Where Next For the NITI Aayog?

The NITI Aayog must be converted from a Department of Development Implementation to a High Command of Development Strategy.

https://www.business-standard.com/article/opinion/reforming-the-niti-aayog-122051601487_1.html

That’s the very last sentence of a thought-provoking column by Nitin Desai. The column is about why the NITI Aayog (in Nitin Desai’s opinion) hasn’t done all of what was hoped of it, and what needs to change for some of these hopes to be realized.

But for us to reach the end of this column, we need to start somewhere, and we’ll start with the setting up of the Planning Commission.


The Indian planning project was one of the postcolonial world’s most ambitious experiments. It was an arranged marriage between Soviet-inspired economic planning and Western-style liberal democracy, at a time when the Cold War portrayed them as ideologically contradictory and institutionally incompatible. With each Five-Year Plan, the Planning Commission set the course for the nation’s economy. The ambit ranged from matters broad (free trade or protectionism?) to narrow (how much fish should fisheries produce to ensure protein in the national diet?). The Commission’s pronouncements set the gears of government in motion. Shaping entire sectors of the economy through incentives, disincentives and decree, the Planning Commission’s views rippled across the land to every farm and factory. Despite this awesome power, economic planning in India was considerably different from the kind practised in communist regimes. The Planning Commission was reined in by democratic procedure that required consultation with ministries in an elected government, with people’s representatives in Parliament—and ultimately with the popular will—through citizens voting every five years.

Menon, Nikhil. Planning Democracy (p. 9). Penguin Random House India Private Limited. Kindle Edition.

That’s from a book I’m currently reading (and thoroughly enjoying), Planning Democracy. There’s a lot to like about the book, and I hope to write a full review once I’m done, but for the moment, think about just the title. There’s a (hopefully healthy) tension implicit in it, because as the excerpt above puts it, the Planning Commission was to be reined in by democratic procedure.

What was it supposed to do? Further on in the same chapter from the book I have just quoted is a nice compact description of what was supposed to have happened:

Its potency stemmed from its authority to draw up an economic roadmap for the country and back it with all the resources and policy instruments available to the Government of India.

Menon, Nikhil. Planning Democracy (p. 21). Penguin Random House India Private Limited. Kindle Edition.

That is, there are two separate but interlinked things worth noting: it had to develop an plan of economic development for a newly independent India, and in order to do so, it had the backing in terms of resources and policy instruments. By the way, there is a reason the word “resources” has not been qualified with a word like financial – the back was not just financial, but also political, given the presence of the Prime Minister and other cabinet ministers as members.

The story of how the Planning Commission evolved, struggled, and refined itself over time (not always successfully, it should be mentioned) is a fascinating one, but not one that we can cover in a single blog post, alas. But long story (very) short, the Planning Commission came to an end in 2015:

Born the same year, Modi and the Planning Commission shared another milestone together. In his first Independence Day address as India’s leader, Modi declared that the Planning Commission had once merited its place and made significant contributions. Now, however, he believed it had decayed beyond repair. ‘Sometimes it costs a lot to repair an old house,’ he said, ‘but it gives us no satisfaction.’ Afterwards we realize ‘that we might as well build a new house’, Modi explained with a smile. He would build it by bulldozing a decrepit structure and raising a shiny new one, the NITI Aayog (National Institution for Transforming India).

Menon, Nikhil. Planning Democracy (p. 8). Penguin Random House India Private Limited. Kindle Edition.

And how has the NITI Aayog done?

But despite progress in these areas, some 7 years since the establishment of NITI Aayog, questions are being raised as to whether India can continue to function without medium-term planning. Annual budget allocations are made by the Finance Ministry to meet various investment goals and objectives but without a well-defined plan. NITI Aayog’s advice is also not taken seriously by state governments as it comes without resources. Some feel that NITI Aayog should have resources it allocates to address development imbalances and that the Ministry of Finance is naturally focused on budgetary management rather than development outcomes.6While no one wants a return to the old Planning Commission, a more involved and competent NITI Aayog, with a stronger voice is clearly needed.

Ajay Chhibber, 2022. “Economic Planning in India: Did We Throw the Baby Out with the Bathwater?,” Working Papers 2022-03, The George Washington University, Institute for International Economic Policy.

The idea itself isn’t all that new. Back in 2019, Vijay Kelkar had given a speech in which he proposed “NITI Aayog 2.0”:

It should rather strive to be a think tank with “praxis” possessing considerable financial muscle and devote its energies to outline coherent medium and long term strategy and corresponding investment resources for transforming India. Towards this, my preliminary study suggests that the NITI Aayog 2.0 will annually need the resources of around 1.5% to 2% of the GDP to provide suitable grants to the States for mitigating the development imbalance. These formulaic annual grants, whether capital grants or revenue grants for the relevant CSS will need to be conditional to ensure that (1) outcomes are commensurate and (2) it discourages an individual State to adopt policies that have negative policy externalities, e.g., creation of populist subsidies and thus avoid race to the bottom. Such presence of “negative policy externalities” we notice often, e.g., the provision of free “electricity,” irrigation water subsidies, etc. “Gresham’s Law” seems to be relevant not only for the currency markets alone!

Towards India’s New Fiscal Federalism, No. 252, NIPFP Working Paper Series, Vijay Kelkar (https://www.nipfp.org.in/media/medialibrary/2019/01/WP_252_2019.pdf)

If you don’t know what Gresham’s Law is, take a look here.


All of which eventually gets us back to the column that we started with, by Nitin Desai:

The real problem of strategy formation for development is that it is not being done. The NITI Aayog has produced some vision documents; but they are not agreed strategies formulated after widespread consultations with experts and discussion with the states. The word “niti” in the name of this organisation is an abbreviation for National Institution for Transforming India. This task requires looking a level above the designing of programmes to a strategy from which programmes must be derived.
A grand strategy for development must spell out the opportunities and threats faced by the key objectives of development which are growth, equity and sustainability. It must then identify the changes in the role of the public and private sector, shifts in global economic alliances and policy shifts that are required to maximise benefits from opportunities and manage risks from threats. The time frame for a grand strategy has to be long-term but the more specific strategies derived from it must take into account short- and medium-term challenges that the country faces.

https://www.business-standard.com/article/opinion/reforming-the-niti-aayog-122051601487_1.html

We need, that is to say, a NITI Aayog that focuses on not just reporting what has been (or is being) done, but also on explaining what needs to be done, over what time period, and why, along with some pointers towards what risks we might encounter. Or as Nitin Desai puts it, “The new Vice-Chairman, Suman Bery, must bring in the talent required and launch a process of broad-based consultation, particularly with the states, to secure a broad national consensus on a long-term growth strategy. Specific programmes must be based on the implementation of this strategy.”

Easier said than done, of course, but this is where NITI Aayog needs to go next.

Meet Max Roser, and Our World in Data

Of course, you may not know who Paul Graham is. Visit his website, click on essays, and say goodbye to your calendar for the next couple of weeks.

But that’s not today’s blogpost. Today we answer the question, who is Max Roser? And what is Our World in Data?

Here is Max Roser’s introduction of himself from a Reddit AMA (Ask me Anything) he had done a while back:

“Hi Reddit! My name is Max Roser. I visualize global development data on OurWorldInData.org, a free online publication on how living conditions around the world are changing.


