Sunday,Mar 04,2007
Shyam Ponappa: Give up state vs mkt dogma
New Delhi March 4, 2007
We are now reeling from the inevitable corrections in a developing market driven by runaway sentiment, hampered by infrastructure and supply constraints, fuelled and spooked by global sentiment — including China’s and the world’s alarming slump just before Budget 2007. A good time to take stock of the fundamental underpinnings for our encouraging prospects, such as they are.
This is the third of four articles on what India needs beyond its tipping point, assuming that is where we are (see Beyond India’s Tipping Point, BS December 7, 2006). To recap, these articles are premised on the critical importance of economic competitiveness to increasing per capita GDP, bringing a modicum of prosperity to all, through improved productivity with radical changes in the four following areas to achieve an appropriate level of competition in the public interest:
First, the government to change from ruler to partner and facilitator, as a stakeholder in the public interest, away from the exploitative, adversarial stance inherited from colonial and feudal legacies (in the article cited above).
Second, the role of the Left to evolve towards a more inclusive Social Democracy, away from conflict and confrontation based on outmoded ideologies.*
Third, the subject of this article: bridging the divide in market philosophy between the privateers and the champions of state control. Difficult, yet necessary to get away from the Hobbesian 'nasty and brutish' of non-regulation, even though all other roads have so far led to the inadequacies we continue to face.
The fourth will address the need to change our personal and social attitudes, the slippery slope of individual commitment and action, a variant on WYSIWYG: What You Give Is What You Get, in a recursive, endless loop.
These four areas of volition are endogenous factors; the catch: the proviso that government sees itself as a stakeholder and stops being an exploiter. All four are driven by an underlying principle of game theory: acting competitively in one’s self-interest in non-zero-sum games, assuming that counterparts will act competitively in their self-interest, results in suboptimal results. Such ‘maximin’ outcomes can always be improved upon by collaboration. The exceptions are where the situational constraints, that is, logic and structure, not psychological limitations, preclude better collaborative outcomes, because the structure of the situations are zero-sum, leading to win-lose results. For instance, if you and I negotiate, what you gain is necessarily what I lose, and vice versa. For more on this, see The Game Plan at http://hamada-diagram.blogspot.com.
Another premise is that only organised, collaborative, systematic, well-planned efforts can make for a sustained, broad improvement in living conditions all around. Finance Minister Chidambaram’s response after the Budget speech to his NDTV interlocutors, that he must cater to a broader constituency than only the media’s concern with big business, is unexceptionable. However, allocating funds to populist causes is like throwing good money after bad if the delivery quality is not ensured.
Escaping From Ideologies
The changes essentially call for eschewing ideologies and dogma in favour of collaborative professionalism, that is, informed, open decisions based on expertise. Some of the significant barriers are outlined below.
# An enduring and powerful myth of international economics, business, and policy is that of free markets and free trade. Many in India seem to subscribe to these notions, ignoring the enormous gulf between the developed markets that tout these myths and ours, which render such comparisons meaningless. Much of the reason for this may be that free trade is America’s ideology if not its reality, with all that this implies in terms of dominance in press, media, and power. It was Milton Friedman, however, who said that a free market “exists nowhere in the world... almost everywhere what you have, at best, is a partly free, largely hampered, private market.”
# Then, there are the repeated invocations of Adam Smith’s Invisible Hand. Little attention is paid to his castigation of what rampant capitalism in the form of the East India Company was doing to India. A clear and incisive book by Nick Robins, The Corporation that Changed the World: How the East India Company Shaped the Modern Multinational, seems to have received scant attention in the Indian press, although it has done much better abroad. One reason may have been the timing of its release in India, which coincided with the launch of William Dalrymple’s The Last Mughal. Robins’ critique of the East India Company was simply obliterated. One wonders, though, whether it might also be that self-selection here, as in America, leads to less attention to those things that do not conform to the prevailing dominant theme, namely, privatisation and free markets.
# Third, there is the oft-made argument by purists for monetary policy to contain inflation, regardless of the known supply constraints: initially oil, then wheat, vegetables and pulses. On the opposite (statist) side, there is the related irony of administered prices: if oil prices rose to $80 a barrel, there would be no fiscal deficit (see Oil price of $80/barrel can erase fiscal deficit, BS, February 20, 2007)! Obviously, we need a systematic, structured, institutional approach to these supply problems as much as to the Administered Price Mechanism for petroleum products.
