I should have known better, especially given the fact that I have a PhD. But us acad types, we will never learn.
I wrote out a fun (remember, this is an economist talking, so the definition of fun is a very relative one!) post, and part of it I wrote out in LaTeX.
That faint sound of helpless giggling you can hear right now? That’s academicians doubling up in laughter, because they know what’s coming next.
In 1961, India’s income per person was $86, South Korea’s was $94 and China’s was $76. India was right in the middle of a very poor pack of countries. India’s income per person today is around $2300, China’s is around $12,500 and Korea’s is around $35,000.
Rajan, Raghuram; Lamba, Rohit. Breaking the Mould: Reimagining India’s Economic Future (p. 47). Penguin Random House India Private Limited. Kindle Edition.
And as I always say whenever this chart comes up in a class I’m teaching, I don’t think it is possible to look at this chart and not ask “Saala, what did they do that we didn’t?”. And because I like to play around with words, I say that some of the students might also wish to ask what we did that they didn’t.
So what did they do?
They enacted “government policies directed at affecting the economic structure of the economy”, in the words of Joseph E. Stiglitz and Justin Lin Yifu. Or if you prefer shorter, simpler phrases, they had better industrial policy.
So what are these government policies directed at affecting the economic structure of the economy? Why are they needed, what effects do they have, who came up with them, and is there anything special about industrial policy as regards India? Let’s deal with each of these questions in turn, one at a time:
What is industrial policy?
Rapid sustained economic development, Rodrik and Stiglitz tell us, requires an explicit strategy.
And almost always since we came up with the idea of rapid (it’s not always been sustainable in more than one sense of the term, alas, about which more later) economic development, the strategy has always had one goal: how can we industrialize better?
Why industrialize at all is a fair question to ask, of course. And the answer is that it is painfully clear to us that you cannot hope to be a developed nation without industrializing first. This becomes clear by doing lots and lots of complicated econometric studies, or by looking at a chart with a lovely title.
It’s a chart called What The Fuck Happened in 1750? And the answer is industrialization. Industrialization happened, starting 1750. Or there and thereabouts, at any rate:
Also known (copyright, Brad Delong, sorta) as the only important or useful economic question ever – "What the fuck happened in 1750?" https://t.co/8jwExGXfOK
And so what we would like to do is make sure that as many countries industrialize as quickly as possible, so that the citizens of all countries can live a longer, healthier and more productive life. Or that’s the plan hope, at any rate.
So what is industrial policy? It is a policy aimed at industrializing a country as quickly as possible. And if you go and take a look at the India, China and South Korea chart again, you can now look at it as three separate industrial policy experiments. One of them clearly worked when it was implemented, one figured it out a little while later, while the third is beginning to hit its straps only now.
So did these three countries differ in terms of their industrial policy, or did they have the same type of industrial policy, but different qualities of implementation?
Think diets, if that helps. If three of your friends are comparing their weight loss, were they on different diets, and therefore lost weight at different rates? Or was it the same diet, with some of your friends being better at sticking to it? And in the case of the the countries, it turns out they were implementing wildly different types of industrial policy.
Which begs the question: how many types of industrial policy are there anyway?
Types of Industrial Policy
Dani Rodrik and Mariana Mazzucato present a framework for evaluating the different types of industrial policies in their paper, Industrial Policy with Conditionalities: A Taxonomy and Sample Cases. On pp 8 and pp9 of their paper, they present a simple framework, based on which I have created that picture you see above.
Industrial policy depends, they say, on the answer to these four questions:
What type of firm behavior are you targeting through your industrial policy?
Do you hope to ensure equitable access to the products and services that will result from your industrial policy?
Or do you hope to direct firms’ activities towards socially desirable goals?
Or do you hope to get the successful firms to share their returns with you, the government (via royalties, perhaps, although other options are also available)
Or do you plan to require that profits be mandatorily reinvested into productive activities?
How do you plan to work out the conditionalities associated with the program? Are they up for negotiation, or are they cast in stone?
Is the upside from the program split? Is the downside split? (When I say split, I mean between the firm in question and the government).
Finally, what about measurement criteria?
Using this framework, Rodrik and Mazzucato say, you can figure out the type of industrial policy at play.