Now I am working with a great team and we want to cover global development as broadly as we can to show how our world is changing. Our World in Data now includes data and research on global health, violence, poverty, inequality, economic growth, environmental changes, food and agriculture, energy, technological change, education and more specific topics.

While much of the news is focussing on what happened yesterday or even what is currently “breaking news”, I think that many of the very important changes, which fundamentally reshaped the world that we are living in, happen very slowly and persistently over the course of decades or centuries. On ‘Our World in Data’ we don’t report the ‘breaking news’ and instead zoom out to show the slow trends that dramatically change our world.

Other than that I am a researcher – mostly focusing on inequality and poverty – at the University of Oxford.”

And Our World in Data? Check out their About page.

But better still, consider this extract:

“Why have we made it our mission to publish the “research and data to make progress against the world’s largest problems”?

At the heart of it is a simple truth. When we look around us, it is clear that the world faces many very large problems: 

  • Every year 300,000 women die from pregnancy-related causes, this means that on any average day 830 mothers die
  • The majority of the world – 65% – lives on less than $10 per day.
    And almost 10% live in ‘extreme poverty’, they live on less than $1.90 per day. 
  • The world deforested 47 million hectares of forest in the last decade, that’s an area the size of Sweden.
  • 60 million children of primary school age are not in school.
  • Almost a quarter of the world population – 23% – live in autocratic regimes.
  • 14% of the world’s adults do not know how to read and write.
  • And 3.7% of all children die before they are five years old. This means that 5.2 million children every year and on any average day the world sees 14,200 child deaths.

This is a list of terrifying problems. And as we don’t hear much that would tell us otherwise, it is easy to be convinced that we can’t do anything about them. Even in the extensive 24/7 news cycles we hear little that suggests it would be possible to make progress against these problems. The same is true for our education — questions like how to end hunger, child mortality, or deforestation are rarely part of the curriculum. 

As a consequence it is not surprising that many have the view that it is impossible to change the world for the better. For many large problems the majority in fact believes that they are getting worse.

This however, is not the case. We know that it is possible to make progress against these large problems, because we have already done so.”

How do we know that we have already done so? Take a look at this one chart:

Click on that little toggle next to the world “Relative” in the chart, and the chart becomes even better. Here’s a simple way to think about it: Max Roser is a person who wants to help you understand two things:

  1. Take the glass half full view, because the world is genuinely becoming better over time.
  2. But don’t for a single moment forget the fact that the world needs to become a lot better, and for that to happen, we need to move faster.

Or, in much more eloquent terms:

Because our hopes and efforts for building a better future are inextricably linked to our understanding of the past, it is important to study and communicate the global development up to now. Studying our world in data, and understanding how we overcame challenges that seemed insurmountable at the time, should give us both confidence and guidance to tackle the problems we are currently facing. Living conditions can be improved, we know from the past that they already have been.
For each of the problems we face today we need to also address the difficult question of whether and how we can make progress in the years ahead.

https://ourworldindata.org/problems-and-progress

Here is his website, here is his Oxford Martin school page, and here is a wonderful place to get started if this is your first time on the website Our World in Data.


But if you are a student of economics (and who isn’t, eh?), spend more time on Our World in Data, and help other people find out about the website. A genuine treasure of our times.

India’s Demographics and the Total Fertility Rate

For many, many years, this was my slide on India’s TFR in lectures I used to give on India’s demographics:

Wikipedia (Old data)

What is TFR? Here’s Wikipedia:

“The total fertility rate (TFR) of a population is the average number of children that would be born to a woman over her lifetime if:

  1. she were to experience the exact current age-specific fertility rates (ASFRs) through her lifetime
  2. she were to live from birth until the end of her reproductive life.”

Hans Rosling had a better, more intuitive term: babies per women. Here’s an excellent chart from Gapminder, although ever so slightly outdated:

Click here to see the original chart, and please press on the play button to see this change over time

Here’s the excellent Our World In Data page about the topic, and here’s a lovely visualization of how the TFR has changed for the world and for India over time (please make sure to “play” the animation):

(I hope this renders on your screens the way it is supposed to. If not, my apologies, and please click here instead)

But now we have news: India’s TFR has now slipped below the replacement rate. Here’s Vivek Kaul in Livemint explaining what this means:

The recently released National Family Health Survey (NFHS-5) of 2019-2021 shows why. As per the survey, India’s total fertility rate now stands at 2. It was 3.2 at the turn of the century and 2.2 in 2015-2016, when the last such survey was done. This means that, on average, 100 women had 320 children during their child-bearing years (aged 15-49). It fell to 220 and now stands at 200.
Hence, India’s fertility rate is already lower than the replacement level of 2.1. If, on average, 100 women have 210 children during their childbearing years and this continues over the decades, the population of a country eventually stabilizes. The additional fraction of 0.1 essentially accounts for females who die before reaching child-bearing age.

https://www.livemint.com/opinion/columns/the-women-who-went-missing-in-our-demographic-dividend-11652200177580.html

And here’s the breakup by state, updated for the latest results:

By iashris.com – https://indiainpixels.xyz, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=112844699

Of course, as with all averages, so also with this one: you can weave many different stories based on how you slice the data. You can slice it by urban/rural divides, you can slice it by states, you can slice it by level of education, you can slice it by religion – and each of these throws up a different point of view and a different story.

But there are three important things (to me) that are worth noting:

  1. The TFR for India has not just come down over time, but has slipped below the global TFR in recent years.
  2. This doesn’t (yet) mean that India’s population will start to come down right away, and that for a variety of reasons. As Vivek Kaul puts it:
    “So, what does this mean? Will the Indian population start stabilizing immediately? The answer is no. This is primarily because the number of women who will keep entering child-bearing age will grow for a while, simply because of higher fertility rates in the past. Also, with access to better medical facilities, people will live longer. Hence, India’s population will start stabilizing in around three decades.”
  3. The next three to four decades is a period of “never again” high growth opportunity for India, because never again (in all probability) will we ever have a young, growing population.

Demography is a subject you need to be more familiar with, and if you haven’t already, please begin with Our World in Data’s page on the topic, and especially spend time over the section titled “What explains the change in the number of children women have?”

Lessons from the eradication of smallpox

Vox has a nice and short read out on the battle against smallpox, and lessons we might learn today from how and where the battle was waged, at what costs, and with what effects.

