On Decentralization

Andrew Batson has a nice post out about an essay in the Palladium magazine. The theme of both the essay and the blog post is decentralization in China.

Dylan Levi King has a nice essay out in Palladium on the history of decentralization in China, opening with the assertion that “the most significant reform carried out in China after 1978 was one of systematic decentralization.” It is difficult to disagree with this. As the best China scholarship of the last few decades has made clear, local initiative played a central role in the country’s growth miracle–see for instance Jean Oi’s book on local state corporatism, or Xu Chenggang’s classic article on “regionally decentralized authoritarianism”.

https://andrewbatson.com/2021/11/29/the-consensus-on-centralization/

The essay is a reflection on how decentralization has evolved (and retreated) under the various leaders who have been in charge of the central Chinese government, beginning with Mao, and ending with Xi Jinping. As always, please read the whole thing.


The essay makes the rather unsurprising point that under Xi’s leadership, China is becoming ever more centralized. But the interesting (if not entirely surprising) nugget is that the attempt to increase the degree of centralization began about thirty years ago – Xi is the first leader since then who’s been very successful at it.

Well, so far, at any rate. See this thread, for example:

But the essay helps us think about a question which should be of interest to a student of economics: what is the appropriate level of decentralization? I mean this to be a one-size-fits-all question: for any organization, institution or level of governance, how should we think about the appropriate level of decentralization?

Think about the answer to this question in regard to your own college/school, for example. Who do you need to approach for permission in order to hold an event in your college? Does any prof have the ability to give permission, or are they likely to pass your question up to the head of the department? What about the head of the department? Are they likely to take the decision, or will they pass the question up to the principal or the director? In other words, how much decision-making authority is vested in the lower levels of hierarchy? And how much decision-making authority should be vested in the lower levels of hierarchy?


It is a question with far reaching implications: a centrally driven decision making system retains all the power at the centre, and everybody knows who to go to for getting approval. On the other hand, this is likely to make the system rather inflexible, with very little decision-making authority at lower levels.

Here’s a very simple example: let’s say you’re fifteen minutes late while checking out of a hotel. Should you be charged a fine or not? Should this be up to the clerk who is helping you check out, or should the clerk just blindly follow the “rule” with zero decision-making authority? If you (the guest) then kick up a ruckus, should the clerk call their superior? Should the superior call their superior? And on and on…

Management consultants agonize about this, as do politicians and bureaucrats. But so do government officials, professors in universities and even parents! What is the appropriate level of decentralization is an important question in literally any organization!


So how do we go about building a model in our heads to think about this issue?

Here’s one way to think about it:

Let’s assume that we’re seeking to optimize for the long term growth and stability of the organization in question. That is, to me, an entirely reasonable assumption. Concretely, the management consultant in charge of instituting check-out processes in the hotel is charged with creating a process that will optimize for the long term growth and stability of the hotel chain.

Should the management consultant vest, then, the clerk with the power to waive off the late fee? Under what circumstances? To what extent? With what amount of leeway given for mitigating circumstances? Maybe the clerk can waive off the late fees only for a certain number of times per month? Can HR track which clerks waive off fees the least across the year, and decide bonuses accordingly? Or should clerks be rewarded for building out customer loyalty by waiving off late fees by default for a period of up to an hour beyond the checkout time?

What about re-evaluation requests for semester-end examinations? What about disciplinary committees for deciding upon the punishment for low attendance? The decision to sell land in order to meet revenue requirements by local governments? As you can see, once you start to think of hierarchies and organizations, this can get very complicated very quickly.


And within the field of economics (at least for a specific context), the Oates Theorem is a good starting point to think about this analytically:

Many years ago in Fiscal Federalism (1972), I formalized this idea in a proposition I referred to as “The Decentralization Theorem.” The basic point is that if there are no cost advantages (economies of scale) associated with centralized provision, then a decentralized pattern of public outputs reflecting differences in tastes across jurisdictions will be welfare enhancing as compared to a centralized outcome characterized by a uniform level of output across all jurisdiction

Oates, Wallace E. “On the evolution of fiscal federalism: Theory and institutions.” National tax journal 61.2 (2008): 313-334.

In English, what this means is that so long as centralized provisioning doesn’t have any “bulk” benefits, lower levels of hierarchy will always know more about “local” tastes and preferences, and therefore decision making ought to be as decentralized as possible.

Put another way, a one-size fits all rule won’t be as optimal for the hotel chain as letting the clerk in question decide on a case-by-case basis.


So as a thumb rule, the more one decentralizes, the better. Alas, decentralizing decision-making also has the knock-on effect of decentralizing power, and that tends to not go well with those who, well, have power.

And so while effective decentralization has economic benefits, it also has political consequences. Which is why it makes sense to ask what one is optimizing for. And occasionally, it behooves all of us to ask what one should be optimizing for.

The answers are often wildly different, and more’s the pity.

Were The Farm Laws a “1991 Moment”?