Here’s how their framework can be applied to the case study of the now famous Oxford/AstraZeneca vaccine program, for example:
So all right, there’s industrial policy, which is about industrialization, and South Korea seems to have done a better job of it than China and India (so far), and that’s because they used a type of industrial policy that worked better. Speaking of types, there’s lots of different types possible. But it still begs the question: what was South Korea’s industrial policy, exactly?
South Korea’s Industrial Policy
Understanding South Korea’s industrial policy requires a book length treatment, and there are more than a few that have tried to tackle the subject. As you might imagine, it is difficult to compress all of that material into a single blog post. But here’s what can be said:
South Korea’s industrial policy was inspired in part by the Meiji Reformation in Japan
The Meiji Reformation was in part based on the historical school of economics from Germany.
This historical school took part of its inspiration from… and this might surprise you a bit… Alexander Hamilton(!)
In particular, you might want to focus on a specific report:
One that has become especially well known was the ‘Report on the Subject of Manufactures’ submitted to Congress in 1791. In the report, he stressed that the United States needed to develop its manufacturing sector in order to grow its economy, bolster its military, secure its sovereignty, increase productivity, and absorb labour. He also stressed that industrialization was necessary to avoid being disadvantaged in trade with European nations, especially Great Britain, the industrial superpower at the time. The way to do this, according to Hamilton, was for the United States to protect and nurture its manufacturing sector through active use of industrial and trade policy. More specifically, industrialization was to be achieved by strategically applying tariffs and import bans on imported manufactured goods.
Hauge, Jostein. The Future of the Factory: How Megatrends are Changing Industrialization (p. 35). OUP Oxford. Kindle Edition.
And so the outline of South Korea’s industrial policy was to protect and nurture its manufacturing sector. Here are two questions worth asking:
Protect it from whom?
Nurture it for what purpose?
It is the answers to these questions that helps us understand where India and South Korea differ in terms of their industrial policy from the second half of the twentieth century.
The Carrot and The Stick
Both South Korea and India, you see, were clear about the answer to the first question. Both of their domestic industries needed to be protected from foreign competition.
But their answer to the second question could not have been more different. South Korea said that the protection and the nurturing was necessary so that South Korean firms could one day become world-beaters.
India, on the hand, ended up protecting its domestic manufacturers in perpetuity. Or least until 1991, at any rate.
We have names for both policies (of course we do). The South Korean policy was about export promotion – protect domestic firms until they learn to play with the big boys on their own turf. The Indian policy was about import substitution – if you’ve ever seen a mollycoddled spoilt Indian kid, that was India’s domestic firms until 1991. (As always, it’s a more complicated story than that, but hey, this post is long enough already. Some other day, maybe, we’ll dive deeper into this)
In other words the South Koreans got their incentives right – they held out the carrot, but didn’t hesitate to wield the stick when necessary. The carrot was pretty much whatever it was that the South Korean firms asked for – cheap labor, state supported finance, guaranteed power, great roads, you name it.
But Rodrik and Mazzucato’s framework comes into play here, because access (pillar 1) was given to export oriented firms, based on strict and non-negotiable conditionalities (pillar 2), with explicit and clear measurement standards (pillar 4):
The capacity to export told politicians in Japan, South Korea and Taiwan what worked and what didn’t and they responded accordingly. Since exports have to pass through customs, they were relatively easy to check up on. In Japan, the amount of depreciation firms were allowed to charge to their accounts – effectively, a tax break – was determined by their exports. In Korea, firms had to report export performance to the government on a monthly basis, and the numbers determined their access to bank credit. In Taiwan, everything from cash subsidies to preferential exchange rates was used to encourage exporters.
Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (pp. 76-77). Grove Atlantic. Kindle Edition.
And if the measurement in pillar 4 didn’t come up to the expected level, pillar 3 kicked nito play, and how:
North-east Asian politicians then improved their industrial policy returns through a second intervention – culling those firms which did not measure up. This might have meant a forced merger with a more successful firm, the withdrawal of capital by a state-directed financial system, withholding – or threatening to withhold – production licences, or even the ultimate capitalist sanction, bankruptcy. Since the 1970s, there has been much talk about state industrial policy in western countries being an attempt to ‘pick winners’ among firms, something that most people would agree is extremely difficult. But this term does not describe what happened in successful developing states in east Asia. In Japan, Korea, Taiwan and China, the state did not so much pick winners as weed out losers.
Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (p. 77). Grove Atlantic. Kindle Edition.
India? We have the Industrial Disputes Act, which makes it difficult for us to shut down loss making firms, let alone those firms that are not exporting.
The protection to labour in larger firms is extremely high in India and translates into excessively high effective labour costs. As an example, Chapter V.B of the Industrial Disputes Act of 1947 makes it nearly impossible for manufacturing firms with 100 or more employees to lay off workers under any circumstances. Such high protection makes large firms in labour-intensive sectors, in which labour accounts for 80 per cent or more of the costs, uncompetitive in the world markets. Small firms, on the other hand, are unable to export in large volumes.
Panagariya, Arvind; Bhagwati, Jagdish. India’s Tryst With Destiny . HarperCollins Publishers India. Kindle Edition.
So we’ve learnt:
1. What Industrial Policy is…
2. What types of industrial policy there are…
3. What South Korea’s Industrial Policy looked like back in the day…
4. The importance of negative incentives in designing effective industrial policy (and that India sucked at getting the negative incentives right)
OK, cool. So CTRL-C and CTRL-V the South Korean awesome sauce idea into India and we’re sorted. Right?
I was on a work call yesterday, and an uncle of mine called up on WhatsApp. I saw the incoming call on WhatsApp on my desktop, and cut it. I also messaged my uncle, on WhatsApp, that I would call him back later.
Today morning, while catching up on messages after having woken up, I saw a message from him:
“Still on the call?”
My near and dear ones will tell you (and the more dramatic ones among them, which is all of them, will have tears in their eyes as they do so) that I am very bad at returning calls.
Today’s blogpost is a defiant one, for I’m here to tell you that not only do I agree with them, I hope to get better at this skill. Yes, I’m bad at returning calls and responding to messages, and hooray for me.
This is my phone screen, right now:
As you can see, there isn’t a single app on my home screen. Nor is there a single notification, except for the little 0 in ().
That little icon is my favorite setting on my phone. It stands for focus mode, and it prevents me from accessing YouTube, WhatsApp, Signal, GChat, Slack, GMail, Twitter and whatever other apps I want to banish from my head. It stands guard from nine in the morning until five in the evening, seven days a week. Post five pm, it relents and lets me use these apps.
Why is the word “accessing” in bold and italics in the previous paragraph? Because while I can access these apps on my phone after 5 pm, their notifications are permanently turned off. I’m trying, you see, a novel experiment with focus mode and no notifications:
I will decide when to use my phone, rather than having the phone decide when to disturb me.
How is it going, you ask? Oh just fine, thank you very much.
There are downsides, of course, such as forgetting to return calls from uncles. Friends and family frequently express frustration at the fact that I have not responded to their messages, and about once a day, I get a “Don’t you ever check your phone?”.
The only correct answer, dear reader, is “Hardly ever”:
I’m also just not replying to everything any more, or indeed most things. This might not apply to you, but because I publish things semi-regularly and my contact information is out there on the internet, I get a fair amount of unsolicited email. Most of it is charming and well-meaning (a small proportion of it is not, of course) but that, I am realising, does not mean that I have to reply to it. Previously, I used to reply to everything from strangers as promptly as if it was from a close friend or colleague. I am beginning to realise that this was an odd thing to do. Just because someone has looked up my email address doesn’t mean I owe them anything; I agree with Elyse Myers that the communication norms of our always-on existence are strange. As she says, the fact that “someone at any time, any place, any mental state can send you a message, and now you’re the asshole if you don’t respond to it” feels backwards if you think about it for very long.
The default response of our species has become “respond as quickly as possible”, and not responding is seen as the rude, impolite thing to do.
Responding as quickly as possible was fine in the early days of our hyperconnected existence. Responding to emails was fun, and our generation positively salivated at the chance to chat with folks using ICQ, MSN Messenger, Yahoo Chat and the likes. But with the advent of WhatsApp and the mobile phone, things have very quickly gotten way out of hand.