But for all that the world has lost in the last few years, the history of infectious disease has a grim message: It could have been even worse. That appalling death toll resulted even though the coronavirus kills only about 0.7 percent of the people it infects. Imagine instead that it killed 30 percent — and that it would take centuries, instead of months, to develop a vaccine against it. And imagine that instead of being deadliest in the elderly, it was deadliest for young children.
That’s smallpox.

https://www.vox.com/future-perfect/21493812/smallpox-eradication-vaccines-infectious-disease-covid-19

My notes after having read the article:

  1. Smallpox is estimated to have killed between 300 million to 500 million people in the 20th century alone
  2. We still do not have an effective treatment against smallpox
  3. There are two different viruses that cause smallpox: variola major and variola minor
  4. We no longer need to explain R0 to anybody, thanks to covid, but this point is staggering: it had an infectiousness of between 5 to 7, and a mortality rate of 30%.
  5. “In China, as early as the 15th century, healthy people deliberately breathed smallpox scabs through their noses and contracted a milder version of the disease. Between 0.5 percent and 2 percent died from such self-inoculation, but this represented a significant improvement on the 30 percent mortality rate of the disease itself.”
    What a horrible lottery to play. Would you play this lottery? This, by the way, is one of the many reasons why learning statistics and probability is worth your time.
  6. Learn more about Edward Jenner.
  7. We have better ways of shipping vaccines across the world these days, but what a story this is!
    “Spain especially struggled to reach its colonies in Central and South America, so in 1803, health officials in the country devised a radical new method for distributing the vaccine abroad: orphan boys.
    The plan involved putting two dozen Spanish orphans on a ship. Right before they left for the colonies, a doctor would give two of them cowpox. After nine or 10 days at sea, the sores on their arms would be nice and ripe. A team of doctors onboard would lance the sores, and scratch the fluid into the arms of two more boys. Nine or 10 days later, once those boys developed sores, a third pair would receive fluid, and so on. (The boys were infected in pairs as backup, just in case one’s sore broke too soon.) Overall, with good management and a bit of luck, the ship would arrive in the Americas when the last pair of orphans still had sores to lance. The doctors could then hop off the ship and start vaccinating people.”
  8. Institutions matter:
    “It was not until the 1950s that a truly global eradication effort began to appear within reach, thanks to new postwar international institutions. The World Health Organization (WHO), founded in 1948, led the charge and provided a framework for countries that were not always on friendly terms to collaborate on global health efforts.”
  9. Culture matters:
    “Efforts by the British Empire to conduct a smallpox vaccination program in India made less progress, due in large part to mistrust by the locals of the colonial government.”
  10. Science matters:
    ” “There was no shortage of people telling [the people involved in the eradication effort] that their effort was futile and they were hurting their career chances,” former CDC director William Foege wrote in his 2011 book House on Fire about the smallpox eradication effort.
    But other advances had brought it within reach. Needle technology had improved, with new bifurcated needles making it possible to use less vaccine. Overseas travel improved, which made it easier to ship vaccines and get public health workers where they were most needed, and provided impetus for worldwide eradication as it made it more likely that a smallpox outbreak anywhere in the world could spread.”

As always, read the whole article. I’ll quote here the concluding paragraph from the piece, and I’d urge you to reflect on it:

The devastation of Covid-19 has hopefully made us aware of the work public health experts and epidemiologists do, the crucial role of worldwide coordination and disease surveillance programs (which are still underfunded), and the horrors that diseases can wreak when we can’t control them.
We have to do better. The history of the fight against smallpox proves that we’re capable of it.

https://www.vox.com/future-perfect/21493812/smallpox-eradication-vaccines-infectious-disease-covid-19

The Solow Model and China

If you don’t know what the Solow model is, here is a great place to get started:

There are 11 videos in that series, and if you can spare the time, please watch all of them. Just two a day (they’re not more than 5 minutes each), and you’ll be done come the weekend.

But in effect, here is what the Solow model says:

  1. Output for a nation is a function of three (actually four) things:
    1. Capital (K): Buidings, ports, dams… infrastructure, basically.
    2. Education Augmented Labor (eL): The amount of hours that a person is able to put in to their work, but with the built in assumption that an educated person is likely to be more productive than a person without education.
    3. Ideas: Read the paragraph below to get a sense of what this means in practice.

Think about this blogpost that you are reading. I wrote it using my laptop, which is my capital. I will spend about an hour (that’s my plan, I’ll update you towards the end of this post about how well it worked out) writing it, and that’s the labor that I’ll be putting into this post. The fact that I have been “educated” in economics should mean that this post will be easier to write for me than, say, a gardener. The gardener could have written this post as well, of course, but it’s safe to assume that she would first have had to learn about the Solow model, and that, presumably, would have taken longer.

So that’s K and eL where the output (this blogpost) is concerned. But now think about it this way: what if another person, with a similar level of economics education as mine were to write this blogpost instead of me? Would that person have chosen this video, and these paragraphs to explain the Solow model? Maybe they would have recommended some other video, or some other podcast, or chosen to share details of an online textbook in which the Solow model is explained. That’s one way to think about ideas.

And so when you combine the capital (the laptop), the labor (the time I spend on this blogpost, given my education levels) and the ideas (what I choose to put into this blog post, and how), you get the output you’re reading right now.

What if I double the capital? Will the blogpost be done in half the time? Say I have an external monitor attached to my laptop – will two screens mean finishing the blogpost in half the time? It will save some time, but not by a factor of two, surely. Trust me, I have tried.

What if I double the labor? Hire an assistant to write this blogpost with me? The way I work, trust me, it will probably take longer! What if I go get a post-doc, to augment my education? Will that save me time? The hysterical laughter you hear in the background is the response of any PhD/post-doc student anywhere in the world, and that sound means a loud and resounding no.

In a sense, the Solow model asks these and related questions, and answers them using some graphs and equations. Except, of course, the Solow model does it for not one guy writing one blog, but for an entire nation at a time. There is no sense in me explaining the whole model over here, for it would be a case of me reinventing what is already a very good wheel. Please watch the videos.


But the Solow model is a remarkably useful way to get a handle on the long run growth prospects of a country. Is India likely to grow in the future? Well, is it going to add to its capital stock? Yes. Is it going to augment it’s stock of education augmented labor? Yes. Is it likely to produce more ideas than it is right now? Yes. And so the growth prospects for India look reasonably good.

Of course, there is more to the Solow model. All of this holds true given a strong and stable political system, well established rules of law, and strong and capable institutions. But so long as you believe that these are likely to continue to be so in the Indian case, you should be bullish on India.

What about, say, Japan? It has a capital stock that is more in need of replacement than new construction ( a feature of the Solow model that we have not discussed here, called depreciation), so it is unlikely that it will grow its capital stock too much. Here’s an example of what I mean. What about it’s stock of education augmented labor? Well, the news ain’t very good. Ideas? Trending upwards, but not by much. So if I had to bet on which country would grow more over the next twenty years, I would bet on India, not Japan.

Bear in mind that this is a model, and like all models, it is an imprecise abstraction of reality. So it is possible that at the end of the twenty year period, we find out that I am completely wrong. But if you think the Solow Model is a reasonably good model, you ought to bet the way I did.


So what about China?

Well, now, that’s a whole different story, and one that Noah Smith talks about in a recent blog post. Long story short, he doesn’t think China’s growth prospects are that great.

But the story is a little more complicated than that. The Solow model is a good model, sure, but it’s not as if the Chinese authorities/experts aren’t aware of the problem. And in his blog post, Noah looks at arguments put forth by two people who know a thing or two about China, and analyzes them critically.

The first argument is that sure, China’s demographics are on a downward trend, but what if we raised the retirement age for Chinese workers? Would that not solve the problem? Noah says no, probably not, because firms made of exclusively old folks isn’t necessarily a good idea. I wholeheartedly agree.

What about adding to China’s urbanization, and therefore its infrastructure? After all, China’s urbanization rate is “only” 64%. The inverted quotes around only in the previous sentence is because we, in India, are officially at 31%, but as in the case of China, it very much is a function of how you define urbanization. But similarly, in China, the urbanization rate is actually way more than 64%, and the Lewis turning point has already taken place in China, or will do so any moment.

