies and give birth to under­nourished children. Just providing extra calories will therefore not help under­nourished children.

The details of the recent nutrition survey results have not been published yet, and the National Family Health Survey has been stuck because of a Gujarat high court order. Therefore, it is difficult to figure which states have performed better, and whether PDS performers also lead in nutritional gains. However, a recent multi­disciplinary study on Maharashtra by the UK­based Institute of Development Studies (IDS) shows that Maharashtra achieved impressive gains in reducing child stunting, even without major PDS reforms.

Maharashtra’s success is because of its coordinated approach to tackle malnutrition through a nutrition mission, which was headed by an extraordinary Indian Administrative Service (IAS) officer, V. Ramani. Ramani had led an impressive campaign against malnutrition as the commissioner of the Aurangabad division, and his success there won him political backing for the state­level mission. Ramani’s success relied largely on developing better protocols for treating the acutely malnourished, and in ensuring better co­ordination between the departments of health and nutrition, as a 2011 Mint profile showed.

The battle against malnutrition will therefore have to be a multi­pronged one, and food security can only be one of its components. Whether in­kind transfers, food coupons, cash, or a combination of the three, works most efficiently is an open empirical question. The preference

for either of these options may vary quite widely across different Indian states. Different states have already instituted different kinds of reforms in their food distribution systems, as economists Bharat Ramaswami and Milind Murugkar pointed out in 2013 research paper. Some states have computerized stock management, others have moved towards biometric identifications and instituted food coupons, which at some stage can be replaced by direct cash transfers. The preference for cash transfers will likely be highest in states where the PDS is the weakest.

The Central government will do well to allow states to try out different policy reforms according to their needs and tastes. It is inevitable that the less successful policy models will give way to the more successful ones. The role of the Centre should be to evaluate state and district level outcomes on hunger and nutrition on a regular basis, so that policy changes can be made based on evidence. Five years is simply too long a wait for consumption expenditure data, and a nutrition survey once in a decade does not exactly highlight commitment to tackling under­nutrition!

Water, water everywhere, not a drop to drink

Date: August 1, 2014

By Sumit Mishra

Every monsoon brings with it stories of child deaths in different parts of the country owing to the rampant spread of water­borne diseases. Nearly three­quarters of rural Indian households do not have access to safe drinking water on their premises according to the Census 2011 data, and the absence of safe water leads to the deaths of about 2,00,000 children under four years annually, according to a 2013 Lancet study.

That piped water leads to better child health outcomes is well known but new evidence shows that access to piped water also leads to an improvement in gender outcomes—better educational attainment as well as greater employment opportunities for females. Women, young and old, have to suffer the daily drudgery of drawing water from sources which are located more often than not kilometres away from their premises. Therefore, the beneficiaries from having access to water within the premises are women; lesser time spent on fetching water means more labour­force participation, and greater levels of education for them.

A recent working paper by Sheetal Sekhri of the University of Virginia draws attention to the positive impact of having access to water nearby on literacy rates of women. Using data for 8,261 villages in the state of Uttar Pradesh, she finds that female literacy rates are 5% greater in villages with better water access accounting for many demographic and geographical characteristics. The paper adds further the “suggestive evidence that time spent on fetching water has a negative effect on schooling outcomes of children including enrolment, attendance, dropping­out, and hours spent doing homework. I also show that children who spend longer on fetching water perform poorly on tests of basic skills in Math, reading and writing”.

One way in which the gender­bias could be reduced is greater political voice for women. In 1992, through the 73rd Amendment in the Constitution, one­third of seats in all Panchayat positions were mandated to be reserved for women. In a widely cited study on the impact of political reservations on public goods outcomes, Esther Duflo of the MIT and Raghabendra Chattopadhyaya of the Indian Institute of Management Calcutta find that a village with a female head invests far more on setting­up or repairing water facilities than a village which has a male head.

Greater coverage of tap water is also associated with lower incidence of disease among children. Jyotna Jalan of the Center for Social Science Studies, Kolkata and Martin Ravillion of the World Bank found significantly lower levels of diarrhoea among children in households that had access to piped water.

India has struggled to improve nutritional outcomes chiefly because of poor sanitation and lack of clean drinking water. The recently released district level health survey results suggest that the number of underweight children have remained more or less the same between 2005­06 and 2013­14. The absence of toilets and safe drinking water leads to rampant spread of childhood diseases, which inhibit children’s ability to absorb food.

The absence of any major thrust on provisioning of water may partly reflect the stratification of our society, which makes it difficult for diverse social groups to agree on desirable public goods. Collective action problems are more acute, and subsequent delivery of public goods lower, in rural areas of districts that are more heterogeneous in terms of caste, according to a recent paper by Divya Balasubramanian of the St. Joseph’s University, and Santanu Chatterjee and David Mustard of the Georgia State University.

However, the effect of social divisions on water access could well be offset by an increase in political voice of the marginalized caste groups. While the scheduled castes (SCs) have found a reasonable level of political voice in India, scheduled tribes (STs) exhibit limited political participation. The divergent trends in outcomes between SCs and STs could partly reflect their differing levels of political voice. The Census 2011 data shows that 16% of SC households in India have access to clean piped water, whereas only 8% of ST households get potable water on their premises.

Fixing the tap water woes of India will require imaginative public interventions with a focus on delivering clean drinking water to every household. The benefits of such interventions will be manifold. Greater hygiene, clean drinking water and sanitation have been the main drivers of improved health across nations, history shows.

Why India has woken up to the importance of toilets

Date: May 9, 2014

By Sumit Mishra

Commenting on the Indian elections in his satire show, British humorist John Oliver remarked, “(Narendra) Modi has managed to inspire people with his populist platform including a pledge to put a toilet in every home. That’s a bold move, coming out as pro­toilet.”

Oliver’s wisecrack may have deliberately exaggerated Narendra Modi’s pitch on toilets but the focus on sanitation has been one welcome change in the 2014 election campaign. In a public rally, Modi had exhorted, “pehle shauchalay, phir devalay” (first toilets, then temples). Jairam Ramesh promptly accused Modi of stealing his lines. Irrespective of who gets the credit, that senior politicians took toilets seriously is a remarkable development. After a cabinet reshuffle in 2011, Congressman Gurudas Kamat had refused to take charge of the ministry of water and sanitation, considering the ministry to be beneath him.