I will still respond to work messages, of course. And contrary to the protestations of my near and dear ones, I do respond. Eventually, I will admit, rather than immediately, but still.
But “near and dear ones” and “work” are groupings that I get to define, and not the sender of the message. Cuts both ways, of course, and this goes without saying. That is, when I send messages to other people, the same rules apply!
It is fashionable at this point to talk about how I am a more productive person who is calmer, more at peace, more well-read and in general a happier soul.
Nothing of the sort has happened, and it’s not even close.
My to-do list grows ever longer, I still grit my teeth at every little provocation, piece is but a morsel of chicken in my biryani, and I still remain much better at buying books than reading them.
But on the asset side of the balance sheet is this: there will be a quiet smile on my face when I respond to the next person who asks me if I don’t ever check my phone. This much is true.
“As little as possible” I will say, a beatific smile on my cherubic visage. And I will walk on nonchalantly.
Zero notifications, it would seem, has a marginally positive impact on making me a happier soul.
Part of my job when I teach principles of economics is to point this out relentlessly and throughout the semester – that no matter what you do in life, there are costs and consequences.
But there are those, we learn in today’s blog post, who may choose to not acknowledge the fact that there are trade-offs:
Consider the following moral clashes: Negative liberty v. positive liberty; liberty of the individual v. the safety and security of the community, group, or nation; deference to authority v. individual autonomy; sanctity and piety v. skepticism, curiosity, and irony.
Berlin maintained that every ideal listed above, on either side of each clash, is worthwhile. He then divided the human world into two broad human types—those who recognize these clashes and accept the need for trade-offs to negotiate them, and those who refuse either to recognize or accept the need for such choices. In an essay written a few years before “Two Concepts of Liberty,” Berlin adapted a saying by the Greek poet Archilochus—“The fox knows many things, but the hedgehog knows one big thing”—in order to flesh out the contrast
Should one optimize for the liberty of the individual? What a stupid question, you might say. Of course one should. But ah, what if the liberty of the individual puts the safety and security of the community, the group or the nation at risk? Then, in that case, should one optimize for the liberty of the individual, or the safety of the community?
If this sounds too abstract, consider the problem of gun control in the United States of America.
What about individual autonomy? Should one optimize for it, even when it goes up against showing deference to authority? Consider the right to protest, for example. Should one optimize for it, even when it goes up against showing deference to authority?
What about sanctity and piety versus skepticism, curiousity and irony?
The ordinary resources of empirical observation and ordinary human knowledge … give us no warrant for supposing that all good things, or all bad things for that matter, are reconcilable with each other. The world that we encounter in ordinary experience is one in which we are faced with choices between ends equally ultimate, and claims equally absolute, the realization of some of which must inevitably involve the sacrifice of others. … If, as I believe, the ends of men are many, and not all of them are in principle compatible with each other, then the possibility of conflict—and of tragedy—can never wholly be eliminated from human life, either personal or social.
Berlin, Isaiah. “Two concepts of liberty.” In Liberty Reader, pp. 33-57. Routledge, 2017.
The optimization of one’s particular “monism” is ultimately both a failed as well as dangerous pursuit. There are other truths in the world, and other people have other ideals. When one’s ideals and one’s goals go up against someone else’s, there is a “clash of values”.
Resolving these clashes isn’t easy or exciting. But not resolving them, or worse, defeating to the point of subjugation those who dare oppose your own one true way hasn’t ended well:
“But you must believe me, one cannot have everything one wants—not only in practice, but even in theory. The denial of this, the search for a single, overarching ideal because it is the one and only true one for humanity, invariably leads to coercion. And then to destruction [and] blood….”
Or, in the language of this blog, yes, sure, be clear about what you’re optimizing for. But also ask if that is the only worthwhile goal in life, and ask if it’s absolute and total attainment is worth it. Even if you say it is worth it, relative to what?
And hey, remember: the truth lies somewhere in the middle!
Let’s begin with an extract from one of my favorite books to have re-read this year, “Country Driving: A Chinese Road Trip”, by Peter Hessler:
At the end of the 1990s, the government of Wuhu, a city in eastern China’s Anhui Province, decided to set up a car company of their own. They hired an engineer named Yin Tongyao, who had previously been a star at Volkswagen. Yin had distinguished himself during the transfer of the VW Fox, when he helped move manufacturing equipment from Westmoreland, Pennsylvania, to northeastern China.
