Risks, Investment and the Government

I linked to a Scott Galloway post about this topic recently, and have other posts about this topic (see this review of The Entrepreneurial State, and a post on R&D spends in an Indian context).

And the reason for another post about this topic is a recent Ezra Klein column about a new initiative out of the United States called ARPA-H:

Shortly after winning the presidency, Biden persuaded Congress to fund an analogue focused on medical technology: ARPA-H. Why do we need an ARPA-H when the National Institutes of Health already exists? Because the N.I.H., for all its rigor and marvels, is widely considered too cautious. ARPA-H will — in a move some lament — be housed at the Institutes, but its explicit mandate is to take the kind of gambles that Darpa takes, and the N.I.H. sometimes lets go. Wegrzyn, Biden promised, is “going to bring the legendary Darpa attitude and culture and boldness and risk-taking to ARPA-H to fill a critical need.”

https://www.nytimes.com/2022/09/18/opinion/biden-invention-arpa-h.html

Please read the whole article, as always, but I wanted to use this post to talk about the three things that make up the title of today’s post: risks, investments and the government.

If you are a student of economics, how should you think about these three things, and why do they matter?

  1. Investment is necessary for an economy to grow. And investment depends on a whole host of factors, and for a variety of reasons, this investment isn’t always forthcoming at speeds which one would like. This is one way to think about macroeconomics as a field of study.
  2. Part of the reason the requisite level of investment isn’t forthcoming is because of risks. Not all investments bear fruit, and it is quite likely that some investments will fall by the wayside. If firms are risk-averse, they may choose to not invest.
  3. Risk aversion (whether on parts of firms or individuals) isn’t a constant. It keeps on changing, once again for a variety of reasons, and what makes this even more difficult is that the assessment of risk is a very subjective phenomenon. You can dress it up in the garb of statistics and models as much as you like, but you’d be wrong to assume that subjectivity can be eliminated entirely. Leave alone the difference between risk and uncertainty, and the discussions that follow from here on in. That’s a whole other topic!
  4. If private firms aren’t willing to make investments, or take risks, especially in the case of moonshot investments that other nations are making, governments might decide to step in and invest instead. Remember that there is no reason to assume that governments will get the judgment call of when to do so right. They are as prone to mistakes as they rest of us, and if you take into account incentive alignment, you might well be right in assuming that they are likely to do marginally worse.
  5. But remember always that all-important question: relative to what? That is, if the need to invest is pressing and urgent (strategic considerations, geopolitical considerations, the need to develop more rapidly than we are thus far), and if investment is not forthcoming from the private sector, it makes sense for government to step in and get things moving.
  6. When should government step in? How much should it fund? How should it recoup its investments, if at all? How long should it stick around? What are the metrics of success? What are the opportunity costs? How is continuity of such programs guaranteed across different political administrations?
    There are no easy answers to these questions, and controversies galore are guaranteed.
  7. But the bottomline (to me) is that investments are necessary, they are risky, and they aren’t always forthcoming from the private sector. And there is therefore a role for government.
  8. But an economist should also worry about whether government will get it right or not, and if not, for what reasons. And to focus on making suggestions to make the processes associated with this better. This is hard, it is politically fraught, and it will go wrong more often than not.
  9. But it is necessary, and often unavoidable.
  10. If you are new to economics, and are wondering how principles of economics are applicable in “real-life” problems, I guarantee you this – you can spend entire careers thinking about these issues. And no matter when you start, your timing couldn’t be better.

A Rare Ol’ Treasure Trove

After yesterday’s post, I asked some folks for their choice of textbooks that undergraduate students should definitely be reading before getting their BSc/BA degree in economics. And what a list we have, already!

If you are an undergraduate student, please bookmark this post, and keep coming back to it when you want book recommendations. And I would argue that even if you are not an undergrad student of economics, you might still want to keep checking on this post, because I will be updating it regularly.

In what follows, I have not mentioned who has recommended what. That’s simply because I’m writing this post out on the fly, and haven’t had time to format it, add hyperlinks or even figure out how I want to tabulate this data. More than one person has recommended some of the books on the list too, and that’s an additional complicating factor. Note that not all of them are textbooks, and some aren’t even books (they’re essays), but hey, when it comes to reading, there’s no bureaucratic stuffiness in these parts.