And about ideas, well, China is an even more complicated story. Noah makes the point that China’s industrial policy is essentially a one-man army that is trying something that has never been tried before, and Noah is betting on it not quite working out. And given the events of the last year and a half or so, it is hard to disagree.

And so the Solow Model would probably tell you that China is unlikely to grow as fast in the near future as it did in the recent past, and even if you take into account potential adjustments, it likely will still be the case that China’s growth rate will start to plateau.


Please, read the entire post by Noah. But if you are a student of economics who has not yet met the Solow Model, begin there, and then get on to Noah’s post – your mileage will increase considerably.

More Than An Inconvenient Iota of Truth

Regular people everywhere are being deprived of purchasing power — and tricked by chauvinists and opportunists into believing that their interests are fundamentally at odds. A global conflict between economic classes within countries is being misinterpreted as a series of conflicts between countries with competing interests.

https://noahpinion.substack.com/p/book-review-trade-wars-are-class?s=r

An extract twice removed, as it were, for Noah Smith extracted this bit in his excellent review of a book called Trade Wars are Class Wars, by Michael Pettis and Matthew C. Klein. I have not read it yet, but it has shot to the top of my reading list.

Any student who has attended a class in which I have taught aspects of international trade will tell you that I bore them to death with one particular theme: that the textbook study of international trade doesn’t adequately cover (in my opinion) the study of inequality.

Now that might sound weird if you are a student new to the study of international trade. What on earth, you might think, does inequality have to do with international trade?

Well, here’s the thesis put forward in the book, via Noah:

Trade Wars are Class Wars offers a provocative thesis — that what looks like economic competition between nations is actually just a manifestation of economic competition between classes within those nations.

https://noahpinion.substack.com/p/book-review-trade-wars-are-class?s=r

Again, I haven’t read the book, but this is slightly confusing to me. I have always thought of the causality running the other way around: increased competition between nations has exacerbated economic competition (and therefore inequality) within nations. It would seem that the authors think of it differently. Excellent, more things to ponder upon!


Why do I think that international trade is one causal factor where inequality is concerned? Let’s begin with an excellent article published by The Economist a few years ago:

In rich countries, skilled workers are abundant by international standards and unskilled workers are scarce. As globalisation has advanced, college-educated workers have enjoyed faster wage gains than their less educated countrymen, many of whom have suffered stagnant real earnings. On the face of it, this wage pattern is consistent with the Stolper-Samuelson theorem. Globalisation has hurt the scarce “factor” (unskilled labour) and helped the abundant one.

https://www.economist.com/schools-brief/2016/08/06/an-inconvenient-iota-of-truth

Please, pretty please with a cherry on top, read the whole thing, especially if you have studied the Stolper Samuelson theorem. This article remains the best explainer that I have come across.

But what is being said here should be at least somewhat surprising to a student just beginning to study international trade. Trade, it would seem, may well be welfare enhancing, but it does not affect everybody a) equally and b) not necessarily positively! But, you might think as an Indian student, this might imply that unskilled labor in India might benefit from international trade.

Remember, one thing a good student of economics always bears in mind is a specific question: relative to what? That is, unskilled labor in India might well benefit from international trade, but relative to what? And the answer turns out to be, well, an unexpected one:

But look closer and puzzles remain. The theorem is unable to explain why skilled workers have prospered even in developing countries, where they are not abundant.

https://www.economist.com/schools-brief/2016/08/06/an-inconvenient-iota-of-truth

What might explain this?


Enter Professors Maskin and Kremer:

Nineteenth-century economist David Ricardo’s theory of comparative advantage predicts that China’s poorest workers should benefit most from the growth in trade. Before globalization, that country had a huge supply of unskilled workers and relatively few high-skill workers, who were thus in high demand; the situation was just the opposite in the United States. When two such countries begin to trade, the theory states, the less-developed nation has the advantage in producing relatively low-tech products—so demand and income for under-educated workers should shoot up, while their high-skill countrymen suffer. Thus, the theory predicts, globalization should lower inequality in the developing world.
Instead, as Gates professor of developing societies Michael Kremer explains, in much of the developing world, “The empirical evidence is not really consistent with the idea that trade is reducing inequality.” He and Adams University Professor Eric Maskin, a 2007 Nobel laureate in economics, have therefore proposed a new model to help explain the discrepancy between traditional theory and current reality. The key, they say, lies in a more nuanced understanding of how global production cycles sort workers into different jobs.

https://www.harvardmagazine.com/2015/03/how-globalization-begets-inequality

Here’s one way to understand their model. Note, before you proceed to read, that this is my explanation of their model, and I have simplified it a bit. I’ll add more nuance in as we go along:

Think of two countries, and two types of workers in both countries. Let’s say country 1 has Type A and Type B workers, and Country 2 has Type A1 and Type B2 workers. A and A1 are skilled workers, and B and B2 are unskilled workers. Maskin and Kremer make the point that international trade and the advent of modern globalization has resulted in skilled workers across countries “matching” with each other. As a result, their incomes go up, relative to unskilled workers in their own countries. So while the Stolper Samuelson theorem may be unable to explain why skilled workers have prospered even in developing countries, we now have a plausible answer to the question.

As an illustrative example, consider the fact that I joined a multinational firm called Genpact straight out of college.

And of course, one can think of many countries, not just two, and one can imagine a spectrum of skill sets across workers, rather than a binary framing. The point still holds!


And to complicate the matter further still, there may well be explicit/implicit choices made by policymakers in their own countries.

Back in the good old days, FT Alphaville used to be a free blog. And about seven years ago or so, it carried an excellent, excellent post written by Isabella Kaminska. The title of the (two-part) post was “What Are Chinese Capital Controls, Really?”. The post is a must-read for any student of international trade, but this excerpt is especially relevant for us today:

What those who accused China of using its exchange rate to gain advantage probably misunderstood was that it wasn’t the currency which was being undervalued, it was the people.


There are several other reasons why China should leave its currency unchanged. Contrary to widespread perception, China does not compete on the basis of an undervalued currency. It competes mainly in terms of labour costs, technology, quality control, infrastructure and an unwavering commitment to reform.

https://www.ft.com/content/d11a4c5e-d5fb-32f4-a606-e64d1483cea1 (Emphasis Added)

“It competes mainly in terms of labor costs” is a dry, academic way to put it. Elsewhere in this post, Isabella puts it much more plainly, when she says that it sucked to be a Chinese worker. And it did! Not just because of low labor costs, but because of a whole host of other reasons that should excite students of macroeconomics. Read the whole thing to get a richer understanding of how China has gone about doing what it has. As I always say to folks in my classes who wish we “grew like China”: be careful what you wish for!

You might also want to take a look at David Autor’s work on The China Shock. A good place to begin would be Russ Roberts’ podcast with David Autor, and for those who are interested, there’s a follow-up symposium about this episode as well. The point I’m making is that where trade between China and the USA is concerned, it would seem that inequality has gone up in both countries, but for different reasons.

This applies to international trade in general, of course – I’ve used China and US as examples because we are more familiar with them.

So, to return to the original question: are trade wars class wars? And more importantly, are class wars causing trade wars, or is it the other way around?