As with everything that happens in the world today, so also with the farm laws: a lot of heat, and hardly any light. Reams have been written about how the farm laws were good (or bad), about their introduction being a much needed thing (or not), and their withdrawal being a disaster for take-your-pick-from-Modi-BJP-India (or not).

I have neither the desire nor the energy to get into any of these debates. Here’s my simple take as a student of economics: markets almost always work. Where they don’t work, identify the reasons why they don’t work, and either correct those causal factors, or have the government step in until (and only until) those factors are corrected.

Things get tricky when you begin to ask pesky questions along these lines:

  • How do you define markets not working? Bench-marked against what standard? Who decides?
  • How do you correct these causal factors? How do you judge that they have been corrected? Are you sure they won’t return? On what basis?
  • To what extent should government step in? How are you sure this will make things better in all markets at all points of time? Using what framework?

But that is precisely what makes the study of India’s political economy so very interesting! And this is true of agriculture as well, not just in India, but in other places too.


For the moment, let’s take as a given the fact that government had to be present in agricultural markets in India these past decades. That may or may not be true, but for the purposes of this blog post, let us assume that there was a confluence of factors in India’s agricultural markets that necessitated the active presence of the government as a participant, not just as a regulator.

Now, if markets almost always work, and if government was present in agriculture, then we have to figure out a way for government to eventually not be present in agriculture. (Note, again, that your opinion may be different from mine. But play along with me for the moment, please.)


Yamini Aiyar and Mekhala Krishnamurthy argue in an HT article that in the case of the three farm laws, what the government missed out on was the word “eventually”. They argue that it was the suddenness of the move that was problematic, not the move itself.

There’s a political angle to the sudden withdrawal, and the authors refer to it in their piece. There’s a regulatory angle to the sudden withdrawal, and that is also covered by the authors. But there also is an institutional (and therefore economic) angle to it, and that is what I would like to focus on:

Consider this. The protesting farmers from Punjab, Haryana and western Uttar Pradesh are locked into a system where State intervention, driven by the logic of Minimum Support Prices (MSP) and the Agricultural Produce Marketing Committee (APMC) mandis, dominates. The State is not a benign actor. It has created and sustained local elites with vested interests – traders, middlemen and moneylenders, each of whom extracts to control market power. This undermines competition and compromises farmer interests in different ways. But farmers have learnt to negotiate these relationships of extraction. And the state through MSP and mandis has served as insurance that gives them bargaining power. Any attempt to break this system will inevitably, as the protests amply demonstrate, unleash anxieties.
In this context, the move towards genuine competition will not be viable without the State demonstrating its willingness to protect farmers interests and gain their trust.

https://twitter.com/AiyarYamini/status/1464452741325996032/photo/1

What is the point? The point is that the current system isn’t perfect, and it isn’t sustainable. As the authors point out, the farming sector isn’t competitive.

In theory, that should mean, to a student of economics, that they are not efficient. That, in turn, means that we should expect that producers aren’t producing as much as they could have, and whatever they produce is being produced at a higher cost than would otherwise have been the case. We should expect that procurement, storage and distribution are also potentially riddled with inefficiencies. We should expect divergent quality of produce, and we should expect consumers to be paying higher prices, potentially for a lower variety of goods.

We should also anticipate a whole host of things due to the fact that the farming sector isn’t competitive: prices aren’t transparently determined, there isn’t free entry and exit, certain sellers are likely to get a better deal, transaction and search costs are high, and on and on and on. This is microeconomics 101 in practice.

(A quick note to students of economics: ask yourself if you’re able to relate what you’re learning in your microeconomics courses to the two paragraphs above. If you disagree with my assessment, ask yourself what is it that is causing you to disagree. Can you frame your disagreement in the context of microeconomic theory? Secondly, irrespective of whether you agree or not, can you think of what data points you might need to empirically verify or disprove my arguments? Where might these data points be available? What models (economic and econometric) can we use to settle this debate? Finally, why stop at agricultural markets – which other markets can you analyze this way?)

And for all of these reasons and more, reform is needed. It cannot possibly be anybody’s argument that the status quo in India’s agriculture must persist forever.


Which then, in turn, gives rise to two separate questions:

  1. If reforms are to be introduced, how?
  2. However they are to be introduced, how fast should we proceed with their implementation?

Again, the question isn’t one of the desirability of reforms, or their appropriateness. Rather, the question is about whether the reforms should be a top-down, one-size-fits-all initiative, or a more locally driven approach. And second, should reforms be introduced all at once, or slowly and gradually, one step at a time.

And I would like to argue that at least in this one regard, we should be looking at China. Not for the specifics of their reform and a CTRL-C CTRL-V hit job. But for their approach, beginning in the late 1970’s.