Folks who have read some of these books might wonder at the very broad political and economic ideology spectrum over here, but surely this is a plus and not a minus. As an undergrad student, read far and wide, and figure out over time what resonates and what does not (and why).

Finally, to everybody who took time out of their busy schedules to reply, thank you very much!

Here is this most magnificent list, in no order whatsoever:

  1. On the Wealth of Nations, by Adam Smith
  2. That Which We See and That Which We Do Not See, by Frederic Bastiat
  3. (Bonus points if you saw this coming) Economics in One Lesson, by Hazlitt
  4. Micro Motives and Macro Behavior, by Schelling
  5. Free to Choose, by Milton Friedman
  6. Both the Freakonomics books, by Levitt and Dubner
  7. Road to Serfdom, by Hayek
  8. Modern Principles of Economics, by Cowen and Tabbarok
  9. Public Finance and Public Policy, by Jonathan Gruber
  10. Economic Growth, by David Weil
  11. The Effect: An Introduction to Research Design and Causality, Nick Huntington Smith
  12. Economics Rules, by Dani Rodrik
  13. An Uncertain Glory, by Amartya Sen
  14. Everybody Loves a Good Drought, by P Sainath
  15. In The Service of the Republic, by Vijay Kelkar and Ajay Shah
  16. Of Counsel: The Challenges of the Modi-Jaitley Economy, by Arvind Subramanian
  17. In Spite of the Gods, by Edward Luce
  18. The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy, by Thomas Sowell
  19. The Meaning of it All, by Richard Feynman
  20. Delhi Rape: How India’s Other Half Lives
  21. Principles of Economics, by Mankiw
  22. Intermediate Microeconomics, by Hal Varian
  23. Macroeconomics, by Dornbusch Fischer and Startz
  24. International Economics, by Dominic Salvatore
  25. Introduction to Econometrics, by Woolridge
  26. Complete Business Statistics, by Aczel and Sounderpandian
  27. Using Econometrics: A Practical Guide, by Studentmund
  28. Introduction to Economics, by Richard Leftwich
  29. Theory of Econometrics, by Koutsoyiannis
  30. Principles of Economics, by Koutsoyiannis
  31. The Worldly Philosophers, by Heilbronner
  32. Macroeconomics, by Alex Thomas
  33. Economic History of India, by Tirthankar Roy
  34. India After Gandhi, by Ramchandra Guha
  35. Macroeconomics, by Snowdon and Vane
  36. Causal Inference Mixtape, by Scott Cunningham
  37. International Economics, by Paul Krugman
  38. Capital, Vol. 1, by Karl Marx
  39. Classical Political Economy and the Rise to Dominance of Supply and Demand Theories, by Krishna Bharadwaj
  40. Three Essays on the State of Economic Science, Koopmans
  41. Universal/University Economics by Alchian and Allen
  42. Introduction to Econometrics, by Cristopher Dougherty
  43. Studies in Indian Public Finance, by M. Govinda Rao

Can the economy grow forever?

What Lies Ahead for India?

Towards the end of his column, Niranjan highlights three key areas for India to work on in the years to come:

  1. Jobs, and those preferably in manufacturing.
    There is no sugarcoating this: we need to do much better in this regard, and if anything, we have been doing marginally worse in the last decade or so.
  2. Irregular and inefficient access to energy.
    We’ve tried to solve this problem the way teenagers clean their rooms. And the results have been exactly as bad as in the case of those teenagers. Niranjan offers hope by speaking about the transition to green energy, and I wish I could share his optimism.
  3. Political economy: will India resemble East Asia or Latin America?
    I put on my Straussian hat to think about the points Niranjan is making here, and I would encourage you to do the same.