# Fourth, harping on privatisation instead of autonomy, that is, reducing government control and interference. Clearly, government control and interference are massive costs. For examples of what to avoid, see How to kill a PSU, BS, February 27, 2007, for the cases of ONGC and BSNL. But if changes can be made to introduce autonomy, that is where to focus.
Collaborate To Win
Let us recognise at the outset that every nation uses its policies to pursue its national interest, regardless of speeches at international conferences. Let us also recognise that we can do this far better if we approach it systematically, and collaboratively. There is a price to be paid: statists and privateers have to learn to play team, something we seem to do only when other people make the rules, e.g., functioning in corporate environments abroad, or targeting foreign markets, as with the major IT companies like Infosys, Wipro, or TCS, or Sundaram Fasteners in automotive products.
The price includes giving up our penchant for claiming omniscience on whatever side we are. Team play means accepting that there are limits to one’s knowledge, and respect for the knowledge of others, even when such expertise is in areas we do not comprehend fully.
Most important, all players have to recognise that organisation and systems are necessary for long term planning and execution, and put these in place. Otherwise, we cannot have cities that are clean and beautiful, or a clean, beautiful and prosperous countryside. No amount of individual excellence and accomplishment can substitute for the achievement of organised collective action.
* Opportunities for the Left, BS, Feb 1, 2007:
http://praxis-regs.blogspot.com
shyamponappa@gmail.com
Sunday, March 4, 2007
Regulatory Constraints: A Reform Agenda
Regulatory constraints on productivity and per capita GDP growth - India
Ways Out
Opportunities for the Left
Shyam Ponappa / New Delhi February 01, 2007
Could Social Democracy work in India?
Regulatory constraints
In my previous column, I mentioned a McKinsey report about how fixing India's regulations could improve productivity by 61 per cent. The figure shows their estimate of how much poor regulation constrains productivity.
Source: http://www.mckinseyquarterly.com/article_abstract.aspx?ar=1612
Despite its record, the Left in India today has unprecedented scope for influencing constructive change, while substantially enlarging its constituency. The Left's reorientation away from adversarial class war was the second of four change areas identified in my previous article, the government's need to change from ruler to facilitator being the first. In West Bengal, the Left has already initiated some difficult constructive steps to revive economic growth. CPI (M) General Secretary Prakash Karat reportedly says that their challenge is to achieve economic development in a manner that benefits the people.
Their potential for positive influence far exceeds the ambit of the states where the Left has a majority. However, to realise this, the Left will probably have to realign itself to develop a kind of social democracy in India.
This scope for influencing policy has come about because fractious politics ensures that we will have extensive coalitions in power, with the Left having a significant role for better or worse, whether as participants, supporters, or in the opposition. While the Left can obstruct, disrupt, or hold back through confrontation as in the past, its capacity to influence actions in the broad public interest is now unprecedented, provided there is a conscious evolution towards a broad, inclusive social democracy. This is because other parties -- the Congress, the JD, and the BJP -- have failed in developing appropriate systems and institutions that deliver the governance people could expect, i.e. in addition to law and order, the enabling and facilitating infrastructure that people need to be productive and have a reasonable quality of life. While necessary, the Left's realignment is not sufficient, as other stakeholders -- individuals as owners, workers/managers/professionals, politicians, and all members of society -- have to collaborate actively for a good composite outcome. Therefore, developments modelled on the balanced achievements of well-functioning social democracies, e.g., in Scandinavian countries or the Netherlands, are likely to appeal not only to the Left's traditional constituents, but also to a broad set of liberals. Many in India are beginning to show a willingness to make efforts to improve their society and living conditions, rather than tolerate the filth and shoddiness that go with the inequities and disparities we have had so far. We need to develop this path that we don't yet have.
To realise its potential, the Left has to engage with society for inclusive constructive change. As in West Bengal, this means turning away from its historical role of advocating class conflict. Instead, the Left can help to evolve a form of social democracy that makes sense for India.