The importance of sanitation can be gauged by looking at the manifestos of the two major parties over time. While sanitation was conspicuous by its absence in the manifestoes of major parties in 2009, this time has been different. Both the Bharatiya Janata Party (BJP) and Congress promise to make India open­defecation free in their 2014 manifestoes.

The increasing recognition of sanitation as a major challenge for the country follows a growing body of evidence that shows how India’s abysmal standards of sanitation is responsible for our poor developmental outcomes. About half of Indian households defecate in the open according to the latest census data and open defecation has remained one of the major causes of child malnutrition.

A recent report by the World Health Organization (WHO) puts the returns to building a toilet in India at about Rs.5 per spent.

Narrating the story of “escape from poverty and death” in his important new book The Great Escape, the celebrated Princeton University economist Angus Deaton shows how better public health measures and improved health technology led to a rise in living standard as well as life expectancy all over the world. During the mid­19th century cholera epidemic in London, it was widely believed that cholera was caused by a blood disorder. John Snow, a physician, collected data on 1854 cholera deaths in London and put it on a map to find that cholera epidemic was more severe in areas with contaminated water supply, debunking the myth that cholera was caused by blood disorder. This led to a significant reduction in child mortality not only in Britain but also across the world in the 20th century.

Recent research has established the causal relationship between open defecation and poor health outcomes. An entire session called ‘Toilet Papers’ was devoted to research on the impact of sanitation on child health in the last conclave of the American Economic Association. There is concrete evidence now that moving away from open defecation has led to a reduction in child

mortality globally. Building toilets also accounts for increases in children’s height under different settings, research shows.

There is of course a Palaeolithic­era argument that genes, not factors like sanitation and maternal health, are responsible for difference in children’s height across countries. The Columbia University economist Arvind Panagariya advocated such a view in a 2013 Economic and Political Weekly (EPW) article arguing that Indian children are shorter than sub­Saharan African children because of genetic differences. Panagariya argued that WHO’s horrible methodology is to be blamed for conventional wisdom about malnutrition being higher among children in India than those in sub­Saharan Africa. Researchers from different disciplines­­ economics, paediatrics, and nutrition—took a dim view of this rather astonishing claim. Princeton University economist Dean Spears refuted it first in Mint explaining that sanitation is the key predictor of the difference between children’s height across countries. This was followed by the publication of a collection of six papers in EPW by, among others, Deaton and Spears, who pointed out how Panagariya had ignored the role of disease and ill­health, often caused by poor sanitation, in stunting growth.

Research by Spears and two of his colleagues, Arabinda Ghosh and Aashish Gupta, shows that for a given level of economic status, children in Bangladesh are taller than those in West Bengal because of lower level of open defecation in Bangladesh. Similarly, Cambodia experienced a rapid decline in open defecation in the last 10 years; this alone accounts for much of the rise in the height of children, Spears et al argue in another study. Spears, Ghosh and Oliver Cummings in an analysis of data for hundred poor districts in India show that “ten percent increase in open defecation was associated with a 0.7 percentage points increase in stunting and severe stunting.”

Is there any evidence that there are long term benefits of improved sanitation? In a remarkable study on the impact of sanitation projects in US Indian reservations, Tara Watson, economist at the Williams College, Massachusetts found that this intervention alone accounted for about 40% improvement in native American mortality rates vis­a­vis the rates for Whites between 1968 and 1998.

In 1999, India launched a sanitation program which is now known as the Total Sanitation Campaign (TSC). Increased participation in this programme has led to a reduction in child mortality and an increase in children’s height, on an average. In a recent study, Spears and Lamba found that children who reside in districts with greater intensity of toilets built under TSC are more likely to recognize alphabets and numbers at the age of six.

Achieving better sanitation is not an easy task for there are behavioural aspects that prevent people from adopting improved sanitation. Deaton argues in The Great Escape that “diffusion of ideas and their practical implementation take time because they often require people to change the way they live.”

While subsidies may help in incentivizing the take­up of toilets, these incentives are sometimes just not enough and a nudge is required. Social pressure has played a very important role in whatever success TSC had in building more toilets. A randomized experiment by Subhrendu Pattanayak of the Sanford Institute of Public Policy and Nicholas School of the Environment, Duke University and others in 40 villages in Odisha on TSC makes the case for social pressure

as an important determinant of success in improving sanitary outcomes. Social shaming through information, education and communication (IEC) approach contributed to about two­third of the toilets constructed and the rest one­third by subsidies, the study showed.

Complementing what Pattanayak et al found, Yaniv Stopnitzky, an economist at University of San Francisco noted that subsidies had made very little impact on adoption of toilets through the large subsidy programme. Much of this failure, critics argue, is due to lack of collective action and community participation.

In another research paper, Stopnitzky showed that the “No Toilet, No Bride” scheme in Haryana led to greater male investment in toilets after exposure to the programme.

In a provocative new paper, economists Michael Geruso and Spears find that Muslims are taller than Hindus and have lower rates of child mortality solely because of the differing sanitation practices in the two communities. While 67% poor Hindus defecate in the open, only 42% poor Muslims do so, they report, using data from the last National Family Health Survey. Their estimates also suggest that relatively wealthy Hindus invest more on assets like motorcycle and choose open defecation. They also argue that not only is using toilet important, it also matters if neighbours also use toilets.

Research has shown why toilets are important and how policymakers should address the issue of open defecation. While there is emphatic and unqualified evidence that better sanitation leads to better health, there is very slim evidence that large subsidies are alone responsible for reduction in open defecation. The answer to the sanitation puzzle in India could well be a combination of subsidies and social mobilization. Given that collective action matters so much in the provision of better sanitation facilities, politics, as always, has a very important role to play.

Chapter 7: Jobs and their future

The jobs debate

Date: April 4, 2014

By Pramit Bhattacharya

The health of the economy occupied the centrestage of the political battlefield this week, as the ruling United Progressive Alliance (UPA) and the opposition National Democratic Alliance (NDA) engaged in a spirited debate on India’s economic performance. A major bone of contention was the slower pace of job growth in the UPA’s 10­year reign compared to the preceding five­year period, when the NDA was in power.