Each of these points is spot on, to which I would add the following:

  1. More expenditure on the capital side.
    We need to build. More roads, more airports, more dams, more electricity projects, more ports, more housing units, more everything. One of my favorite factoids in the recent past has been about China pouring more concrete between 2012-2016 than the USA did in the entire 20th century. India needs to join this conversation, and real quick. But that is a hard political economy problem.
  2. Preserve and improve the quality of our institutions.
    Easier said than done, but the quality of our executive, our legislature, our judiciary, our monetary policy authority, our media, our regulators and our public policy institutions needs to not regress and become better over time. There is an unfortunate tendency to have a discussion about this very quickly turn into finger-pointing and yelling, but the sad truth is that these institutions are nowhere near as good as they need to be, and are arguably getting worse. Institutions matter!
  3. Better education, better health:
    Not more schools and colleges, not more degrees. But better know-how, a better trained work-force and a focus on improving the quality of education at all levels rather than the quantity of institutes and organizations.
    India’s healthcare system is a mess, and we don’t yet realize how bad it is. But twenty years down the line, there is waiting for us a ticking time bomb: a rapidly ageing population of India’s size, going up against our healthcare system as it currently exists is something that should fill all of us with dread.

Each of these are truly hard problems, with no easy solutions. But hey, nobody ever claimed that this was going to be a walk in the park. If you are a student of economics in India today, you have your work cut out for you, and time is of the essence.

My thanks to Niranjan Rajadhakshya for writing this excellent column, and I hope his column and these blogposts spark many conversations, debates and projects in the days to come.

Onwards!

Land, Labor and Capital

A very long extract to begin with today, because it just is that important:

The first tentative economic reforms began after Indira Gandhi came back to power in 1980. Political scientist Atul Kohli has written of how she made her peace with Indian business houses. The licence raj was eased. Taxes were reduced. VP Singh presented a reformist budget in 1985, when Rajiv Gandhi was prime minister. Manmohan Singh helmed the seventh five-year plan. It focussed on technology, productivity and efficiency. The Reserve Bank of India allowed the rupee to gradually depreciate in a bid to promote exports.
The growth spurt in the 1980s was supported by a large increase in fiscal deficits as well as international borrowing. It was unsustainable. The road to the 1991 crisis lay ahead. The macroeconomic crisis—in the midst of political and social instability —was a turning point. The duo of PV Narasimha Rao and Manmohan Singh abolished industrial licensing, slashed import tariffs, opened up the financial sector, attracted foreign capital, fixed public finances and made the rupee convertible on the current account. In his landmark budget speech in July 1991, Manmohan Singh cogently argued that the balance of payments crisis was a symptom of a deeper malaise: macroeconomic imbalances, low productivity of public sector investments, loopholes in the tax system, indiscriminate protection that had weakened the incentive to export, lack of domestic competition, a weak financial system that was not allocating capital efficiently, lack of access to the latest technology, and much more. The great achievement of 1991 was not each reform in isolation, but the rollout of a comprehensive reform programme where different parts complemented each other.
The development state was replaced by the regulatory state. The government was no longer the main vehicle of investments. That job was handed over to the private sector, while new regulators were set up or empowered to ensure markets functioned well in a wide range of areas.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

The entire column is excellent – that’s why we’ve spent four days (and counting) on it. But it is awe-inspiring to see how concisely and yet how thoroughly Niranjan has spoken about the 1991 reforms in three short paragraphs. Shruti Rajagopalan and her excellent colleagues at the Mercatus Center have an entire website dedicated to the events of 1991 and what came after, and I would strongly encourage you to spend a lot of time on it.

If you are younger than thirty years today and are reading this, you need to understand why you are able to read this today. You need to understand how the Indian economy changed enough for me to be able to write this blog in addition to all of what I do to earn my daily bread, and you also need to understand how your own income (or that of your family’s) went up enough to be able to afford the device that you are using right now to read this. To say nothing of the job/business that paid for this device- both the device and the job likely wouldn’t have been available prior to 1991.

I hope to write more about how the 1991 reforms changed lives on the ground for those of us who were around in the 1990’s and the early 2000’s. In all my classes, I tell my students that they have a secret superpower that they should make full use of. This secret superpower is called TMKK. It stands for Toh Main Kya Karoon? In English, that means ‘so what should I do?’, although a more accurate translation would be ‘so why should I care?’.

Consider this sentence once again: “The duo of PV Narasimha Rao and Manmohan Singh abolished industrial licensing, slashed import tariffs, opened up the financial sector, attracted foreign capital, fixed public finances and made the rupee convertible on the current account.”

Especially as a young student, you should absolutely be asking TMKK. How did the life of the average Indian change because industrial licensing was abolished? So what if import tariffs were abolished? What could I buy and consume that I could not earlier? How did opening up the financial sector help ordinary folks who were around in the 1990’s? What changes in the lives of ordinary citizens when India finds herself able to attract foreign capital?