At his new job in Wuhu, Yin immediately put this international experience to good use. He first went to England, where he bought equipment from an outdated Ford engine factory. Then he traveled to Spain, where he acquired manufacturing blueprints from a struggling Volkswagen subsidiary that formerly made a car called the Toledo. The Toledo shared the same platform—the basic frame and components—as the Jetta. In secret, Yin moved the British Ford engine factory to Wuhu, incorporated the Spanish blueprints, and set up an assembly line. Strict national regulations forbade new auto manufacturers from entering the market, so the officials in Wuhu simply called it an “automotive components” company. The factory produced its first engine in May of 1999. Seven months later it turned out a car. It had a Ford-designed engine, a body that came from Volkswagen via Spanish blueprints, and many authentic Jetta accessories. The folks in Wuhu had simply tracked down Chinese parts suppliers who were supposedly exclusive to Volkswagen, and then they worked out deals on the side. Volkswagen was furious, and so were people in the central government.
Hessler, Peter. Country Driving: A Chinese Road Trip (p. 65). Canongate Books. Kindle Edition.
By the way, the next sentence in the book is one of my favorite sentences from it: “Everybody knew the basic principle of the Reform years: It’s easier to ask for forgiveness than permission”. If you are an Indian student reading this, and wondering what the big deal is, look up negative lists.
But anyways, the reason I began with this excerpt is because I was reminded of it when I read this:
Then, in 2007, the industry got a significant boost when Wan Gang, an auto engineer who had worked for Audi in Germany for a decade, became China’s minister of science and technology. Wan had been a big fan of EVs and tested Tesla’s first EV model, the Roadster, in 2008, the year it was released. People now credit Wan with making the national decision to go all-in on electric vehicles. Since then, EV development has been consistently prioritized in China’s national economic planning.
“Industrial policy” is an easy phrase to bandy about, but very few countries have managed to successfully execute industrial policy. Whatever your opinion about the Chinese economy (especially in the present instance), even the most pessimistic China observer will happily admit to the fact that China deserves to be put in the small group of countries that has managed to successfully execute industrial policy for some sectors. And as we have covered earlier, the EV sector is certainly one of them. Remember how Volkswagen was “furious”, back in 1999?
In July, Volkswagen paid $700 million for a 4.99 percent stake in XPeng, a money-losing Chinese electric car start-up, putting a valuation of $14 billion on XPeng. Nio received assistance from the Hefei local government, but XPeng has acknowledged assistance from the local government in Wuhan, also in central China. Volkswagen announced in April that it would build a $1.1 billion car development center in the central China city of Hefei. VW will hire 2,000 engineers to do work previously performed at its headquarters in Wolfsburg, Germany, for cars manufactured in China.
So what exactly did China do when it comes to industrial policy regarding automobiles?
They played the long game: “They realized … that they would never overtake the US, German, and Japanese legacy automakers on internal-combustion engine innovation,” says Tu. And research on hybrid vehicles, whose batteries in the early years served a secondary role relative to the gas engine, was already being led by countries like Japan, meaning China also couldn’t really compete there either. This pushed the Chinese government to break away from the established technology and invest in completely new territory: cars powered entirely by batteries.
They used the ability to provide subsidies in myriad ways: subsidies for production, but also an implicit guarantee of purchase of EV’s, and nudge-nudge, wink-wink tweaking of “regulations” to make sure demand for EV’s remained in place.
China utilized it’s home ground advantages judiciously when it came to economic geography.
And if you’re looking for a metric that exemplifies the success of this industrial policy, look no further: “Chinese automakers like BYD and Chery, and the European and Singaporean shipping lines that transport cars for them, have placed almost all of the orders now pending worldwide for 170 car-carrying vessels. Before China’s auto export boom, only four a year were being ordered, said Daniel Nash, head of vehicle carriers at VesselsValue, a London shipping data firm. The incentive to build more ships is clear. The cost per day for an automaker to hire a car-carrying ship has soared to $105,000, from $16,000 two years ago, Mr. Nash said. BYD is spending close to $100 million apiece for the construction of what will be the six largest car carriers ever built. Most of the vessels are scheduled for completion in the next three years.”