And so here we get to the book’s primary thesis. The authors only return to it in the conclusion, having reached it by a circuitous route that took them through history, data, theory, and more history.
The conclusion they ultimately draw is more nuanced than the one initially promised (and that’s a good thing, since nuance is good). In Klein and Pettis’ telling, global imbalances feed inequality in the U.S., but the fundamental cause isn’t inequality.

https://noahpinion.substack.com/p/book-review-trade-wars-are-class?s=r

Yup, that I completely agree with, and “get”. But it doesn’t solve the original problem of course, it only helps us understand that it exists: trade does seem to exacerbate inequality.

How we should think of this problem, how we might resolve it, and with what consequences, is likely to be fertile ground for economic research in the years to come. If you are a student wondering about how to go about picking a topic to work on, well, please do consider this one! And a good place to begin would be Noah’s post, (and the book itself sounds like a must read too).


Bonus material alert: I simply had to share this extract from Noah’s blog, written by Paul Krugman. If you have recently studied macro, you can thank me later for bringing this to your attention:

[E]conomic explanations…have to [describe] how the actions of individuals…add up to interesting behavior at the aggregate level.
And the key point is that individuals in general neither know nor care about aggregate accounting identities…. [I]f you want to claim that a rise in savings translates directly into a fall in the trade deficit, without any depreciation of the currency, you have to tell me how that rise in savings induces domestic consumers to buy fewer foreign goods, or foreign consumers to buy more domestic goods. Don’t tell me about how the identity must hold, tell me about the mechanism that induces the individual decisions that make it hold…. [O]nce you do that, you realize that something else has to be happening — a slump in the economy, a depreciation of the real exchange rate, it depends on the circumstances, but it can’t be immaculate, with nothing moving to enforce the identity….
Accounting identities… inform your stories about how people behave, [they do] not act as a substitute for behavioral analysis.

https://krugman.blogs.nytimes.com/2012/01/16/mistaken-identities-wonkish/?pagewanted=all

The Case For Doubling Spending on R&D

Timothy Taylor, author of the blog The Conversable Economist, has a nice post out on the case for doubling R&D spending. He speaks of doubling spending on R&D by the US government, but the point is equally applicable to all governments, including India’s.

The post is a reflection on a chapter in an e-book published by the Aspen Group. The chapter has been written by Benjamin F. Jones, and is titled “Science and Innovation: The Under-Fueled Engine of Prosperity.” (pp. 272 in the PDF that has been linked to above). Timothy Taylor shares an extract that ought to familiar to us in terms of the direction in which scientific progress has been headed, and perhaps even the magnitude – but every now and then, it helps to remind ourselves how far we’ve come:

Real income per-capita in the United States is 18 times larger today than it was in 1870 (Jones 2016). These gains follow from massive increases in productivity. For example, U.S. corn farmers produce 12 times the farm output per hour since just 1950 (Fuglie et al. 2007; USDA 2020). Better biology (seeds, genetic engineering), chemistry (fertilizers, pesticides), and machinery (tractors, combine harvesters) have revolutionized agricultural productivity (Alston and Pardey 2021), to the point that in 2018 a single combine harvester, operating on a farm in Illinois, harvested 3.5 million pounds of corn in just 12 hours (CLASS, n.d.). In 1850, it took five months in a covered wagon to travel west from Missouri to Oregon and California, but today it can be done in five hours—traveling seven miles up in the sky. Today, people carry smartphones that are computationally more powerful than a 1980s-era Cray II supercomputer, allowing an array of previously hard-to-imagine things—such as conducting a video call with distant family members while riding in the back of a car that was hailed using GPS satellites overhead.

https://conversableeconomist.com/2022/04/19/the-case-for-doubling-us-rd-spending/

The latter part of the extract, which I’ve not quoted here, is about the increase in life expectancy, and is also worth reading. Post the extract, Timothy Taylor goes on to speak about how it is important to celebrate the fact that we were able to push out vaccines in the space of a little less than a year, which is a stellar achievement. And indeed it is! You might have differing opinions about the efficacy of these vaccines, and you might even be of the opinion that the firms doth profit too much from their creation, but I hope you agree that the fact that we were able to do this at all, and as rapidly as we did, is testimony to have far we have come as a civilization.

As an aside, read also this Washington Post editorial about the discovery of the virus, and how the message didn’t get out nearly quickly enough (duh.)

Both points are important to understand as students. Which two points, you ask? That progress as a civilization depends on two things: the rate of technological progress, and the underlying culture that enables it, embraces it and uses it properly. For reading the editorial, I came away with the opinion that China had the technology, but lacked the culture.

I would urge you to think about how this might resonate with each of us as individuals: we have the technology to be ever more productive, and the technology improves every year. But have we built for ourselves a culture of allowing ourselves to use this technology as efficiently as we should? What about the institutions that each of us work for or study in? What about the countries we stay in? Technological progress without an enabling culture doesn’t work, and as students of productivity (that’s one way to think about studying economics), you need to be students of both aspects.


Anyway, back to scientific progress. One of the points that Jones makes in his chapter is that the US has been lagging behind the current leaders on two different metrics: total R&D expenditure as a percentage of GDP, and public R&D expenditure as a share of GDP. China’s R&D expenditure has seen an annual increase of 16% since the year 2000, while the US is at 3% annual growth.

What about India, you ask? Here’s a chart from an Indian Express article about the topic:

https://indianexpress.com/article/opinion/columns/unesco-stats-on-global-expenditure-on-r-d-7775626/

As the article points out, let alone trying to compute the rate of increase, we actually seem to be on a downward trajectory for a metric called GERD, which stands for Gross Domestic Expenditure on Research and Development. Here’s the link to the data from the World Bank.

https://data.worldbank.org/indicator/GB.XPD.RSDV.GD.ZS?end=2018&locations=IN&start=2000&view=chart

We clearly need to do better. That article in the Indian Express ends with this paragraph:

A commitment from the Centre to raise GERD to 1 per cent of the GDP in the next three years could be one of the most consequential decisions taken in the 75th year of India’s independence.

https://indianexpress.com/article/opinion/columns/unesco-stats-on-global-expenditure-on-r-d-7775626/

And that is a nice segue back to the blog post that we started today’s post with. If you’re asking (and I hope you are!) questions along the lines of why it should be the government and not the private sector, I have two answers for you. One, the truth always lies somewhere in the middle, and so you need both private and government spending. And two, there is an economic argument for your consideration:

Jones’s essay reviews the argument, fairly standard among economists, that a pure free market will tend to underinvest in new technologies, because in a pure free market the innovator will not capture the full value of an innovation. Indeed, if firms face a situation where unsuccessful attempts at innovation just lose money, while successful innovations are readily copied by others, or the underlying ideas of the innovation just lead to related breakthroughs for others, then the incentives to innovate can become rather thin, indeed. This is the economic rationale for government policies to support research and development: direct support of basic research (where the commercial applications can be quite unclear), protection of intellectual property like patents and trade secrets, tax breaks for companies that spend money on R&D, and so on.

https://conversableeconomist.com/2022/04/19/the-case-for-doubling-us-rd-spending/

Now, how much of the lifting should be done by government, and how much should be done by the private sector is a debate that will never end, but here is an EFE post that might help you start to think through the process.


Timothy Taylor and Benjamin F. Jones argue that the US needs to spend more on R&D, and that the U.S. government should do more in this regard.