You get the drift. I suspect most folks nod along when they hear us economists rhapsodize about 1991, without really getting what was in it for them. But they need to know. One, to better understand why exactly 1991 was so important, and second, to realize how fragile our economic freedom is, and to do our utmost to preserve it in the years/decades to come.


In their book, Tryst with Destiny, Bhagwati and Panagariya speak about how far India has come since 1991. And it really has come a long way! But they also speak about the need to have sustained and accelerated growth from here on in (the book was published about a decade ago). And they say that this needs two kinds of further reform.

Track I reforms are all about accelerating and sustaining growth, while making it even more inclusive, while Track II reforms are about making redistribution even more broad-based and effective. And they make the point that while 1991 was a great start to Track I reforms, there is a long, long way to go:

If truth be told, India is far from done on Track I reforms for two broad reasons. First, the potential for growth remains grossly underexploited. The economy remains subject to vast inefficiencies. Removing these inefficiencies not only offers the opportunity to arrest the recent decline in growth but to push the economy to a double-digit growth trajectory. Second, the poverty reduction that directly results from growth, in terms of enhanced wages and employment opportunities per percentage point of growth, can be increased: we can get a larger bang for the buck.

Panagariya, Arvind; Bhagwati, Jagdish. India’s Tryst With Destiny . HarperCollins Publishers India. Kindle Edition.

Every single economics student is taught, sooner or later, about the three factors of production: land, labor and capital. The link I have added here mentions a fourth, but let’s keep things simple for now. And I find it instructive to think about what Bhagwati and Panagariya choose to talk about in Part II of their book. This section of their book is about accelerating, widening and deepening what they refer to as Track I reforms, and the these are the first three sub-sections:

  1. Labor laws
  2. Land Acquisition
  3. Infrastructure

That is to say, even now, a full 75 years after India’s Independence, it isn’t as easy as it should be to utilize land, labor and capital to the fullest extent possible. You may agree or disagree with their solutions to these problems, but I would argue that the diagnosis is spot on.

The Indian economy is freer today than it was in 1990, and that is really and truly awesome. But it isn’t free enough, and much more work remains to be done.

Quite what this work is, and how to best go about it, is the journey that we need to undertake on the long road to breaking free.

And if this challenge excites you, well, like it or not, you are a student of the Indian economy – welcome to our tribe!

One Step Forward, Five Steps Back

Alternate history is a genre is underrated. I should say at the outset that I haven’t read as much as I would have liked to in this genre, but have thoroughly enjoyed what little I have read (or seen, in terms of movies).

Why begin with this? Because Niranjan raises, as he puts it, a tantalizing question:

The short period when Lal Bahadur Shastri was prime minister offered hope of change. Shastri wanted more investment in agriculture to control rising food inflation. He saw that physical controls were creating artificial shortages and black markets; he preferred financial controls. And the failures of the public sector convinced him that the private sector should have a bigger role in the economy. One of the tantalizing questions in Indian economic history is whether India would have embraced liberal economic reforms 25 years before 1991, if Shastri’s tenure had not been cut short by his premature death.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

But if there is somebody reading this whose interests lie at the intersection of writing fiction and studying economics, boy do I have a project for your consideration. What if agriculture had become more productive and efficient back in 1965? What if we had moved away from the License Raj, rather than embracing it wholeheartedly? What if – the most ‘if only’ question of them all – 1991 had instead been 1965?

Please, somebody, write this book.


But alas, we went in a whole other direction. It all began promisingly enough, but things soon went awry:

Indira Gandhi began with a relatively liberal economic agenda, including devaluing the rupee as well as easing trade restrictions in response to balance of payments pressures. However, in response to the international geopolitical situation as well as domestic political calculations, she swung to the Left after 1969. The economy was choked with stringent licensing, credit rationing, import controls, as well as draconian laws such as the Monopolies and Restrictive Trade Practices Act and the Foreign Exchange Regulation Act. A series of exogenous shocks between 1965 and 1980 — wars, droughts and oil prices — further battered the economy.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

I would strongly encourage young readers and folks new to economic theory to go over the presentation linked to in this blogpost. Why do I recommend this presentation? Because it is one thing for Niranjan to say that Indira Gandhi ‘swung to the Left after 1969’ because of domestic political calculations, and it is quite another to model why this was inevitable. Economics, remember, is the study of how to get the most out of life, and Indira Gandhi chose to get the most votes. This presentation explains why.