When I first proposed the household responsibility system (HRS), I was criticized as follows: Chairman Mao had been dead only a few years. Supporting the HRS, a system he opposed, meant forsaking his principles. This was the severe environment that reform faced at first. Our support of the HRS, of institutional innovation, and of transformation of the agents of the rural microeconomy would inevitably involve adjusting a number of interests. To avoid risk, it was necessary to carry out trials first. Also, the HRS could not move ahead on its own. It had do so in connection with other institutions and be realized in the course of reforming the institutional environment as a whole. But this institutional reform is not something that could be accomplished in one fell swoop. To carry out reform, a strategy of gradual advance was unavoidable.

http://ebrary.ifpri.org/utils/getfile/collection/p15738coll2/id/125214/filename/125215.pdf (Emphasis added)

That’s Du Runsheng, the author of a short publication called The Course of China’s Rural Reform. He did, um, some other things besides.

In the publication that I have excerpted from above, there are some points that I am going to summarize that I think help me make my point better:

  1. Resistance to the introduction of market based reforms was anticipated in China back then, and was in some sense inevitable. Three measures were conceived of to reduce this resistance:
    1. “First, the reform would not initially call for abandoning the people’s communes, but rather would implement a production responsibility system within them. This approach enabled many who would have opposed the change to accept it.”
    2. “Second, the responsibility system could take a number of forms, among which the populace could choose. One did not impose one’s own subjective preference on the populace but respected its choice.”
    3. “Third, the reform began in a limited region, where it received popular support, and then widened step by step.” (Emphasis added)
  2. “In 1980, after the central leadership was reorganized on a collective basis, the top central leaders, including Deng Xiaoping and Hu Yaobang, consistently supported allowing different areas to adopt different forms of the agricultural production responsibility system. It was then proposed to divide them into three types of areas: impoverished areas would carry out the HRS; advanced ones would adopt specialized contracts with wages linked to output; and intermediate regions could freely choose.”
  3. Or, as Ajay Shah and Vijay Kelkar put it in their book:
    “The heterogeneity of economic and social development, across the regions of India, generates heterogeneity in the public policy pathways desired by different groups of people. A policy position that is well liked in Uttar Pradesh may not be liked in Kerala, and vice versa. This creates conflict in a centralized public policy process.”
    Kelkar, Vijay; Shah, Ajay. In Service of the Republic . Penguin Random House India Private Limited. Kindle Edition.
  4. Finally, there’s a lot to pick at and think about here when we get down to the specifics. I’m not suggesting that China in the late 1970’s had the exact same problems that India does today. Nor am I suggesting that India do today exactly what China did back then. I am making three points:
    1. I agree with Yamini Aiyar and Mekhala Krishnamurthy when they say that one of the problems was the suddenness of the proposed reforms, both in terms of their scope, and in terms of their geographical spread. I also agree with them when they say that the introduction of the reforms ignored the ground realities of the both the sociology of agricultural markets, and their institutional complexity (note that I am paraphrasing here, these are not their words).
    2. But having read their article, one must ask: if not the pathway that we have now left behind us, what else? That is, for better or for worse, the three farm laws now stand withdrawn. Is the status quo desirable? Should we seek to perpetuate it, or change it for “the better”? (Inverted quotes because better means different things to different people.) My opinion is that we should seek to change it for the better, and maybe yours is the same.
    3. But that gives rise to the next question: how? And that is where Du Runsheng and his write-up is of limited help. Learning how other nations did it is a good place to start if you are a student of economics, India or public policy, and post-Mao China holds some valuable lessons for us.

The Economist on Year Three of the Pandemic

(Note: this was written and scheduled for posting before the world found out about Omicron. I have not changed a single word, except for the two sentences in these brackets)

‘Tis that time of the year, and we will soon be inundated with reflections on the year gone by, and the year to come. The Economist has come up with its list, and today, we will be focusing on one from among this series: What To Expect in Year Three of the Pandemic.


  1. The key takeaway is that the world as a whole will be better off because of the vaccines that become widely available in 2021, but…
  2. Vaccine inequity, already unfortunately visible, will become starker still. And this will have obvious ramifications on health (that much is obvious), but also on economic outcomes.
    “A disparity of outcomes between rich and poor countries will emerge. The Gates Foundation, one of the world’s largest charities, predicts that average incomes will return to their pre-pandemic levels in 90% of advanced economies, compared with only a third of low- and middle-income economies.”
  3. Distribution difficulties and vaccine hesitancy will also play (unfortunate) roles in the continuing saga, and a glut (imagine!) is not impossible to imagine in late 2022
  4. This is a chart well worth staring at. I encourage you to stare at it:

5. Vaccines will become better, more broad based, and supply chains will ease out in part because of technological advancements, such as freeze-dried mRNA vaccines.

6. But the larger point that I personally take away from the article is this: it’s going to be better, the article says than both 2020 and 2021, but it won’t be over in 2022. Variants will emerge, hesitancy will remain, and inequity will persist.
There will be, in other words, progress, but not as much as one would have liked, not as fast as one would have liked, and with complications that are bound to emerge, but impossible to currently specify.
Better, in short, but not by much, and with real risks to boost.

7. But all that being said, given the year that went by, I suppose we should take what we get.

Tim Harford on The Ease of Doing Business Report

But before anything else, let’s take a moment to acknowledge the title of the article – if you haven’t seen the movie, please do. One of my favorite Judie Dench movies.