The areas that need radical change and require multipartisan efforts to engage in developing workable solutions for India's varying local circumstances are:
a) Works councils that are inclusive and collaborative as in the Netherlands, in place of confrontational unionism. Game theory posits that a collaborative outcome will always improve on a competitive approach, which results in the minimal Nash equilibrium (see "Tata's Corus Buy", Business Standard, November 3, 2006). The rationale is the same as for corporate alliances, e.g., Tata and Corus.
b) A more equitable solution to the acquisition of land for development. The Left could champion an approach based on the analogy of equity stakes in urban land development, e.g., tenants getting apartments on conversion to highrises. Similar principles can be applied to rural land acquisition, although the details of what is paid up-front as against continuing equity in the development will need some financial engineering. There is also a distinct need to ensure that compensation policies are effectively implemented.
c) A concerted long-term effort addressing the policy framework for enabling infrastructure. This needs a systematic makeover in every major aspect addressed, e.g. energy, communications, transportation, basic health including water and sanitation, and basic education. For each of these, the entire gamut needs to be made over, comprising an integrated system of policy aims with requisite laws, rules, procedures, practices, and institutions for execution and maintenance.
d) Getting It Right: We have to be honest with ourselves, rather than indulge in overeager self-congratulation (e.g., see Sunil Jain:* "...a host of regulatory decisions that have been one-sided, in areas like telecom especially"). If you wonder that the rhetoric of several rounds of liberalisation resulted in such messy outcomes, it helps to scrutinise each step in the whole chain relating to a sector in each round to identify the flaws. It is good to see a glass as half-full, but not if we shortchange ourselves in setting up poor systems. These systems are like structures: build on political accommodation coupled with incompetence instead of economic logic, and the edifice collapses or is dysfunctional (imagine a massive physical edifice built on political compromise instead of engineering principles).
Quality of life
If you are impressed with the telecommunications revolution in India, consider how much more effective countrywide broadband services would be for delivering everything from education to health care and entertainment, as well as marshalling productive capacities across our vast distances, to know what we are missing with our hodge-podge approach -- bad connections, slow speed, intermittent failure, even in Delhi. The policy and regulatory framework needs to be built with system integrity to be effective. This can greatly improve the ability of vast numbers of our people to access learning and health care, interact with each other, function productively, and contribute in manifold ways to efficiency and convenience, important aspects of the quality of life.
No political party or government has acted systematically to correct these shortcomings, neither in telecommunications, nor in any other sector -- except possibly the new Automotive Mission Plan 2006-16. The ultra mega power projects are one-off's for power; they do not address the absence of a systemic solution.
Could the Left channel its organisation and energies to provide this lead while seeking multipartisan inputs to raise our quality of life?
* 'Why have regulators'�
BS January 22, 2007.
shyamponappa@gmail.com
Posted by Praxis at 4:25 PM 0 comments Links to this post
Labels: left, productivity, reforms, regulation, unions, works councils
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* ▼ 2007 (1)
o ▼ February (1)
+ Regulatory Constraints in India - Ways Out
About Me
Praxis
View my complete profile
Ways Out
Opportunities for the Left
Shyam Ponappa / New Delhi February 01, 2007
Could Social Democracy work in India?
Regulatory constraints
In my previous column, I mentioned a McKinsey report about how fixing India's regulations could improve productivity by 61 per cent. The figure shows their estimate of how much poor regulation constrains productivity.
Source: http://www.mckinseyquarterly.com/article_abstract.aspx?ar=1612
Despite its record, the Left in India today has unprecedented scope for influencing constructive change, while substantially enlarging its constituency. The Left's reorientation away from adversarial class war was the second of four change areas identified in my previous article, the government's need to change from ruler to facilitator being the first. In West Bengal, the Left has already initiated some difficult constructive steps to revive economic growth. CPI (M) General Secretary Prakash Karat reportedly says that their challenge is to achieve economic development in a manner that benefits the people.
Their potential for positive influence far exceeds the ambit of the states where the Left has a majority. However, to realise this, the Left will probably have to realign itself to develop a kind of social democracy in India.
This scope for influencing policy has come about because fractious politics ensures that we will have extensive coalitions in power, with the Left having a significant role for better or worse, whether as participants, supporters, or in the opposition. While the Left can obstruct, disrupt, or hold back through confrontation as in the past, its capacity to influence actions in the broad public interest is now unprecedented, provided there is a conscious evolution towards a broad, inclusive social democracy. This is because other parties -- the Congress, the JD, and the BJP -- have failed in developing appropriate systems and institutions that deliver the governance people could expect, i.e. in addition to law and order, the enabling and facilitating infrastructure that people need to be productive and have a reasonable quality of life. While necessary, the Left's realignment is not sufficient, as other stakeholders -- individuals as owners, workers/managers/professionals, politicians, and all members of society -- have to collaborate actively for a good composite outcome. Therefore, developments modelled on the balanced achievements of well-functioning social democracies, e.g., in Scandinavian countries or the Netherlands, are likely to appeal not only to the Left's traditional constituents, but also to a broad set of liberals. Many in India are beginning to show a willingness to make efforts to improve their society and living conditions, rather than tolerate the filth and shoddiness that go with the inequities and disparities we have had so far. We need to develop this path that we don't yet have.