And that brings us to the inevitable question: can we (India, that is) replicate what the Chinese did for their automobile industry?
“I think the interesting question is, would a country like India or Brazil be able to replicate this?” Mazzocco asks. These countries don’t have a traditional auto industry as strong as China’s, and they also don’t have the Chinese government’s sophisticated background in handling massive industrial policies through a diverse set of policy tools, including credits, subsidies, land use agreements, tax breaks, and public procurements. But China’s experience suggests that EVs can be an opportunity for developing countries to leapfrog developed countries.
“It’s not that you can’t replicate it, but China has had decades of experience in leveraging these [systems],” says Mazzocco.
“The Chinese government’s sophisticated background in handling massive industrial policies” is a phrase I do not disagree with, but one of the many reasons to read Hessler’s excellent book is so as to understand that this sophistication was earned. It didn’t fall out of the sky:
When Deng came to power, China’s auto industry faced the same basic challenge that characterized so much of the Reform period: How do people learn to do something completely new? From the government’s perspective, it was critical to learn from foreign automakers, but nobody wanted to relinquish profits and control of the industry to outsiders. As a result, Deng invited foreign manufacturers to set up shop under strict regulations. In order to produce cars in China, a foreign company had to find a state-owned partner, and outside ownership was limited to 50 percent. The American Motors Company jumped at the opportunity. In January of 1979, less than a week after President Jimmy Carter formally recognized the government of the People’s Republic, AMC was already sending a delegation to work out a deal. Over the next decade they learned to regret their pioneering status. While other companies such as Toyota stayed out of China, biding their time, AMC forged ahead and got nowhere. The partnership structure was awkward: two sets of management, each with its own culture, goals, and values. The AMC experience became so notorious that it eventually inspired a book called Beijing Jeep by the journalist Jim Mann. It’s a story of one misunderstanding after another; the chapter titles include “Getting Nowhere,” “A Very Long Haul,” and “An Outpouring of Grievances.” Even the index conveys a sort of taut frustration—it begins with “Absenteeism” and continues through “Xenophobia,” an alphabetized testimony to cultural differences of the 1980s.
Hessler, Peter. Country Driving: A Chinese Road Trip (p. 63). Canongate Books. Kindle Edition.
And if you ask me, the best place to start is to internalize my favorite sentence from Country Driving: sometimes, it is easier to ask for forgiveness than ask for permission.
Nike says it more pithily, and therefore better, but the message remains the same in either case.
The production-linked incentives (PLI) scheme for the automotive sector has hit another speed breaker due to lack of clarity about the process to apply for subsidies, multiple industry executives said. The government is still working on the standard operating procedures (SoPs) for claiming incentives, nearly two years after the scheme became operational, the people said on the condition of anonymity.
What is missing? Processes for verifying sales and investments, the “formats” of various certificates, undertakings and documents, and a “standardized procedure” for testing agencies to verify the claims.
More importantly, the article goes on to point out three very face-palm-y things. One, no applicant has been able to file claims for the first year of the scheme, which ended in March 2023. Why? Because the SoP for calculation of domestic value addition were only released a year after the scheme become operational. Second, the volume of documents and compliances required only seems to be going up. And finally, the reason this is happening is because of the unholy mess that was FAME-2.
Executives said the government’s insistence on strict compliance with the rules arises from its experience with another auto industry subsidy scheme. Many automotive companies had wrongfully claimed subsidies as part of the FAME-2 scheme by stating incorrect details and taking a warped interpretation of the rules. Many companies wrongfully claimed that they were sourcing certain parts locally as mandated by the scheme even as they relied on imports. “The FAME episode has put the whole ecosystem into an auditor’s mindset rather than a facilitator’s mindset. The same rules can be interpreted in different ways. They are taking the strictest interpretation due to the FAME setback,” an auto industry executive said.
Now, there are only two acceptable ways to react to news like this these days. You can take your pick.
The first would be to point out that it is early days, and that other schemes in the past have also had teething issues, and that it is too soon to tell, and that we need to be more positive about things that are being attempted.