The raw employment numbers during the UPA’s reign indeed look depressing even though economic growth was higher in the UPA than in the NDA period. In the seven years between 2004­05 and 2011­12, when gross domestic product expanded at an average rate of 8.5%, there was new work for only 15 million people, compared with 60 million in the five years to 2004­05, when the country’s economy clocked an average 5.7% growth, data from the National Sample Survey Office (NSSO) shows.

What explains the mystery of job growth slowing so drastically just when growth spiked up so rapidly? The answer lies in the data itself. A closer look at the data suggests that the aggregate numbers mask two structural shifts in India’s labour market: a massive withdrawal of women from the labour force in recent years and steady growth in non­farm jobs, primarily in building and construction.

Roughly 30% of new jobs during the NDA period were poorly paid agricultural jobs, which women took up in distress. As rural incomes went up, many women quit such distress jobs, leading to a fall in the labour force participation rates. As a result, if one looks at the unemployment rate, it has not risen during the UPA period. The withdrawal of women from the labour force also partly explains why rural wages have risen sharply during the UPA era, with casual wages for rural women outpacing those for men.

Unfortunately, just like the debate on the poverty line in India, the popular debate on the issue tends to gloss over the nuances involved in evaluating labour market changes in a developing labour market such as that of India.

Does all this mean the UPA has a shining record in job­creation as UPA spokespersons would have us believe? Well, that would be stretching things a bit too far. The net additions to non­farm jobs in the seven years to 2011­12 at 6.9 million was indeed higher than the corresponding number for the 11 years between 1993­94 and 2004­05, when the economy added a net 5.9 million new non­farm jobs each year. But if one looks only at the NDA period (1999­2000 to 2004­05), one finds that the pace of job creation in the non­farm sector was higher than in the UPA period. During the five years leading up to 2004­05, the economy added a net of 8.4 million new non­farm jobs each year.

The UPA’s employment record is not as bad as Yashwant Sinha would have us believe. Still, the NSSO numbers show that employment generation in the non­farm sector was slower in the UPA period than in the NDA era. The key to this slowdown is the manufacturing slump in India. As the labour economist Jayan Jose Thomas pointed out in a Mint opinion piece, the pace of job creation in the unorganized manufacturing sector decelerated markedly in the past decade: from 12.6 million new jobs between 1993­94 and 2004­05 to just a little over a million new jobs between 2004­05 and 2011­12.

The UPA would have a far better legacy to defend had it focused on creating decent manufacturing jobs rather than seeking to artificially protect employment through an ill­designed rural employment guarantee program. As Pranab Bardhan, emeritus professor of economics at the University of California, Berkeley, argues, the brains behind UPA’s marquee welfare schemes did not pay enough attention to improving delivery mechanisms, leading to a wastage of public resources.

While most economists agree that growth in the UPA period has not been entirely ‘jobless’, they are a divided lot when it comes to the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). MGNREGA votaries (and there are several of them in the economics profession) tend to point out its role in empowering women and the deprived: things that are very hard to quantify even if sophisticated econometric techniques are used. Opponents tend to attack it as an artificial boost to the minimum wage level in India that has created labour scarcity, driven up rural consumption, and fed inflation: things that may as easily have been caused by factors other than MGNREGA.

I would think both proponents and opponents tend to exaggerate the labour market impact of MGNREGA, given that the implementation of the scheme has been extremely patchy in most states and has led to large leakages. The past few years have seen several other changes in rural India: an expansion in the rural road network, growth in agricultural productivity (partly owing to better weather), higher educational enrollment and growth in construction jobs that have shrunk the agricultural workforce, and an unprecedented boost in farm support prices, all of which have combined to drive up wages and incomes at the bottom of the pyramid. As Indian Statistical Institute­Delhi economist Kanika Mahajan pointed out in a Mint opinion piece, adjusting for agricultural productivity growth alone could explain much of the rise in wage growth that is ascribed to MGNREGA.

MGNREGA also appears a much more leaky strategy to empower deprived social groups compared to conventional development strategies, which encourage rather than stem rural­urban migration. It is not for nothing that B.R. Ambedkar, an economist by training and the greatest champion of Dalit empowerment, believed that the solutions to India’s agricultural and rural problems lay in urbanization and industrialization.

Analyzing the problems of low labour productivity in agriculture and fragmentation of landholdings in a 1918 paper, Ambedkar argued that solutions to agriculture might well lie beyond it: “A large agricultural population with the lowest proportion of land in actual cultivation means that a large part of the agricultural population is superfluous and idle…this labour when productively employed will cease to live by predation as it does today, and will not only earn its

keep but will give us surplus; and more surplus means more capital. In short, strange as it may seem, industrialization of India is the soundest remedy for the agricultural problems of India.”

Ambedkar, quite unlike Gandhi, was deeply aware of how constraining rural life could be, which is why he warned: “The love of the intellectual Indian for the village community is of course infinite, if not pathetic… What is a village but a sink of localism, a den of ignorance, narrow­mindedness and communalism?”

Ambedkar’s description of intellectuals appears to apply quite well to the group of advisers the UPA government had over the past decade, which refused to accept that urbanization and industrialization could be effective empowerment strategies even for people currently living in rural areas.

Robots, offshoring and WhatsApp—and the inequality question

Date: April 24, 2014

By Niranjan Rajadhyaksha

Economics intersects with science fiction in the Foundation novels by Isaac Asimov. His psychohistorians use their knowledge of history, sociology and mathematics to save the galactic civilization they live in. Nobel laureate Paul Krugman has said that he chose to study economics after he read as a young boy how a social science such as the fictitious psychohistory could help a society.

However, it is not the psychohistorians but the protagonists of the three laws of robotics thought up by Asimov in his wonderful stories that are more salient to one of the most important issues that contemporary economists are grappling with: inequality. The growing use of robots in production has sparked off a spirited debate among economists about the impact of technological change on income distribution.

There are two ways to approach the inequality issue. The first is to examine how national income is distributed between households. The second is to study what economists call the functional distribution of income between workers and owners of capital. In fact, the publication of French economist Thomas Piketty’s magnum opus—Capital in the Twenty­First Century—has fanned a firestorm of interest in the functional inequality question.

The crux of his argument is that capitalism has a natural tendency towards growing inequality because the rate of return on capital exceeds the rate of economic growth. Piketty has empirically challenged two hoary truths in economics that took root more than five decades ago.