You may have heard of the problems associated with the Ease of Doing Business report. (The reason I have linked to the Wikipedia page rather than the original page is because it wasn’t opening for me. Your mileage may vary.)

Even a spreadsheet can become a victim of its own success. Just ask the World Bank’s Doing Business report. While many worthy publications from the World Bank are never downloaded, Doing Business has been a smash hit for years. No longer. Amid an ugly scandal about data manipulation that has left the head of the IMF, Kristalina Georgieva, fighting for her career, Doing Business has been cancelled.
The power struggle at the top of the fund involves: a three-way tussle for influence between the US, Europe and China; rivalry between Georgieva, former chief executive at the World Bank, and the current, Trump-nominated bank president David Malpass; and domestic US politics. (Democrats have long disliked the Doing Business report’s low-regulation tone.)
The accusation is that in 2017 the World Bank’s leadership, including Georgieva, pressured the Doing Business team to improve China’s ranking in order to keep the Chinese government happy. The case for the defence is that Georgieva’s team were merely double-checking a sensitive number, that China’s ranking barely moved (from 85th to 78th), and anyway China is now ranked far better (25th) than when Georgieva was at the bank. The fight is as fascinating as it is unedifying.

https://timharford.com/2021/11/notes-on-a-statistical-scandal/

By the way, if you want to learn how to write columns well, you could do a lot worse than reading these three paragraphs.

A short, interesting sentence to begin the column, followed by an easy to read first paragraph that explains what the problem is. The next two paragraphs provide context, give additional details, and bring the reader up to speed, so that Tim Harford can get to the points that he wants to make regarding the whole issue. And contrast that with what I have managed to do so far: four paragraphs, one lengthy excerpt, and two tangential points, one of which is meta. Ah well.


But all of that aside, take some time out to read Tim Harford’s column before reading what follows.

  1. What was the report optimizing for?

    Originally, it seems to have been an attempt to help interested entities understand how easy (or not) it was to do business in a particular country. This helps entrepreneurs (domestic and international) understand some of the potential impediments to starting a business. The report lays out the processes involved in starting a business, and speaks about the length of time required to complete those process. That is surely a good thing, correct?
  2. Is a report not the same as a ranking?

    What matters more to you as a student when it comes to examinations? Are examinations a way for you to reflect upon how much you’ve learnt and what remains to be learnt, or are examinations a way to understand where you are in the pecking order? The problem with the Ease of Doing Business report wasn’t the report itself, it was the rankings that were generated on the basis of the reports.
    As Tim Harford says in his column: “But Klein has one regret: the original decision to publish an overall ranking of which countries were the best and the worst in the world for doing business. Such aggregate rankings make little sense, but they are ubiquitous because they are clickbait. The Doing Business aggregate ranking was no exception. Without it, the report would never have received so much attention. But without the ranking, it is doubtful anyone would have cared enough to try to manipulate the data.”
    And of course the inevitable followed: the rankings became more important than the report itself.
  3. A rare point of disagreement. Here is the quote from his column: “This newspaper recently celebrated the demise of the Doing Business indicators, complaining that countries were “expressly changing policies to score better”. That is a strange objection. Unless the indicators are valueless, when countries try to score better that is a feature, not a bug.”

    When Tim Harford says “this newspaper”, he is referring to the Financial Times, where he happens to be a columnist. I’m unable to access the original FT article from where this point was excerpted, but I happen to agree with excerpt above, and therefore disagree with Tim Harford. That being said, I certainly do wish that the original FT article had been worded better in the case of the sentence that we’re able to read.
    Think about that phrase up above: ““expressly changing policies to score better”.
    I think what they wanted to say was this: countries should ideally have been trying to figure out how to change policies so that in reality, on the ground, it became easier to do business. This should then have been reflected in the rankings. That would have been Utopian. Instead, policymakers and politicians in some cases tried to change the policies so that the ranking improved, without there being much change on the ground. That word, “expressly”, is doing a lot of lifting in that phrase – because all of what I have written is what I think they were trying to get at.
    Put another way, the indicators are not valueless, unless they’ve become the target. And that, really, is all that the FT was trying to say: the indicators did, in fact, become the target. Countries were more focused on the outcome (the ranking) rather than the process (has it actually become easier to do business?), and that is never a good idea.
  4. Consider this quote: “The Doing Business aggregate ranking was no exception. Without it, the report would never have received so much attention. But without the ranking, it is doubtful anyone would have cared enough to try to manipulate the data.”

    It is a question we should all be asking ourselves repeatedly: what are you optimizing for?
    In this case, was the World Bank optimizing for drawing attention to the report? We live in a world in which signaling matters, Goodhart’s Law is real and status is the name of the game. So if the World Bank was optimizing for publicity, it should have acknowledged that all of what eventually happened was a very real risk.
    But if the World Bank was optimizing for preparing a good report that stood up to scrutiny, then it should have acknowledged that the opportunity cost of such a strategy is that hardly anybody would ever read it. But such, alas, is life.

Improving the Quality of Social Science Research in India

Gulzar Natarajan points us towards an excellent paper written by Jacob Greenspon and Dani Rodrik, on who is writing papers in top tier journals today.