Economics is also the study of opportunity costs, and this presentation explains to us the cost of her choices. India fell behind when compared to some of her Asian peers in this period, and any student of Indian economics must almost heave a wistful sigh when studying this era of India’s economic history.

But the other reason I ask you to go over that presentation is because it helps you understand decisions made by all political leaders in all electoral democracies everywhere in the world. And as students of economics, it helps to understand how politicians respond to their incentives. This helps you become a better analyst of both economics and politics, and therefore of public policy.

The 1970s were a lost decade, with low growth and high inflation. However, there were two significant structural breakthroughs. First, the Green Revolution that began in the late 1960s helped India make a big dent in the food constraint. Second, the domestic savings constraint eased, perhaps helped by the spread of bank branches after nationalization. There were also the first signs of introspection on the nature of Indian economic policy in several official committee reports, though actual policy reforms were not yet on the horizon. The underrated budget speech by H M Patel in 1978, as finance minister of the short-lived Janata party government led by Morarji Desai, deserves more attention.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

To me, what is most interesting in this paragraph is what Niranjan doesn’t say in it. In my personal opinion, this decade is worth studying not for its datasets or its metrics, but for the weakening of India’s institutions. The Solow Model is a great way to think about the growth trajectories of nations, and what students often miss out in the Solow Model are the underlying assumptions. Well defined property rights, a strong and independent judiciary, free and well-functioning markets, and a legislature that doesn’t indulge in over-reach are crucial for reasonably rapid long-term growth, and I would argue that all of these were missing either in parts or wholly for much of the 1970’s.

Niranjan hints at part of this in the paragraph that precedes the one I have extracted above, but there is much more going on in that unfortunate decade. If you wish to learn more about this decade and the impact that it has had on our growth trajectory, come to the economic data and its analysis last. Begin with biographies of the more important public personalities of those times, read about landmark judgments passed in and around that decade, and speak to journalists and political scientists who were around back then, or have studied that era well. Once you get a sense of the politics and the culture (political, social) of that decade, then start upon the economic analysis. That would be good advice in general, I suppose, but it is particularly applicable to the 1970’s. Oh, and watch the movies that were being made back then!


There is far too much going on in this decade for us to speak meaningfully about it in a single blogpost, and I hope to come back and write/speak about this topic later. But for the moment, I wish to leave you with my own sense of utter regret and wistfulness regarding the 1970’s. There was some progress, of course, but there was, in my opinion, much that was wrong, and too little that was right.

Growth always matters, but it really and truly mattered back then, and we failed to optimize for it.

One Step Forward, Two Steps Back

Niranjan speaks about three things in his essay as regards the first two decades or so of India’s independent history:

  1. What did we seek to achieve? A more accurate framing of the question, arguably: what should we have sought to achieve, and how should we have gone about it?
  2. How did we do in terms of conventional macroeconomic metrics?
  3. What did the dissenters of the time have to say?

Let’s deal with each of these questions in turn.


  1. What did we seek to achieve?

The Indian economy had to create opportunities for people to move from farms to factories/offices, from villages to cities, from household enterprises to formal enterprises. Each shift would enable labour to move from low productivity to high productivity activities, thus boosting incomes.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

The reason I said that a more accurate question would have been “what should we have sought to achieve” is because it is not clear to me if economists, politicians and policymakers of that time would have agreed with Niranjan’s goals in the excerpt above.

As Niranjan himself mentions in his essay, MK Gandhi wouldn’t have agreed with this vision, preferring a version of India in which each village was a republic unto itself, and as self-sufficient as possible. But Gandhi’s wasn’t the only dissenting voice – we simply didn’t know then what was the most appropriate path to development, and lots of different folks had lots of different ideas. By the way, a good way to begin your exploration of what ideas were being discussed around and before Independence is by reading Towards Development Economics, a collection of essays edited by J. Krishnamurthy. Another excellent, and more recent source is Planning Democracy, by Nikhil Menon. There is a ton of material on this issue, of course, so please treat these recommendations as random starting points, and read as much about this period of India’s history as possible.