The first was the observation of the US economist Simon Kuznets that income inequality increases in the initial stages of development but then eventually falls as countries complete their structural transformation from agriculture to modern industry. The second was one of the six stylized facts about economic growth proposed by British economist Nicholas Kaldor: the share of national incomes going to capital and labour in any country is roughly equal over long periods of time.

Piketty has shown in his data, which he has helpfully made available online, how inequality has been increasing once again in recent decades while the share of income going to capital is also trending up.

There are three grand narratives in economics about growing inequality.

The first narrative deals with the impact of technological change on labour incomes. Piketty is not the first economist to show that the share of capital income has been going up. For example, Loukas Karabarbounis and Brent Neiman show in a paper published in June 2013 that the share of labour income has been dropping across the world over the previous 35 years. They argue that about half of this fall in the labour share of global income can be explained by

the fall in the relative price of machines thanks to the introduction of new production technology. I will deal with this complicated issue in greater detail in a while.

The second narrative looks at the impact of globalization on the functional distribution of income. The entry of over one billion Chinese and Indian workers into the global economy over the past 25 years basically drove down the relative price of labour, and hence the share of workers in national income. These extra workers from the two most populous countries in the world have had the same effect on global wages that Karl Marx expected from what he called the reserve army of labour.

A recent paper by Michael Elsby, Bart Hobijn and Aysegül Sahin shows that the decline in the labour share of US income can be explained by offshoring to low­income countries. But the research done by Karabarbounis and Nieman shows that the share of labour income has been declining even in China; so globalization can perhaps explain what is happening in one country but may not be able to tell us why the same trend can be seen in countries across the world.

The third narrative about inequality deals with the tendency of the new global economy to give disproportionate rewards to a handful of winners. The classic paper was published in 1981 by Sherwin Rosen on the economics of superstars. He showed that new technologies allow the best to capture most of the returns in an industry. The obvious examples are in creative pursuits such as film, music or sports. The superstars dominate.

The emerging digital economy also creates unique opportunities for income concentration. Consider the recent purchase of WhatsApp by Facebook Inc. Just 55 employees at WhatsApp created an astonishing $19 billion (around Rs.1.1 trillion) of value in a few years. The network externalities that can be harvested in the digital world ensure that there is a natural tendency to dominance—the winners take all.

The globalization and network externalities arguments are powerful but many economists have now been focusing their attention on the impact of new production technologies—especially robots—on the changing shares of labour and capital incomes. Some of the analysis is glum. In a paper published in December 2012, Jeffrey Sachs and Laurence Kotlikoff try to show that robots are the enemies of the next generation.

Their basic model is as follows. Smart machines such as robots complement the skills of older workers but displace younger unskilled workers. The latter see their wages decline. They are then unable to invest in skills as well as physical capital. This creates an economy with increasingly less human and physical capital. The process means there is a risk that each generation is worse off than its predecessor. Smart machines lead to long­term misery.

Does new technology always drive down wages? A lot depends on the nature of technical change. One of the finest expositions of this reasoning takes off from the classic 1932 paper by John Hicks, The Theory of Wages. Much depends on the extent to which technical change is “capital­biased”.

Krugman has used the insightful framework developed by Hicks to explain in a lucid blog post: “It’s wrong to assume, as many people on the Right seem to, that gains from technology always trickle down to workers; not necessarily. It’s also wrong to assume, as some (but not all) on the

Left sometimes seem to…that rapid productivity growth is necessarily jobs­ or wage­destroying. It all depends. What’s happening right now is that we are seeing a significant shift of income away from labour at the same time that we’re seeing new technologies that look, on a cursory overview, as if they’re capital­biased.”

What could be the larger economic impact of the growing use of robots in production? Martin Wolf of the Financial Times recounted a delicious story in one of his recent columns. The manager of a large automobile factory in the US was showing the union official around the new assembly line dominated by robots. “They will not be going on strike,” said the manager. The union official quickly retorted: “Yes, but they will not be buying your cars either.”

There is a serious economic issue highlighted here. The increasing use of robots could indirectly damage effective demand because the standard assumption in Keynesian economics is that those with lower incomes have a higher marginal propensity to consume. So a lower share of wages in national income will tend to depress demand.

But the more insightful analysis comes from the brilliant heterodox Polish economist, Michal Kalecki. He put the division of national income between labour and capital at the heart of his analysis of economic fluctuations. Kalecki argued that a higher share of labour income is expansionary because workers have a higher propensity to consume.

The Kalecki model has microeconomic foundations. Not only does income distribution play a key role in his theory of effective demand but he also argued that the relative share of profits in national income is determined by the degree of monopoly in an economy. His analysis has faded into the background but this link between monopoly and profit share could be useful in the emerging fourth narrative about inequality—its link with what is loosely called crony capitalism. An economy that does not have competitive markets could push up the share of national income going to owners of capital.

The converse of what Kalecki said is that a more unequal distribution of income will lead to a higher share of capital income that will be reinvested.Richard Godwin argued in a 1967 paper that a higher wage share will reduce investment and hence economic growth. The two views—Kalecki and Godwin—were analyzed well by Engelbert Stockhammer and Robert Stehrer in a June 2009 paper.

Is inequality growing?

The answer is more complicated than many assume. Inequality within countries is definitely growing. But inequality in the world as a whole is perhaps reducing because of the rapid income growth in the two most populous countries in the world: China and India. Hundreds of millions of people in these two countries have moved closer to the global average. However, the growing inequality within nations attracts more attention because politics is national. Growing inequality within nations will likely be a growing area of concern in the coming years even as global inequality declines.

“Disparities are increasing—between the rich and poor in individual countries, and until recently, between countries. The global financial crisis is keeping real incomes stagnant in advanced economies but it probably narrowed global inequality between citizens of the world, because

most developing countries continued with strong growth,” wrote World Bank economist Branko Milanovic, one of the greatest scholars on inequality. Even the International Monetary Fund has said in a staff paper released in January that it will be sensitive to the impact of the policies it recommends on inequality in member nations.

In a celebrated essay titled The Economic Possibilities of our Grandchildren, John Maynard Keynes had predicted the “euthanasia of the rentier” because of low interest rates: “The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.”