Developing country representation has risen fastest at journals rated 100th or lower, while it has barely increased in journals rated 25th or higher.

Click to access a_note_on_the_global_distribution_of_authorship_102521.pdf

Take a look at the table below, and note how developing country authorship has barely budged from 3.5% to 4.4% across the two time periods the authors have chosen to work with.

https://drodrik.scholar.harvard.edu/files/dani-rodrik/files/a_note_on_the_global_distribution_of_authorship_102521.pdf

What is the problem being addressed here? The fact that there isn’t enough representation in the very top tier journals of authors from developing nations.

How might this problem be resolved? In one of two ways: either the current top tier journals figure out a way to have more representation from developing countries, or developing countries start on the (rather long) journey of creating journals that will replace the ones currently at the top.

In his blogpost, Gulzar Natarajan points out nine ways in which both of these solutions might be implemented:

  1. Hire more local Principal Investigators, both for its own sake, but also because of the large positive externalities they will generate
  2. Develop academic consortium(s) such as NBER in developing countries. Gulzar Natarajan uses the example of India, but this could of course be done in many other countries as well
  3. Give more personalized, contextualized lectures in Indian universities
  4. More mentorships
  5. More referees from India in top tier publications, at least for “India” papers. (Note again that Gulzar Natarajan is writing this for an Indian audience, the same applies for other countries)
  6. Create and share data repositories.
  7. Build out better conferences.
  8. Build out more university level tie-ups on an international basis
  9. Build out better Institutional Review Board certifications for local Indian universities.

The author is kind enough to mention the place at which I currently work (the Gokhale Institute of Politics and Economics) as an Institute which may be able to play a role in furthering this initiative.

We’ve tried to do work on some of the initiatives he has outlined, including building out on mentorships, trying to build out better (and more) university level tie-ups, and one of the few silver linings to the last eighteen months has been the fact that it has never been easier to get professors from the world over to “come” and speak via video conference. But much more – much, much more! – remains to be done.


In an ideal world, each university in India would have a faculty member whose sole full time job it would be to figure out how each university is working on each of these nine points, with some sort of a coordinating agency working with (and across) each participating university. This is, of course, easier said than done.

Its necessity, if you ask me, is indisputable.

Industrial Policy, South Korea and Learning by Doing

Amol Agarwal points us to an excellent paper, the title of which is “The Long Term Effects of Industrial Policy“. Here is the abstract:

This paper provides causal evidence of the impact of industrial policy on firms’ long-term performance and quantifies industrial policy’s long-term welfare effects. Using a natural experiment and unique historical data during the Heavy and Chemical Industry (HCI) Drive in South Korea, we find large and persistent effects of firm-level subsidies on firm size. Subsidized firms are larger than those never subsidized even 30 years after subsidies ended. Motivated by this empirical finding, we build a quantitative heterogeneous firm model that rationalizes these persistent effects through a combination of learning-by-doing (LBD) and financial frictions that hinder firms from internalizing LBD. The model is calibrated to firm-level micro data, and its key parameters are disciplined with the econometric estimates. Counterfactual analysis implies that the industrial policy generated larger benefits than costs. If the industrial policy had not been implemented, South Korea’s welfare would have been 22-31% lower, depending on how long lived are the productivity benefits of LBD. Between one-half and two-thirds of the total welfare difference comes from the long-term effects of the policy.

https://www.nber.org/papers/w29263

Why should you read this paper if you are a student of the Indian economy?

Because industrial policy has been, i,s and will be critical for long run growth in India, and South Korea is an excellent example of getting industrial policy “right”. The reason I put “right” in inverted quotes is because there is still debate about whether South Korea really got it right or not.

If you are interested in reading more about this, part of footnote 4 from the paper is worth reading in greater detail (And the papers that are cited there, naturally):

However, many economists have been skeptical of the effectiveness of industrial policy (e.g. Baldwin, 1969; Lederman and Maloney, 2012). Lee (1996) did not find a positive correlation between sectoral TFP growth and tariff rates in South Korea during the 1970s and interpreted the correlation as the ineffectiveness of industrial policy.

https://www.nber.org/system/files/working_papers/w29263/w29263.pdf, footnote 4, page 5

Me, I’m very Studwellian in my outlook, and am therefore a sucker for papers such as these. And even if the paper were to show that industrial policy had not worked, that in itself is also a lesson worth learning, no? But if you ask me, something worked in South Korea at that point of time, and while causality is tricky, Industrial Policy (IP) certainly seems to have been at least partially at play:

Between 1973 and 1979, the average annual real GDP growth rate of South Korea was 10.3%, and the average export growth rate was around 28%. The HCI sectors increased their share of manufacturing output from 40% to 56% and their share of total exports from 12.9% to 37%.

https://www.nber.org/system/files/working_papers/w29263/w29263.pdf pp 6

The paper does three things, in my opinion:

  1. Establishes that Industrial Policy did too have a role to play in South Korea’s development
  2. That role has had effects that have persisted well beyond the years in which that specific industrial policy was “in play”
  3. Makes the case for how South Korea’s welfare would have been lower had this policy not been implemented

Your mileage may vary with regards to point 3, no matter how careful the econometric modeling (and it’s pretty careful, if you ask me). But this paper is worth reading because it reinforces my opinion that industrial policy, when done well, can have meaningful impacts upon the development of a nation.