My contention is two-fold: that this point applies with even more urgency in the Indian context, and that an enabling culture is an equally important concept, but an underrated one the world over.

On Sri Lanka

Back in 2014, out of the blue, I got the chance to travel to Sri Lanka thrice in the space of two months for work. It was my first visit to the country, and I haven’t been back since. I spent time in Galle, Colombo and a place called Puttalam. As with most other people who have been to the country, I found it to be a beautiful place with fabulous food. Oh, the food. What food it was.

And the deep irony, of course, is that the current tragedy revolves so much around the same word: food. Only now, there simply isn’t enough of it.

But what happened, exactly? How did Sri Lanka get to where it is today?


The answer to that question must necessarily be another one: how far back do you wish to go? To borrow an analogy from another field, where should you begin if you want to explain the 2008 Great Financial Crisis? Should you begin with Bear Sterns going belly up in March 2008? Or should you begin with low interest rates in the early 2000’s? Maybe 9/11 and the lowering of interest rates immediately after? The S&L crisis of 1984? How about tulips in the 16th century?

In Sri Lanka’s case, thanks to the excellent Amol Agarwal, let’s begin with a book written by the son of the guy who founded Bata shoes:

At that time, the only oasis of peace in the area was Sri Lanka, or Ceylon as it was called before decolonization. When I first went there in the late 1940s, it was a Shangri- la full of smiling people, ambling elephants and king coconuts with delicious milk to quench one’s thirst. Almost in defiance of the horrors that were raging all around it, Ceylon was an island of tranquility and racial tolerance. Forty years later the Indian subcontinent, along with Singapore, Malaysia, Thailand and Indonesia all enjoy peace and varying degrees of prosperity, and our enterprises in these countries are among the strongest pillars of the Bata organization.

https://www.amazon.com/Bata-Shoemaker-World-Thomas-J/dp/0773724168

But then things started to go wrong in 1948, and who better than Samanth Subramanian to make a complicated history simple to understand? Read the entire book, but the introduction is a good way to come to grips with how things started tear apart at the seams:

It is curious to locate the proximate cause of a war in something as noble as a desire for education. When Sri Lanka broke free of British rule in 1948, the seats in its universities were occupied to disproportionately high levels by the minority Tamils, who through quirks of colonial history spoke better English and were better educated than the majority Sinhalese. The Tamils then went on, after university, to fill the civil service, the country’s most reliable provider of employment at the time. To the country’s Sinhalese who suddenly found themselves empowered with a vote, and therefore to the government, this state
of affairs appeared too lopsided and unfair to continue. When laws and quotas were enacted to protect the interests of the Sinhalese, the Tamils felt they were being discriminated against. The frictions between the two communities erupted repeatedly into ghastly riots; in the worst of them, the Black July riot in 1983, roughly 3,000 people were killed, many of them burned alive. Tamil houses and shops were looted and burned, and 150,000 Tamils were rendered homeless.
When a clutch of Tamil militant groups had begun to emerge in the 1970s, to agitate for a free Tamil state, they found only a trickle of willing recruits; after Black July, though, they were flooded by young
men and women wanting to fight, and none more so than the Tigers. Starting as a ragtag outfit carrying out the odd guerrilla attack, the Tigers grew into a fearsome terrorist organization. They ran arms and drugs, pulled in funds from a Tamil diaspora scattered across the planet, killed thousands of civilians, assassinated presidents and prime ministers, and perfected the art of the suicide bomber. They kept their own people, the Tamils, in line by intimidation and murder. In their full pomp, the Tigers controlled vast wedges of territory in the north and east of Sri Lanka, where flat, hot, sandy coasts meld gradually into jungle. Here they ran their own country in all but name, collecting taxes and policing the streets and adjudicating disputes. But the Sri Lankan state was always just outside the door, impatient to snatch back its land, working itself up into a state of angry nationalism.
Buddhism, the religion of most Sinhalese, developed a vocal right wing; its monks entered politics, pressed for a more merciless war, and dreamed of a purely Buddhist island.

Introduction, This Divided Island (Life, Death and The Sri Lankan War) by Samanth Subramanian

Even by my usual standards, this is a bit of a whopper, this extract, but I hope it nudges you into reading the entire book. (Actually, given that it is Samanth Subramanian we’re talking about, pick up anything written by him. It’s guaranteed value for money.)

The war ended, finally, in the year 2009, but it ended with a very high cost. The Wikipedia article serves as an introduction to the war, and Samanth’s book is a deep, thought-provoking reflection on the aftermath.


That’s a ridiculously brief background, and now let’s get down to the economy. The Sri Lankan economy, much like the Indian economy, is mostly a service based economy. Around sixty percent of their GDP comprises of services today, but that’s where the similarity with the Indian economy ends. A large chunk of this sixty percent, as you might imagine, is down to the tourism sector. And the pandemic has devastated this segment – not just in Sri Lanka, of course, but the effects are felt with much more severity in a nation that is so very dependent on it.

But it gets worse!

The economy is highly-dependent on imports for essential items such as food, and oil. The economy finances these imports mainly via agricultural exports (tea, rubber, and coconut), industrial products (textiles), and remittances from abroad. The revenues from exports, and remittances have not covered the cost of imports, and Sri Lanka has always been in a current account deficit (CAD). The average CAD in 2010-19 was around 1.2 percent of GDP.
The CAD has been met mainly by the government borrowing from abroad. As the government borrowing from abroad has been larger than the CAD, the balance has been pegged to the foreign exchange reserves. What can one make of an economy where the forex reserves consist of mainly borrowings from abroad!

https://www.moneycontrol.com/news/opinion/how-sri-lanka-reached-this-economic-precipice-8314151.html

So an economy that was, at best, precariously placed during the Covid-19 pandemic. And then, of course, going 100% organic.

Here’s a part of the conclusion from Seeing Like a State, by James C. Scott:

Take small steps: In an experimental approach to social change, presume that we cannot know the consequences of our interventions in advance. Given this postulate of ignorance, prefer wherever possible to take a small step, stand back, observe, and then plan the next small move. As the biologist J. B. S. Haldane metaphorically described the advantages of smallness: “You can drop a mouse down a thousand-yard mineshaft; and on arriving at the bottom, it gets a slight shock and walks away. A rat is killed, a man broken, a horse splashes.”

Seeing Like a State: How Certain Schemes to Improve The Human Condition Have Failed, by James C Scott

Or, if you prefer pithier statements, Deng Xiaoping’s famous dictum about crossing the river by feeling the stones comes to mind (although the quote isn’t originally by him). But Sri Lanka, of course, went straight to 100% organic farming, and well, if you’ve read even a single newspaper in the last two months or so, you know how that turned out.

The rest of the story is predictably depressing, and depressingly predictable. Rapidly depleting forex reserves, a drying up of foreign investment, stratospheric inflation, a weakened currency and all the rest of it.

And the knock-on effects of each of these on the ordinary person on the street are equally horrible. We’ve all heard about postponement of exams because of a lack of ink, long lines at petrol pumps, rising protests, people fleeing the country and so on.

And most tragic of all perhaps, is the ostrich-like approach of the government, which insists on coming up with ridiculous (there really is no other word) responses in terms of policy making. Long story short, this is a problem that is going to get much, much worse before it gets better.