The current era of low interest rates has in fact seen inflated asset bubbles that have multiplied wealth at the top of the income pyramid. It is never clear whether a rich man is a rentier or a risk­taker—a lot depends on the ideological bias of the writer. But there can be no doubt that the complicated debate about inequality has nuances that deserve more attention in the midst of all the loud political rhetoric.

Are the robots coming for our jobs?

Date: September 26, 2014

By Pramit Bhattacharya

The imminent arrival of drones delivering parcels, of cars run by Google, and the looming prospect of robots taking over shop floors have led many to worry about the future of jobs. But such concerns are not entirely new. In one of his most famous essays titled, Economic Possibilities for our Grandchildren, John Maynard Keynes, arguably the greatest economist of the 20th century, first envisioned a future when machines will take over almost all the work humans do. Writing in 1930, at the height of the Great Depression, Keynes was sanguine about our society freeing itself from both want and work.

Keynes considered the huge improvements in productivity the industrial revolution had brought as a force for good, and argued that such forces would render much of human labour obsolete over time. While new technologies could displace labour faster than the pace at which society could find new uses for labour, Keynes argued that technological change would also improve living standards rapidly so that no one would have to live in want or misery.

“I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years,” wrote Keynes. “...for the first time since his creation man will be faced with his real, his permanent problem­how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well,” wrote Keynes.

Keynes acknowledged that the disappearance of work from our lives may be painfully destabilizing, robbing us of a sense of purpose. But Keynes, who must have been in a really cheerful mood while writing that essay, argued that three hour shifts or a fifteen hour work week may yet put off the problem for quite some time.

The world changed rapidly in the years following the publication of Keynes’s essay. As industrialization created more jobs than it destroyed in the developed world and increased real wages across income classes, Keynes’s prediction was nearly forgotten. But growing wage inequality and the rising automation of jobs over the past few years have rekindled a debate on the future of jobs.

The idea that we may have to redefine our conception of work is gaining currency once again. An August report by the Pew Research Center based on a survey of technology experts pointed out that many experts believed that the changes in automation will “allow us to renegotiate the existing social compact around work and employment”. The industrial age notion of what a job is could change, and it might mean less drudgery and more leisure for most people as more and more robots take up tasks humans are now doing.

To be sure, not everyone believes the robots are going to destroy more jobs than they create. Roughly half the respondents in the Pew survey believed that there will be more new jobs than

before. But the very fact that there is a divide among experts today on the future of jobs is notable, and marks an important break from the past.

In the early 19th century, a group of English textile artisans calling themselves the Luddites staged a machine­trashing rebellion in protest against the mechanization in the textile industry because they feared they would lose their livelihoods. Since then, the term Luddite has been usually used in a disparaging sense, especially by economists, to describe those who stand against technological progress. The history of modernization and industrialization seemed to prove the Luddites wrong as rising productivity did not shrink the number of jobs; rather the workforce expanded in many countries even as more women started taking up jobs. The mechanization of farming took away many farm jobs in advanced economies but the industrial revolution ensured that those displaced found better paying jobs in factories.

But the past few years seem to have rekindled old fears about machines, and their impact on the labour market. Labour economists who had long forsaken the possibility that mechanization and automation could ever reduce aggregate employment are now beginning to have second thoughts.

There is a growing realization that robots and smart machines will obliterate some professions rapidly although experts still remain divided over whether their net impact over the long run will expand or shrink employment opportunities.

“Three possible scenarios could happen with this current wave of technology,” said Andrew McAfee, associate director of the Center for Digital Business at the MIT Sloan School of Management in an interview published in Slate magazine. “One is that it is going to hit the economy, and it might take a while to work itself out, but in the end we will reach a happy equilibrium. The Industrial Revolution was great news, eventually, for British workers. Electrification of factories eventually led to a large, stable, and prosperous American middle class. That pattern should give us confidence that we will wind up in another happy equilibrium.”

“Scenario two is that we see successive waves: artificial intelligence, automated driving that will impact people who drive for a living, robotics that will impact manufacturing. If scenario two happens, the problem is a bit worse because it will be difficult for the economy to keep adjusting and for workers to keep retraining.”

“Scenario three is that we finally transition into this science­fiction economy, where you just don’t need a lot of labor.”

“I believe that in my lifetime—I’m in my mid­40s—we’re going to see that third scenario,” said McAfee. “We won’t see a zero­labor economy, but we’re going to head into a labor­light economy. Of course, people like me have been saying some version of that for 200 years. The Luddites, John Maynard Keynes, a lot of people have said it and been wrong. But when I look at the encroachment of digital stuff into the total bundle of skills and abilities that humans have, I think this time it is different.”

Several economists share McAfee’s view that this time may be different and quite a few of them are less optimistic than McAfee about the future of jobs. In a 2012 National Bureau of Economic Research (NBER) working paper, economists Jeffrey D. Sachs and Laurence J. Kotlikoff argue

that smarter machines will raise rewards for skilled workers disproportionately. Older workers, who have had the opportunity to pick up skills, will benefit by working in tandem with smart machines but the younger lot will suffer, the duo argue, and propose an inter­generational tax to compensate the young inexperienced lot. Skilled biased technical change will impact both skilled and unskilled workers but unskilled workers will be hit harder, the duo argues.

Sachs and Kotlikoff point out that the reluctance of economists to embrace the Luddite view springs not just from their analysis of the history of the Industrial Revolution, which benefited workers across the spectrum but also from the particular functional form economists use to model production in an economy. For the mathematically inclined, they refer to the Cobb­Douglas production function, in which different inputs enter the function symmetrically and hence technical change makes all inputs more productive. While this specific form may be very convenient mathematically and hence quite popular among economists, it is not necessarily the best description of reality.

In a widely cited study published a year ago, Carl Benedikt Frey and Michael A. Osborne of the Oxford University show that about 47% of occupations in the US face the risk of extinction because of automation. The risks are significantly higher for low­skill and low­wage jobs, according to their estimates. While routine tasks are at the greatest risk, even non­routine jobs requiring higher cognitive skills are not immune to the threat of extinction. Frey and Osborne argue that the advent of big data combined with lowered computing costs has meant that even tasks requiring cognitive skills can now be delegated to smart machines and machine learning algorithms which can compensate the lack of context and experience with brute processing power. The ability to analyze terabytes of data on past trends in a jiffy and their lack of bias can make smart computers more efficient than their human predecessors.