There is a citation in this paper that is worth reading in its entirety (if you go in for that sort of thing). The citation is that of a chapter in The Handbook of Development Economics, Vol. 5. The title of the chapter is “Trade, Foreign Investment, and Industrial Policy for Developing Countries

I really do mean the “if you go in for that sort of thing”, because this is assuredly not light reading. Why, the section titled “Concluding Comments” takes up a solid four and a half pages! But I’ll speak here about three things that I found especially relevant from that section alone. Note that this is my paraphrasing, not a direct quote.

  1. The infant industry argument is, on the whole, overrated.
  2. In general industrial policy that promotes more exposure to international trade is likelier to be more successful
  3. The authors say that more work is urgently needed to understand, as they put it, “the human cost of adjustment to trade and FDI reforms”. Maskin and Kremer’s work is worth reading in this regard.

Finally, “Learning By Doing“. What does it mean, exactly? The classic paper to read is by Lucas, titled “On the Mechanics of Economic Development“, and the classic-er (est?) paper is, of course, “The Economic Implications of Learning by Doing“. But simply put, it is this:

Learning-by-doing is a concept in economic theory by which productivity is achieved through practice, self-perfection and minor innovations. An example is a factory that increases output by learning how to use equipment better without adding workers or investing significant amounts of capital.

https://en.wikipedia.org/wiki/Learning-by-doing_(economics)

It remains underrated at all levels of economic organization, if you ask me.

Ashwini Deshpande interviewed by Scroll.in

We were lucky enough to get the chance to speak with Alex Thomas on Friday, and the video of the conversation should be up on YouTube soon enough. In a wonderful coincidence, Scroll.in published an interview with Ashwini Deshpande just a day later. It is a coincidence (to me) because Alex’s textbook is the first macro textbook that I read that speaks extensively about caste, gender and ecology.

Who is Ashwini Deshpande? An economist, currently with Ashoka University, Ashwini Deshpande has been working for a while on the economics of discrimination and affirmative action. The interview, conducted by Rohan Venkat, is a fun and instructive (and what a rare combination that is!) read on both the arc of Ashwini Deshpande’s career, and also on the work that she has done, and is currently doing.


Here’s an excerpt from a different source, before we get to the Scroll interview:

There’s a lovely new working paper by Ashwini Deshpande and Jitendra Singh on female labor force participation in India. We talked a little bit about this last time. Our last conversation was about the honor-income tradeoff, how there are all these things at home that are holding women back: public safety issues, child care issues.
They find something quite remarkable, which is that they don’t find much evidence of supply-side demographic characteristics, like household income, structure, motherhood or timing of childbirth, et cetera, to be very significant in the labor force participation. In fact, it has an effect on the level, but it’s not like the timing of the childbirth—you see this big drop-off and then they come back to the labor force and so on. They find that it’s mostly demand-driven, that actually female labor force participation is so low in India because the demand for women is very low.
There’s a second finding that they have. It’s bad news for India going into the immediate future, which is adverse economic shocks actually make this problem worse. Because a lot of the lack of demand or the fallen demand for female labor is because they’re getting displaced by the employment of male workers.
They find that when there’s an economic shock, like demonetization or current COVID constraints and things like that, you see women being driven out of the labor force.

https://www.discoursemagazine.com/culture-and-society/2021/09/16/ideas-of-india-female-friendships-and-fraternal-capital/

Why this excerpt? Well, as a young student, you often get to hear that economists are working on topic “x”, or feature “y” – and when you start to read the work itself, one tends to miss out on asking the big picture questions. This exceprt, I think, helps you focus on just that: the big picture question.

What is the big picture question, you ask? Simple: is women’s participation in the labor workforce so low because the supply is low? Or because demand for labor supplied by women is low? Or both? And how does one go about answering this question? So yes, the age at which women get married, how much education they receive, and cultural impediments to they working are all factors to be considered – but hey, maybe there just is a preference to hire males instead of females as well?

It goes without saying: read the paper, but this should help you read it better 🙂


The first part of the interview is about how Ashwini Deshpande got into this field of research, and is useful reading to understand the role of “luck” in the development of your research interests, and also to understand the resistance to change in terms of new research areas for economics twenty to thirty years ago.

There are a lot of interesting points in the interview, such as, for example, problems with recording women’s work better than is done right now (and what happens if it is not recorded correctly). There’s stuff in there about the lack of meaningful linkages between women’s education levels and the jobs that ought to become available as a consequence – and this could be because of (a lack of) sanitation, and increased mechanization on farms, among other things.

The interview is also useful reading because it introduces you to the so-called “Indian enigma“. (Please read “Where India Goes” if you haven’t already, and here’s an old review of the book on EFE.)