I’ve tried to keep the story as simple as possible, but if you’re looking for a good in-depth read about this, here are some recommendations:

  1. Via Splainer.in (which you really should subscribe to!), an excellent in-depth macro analysis of the crisis, but in English (with jargon explained at the end, imagine!)
  2. The political fallout, which is rapidly evolving, and may well be out of date by the time you read this.
  3. Best of all, try and play around with the data if you happen to be a student of macroeconomics. What charts and tables would you create using this data, for example, and why? Best of all, pick an article such as the first one here, and try and see how many of these charts you can recreate in Excel. Trust me, ’tis the best way to learn.

Read Blogs Written by Gulzar Natarajan

Regular readers must be sick and tired of hearing me say this, I suppose, but please: read blog posts written by Gulzar Natarajan!

Especially so if you happen to be a student of economics. The art of taking a complex topic, asking simple questions about it, marrying them to the appropriate economic concepts that will help in the analysis, and reaching a cogent, well argued conclusion is a rare, rare skill. And Gulzar Natarajan possesses it in spades!

Consider the post titled The Demand Supply Gap in Medical Education.

The demand supply gap is stark. About 1.6 million students appeared for the National Eligibility cum Entrance Test (NEET) in 2021, of which only 88,120 make it to the 562 public and private medical colleges. That’s 19 applicants for every seat. Those numbers are now 89,875 and 596.
How do you analyse this market? What will be the impact on seat prices due to supply changes of medical seats? How will the supply side react to this situation of large numbers of Ukraine returned students? What will be the profile of supply side?

https://gulzar05.blogspot.com/2022/03/the-demand-supply-gap-in-medical.html

These are not hard questions to frame. In fact, I would argue that most of us will be able to frame these questions even without having studied economics formally. But that being said, framing them this simply and concisely takes years of practice.

He identifies four main problems that we need to deal with:

  1. The major constraint is the source of quality faculty
  2. Private supply of medical colleges is unlikely to make up the shortfall (he explains why in the post, and I tend to agree)
  3. As he puts it, “In an acutely supply deficient market, the limited marginal supply is likely to bid up the medical seat prices even more”. I would only add one word to this sentence, between the words marginal and supply: quality. It’s not so much about the supply going up as it is the degree to which high quality supply goes up.
  4. Ah, but alas, that brings us to an even more difficult question: quality as it truly exists, or quality as perceived by prospective students and by society? I studied in Fergusson College in Pune, so I have a moral right to ask this question. And that’s what he means by the phrase “lemon problem“. If you’re wondering why this is known as a lemon problem, take a look at this.

His preferred solution is having the government step in to augment the supply, using government district hospitals and some area hospitals. This, he says, is preferable to the public-private-partnership (PPP) model. I don’t dispute the assessment of the PPP model, and its shortcomings. But I’m curious about why he would say that government institutions are always going to assure a certain basic minimum assured quality. Is this necessarily true, even in a relative sense? And if so, why?

And the concluding paragraph is at once depressing and optimistic:

Finally, this is a teachable example on the reality that though many problems have no immediate solutions, we try to solve them. Part of it is about wanting to do something and also be seen doing something. This is a human reflex and a political economy compulsion. Bridging the demand-supply gap in medical education is one such problem. Given our context and constraints, it’s very unlikely that we can bridge this gap in the foreseeable future. Like with other similar problems like affordable housing, agricultural productivity, or traffic congestion, we can only create the conditions required for its mitigation and gradual easing.

https://gulzar05.blogspot.com/2022/03/the-demand-supply-gap-in-medical.html

Depressing because, as he says, it is unlikely to be solved any time soon. Optimistic because creating the conditions is easier said than done, but it is achievable.

What might these conditions be? How does one go about creating them? If you’re interested in the answers to these questions, you are, like it or not, now a student of economics and public policy.

P.S. And the answers themselves require many more blogposts, but please, feel free to search around on this blog for some of ’em! 🙂

Stephen Kotkin on Putin, Russia and the West

That title is partially borrowed from the subtitle of the New Yorker piece, and I’d strongly urge all of you to read it in its entirety.

I know next to nothing about geopolitics (which is one reason why I enjoyed reading the interview so much), and my notes that follow below aren’t so much about my take on the geopolitical aspects. Rather, they’re about reading this interview as a student of economics, and asking how much of what I know helps me understand the points being made. Simply put, what economic principles are helpful in understanding this interview? And as always, how can I apply these lessons and realizations while reading about geopolitics in general?