But are the doomsday writers overestimating the impact of automation and smart machines? Labour economist David Autor, who has spent long years researching the impact of technology on the labour market, certainly thinks so. In a recent research paper, the professor at the MIT economics department argues that the rise of smart machines will not just replace old jobs but also add many new ones, and will encourage greater specialization by human beings who will now be able to draw on the power of fast computing.

“...journalists and expert commentators overstate the extent of machine substitution for human labor and ignore the strong complementarities that increase productivity, raise earnings, and augment demand for skilled labor,” writes Autor. “The challenges to substituting machines for workers in tasks requiring adaptability, common sense, and creativity remain immense.”

Autor invokes the paradox put forward by the philosopher Michael Polanyi to underline his point that computers can never fully divine how human beings perform tasks because human beings themselves don’t explicitly know how they accomplish them. In Polanyi’s words, “we can know more than we can tell”. Therefore, the rules for making decisions in many tasks cannot be pre­programmed, Autor writes.

“Tasks that have proved most vexing to automate are those that demand flexibility, judgment, and common sense—skills that we understand only tacitly—for example, developing a

hypothesis or organizing a closet,” writes Autor. “In these tasks, computers are often less sophisticated than preschool age children.”

Autor describes two approaches used by computer scientists to deal with Polanyi’s paradox, or to computerize tasks for which we don’t know the rules. The first approach bows to the paradox, and accepts limits to which automation is possible. Autor cites the example of the Google car, which drives not on roads but on maps. If the car’s software detects that the environment in which it is operating differs from the pre­specified map (for instance, because of an unexpected blockade or detour), it will immediately ask the human driver to take charge. The second approach tries to circumvent Polanyi’s paradox by using the advances in techniques of statistical inference and machine learning to form best guess answers in cases where formal procedures are unknown.

“How well does machine learning work in practice?” asks Autor. “If you use Google Translate, operate a smart phone with voice commands, or follow Netflix’s movie suggestions, you can assess for yourself how successfully these technologies function. My general observation is that the tools are inconsistent: uncannily accurate at times; typically, only so­so; and occasionally, unfathomable.”

Autor acknowledges that many of his examples are just prototypes which may get better with time. That indeed is the key selling point of machine learning evangelists, who argue that as computers mine more and more data, they get better. And one day, they will be able to make as good decisions as subject experts solely on the basis of empirical observations.

Indeed, the digitization of information and the gigantic explosion of workable data it has generated have led a growing tribe of analysts in fields as disparate as epidemiology and marketing to mine data for quick solutions to complicated problems. Machine learning algorithms may well replace these analysts over time. But the promise of machine learning and big data may be over­hyped. In many cases, establishing patterns and correlations are simply not enough; it is necessary to form theories or hypothesis, which can then be tested. It is often important to know the subject well even in order to mine data effectively.

Autor may, therefore, well be right in highlighting the complementarities that exist between smarter machines and a smarter workforce. But this also means that not­so­smart workers could still face the prospect of technological unemployment. If there is one thing that most experts agree on, it is on the rising importance of investments in human capital formation. Individuals and societies that invest more in education will continue to reap greater rewards even in the distant future.

Whether or not the future brings a shorter and more relaxed work week, as Keynes predicted, remains to be seen.

Chapter 8: Economics—past, present and future

Student dissent and the future of economics

Date: July 25, 2014

By Pramit Bhattacharya

If the roaring success of the French economist, Thomas Piketty is one indication of the disaffection with mainstream economics, the other signal that not everything is alright with economics comes from the growing discontent among economics students. In universities across the globe, students seem unhappy with the status quo in academic economics after the great financial crash six years ago shook the foundations of the discipline.

After several leading Western universities saw walkouts by students dissatisfied with their economic curriculum, a heterogeneous group of economics student associations from round the globe have banded together under the banner of the International Student Initiative for Pluralism in Economics (ISIPE) to demand reforms in the way economics is taught and practiced.

“We, over 65 associations of economics students from over 30 different countries, believe it is time to reconsider the way economics is taught,” said an open letter published by ISIPE earlier this year. “We are dissatisfied with the dramatic narrowing of the curriculum that has taken place over the last couple of decades. This lack of intellectual diversity does not only restrain education and research. It limits our ability to contend with the multidimensional challenges of the 21st century—from financial stability, to food security and climate change. The real world should be brought back into the classroom, as well as debate and a pluralism of theories and methods. Such change will help renew the discipline and ultimately create a space in which solutions to society’s problems can be generated.”

As the British economist John Kay observed in a blog post, no other discipline has witnessed the kind of dissension within its ranks as economics has. “In no other subject do students express such organised dissatisfaction with their teaching.”

The call for reform by ISIPE followed a similar call by one of its most prominent members, the Post Crash Economics Society of Manchester University, formed by discontented students of the university. These students were at the forefront of protests against academic economists which have rocked campuses at Manchester, Cambridge, and London over the past couple of years. Their grouse against these academics is that they have been acting as the cheerleaders for the neoclassical economic models that pushed the world into the Great Recession, and that they refuse to change. The Post Crash Economics Society also published a manifesto on the agenda for change, with a foreword by none other than Andrew Haldane, the executive director for financial stability at the Bank of England.

In his introduction to the manifesto, Haldane points out that a large part of economic modelling was derived from Newtonian physics, and ignored the complexities of a human society. “That enabled macro­economics, as a fledgling (and perhaps rather self­conscious) discipline, to be built on optimising foundations,” wrote Haldane in his introduction to the manifesto. “These gave

the impression of rigour and solidity.... In the light of the financial crisis, those foundations no longer look so secure. Unbridled competition, in the financial sector and elsewhere, was shown not to have served wider society well. Greed, taken to excess, was found to have been bad. The Invisible Hand could, if pushed too far, prove malign and malevolent, contributing to the biggest loss of global incomes and output since the 1930s. The pursuit of self­interest, by individual firms and by individuals within these firms, has left society poorer.”

“In this light, it is time to rethink some of the basic building blocks of economics. And in this rethink we could do no worse than return to Adam Smith,” wrote Haldane. “For just prior to the Wealth of Nations, Smith had produced a rather different book. It was called The Theory of Moral Sentiments and was published in 1759. In it, Smith emphasizes cooperation, as distinct from competition, as a way of satisfying society’s needs. It places centre­stage concepts such as reciprocity and fairness, values rather than value.”