To realise its potential, the Left has to engage with society for inclusive constructive change. As in West Bengal, this means turning away from its historical role of advocating class conflict. Instead, the Left can help to evolve a form of social democracy that makes sense for India.
The areas that need radical change and require multipartisan efforts to engage in developing workable solutions for India's varying local circumstances are:
a) Works councils that are inclusive and collaborative as in the Netherlands, in place of confrontational unionism. Game theory posits that a collaborative outcome will always improve on a competitive approach, which results in the minimal Nash equilibrium (see "Tata's Corus Buy", Business Standard, November 3, 2006). The rationale is the same as for corporate alliances, e.g., Tata and Corus.
b) A more equitable solution to the acquisition of land for development. The Left could champion an approach based on the analogy of equity stakes in urban land development, e.g., tenants getting apartments on conversion to highrises. Similar principles can be applied to rural land acquisition, although the details of what is paid up-front as against continuing equity in the development will need some financial engineering. There is also a distinct need to ensure that compensation policies are effectively implemented.
c) A concerted long-term effort addressing the policy framework for enabling infrastructure. This needs a systematic makeover in every major aspect addressed, e.g. energy, communications, transportation, basic health including water and sanitation, and basic education. For each of these, the entire gamut needs to be made over, comprising an integrated system of policy aims with requisite laws, rules, procedures, practices, and institutions for execution and maintenance.
d) Getting It Right: We have to be honest with ourselves, rather than indulge in overeager self-congratulation (e.g., see Sunil Jain:* "...a host of regulatory decisions that have been one-sided, in areas like telecom especially"). If you wonder that the rhetoric of several rounds of liberalisation resulted in such messy outcomes, it helps to scrutinise each step in the whole chain relating to a sector in each round to identify the flaws. It is good to see a glass as half-full, but not if we shortchange ourselves in setting up poor systems. These systems are like structures: build on political accommodation coupled with incompetence instead of economic logic, and the edifice collapses or is dysfunctional (imagine a massive physical edifice built on political compromise instead of engineering principles).
Quality of life
If you are impressed with the telecommunications revolution in India, consider how much more effective countrywide broadband services would be for delivering everything from education to health care and entertainment, as well as marshalling productive capacities across our vast distances, to know what we are missing with our hodge-podge approach -- bad connections, slow speed, intermittent failure, even in Delhi. The policy and regulatory framework needs to be built with system integrity to be effective. This can greatly improve the ability of vast numbers of our people to access learning and health care, interact with each other, function productively, and contribute in manifold ways to efficiency and convenience, important aspects of the quality of life.
No political party or government has acted systematically to correct these shortcomings, neither in telecommunications, nor in any other sector -- except possibly the new Automotive Mission Plan 2006-16. The ultra mega power projects are one-off's for power; they do not address the absence of a systemic solution.
Could the Left channel its organisation and energies to provide this lead while seeking multipartisan inputs to raise our quality of life?
* 'Why have regulators'�
BS January 22, 2007.
shyamponappa@gmail.com
Posted by Praxis at 4:25 PM 0 comments Links to this post
Labels: left, productivity, reforms, regulation, unions, works councils
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Blog Archive
* ▼ 2007 (1)
o ▼ February (1)
+ Regulatory Constraints in India - Ways Out
About Me
Praxis
View my complete profile
Beyond India's Tipping Point
Business Standard
New Delhi December 07, 2006
Shyam Ponappa discusses what it will take to improve productivity.
New Delhi December 07, 2006
Shyam Ponappa discusses what it will take to improve productivity.
It is increasingly evident that India is at a tipping point. A qualitative change is beginning to show in a broad swathe of services, products, and mindsets, although it is equally clear that for most activities, this inflection is at an early stage. There are a host of reasons for this, and by definition, it is this convergence of many factors that makes for a tipping point.* Consider the features that make for a good neighborhood or city, and it is obvious that regional and national transitions happen for complex reasons. They encompass the interrelated factors comprising people in their various dimensions, such as their nature, skills, productivity, organization, systems, demographics, their physical and material environment including their natural environs, proximity and linkages, enabling infrastructure, movements of capital and people elsewhere in the world in every connected sector and location, technological and economic developments, the condition of their emigrants to other societies, and much else.