Here’s a chart from her paper that posits a different explanation (I’ve copied it from the Scroll interview, but it is from the paper as cited below):

UC: Upper Caste, SC-ST: Scheduled Castes, Schedules Tribes, OBC: Other Backward Classes. Credit: Ramachandran, Deshpande, The Impact of Caste: A Missing Link in the Literature on Stunting in India

We found that regions where the self-reported practice of untouchability was higher, the child height for upper caste children was unaffected, which means that, for example, Brahmin children were not shorter, compared to regions where untouchability was lower. But the average height of Dalit children was shorter in areas with higher practice of untouchability, compared to heights in areas with lower prevalence of untouchability.
That gives us a mechanism about how stigmatisation and social ostracism might affect child height. The fact that you have to be at the end of the queue in terms of receiving social services, maybe you get excluded actively. There’s a whole set of social and economic processes which either completely exclude these children or put them at the end of the queue.
What this suggests is that the greater prevalence of societal discrimination is associated with a worsening of the stunting problem.

https://thepoliticalfix.substack.com/p/interview-ashwini-deshpande-on-the

Now, you may agree, or you may disagree with her assessment – and that, of course, is more than absolutely fine. The idea, especially if you are a young student starting out on a voyage of discovery in the field of economics, isn’t to either form or change your opinion. It’s awesome to have opinions, and it’s awesome-r to have it change because of something you read or learn. But for the moment, to be informed about this body of work, and to go through it, would be a very good place to start.

As Ashwini Deshpande herself says in the interview:

Sometimes no number of facts can make people change their minds. Some people already have their minds made up. But such people are at the extremes. I believe a very large number of people believe in something because they don’t know better. They’ve just never been exposed to another way of thinking, another way of looking.
The idea is to expand that community of people. Reach out to the people who believe in something, maybe very strongly, but that’s only because that’s all they’ve ever heard. What CEDA is trying to do is to create an evidence base which is accessible. You can always produce evidence that is so obscure and so difficult to understand that nobody would want to engage with it.
But what we are trying to do at CEDA is, through pictures, through little data narratives, through short pieces, to summarise issues in a way that a lay person will find accessible. It’s like a ball that you set into motion, and hopefully it will spread to more and more people.
The more the number of institutions or portals that allow people access to data and debates in a democratic manner, the better.

https://thepoliticalfix.substack.com/p/interview-ashwini-deshpande-on-the

There are some great recommendations at the end of the interview, both to read and to view, and if you haven’t consumed them already, you have your work cut out for you.

If you are interested in reading more about Ashwini Deshpande, here is her CV, here is her faculty page, and here is her Twitter profile. A word of advice: do not click open her Twitter profile if you are feeling hungry. You can thank me later. 🙂

Housing in Singapore

“Solved” is, at the least, ambitious phrasing. But the video is well worth watching. Via Sahil Shaikh, a SYBSc student at GIPE

On Serendipity, Housing and a Request

Just the other day (the 15th of September, if we want to be exact), a student from GIPE sent across a video that I found to be very interesting. So interesting, in fact, that I scheduled it for this coming Sunday’s post. It is about housing in Singapore, and I’ll leave it at that for the moment.

And then, just yesterday, I finally got around to reading some of Shruti Rajagopalan’s interviews of doctoral candidates and postdoctoral researchers for her excellent podcast: Ideas of India. The third interview in the series is of Tanu Kumar, a postdoctoral fellow at William & Mary’s Global Research Institute.

That’s where the serendipity bit in the title of today’s post comes in – the interview is in some ways closely related to the video. (Interesting aside about the etymology of the word serendipity. Got nothing to do with anything, but hey, it’s Friday)


Tanu Kumar’s paper is about housing subsidy programs, and how they might affect political behavior. The paper is about the effects of a housing subsidy program in Mumbai, and local political participation, it would seem, went up among the beneficiaries of the program.

Just a broad overview of this paper is that the Indian government—and actually, governments everywhere—they invest a lot in making housing affordable and accessible to lower-income residents. So, I wanted to understand how these programs actually affect beneficiaries and shape their behavior and their decision-making.
Because these programs are such a large scale—maybe even 5 percent or more of the Indian population benefits from them—any effects on political behavior would have implications for the broader political landscape. What I find is really in line with what you just said—benefiting from a subsidized housing program in Mumbai makes people more politically active at the local level. They’re more likely to complain about local services, attend meetings about local public issues, and they also know more about local politics.
What’s particularly interesting is that they actually care more about local-level community issues like water, electricity, and sanitation. This is different from what we’ve seen in the past, where we find the people who benefit from different programs might participate less in politics. And the difference here is the outcomes that I focus on. I’m focusing more on, really, everyday politics, everyday making of complaints and stuff in cities to make services better as opposed to voting and turnout.

https://www.discoursemagazine.com/politics/2020/12/24/ideas-of-india-how-does-subsidizing-housing-prices-shape-political-behavior/

Read the whole thing, but the reason I found the discussion so interesting is because my intuitive guess would have been that political engagement will go down, not up after getting the benefits of a subsidy such as this. Tanu Kumar thinks that one reason political engagement at the local level is going up is because people have more capacity (time) to spend on these issues.