The Manchester students argue that “the mainstream within the discipline (neoclassical theory) has excluded all dissenting opinion, and the crisis is arguably the ultimate price of this exclusion. Alternative approaches such as Post­Keynesian, Marxist, and Austrian economics as well as many others have been marginalized. The same can be said of the history of the discipline.”

According to both ISIPE and the Manchester students’ manifesto, alternative ways of thinking about economic ideas should form part of the mainstream. So should inter­disciplinary approaches involving the study of sociology, history, politics and anthropology.

The deeper message of these protests is that mainstream economics is in fact an ideology—the ideology of the free market, wrote the economist and politician, Robert Skidelsky in a recent Project Syndicate essay.

“If we assume perfect rationality and complete markets, we are debarred from exploring the causes of large­scale economic failures,” argued Skidelsky. “Unfortunately, such assumptions have a profound influence on policy... The efficient­market hypothesis—the belief that financial markets price risks correctly on average—provided the intellectual argument for extensive deregulation of banking in the 1980s and 1990s. Similarly, the austerity policies that Europe used to fight the recession from 2010 on were based on the belief that there was no recession to fight. These ideas were tailored to the views of the financial oligarchy. But the tools of economics, as currently taught, provide little scope for investigating the links between economists’ ideas and the structures of power.”

The ‘post­crash’ students are therefore largely right, wrote Skidelsky.

The first stirrings of dissension within the ranks of economics came much before the crisis struck, when the ‘post­autistic economics movement’ was launched in Paris in 2000, to correct the excessive use of mathematics and the resulting disconnect from reality in economics. The movement spread to other developed countries but petered out. The first major revival occurred in 2011, when Harvard University students walked out of the class of the renowned macro­economist, Gregory Mankiw in protest against the overly conservative bias of his course.

In the years since then, the battleground of protests against mainstream economics and its guardians has shifted to the UK, with students across several of its universities collaborating to launch the ISIPE. Incidentally, the ISIPE also has an Indian association within its ranks, the Jadavpur University Heterodox Economics Association. Not surprisingly, the biggest response to these protests has also come from within the ranks of UK’s academia, with the launch of the Curriculum in Open­access Resources in Economics (CORE) project. CORE, funded by the George Soros­backed Institute for New Economic Thinking and the Azim Premji University, aims to bridge the gap between economics textbooks and reality.

Several policymakers, not just in the UK, have underlined the need for change in the profession since the crisis struck. The former governor of the Reserve Bank of India, D. Subbarao would often quip that the great financial crash was not just an economic crisis but also marked a crisis in economics, challenging many deeply held notions of economists. His successor, Raghuram Rajan has also struck a similar note in his writings. Rajan argued that ‘specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world’ was responsible for the failure of economists to foresee the crisis.

Rajan did not consider ideology to be a driving factor for the crisis but both Haldane and Skidelsky disagree with him there.

A key reason why the mainstream economic apparatus has withstood the crisis is because economics teaching and research ‘is deeply embedded in an institutional structure that, as with any ideological movement, rewards orthodoxy and penalizes heresy’, wrote Skidelsky. “Moreover, it has become an article of faith that any move toward a more open or “pluralist” approach to economics portends regression to “pre­scientific” modes of thought, just as the results of the European Parliament election threaten to revive a more primitive mode of politics.”

Not everyone is pessimistic about the profession though. In a recent opinion piece , the American financial economist Noah Smith argued that the economics discipline is much more heterodox today than earlier, and no longer serves as a handmaiden of conservative politics.

“I have the vague sense that if you were an idealistic, brilliant young libertarian in the 1960s and ’70s, you might naturally dream of growing up to be an economist,” wrote Smith. “You might watch a rousing speech by Milton Friedman, and you might imagine that one day you, too, would use the power of logic and rationality and mathematics to ward off the insanity of socialism. Well, America still has some idealistic, brilliant young libertarians, and some of them probably still dream of becoming economists. But now they will be in the minority. They will be joined by quite a few—maybe more—idealistic brilliant young liberals, who recognize the power of markets but also want to figure out how to fix things when markets go wrong. And they will also be joined by quite a few brilliant engineers, for whom political ideals take a back seat to the solving of practical, real­world problems. Econ isn’t what it used to be. The world turns, and academic disciplines move along with it.”

Debate, dissent and ideology in the world of economics

Date: January 9, 2015

By Pramit Bhattacharya

Economists are usually viewed as an argumentative lot. Put twelve economists in a room, and you will hear fifteen different opinions, an old joke goes. But the facts do not seem to validate this popular perception. New data published by a European economist, Joe Francis, shows that the number of debates in the top economics journals has fallen dramatically over the past four decades.

As the chart below shows, there was a sharp increase in the proportion of debates in academic economics from the 1920s through the 1960s and an equally sharp fall since then.

There seem to be four key drivers behind the decline in level of economic debates over the past four decades: history, politics, specialization, and academic incentives which reward conformity over dissent.

“The rise in the debates began in the 1930s, presumably as economists suffered from pangs of Great Depression­inspired doubt,” writes Francis in a blog post. “(John Maynard) Keynes did most to increase the level of debate, while the strength of Marxist ideas must also have played

an important part in encouraging a culture of cantankerousness. Paul M. Sweezy, North America’s leading Marxist economist, for instance, contributed to the debates in these journals.”

The so­called rational expectations revolution brought about a sea change in academic economics and veered the academic community towards a neo­classical consensus (neo­liberal hegemony to detractors), leading to a fall in the level of debate within the profession. To put it simplistically, the rational expectations revolution provided the intellectual basis for ‘light touch’ regulation, by positing that markets will auto­correct left to themselves, and state interventions can only be counter­productive. Many economists felt that the big debates against Keynesian and Marxist economics had already been won. The period of the great economic moderation after the oil price shocks of the 1970s only strengthened the neoclassical consensus, while the fall of the Berlin wall a quarter century ago put a nail in the coffin of Marxist economics.

Specialization within the profession also contributed to a decline in big debates, as specialists veered towards niche publications to discuss specific aspects of their research agenda rather than discuss big ideas in the top journals. Even within sub­disciplines such as macroeconomics, economists subscribing to different schools of thought stopped discussing each other’s work. For instance, Keynesians who noted market imperfections and highlighted the importance of state interventions in addressing them, and new classical economists, who downplayed such imperfections refused to address each other’s ideas for a long time.