We sought to raise incomes as rapidly as possible, it is true, but there were many different opinions about how this should be done. Some of the ideas that we adopted then have been discarded over time, and not just by India. Others were eventually jettisoned, but this didn’t happen rapidly enough, in my opinion.

What were these ideas?

The elements of the classic Nehruvian growth strategy are well known: A focus on public sector investment rather than private sector investment, on capital and intermediate goods rather than consumer goods, and on the domestic market rather than foreign trade. There was more than just economics in play. The focus on building capacity in steel, machine tools and mining was an attempt to maintain strategic autonomy in the Cold War era—similar to why countries, including India, are today trying to build domestic capacity in semiconductors, electric batteries and telecom equipment, for example.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

Remember, economics at its heart isn’t as complicated as us economists make it out to be. “What are you optimizing for?”, for example, is a surprisingly powerful question, and reading the paragraph above reinforces my own answer to the question “what was India optimizing for back then?”.

India was optimizing for self-reliance in a socialist setting, and given these constraints, tried to raise incomes as rapidly as possible. India was not optimizing for growth, no matter the underlying ideology, and no matter the opportunity costs. India was prioritizing self-reliance and a socialist mindset, and so long as we didn’t deviate from this path, we tried to achieve as rapid a growth path as was possible.

We now know, given what took place in certain parts of Asia, that this was the wrong thing to optimize for. But that was the zeitgeist of those times, and this, unfortunately, was the path we adopted.

I have said it before, and I will say it again: “What are you optimizing for?” is an underrated question.


2. How did we do in terms of conventional macroeconomic metrics?

Economists have used statistical techniques to pinpoint 1950 as the first big structural break in India’s economic trajectory, with 1980 being the other. The economy accelerated after many decades of stagnant output. Economic growth averaged 4.2% a year between 1950 and 1965. Industrial output grew annually at 7.1%. The fact that industry grew faster than the rest of the economy meant that India began to reverse the deindustrialization that had begun in the last years of Mughal rule. Equally importantly, economist S Sivasubramonian showed in his monumental work on Indian economic growth in the 20th century that total factor productivity grew at 1.8% a year in the 15 years to 1965.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

Economic growth of 4.2% a year would imply a doubling every eighteen years or so. And while that is certainly nothing to sneeze at, another of my favorite questions to ask in economics seems appropriate right now: “relative to what?”

That is, what is the benchmark for deciding whether 4.3% is good enough or otherwise? Niranjan give us a potential candidate when he speaks about India’s first structural break in the year 1950. 4.3%, we understand, was certainly higher than the period preceding 1950, otherwise there wouldn’t be a statistical break to speak of. But two other benchmarks are possible.

  1. How did we grow relative to some of the other Asian economies of that time?
  2. What would have been the maximal rate of sustainable growth that other macroeconomic models would have afforded us?

The answer to the first question isn’t encouraging. And what we, as students of economics should take away from this is the fact that while India did well in the first two decades after her independence, she could (and should) have done better.

The answer to the second question is pure macroeconomic modeling, and can occupy the minds of the best and brightest economists for their entire careers. But long story short, the answer to this question is very much a function of ideology, assumptions and type of model developed. And for this reason, I would prefer to benchmark India’s performance against what came before 1950, or against her peers (howsoever defined), rather than the output of a model.

Bottomline: we did well, but could have done much better.


3. What did the dissenters of the time have to say?

One of the joys of being a social scientist is that there isn’t one definitive answer that everybody can agree upon. The is a deep richness in terms of complexity to human society. There is an inherent subjectivity that we bring to how we see the world in terms of what it looks like and why. And this guarantees that there will be different opinions about how to go about achieving whatever the aim.

There were two other powerful critiques of the Nehruvian development strategy. The Mumbai economists CN Vakil and PR Brahmananda argued that India should invest more in agriculture and the production of consumer goods — or what they called wage goods.
The famous dissent of economist BR Shenoy provided four red flags. First, the heavy dependence on deficit financing to build industrial capacity would lead to balance of payments pressures. Second, the focus on capital goods rather than wage goods for mass consumption would be inflationary, as people employed in new industries would get money incomes but nothing to spend them on. Third, high taxation to finance the plans would weigh on citizens. Fourth, increasing government control of the economy would eventually harm Indian democracy.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

Both arguments have turned out to be prescient. In fact, you could argue that the first of these arguments is really a subset of the second. But any student of the Indian economy should be familiar with the works of BR Shenoy, in my opinion one of India’ most underrated economists. If you can spare the time and have the inclination, read his dissenting note in full.