  1. “Was Iraq the way it was because of Saddam, or was Saddam the way he was because of Iraq? In other words, there’s the personality, which can’t be denied, but there are also structural factors that shape the personality. One of the arguments I made in my Stalin book was that being the dictator, being in charge of Russian power in the world in those circumstances and in that time period, made Stalin who he was and not the other way around.”
    ..
    ..
    Is there causality, and which way does it run, is a question that seemingly occupies the minds of most economists today. But as you can see from this excerpt, the question matters in other contexts too. And in these other contexts, you don’t have access to “data” that you can use to run a model that “establishes” causality one way or the other. Think long and hard about causality, and across multiple contexts, and revel in the confusion that it causes in your mind. If thinking about causality does not confuse you, you aren’t thinking hard enough!
    ..
    ..
  2. “Instead of getting the strong state that they want, to manage the gulf with the West and push and force Russia up to the highest level, they instead get a personalist regime. They get a dictatorship, which usually becomes a despotism. They’ve been in this bind for a while because they cannot relinquish that sense of exceptionalism, that aspiration to be the greatest power, but they cannot match that in reality. Eurasia is just much weaker than the Anglo-American model of power. Iran, Russia, and China, with very similar models, are all trying to catch the West, trying to manage the West and this differential in power.”
    ..
    What are you optimizing for? Growth for it’s own sake, because it is fundamentally a good thing, or growth in order to achieve another end (whatever that end may be)? Does the answer matter in terms of how you’ll achieve said growth, and if so, with what consequences? Is there a stable way to grow, as opposed to potentially unstable ways? How should one, as an Indian, think about the answers to these questions?
    ..
    ..
  3. “And so we think, but we don’t know, that he is not getting the full gamut of information. He’s getting what he wants to hear. In any case, he believes that he’s superior and smarter. This is the problem of despotism. It’s why despotism, or even just authoritarianism, is all-powerful and brittle at the same time. Despotism creates the circumstances of its own undermining. The information gets worse. The sycophants get greater in number. The corrective mechanisms become fewer. And the mistakes become much more consequential.”
    ..
    ..
    Does information matter? We teach, in economics, that prices are a way of communicating information. Need prices always be thought of as being pecuniary in nature? And if not, how does the stymieing of information flows affect the entity being analyzed? How should one use this thought exercise to think about setting up organizations?
    ..
    ..
  4. “But it turned out that “the television President,” Zelensky, who had a twenty-five-per-cent approval rating before the war—which was fully deserved, because he couldn’t govern—now it turns out that he has a ninety-one-per-cent approval rating. It turned out that he’s got cojones. He’s unbelievably brave. Moreover, having a TV-production company run a country is not a good idea in peacetime, but in wartime, when information war is one of your goals, it’s a fabulous thing to have in place.”
    ..
    ..
    This reminds me of Churchill during the second world war, but I mention that only in passing. But there’s that question again: what are you optimizing for? I don’t know enough about Ukrainian politics to even try and guess what the Ukrainian population was optimizing for when they elected Zelensky into power, but the broader take-away for me is that human resources are multi-dimensional. If person x turns out to not be good at task y, it’s not necessarily the end of the road for person x in your organization. This seems like an obvious statement to make, but the longer you work in an organization, the more you realize that this seemingly obvious lesson is often ignored.
    ..
    ..
  5. “The West is a series of institutions and values. The West is not a geographical place. Russia is European, but not Western. Japan is Western, but not European. “Western” means rule of law, democracy, private property, open markets, respect for the individual, diversity, pluralism of opinion, and all the other freedoms that we enjoy, which we sometimes take for granted.”
    ..
    ..
    What are the opportunity costs of being the west? What are the opportunity costs of trying to be like the west? What are the opportunity costs of deciding to not be like the west? These are surprisingly deep questions!
    ..
    ..
  6. “It’s a military-police dictatorship. Those are the people who are in power. In addition, it has a brilliant coterie of people who run macroeconomics. The central bank, the finance ministry, are all run on the highest professional level. That’s why Russia has this macroeconomic fortress, these foreign-currency reserves, the “rainy day” fund. It has reasonable inflation, a very balanced budget, very low state debt—twenty per cent of G.D.P., the lowest of any major economy. It had the best macroeconomic management.”
    ..
    ..
    Amit Varma is fond of reminding his listeners that politics is downstream of culture. Well, economics is downstream of politics. Us economists, we tend to forget this. We should try not to, and that comes with (at least) two implications. Any economist who chooses to not study politics or culture is short-changing themselves. And any economist who makes recommendations while ignoring the cultural milieu and political context is always going to be sorely disappointed with the eventual outcome.
    Students who encounter econometrics for the first time are wont to forget the “econo” bit and focus on the “metrics” bit. If only I had a penny for the number of times I’ve been asked a variant of the following question: I have an econometric method I want to use – can you recommend a good dataset? Similarly, I think we are wont to forget the “social” bit in the phrase “social science”. We do so at our own peril.
    ..
    ..
  7. When asked about China, Chinese growth over the last three decades, and the Chinese Communist Party taking credit for it, this was Professor Kotkin’s response: “Who did that? Did the Chinese regime do that? Or Chinese society? Let’s be careful not to allow the Chinese Communists to expropriate, as it were, the hard labor, the entrepreneurialism, the dynamism of millions and millions of people in that society.”
    ..
    ..
    Sure, each of these are a factor – of that there is no doubt. But is it the case that the Chinese Communist Party had no role to play at all? And if it had some role to play, what was the extent? Is it replicable, this role, in other countries in other contexts? Is this a desirable role? Or do “better” alternatives exist? If so, what are they? Development economics is a very hard, and therefore a very fascinating subject.
    ..
    ..
  8. “There’s never a social contract in an authoritarian regime, whereby the people say, O.K., we’ll take economic growth and a higher standard of living, and we’ll give up our freedom to you. There is no contract. The regime doesn’t provide the economic growth, and it doesn’t say, Oh, you know, we’re in violation of our promise. We promised economic growth in exchange for freedom, so we’re going to resign now because we didn’t fulfill the contract.”
    ..
    ..
    Are there countries that have such a social contract? Read more about Singapore! (To be clear, I am not endorsing the Singaporean model, or any other model.) Here is a good book to get started.
    ..
    ..
  9. “They [Russia] have stories to tell. And, as you know, stories are always more powerful than secret police. Yes, they have secret police and regular police, too, and, yes, they’re serious people and they’re terrible in what they’re doing to those who are protesting the war, putting them in solitary confinement. This is a serious regime, not to be taken lightly. But they have stories. Stories about Russian greatness, about the revival of Russian greatness, about enemies at home and enemies abroad who are trying to hold Russia down. And they might be Jews or George Soros or the I.M.F. and Nato.”
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    Stories matter, but beware of stories. Humanity is all about stories, including the idea of the existence of nations (think about it). Stories, when they work well, are all about uniting folks behind a story. Stories, when they don’t work well, are all about an idea being pushed too far. The truth lies somewhere in the middle, and figuring out exactly where is a Sisyphean task that humanity is perennially engaged with.
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  10. “The biggest and most important sanctions are always about technology transfer. It’s a matter of starving them of high tech. If, over time, through the Commerce Department, you deny them American-made software, equipment, and products, which affects just about every important technology in the world, and you have a target and an enforceable mechanism for doing that, you can hurt this regime and create a technology desert.”
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    Here’s the flipside of that question: why is it the case that the “West/America” has all this awesome technology and the rest of the world does not? Ask yourself this question: the next Elon Musk, wherever they may be in this world today – are they likely to migrate to Russia, or to America? Think through this question, and then think about cultural, political and economic aspects of a free society that is open to migration. Go back to pt. 5 and think about it once again.
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  11. “What are the dynamics there with the regime? You have to remember that these regimes practice something called “negative selection.” You’re going to promote people to be editors, and you’re going to hire writers, because they’re talented; you’re not afraid if they’re geniuses. But, in an authoritarian regime, that’s not what they do. They hire people who are a little bit, as they say in Russian, tupoi, not very bright. They hire them precisely because they won’t be too competent, too clever, to organize a coup against them. Putin surrounds himself with people who are maybe not the sharpest tools in the drawer on purpose.”
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    This excerpt helps us understand what Putin is optimizing for, to the extent that you agree with it. What are the opportunity costs of this optimization? Does this organizational set-up help the long term growth prospects of Russia? How should you think about the nature of organizational set-ups in other nations, in governments, firms and institutions? How should you think about building up your team, in your line of work? Read The Hard Thing About Hard Things, chapter 5 in particular.
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  12. When asked about Putin and the nuclear option, this was the response: “I think there’s no doubt that this is what he’s trying to do. The problem is, we can’t assume it’s a bluff. We can’t assume it’s a pose of being crazy, because he has the capability; he can push the button.”
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    It’s painfully hard, thinking through this!
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  13. “Steve, Sun Tzu, the Chinese theorist of war, wrote that you must always build your opponent a “golden bridge” so that he can find a way to retreat. Can the United States and nato help build a way for Russia to end this horrific and murderous invasion before it grows even worse?”
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    This is an important lesson, particularly for students. You’ll meet folks in a professional context who you do not like, do not enjoy working with, and have frequent quarrels with. You’ll meet folks who are at the opposite end of this spectrum, and most will lie in the middle of this spectrumThis is a guarantee, because that how statistics works.
    Your job is not to defeat the folks in the first set, but to work with them. The sooner you learn this lesson, the better your work and career will be.
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  14. When asked about the Biden administration: “They’ve done much better than we anticipated based upon what we saw in Afghanistan and the botched run-up on the deal to sell nuclear submarines to the Australians. They’ve learned from their mistakes. That’s the thing about the United States. We have corrective mechanisms. We can learn from our mistakes. We have a political system that punishes mistakes. We have strong institutions. We have a powerful society, a powerful and free media. Administrations that perform badly can learn and get better, which is not the case in Russia or in China. It’s an advantage that we can’t forget.”
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    Competition matters. Insulating oneself from competition is the surest path to slow but guaranteed institutional decay. Individuals, institutions and nations tend to not like this lesson, but it is an unavoidable truth.