The exchanges between two Nobel laureates, Robert Solow, representing the Keynesian school of thought, and Robert Lucas, representing new classical economists, are perhaps the best illustration of this trend.

“While Lucas, the leading new classical economist, was proclaiming that ‘people don’t take Keynesian theorizing seriously anymore,’ leading Keynesians were equally patronizing to their new classical colleagues,” wrote Gregory Mankiw, the Harvard University economist, in a 2006 research paper. Mankiw goes on to highlight how the two economists sparred on this issue without really answering each other’s questions.

In his 1980 American Economic Association (AEA) Presidential Address, Solow called it “foolishly restrictive” for the new classical economists to rule out by assumption the existence of wage and price rigidities and the possibility that markets do not clear. He said, “I remember reading once that it is still not understood how the giraffe manages to pump an adequate blood supply all the way up to its head; but it is hard to imagine that anyone would therefore conclude that giraffes do not have long necks.”

In an interview with Arjo Klamer (1984) a few years later, Lucas remarked, “I don’t think that Solow, in particular, has ever tried to come to grips with any of these issues except by making jokes.” In his own interview in the same volume, Solow explained his unwillingness to engage with the new classical economists: “Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the Battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon Bonaparte.”

Academic incentives could also have played a part in tempering the scope of debate within the profession. Career progression in academia depends on success in publishing research papers

in top journals, and in economics, editors of top journals exert enormous influence because of the nature of the publication process, as Chicago University economist Luigi Zingales (who co­wrote the book Saving Capitalism from the Capitalists with Raghuram Rajan) pointed out in a 2013 research paper. Young contributors, especially if they are untenured faculty, can easily give in to the suggestions of a persuasive editor, slanting the discourse on a certain subject. All it takes to propagate certain ideas in the profession is to capture a few top editors, suggests Zingales.

“The lack of bias in the publication process depends crucially upon the lack of bias of the editors or, at least, the diversity of biases of the editors across major journals, since there are multiple outlets and thus an author can shop around,” wrote Zingales. “Unlike in law, though, the search process is impaired by the prohibition to submit the same paper to multiple outlets contemporaneously. Combined with the relatively long review time and the multiple rounds required, this process gives quite a bit of power to the editor to massage papers in the direction they prefer. If an assistant professor who is going up for review soon is asked at the last round of a long review process to modify slightly the conclusions to make them more palatable to a certain audience, would he refuse? Probably not. Not only does this action bias the conclusions of one paper, but it projects a perception that to publish in that journal one has to reach the ‘right conclusions.’ Hence, researchers who want to publish in that journal would start tilting their conclusions in the right direction. In equilibrium, the editor does not have to exercise any arm twisting, because all the distortion takes place before the first submission and is done voluntarily by the researchers to reduce the risk of seeing their paper rejected.”

Zingales backs up his simple theoretical model of intellectual capture with an empirical example of how research on executive compensation published in top journals tended to display a pro­business or at least a pro­executive tilt (perhaps because editors of such journals themselves want to be on corporate boards at some point).

Zingales’ research shows that the incentives for a young economist are stacked in favour of conforming to the status quo, thus creating a vicious cycle: the old consensus survives precisely because new research is massaged to support it! The macro­economists Amit Bhaduri and Deepak Nayyar had made a similar point in their post­liberalization book, The Intelligent Person’s Guide to Liberalization. The duo argued that scholars often choose the path of ‘least intellectual resistance’ because that leads them to plum jobs such as those at the World Bank. But this impoverishes the level of debate in the profession.

As Francis points out, the lack of debate would not have mattered if economists had ‘successfully answered all questions they are supposed to ask’. But as the great financial crisis showed, that was not the case.

In fact, several post­crisis assessments of the economy and of economics have pointed to the lack of diversity in economics as a key reason why the profession as a whole failed to foresee the crisis. While significant research on market imperfections was conducted in the 1960s and 1970s, the lessons were either ignored or buried over time. The rational expectations revolution in economics gave rise to the belief that market prices are ‘true’ reflections of fundamentals at all times (rather than on average). The distinction between market efficiency (on average) and

market rationality (under all circumstances) was lost. The great economic crash of 2008 therefore came as a bolt from the blue.

The post­crash report of the Financial Services Authority (FSA) authored by Adair Turner underlined such intellectual fallacies which led to the crisis, and caused the Great Recession that the world is still struggling to cope with. Once we accept that markets for both liquid and illiquid assets are susceptible to herd behaviour and may not necessarily reveal true prices of assets based on fundamentals, regulation has to strike a balance between the quest for complete markets and the risk of instability that it might impose, the Turner review argued. The concept of ‘market discipline’ that is supposed to correct erratic behaviour of market participants also came under question, because market prices failed to indicate that risks were increasing.

The United Nations committee on the crisis led by Nobel laureate Joseph Stiglitz pointed out that regulatory capture occurred through the realm of ideas, rather than mere lobbying for a specific cause. It highlighted the risks posed by the revolving doors between the world of academia, government, and investment banks, a risk which Zingales also cautions against.

While it is difficult to judge as yet if the economics profession is on a self­correction course after the shock of 2008, there are some welcome signs of change. For one, there is far greater scepticism both among lay people and among academic economists to any economic proposition today. The crisis has also allowed a more heterodox bunch of economists to capture public attention. The spread of the internet and the proliferation of blogs (which bypass journal editors) have also helped in the growing diversity within the profession. There have been changes from the demand side as well. As an earlier Economics Express column pointed out, there is growing disaffection among economics students, who are demanding a change in the way mainstream economics is taught and practised. The call for greater intellectual diversity in economics has found great resonance worldwide, with several policy makers lending their weight behind the campaign.

There are other signs of change as well. One of the surprises of 2014 was to see the conservative newspaper, The Economist at the forefront of the campaign to defend the not­so­conservative French economist Thomas Piketty (whose magnum opus clearly evokes Karl Marx’s treatise on capitalism) when he was being attacked by other commentators and publications.

Time will tell if these changes are enough or if we waste the opportunity the crisis has presented in reforming the profession. But one can draw some comfort from the fact that there is a greater openness in discussing and debating economic ideas today.