The second would be to point out that nothing seems to be working, and that this is another example of how bad things have become, and it is all announcements and glitz and glamour, but the nuts and bolts of policymaking really and truly matter, but nobody cares.
Would you care to take a look at a third way instead?
The third way involves thinking about a paragraph from the article, one that I have not quoted thus far. Here goes:
“No one wants to take the blame in case anything goes wrong with this scheme too. But in all that, somewhere, the spirit of the scheme has got lost,” they added.
If you are a sarkari babu tasked with “making this PLI work”, you can treat your assignment in one of two ways. Option one is to treat your job as one in which production of automobiles in India goes up over time. Option two is to treat your job as one in which you are not to be blamed for companies taking undue advantage of the rules and compliances you set up.
The problem is that option one means that you may well get the production to go up, but you cannot control for incidences of cheating. Option two, on the other hand, means that you may well come out of this smelling like roses, but production of automobiles may not go up.
Which error would you rather make?
Babus in our country are crystal clear about their choice. They are always going to choose option two.
Why, you ask? Well, because there is no upside to them in the case of option 1. Their salaries don’t go up if automobile production increases. But in the case of option 2, they will be in hot water if companies end up cheating on subsidies and incentives given.
Ask yourself how their incentives line up, and once you answer that question, the article in Livemint begins to make a lot more sense. It is still depressing as hell, mind you, but hey, at least you understand why.
Economics can be quite a simple science every now and then, thankfully. It can also be quite dismal, more’s the pity.
“A few months ago, as I was reading Constance Reid’s excellent biography of Hilbert, I figured out if not the answer to this question, at least something that made me feel better about it. She writes:
Hilbert had no patience with mathematical lectures which filled the students with facts but did not teach them how to frame a problem and solve it. He often used to tell them that “a perfect formulation of a problem is already half its solution.”
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.. A very short, but oh-so-readable essay from Paul Graham. Please read it for a variety of reasons, but mostly to understand that reading is a long term activity with a lot (a lot!) of positive payoffs in the long run.
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“When the Bureau of Economic Analysis (BEA) measures economic output, it categorizes spending with the National Income and Product Accounts (NIPA). Some of this spending, which is counted as C, I, and G, is spent on imported goods.1 As such, the value of imports must be subtracted to ensure that only spending on domestic goods is measured in GDP. For example, $30,000 spent on an imported car is counted as a personal consumption expenditure (C), but then the $30,000 is subtracted as an import (M) to ensure that only the value of domestic production is counted (Table 3). As such, the imports variable (M) functions as an accounting variable rather than an expenditure variable. To be clear, the purchase of domestic goods and services increases GDP because it increases domestic production, but the purchase of imported goods and services has no direct impact on GDP.”
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From within the link to the Noah Smith article yesterday, a good, short explainer of GDP, and why imports don’t “reduce” from GDP.
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“In economics, there is no free lunch. While TV channels feel that they are saving money by not paying the experts, what they get in return is a total mess and not some meaningful, coherent programming, in which people can take away some learning at the end.”
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Vivek Kaul explains why people on the news shout so much. Incentives – it’s all, always, about incentives!
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“In a 2009 summary paper of their respective decision-making sub-fields, psychologists Daniel Kahneman and Gary Klein spell out the conditions required for expertise to exist. They discover that in order for expert intuition to work, the practitioner needs to inhabit a domain where:The environment is regular. That is, the situation must be sufficiently predictable, with observable causal cues.
There must be ample opportunities to learn causal cues from the environment.”
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.. An interesting article about whether ideas from one domain should be used in another, and under what circumstances.
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“Whether the East Asian Model will take hold in East Africa and beyond is not a given. But it also isn’t a stretch to see how the African “Lion economies” could accelerate their transformation by embracing the formula that successively produced the Asian Tigers and China.In his seminal Development as Freedom, Amartya Sen equated personal freedom with economic development. But to reach that objective requires traversing through the phase of “development as imitation” of successful models that came before.”
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Can Africa achieve in this century what Asia did in the previous one, following the same playbook? This is going to be the most important question for this century, and this article helps you understand how to think about it. One useful way to start thinking about it, at any rate.
EconForEverybody 