My point here is not just to explain how, in my opinion, we took some wrong decisions. We certainly did, but we would do well to remember that there were a lot of different opinions back then about how to help developing economies grow rapidly. It is easy, with the benefit of hindsight to look back and say this should have been done instead of that. But it is always easy to bet on the winning horse after the race is done!

My point instead is to make you, the reader, aware of some of the nuances of the excerpts that I have quoted here, and to leave you with a thought. How do we know what is best for India’s growth trajectory today? Whatever your own particular answer, how sure are you that it is indisputably the correct one? Might folks who disagree with you have an inconvenient iota of truth hiding in their arguments?

Argue more with folks who disagree with you, for these is no better way to learn!

The Long Reads on The Long Road To Breaking Free

Last week marked the 75th anniversary of our Independence. A lot of reflective essays were written to mark this special occasion, and some of them made for excellent reading.

But as a student of economics, I haven’t found anything better than a fantastic essay written by Niranjan Rajadhakshya in the Livemint. It makes for excellent reading, and there is enough material in there to keep students busy for years, let alone a semester. And I simply cannot do justice to the entire article in one blogpost.

So what we’re going to do is that we’re going to spend this entire week going through this article at our own leisure. I’ll give a broad overview today, and we’ll explore some of the finer nuances in the other four blogposts to come this week.


Let’s begin with the title itself. I don’t know if the choice of headline was intentional, and it is usually the case that the headline is not chosen by the author of the piece. But that being said, surely this is a nod to an excellent book written by Vijay Joshi? I, at any rate, interpret it as such, and strongly encourage you to read the book if you haven’t done so already.

Most essays would have begun with a nod, at the very least, to Pandit Nehru’s speech on Independence Day. It remains an excellent speech, and worth a re-read (or re-listen, if you so prefer). But Niranjan begins his essay with a quote from Sardar Patel instead, underlining the need for an economic regeneration in India’s case.

What might this entail? Niranjan highlights four major problems:

  1. Stagnation of economic output
  2. A chronically underfunded state
  3. A dire food situation
  4. A narrow industrial base centered around a few large cities

For each of these things to improve, Niranjan says, we needed a structural change in the way the Indian economy functions.

  1. People needed to move from farms to factories
  2. Almost consequentially (my interpretation, not Niranjan’s statement), we needed more urbanization
  3. And finally, we needed to move from household enterprises to formal enterprises

Why are these changes necessary in order to bring about a structural change in the Indian economy, and why is a structural change deemed necessary? These are excellent questions to ask if you are a student of economics. And the answer to these questions is a great way to begin your journey into the world of development economics.

But very simply put, here are the answers:

  1. Farms alone would not be able to generate the kind of surpluses necessary to raise the incomes of Indians, and certainly not as fast as was required.
  2. Try plotting per capita incomes for nations versus their rates of urbanization.
  3. Reflect on each of the figures in this paper (read the whole thing if you can, but please do look at all the figures)

Reflect on two paragraphs, which I will excerpt here without additional comment:

The famous dissent of economist BR Shenoy provided four red flags. First, the heavy dependence on deficit financing to build industrial capacity would lead to balance of payments pressures. Second, the focus on capital goods rather than wage goods for mass consumption would be inflationary, as people employed in new industries would get money incomes but nothing to spend them on. Third, high taxation to finance the plans would weigh on citizens. Fourth, increasing government control of the economy would eventually harm Indian democracy.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

In his landmark budget speech in July 1991, Manmohan Singh cogently argued that the balance of payments crisis was a symptom of a deeper malaise: macroeconomic imbalances, low productivity of public sector investments, loopholes in the tax system, indiscriminate protection that had weakened the incentive to export, lack of domestic competition, a weak financial system that was not allocating capital efficiently, lack of access to the latest technology, and much more. The great achievement of 1991 was not each reform in isolation, but the rollout of a comprehensive reform programme where different parts complemented each other.

https://www.livemint.com/politics/news/the-long-road-to-breaking-free-11660502122505.html

Was it any surprise that the 1970’s were a lost decade? Was it any surprise that Amitabh Bachchan was an angry young man in the 1970’s? What if the budget of 1991 instead happened to be the budget of 1978 instead (or even earlier, now that we’re dreaming)?