RAJAGOPALAN: What do you think is driving this? Is it because now people have succeeded once through winning the lottery for subsidized housing that it changes their perception of what is possible in terms of the interaction with the state? Is it that now the need for housing has been satisfied, they push their clientelist efforts towards getting other things?
Is it a locational thing? Now that the housing problem has been solved, they are geographically fixed, but they’re also fixed electorally. Now they know that they are constituents of a certain group of people, and maybe now they want to push more, given the geographical elements. Maybe some of these things wouldn’t transfer if it were a different kind of subsidy which wasn’t so geographically rooted. What do you think is driving this push for greater participation?

KUMAR: There could be many different things going on. It would probably vary across the whole population. But what I think is actually going on is two things. First of all, people have greater political capacity. They’re wealthier. They have more time.
I don’t really see more political participation across the board, but I actually see it targeted in a very specific way, like targeted around local, very community-level services. There is probably some element of having better expectations or changed expectations of what the government might provide, but it’s also action that’s very motivated by protecting the value of these homes, is what I argue.

https://www.discoursemagazine.com/politics/2020/12/24/ideas-of-india-how-does-subsidizing-housing-prices-shape-political-behavior/

I have two questions. First, it is interesting that the beneficiaries choose to spend their greater capacity (time or money) on local political issues rather than elsewhere. Why might this be?

Tanu Kumar in a way answers this question, for she says that folks are motivated to protect the value of these homes. What I find fascinating is that if this is true, then the beneficiaries truly believe that the best way of protecting the value of these homes is through greater involvement in local politics – which is a Very Very Good Thing Indeed.

And my second question: if it really is skin in the game that is at play – and that is the simplest way to think about this, correct? – then how should we think about doing more about it at the local grassroots level? And not just for housing, but other goods?

Which brings me to the last part of the title of today’s post…


Do any of you know where I might get to read more about whether involvement in local politics goes up given public housing subsidies? Did this happen in Singapore? In Hong Kong? In other parts of the world?

If yes, it would make the argument for subsidies in public housing (among other things) even stronger, and that is a topic worth thinking about, no?

What Year in History? A Fun Way to Understand Development in India

Ajay Shah, Renuka Sane and Ananya Goyal have a very interesting blogpost out, the title of which is “What year in the history of an advanced economy is like India today?”

India has been stepping out from poverty into middle income. It is estimated that the proportion of persons below the PPP$1.90 poverty line has dropped to an estimated 87 million in 2020. In thinking about India’s journey, it is interesting to ask: In the historical journey of advanced economies, What year in the history of the US or UK roughly corresponds to India of 2021? This is a good way to obtain intuition on where India is, in the development journey.

https://blog.theleapjournal.org/2021/08/what-year-in-history-of-advanced.html

It’s a good blogpost, and the section before they get to comparisons about GDP is worth reading in full, because they come up with a good set of warnings about overdoing analysis like this. Read it, but we’ll get down to the fun part right away. As they mention in the blogpost, India today is at about 6800 dollars per person in terms of GDP, adjusted for PPP and inflation. When in its history was the UK at this point? What about the US? Well, the blogpost gives the answers, but I prefer to show you screenshots of my favorite software, Gapminder:

And I won’t show you the United States here, but it’s around the same point – the late 1800’s, in effect. Or put another way, if you want to use a this very simple way of asking how long to go before we reach the same level of per capita GDP as the United States, we have about 140 years to go.


And Gapminder, of course, has the ability to allow you to do this for every single metric that is available on the software. The blogpost written by Ajay Shah, Renuka Sane and Ananya Goyal speaks about asset ownership and women’s labor participation as other things to compare India’s current level of development with America’s past – but you can, of course, take a look at whichever metric you want.

This blogpost reminded me of a chart that The Economist had come up with earlier:

https://www.economist.com/graphic-detail/2011/10/03/chasing-the-dragon

As with many charts from The Economist, it takes a while to get what is going on, but the chart is worth that effort. Here’s a quick explanation to get you started: life expectancy at birth for China is 73. India is at 65. And China was at 65 36 years ago. Once you get this, the other rows in the chart become easy to interpret. Note that this chart was published by The Economist a decade ago.


These sort of analyses are fun, but of course one shouldn’t take them too seriously. There are other things that are at play beyond the data points that are worth taking into account, but are difficult to quantify. And most notable among these is culture.

That is, sure, China was at 65 in terms of life expectancy 36 years ago, but that doesn’t necessarily mean that we will take even approximately the same amount of time to reach 73. Could be lesser, could be more – and that because of changing technology, different culture, different political structures, different – well, a whole host of things.

But this much is true: both the blogpost that I cited and the chart above shows that we have, as the poet put it, miles to go before we sleep.


By the way, a fun exercise if you are a student today is to see if you can recreate The Economist’s chart updated with today’s numbers. Give it a shot, why don’t you?