To say nothing of the future! Niranjan ends his essay with four challenges that await us in the future:

  1. India needs to develop more, and develop more equitably at the same time? Is that possible, especially while remaining a political democracy?
  2. Jobs! Niranjan speaks of our inability to create quality jobs for the millions who are now leaving agriculture, but the problem is even more urgent, because not enough people are able to leave agriculture in the first place!
  3. What of energy? How are we looking to anticipate the problems that will inevitably crop up, and start thinking about how to deal with them?
  4. And Niranjan ends on what I interpret to be a quasi-pessimistic note by asking where we will find ourselves in 1947. The reason I find it to be a quasi-pessimistic ending is because if the answer to this question isn’t clear by now, that ought to worry all of us. It certainly worries me.

We’ll take a look at the first two decades, roughly speaking, of India post independence tomorrow, using this excellent column as a reference. See you tomorrow!

The Importance of Information Technology

Or, to give it a more un-pithy title, the importance of the technology that allows us to access information.

I’m reading Jacob Bronowski’s “The Ascent of Man”, and am thoroughly enjoying it so far (I’m about halfway through). Here’s an excerpt:

A large system of irrigation extending over an empire requires a strong central authority. It was so in Mesopotamia. It was so in Egypt. It was so in the empire of the Incas. And that means that this city and all the cities here rested on invisible base of communication by which authority was able to be present and audible everywhere, directing orders from the centre and information towards it. Three inventions sustained the network of authority, the roads, the bridges (in a wild country like this), and the messages. They came to the centre here when the Inca was here, and from him they went out of here. They are the three links by which every city is held to every other, and which we suddenly realise are different in this city.

The Ascent of Man, by Jacob Bronowski, pp. 80, Ch. 3, BBC Books

This is true, of course, for all human agglomerations (except for that last bit re: “different in this city”). Bridges, in this context, are roads of a special type, and so really the point that is being made is this: flows of people and information matter for a human settlement to work.

The easier it is to make both of these flows happen as efficiently as possible, the more likely it is that humanity will flourish. You may want to be ever-so-slightly cynical given today’s times and ask if there is such a thing as too much information, but that’s a story for another day.


And that allows us to segue into a recent series of tweets I came across. First, Ethan Mollick:

Even more impressive is the abstract from the paper that Ethan speaks about in his tweet:

The printing press was the great innovation in early modern information technology, but economists have found no macroeconomic evidence of its impact. This article exploits city-level data. Between1500 and1600, European cities where printing presses were established in the 1400s grew 60% faster than otherwise similar cities. Cities that adopted printing in the 1400s had no prior advantage,
and the association between adoption and subsequent growth was not due to printers choosing auspicious locations. These findings are supported by regressions that exploit distance from Mainz, Germany—the birthplace of printing—as an instrument for adoption

http://www.ralfmeisenzahl.com/uploads/7/6/8/1/76818505/dittmar_printing_press.pdf

I haven’t read the whole paper, I should mention, but will get to it soon. Equally impressive is a tweet in response to this, by Cesar Hidalgo (link to paper here), and this fascinating chart:

https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0205771 (Table 3, pp 6)

This chart makes use of the Pantheon 2.0 dataset, and tells us about biographies published in the periods shown in the four sections of this chart. There is a lot to take away from this analysis, and I imagine the presentation at an economics conference would have gone on for hours (how did you take into account changing technologies? How much of this was supply drive and how much by demand, and how did you model for it?… and on and on and on). But I hope you’ll agree – this is fantastic to look at and ponder over.

Bottomline: information flows matter for any grouping of humans. They could be in South America six hundred years ago, they could be in Europe at around the same time, or we could be talking about a firm or a political entity today. Information must flow, and as efficiently as possible. And when, for whatever reason, information doesn’t flow, trouble ensues.


And as students of economics, remember: one of the most efficient way to convey information in a society is a well-functioning price system!

A Useful, Informative, Optimistic and Worrying Thread About India’s Labor Market