Understanding the variables in the tipping point is important for shaping the future, however, even if it is difficult to deconstruct the elements. And one factor clearly at work in India’s present transition is its improving economic competitiveness. According to the McKinsey Global Institute’s former director and founder, William W. Lewis, competitiveness is the single, most important factor in increasing per capita GDP, the most critical need in India, at least up to a point.
Lewis’s book, ‘The Power of Productivity’,** is based on MGI’s study of industry sectors in 13 countries over 12 years to identify each sector’s pattern of productivity, i.e., the ratio of the value of goods and services consumed to the amount of time worked and capital used to produce these goods and services. Sectoral competition is most influential in determining productivity (which is certainly borne out by the rise of India’s IT and BPO sectors), and national productivity closely tracks per capita GDP adjusted for purchasing power parity (see figure below). Lewis concludes that large sectors like retail, wholesale, and construction have the greatest effect on GDP, and to improve per capita GDP, countries must increase their productivity in all sectors primarily through intense, fair competition in consumers’ interests.
http://www.mckinseyquarterly.com/article_abstract_visitor.aspx?ar=1423
A surprise, however, is his dismissal of the role of infrastructure in productivity. This is difficult to accept given what one sees in India, China and elsewhere, as well as our experiences of working in enabled environments.
The MGI maintains that poor regulation is the main factor limiting productivity by distorting competition. To quote from 'Regulation that's good for competition', by Scott C. Beardsley and Diana Farrell, on which there will be more in my next article, ‘India… could raise its labor productivity by 61 percentage points if it removed harmful rules.’
Changes Required
Among the choices that will significantly affect India’s competitiveness for a long time through factors it can control, the endogenous factors, are four areas where enlightened choices will help India become much more competitive:
- The first is the domineering, adversarial stance inherited from colonial and prior feudal legacies of our government towards our people.
- Second, the involvement of the Left in mainstream government and its effects on the social, political, economic, and cultural aspects of our lives.
- Third, partisan politics that exploit bigotry, caste, the effects of reservations through misrepresentation, whether of statistics, situations/examples from India or other countries, or any other mala fide distortions.
- Fourth, the Great Divide between the champions of free markets and of state participation.
In our collective interests, changes in all four require collaborative solutions with one aim: an appropriate level of competition in the overall public interest. With these changes, India can then plan properly for, and achieve, good regulation. Now to the specifics.
The four fundamental change areas therefore concern:
a) Government’s attitudes: from ruler to facilitator partner.
b) The Left: from hard-line ideology pushing adversarial class conflict to participative action for the greatest good.
c) Social/Personal attitudes: from predatory exploitation for short-term gains to enlightened, long-term societal enrichment. This applies equally to all individuals as consumers or producers, whether in politics, administration, in public or private corporations, or as individuals per se.
d) Market Philosophy: from the Great Divide (privateers, capitalists, freebooters, and libertarians, versus state participation) to collaborative aims and actions.
A conscious effort with this mindset could then result in good regulation with high productivity.
The changes in the role of the government are outlined below. Subsequent articles will address the other areas: changing mindsets from confrontational unionism to collaborative works councils; from short-term selfish gains to longer term societal benefits through a pragmatic coalition of interests crossing political and ideological lines; from dogmatic capitalism, libertarianism or socialism to pragmatic collaborative action for the greatest gains.
Government: From Ruler to Facilitator & Partner
If our government understands and acts to orchestrate a beneficial level of fair competition, we will get the most benefit from available capital and labor.
Together with the instruments of colonial exploitation inimical to our interests, our government also inherited the domineering mindset, although in a more patronizing role, instead of being a lead facilitator and partner in the public interest. As a consequence, barring law and order, our governments’ focus has by and large simply not been on those issues we would expect as a priority from our current understanding of improving per capita GDP: systems that provide enabling infrastructure – energy, communications, transportation, basic health (including water and sanitation), education services and shelter, with good regulation to foster an appropriate level of competition. The daily newspaper ads for power backup systems and water purifiers indicate the failure of government in providing these essential services. The bitter zoning conflicts in our cities reflect a similar failure. For instance, the Delhi Development Authority has only built a fraction of the planned commercial space over the last 45 years (16% according to the DDA itself).
This situation must change for us to have the government we need. India does not need feudatories preying on their own people, but a government that engages with its people to plan and create a framework for productive activity. Without this, it will be difficult if not impossible to rapidly increase overall prosperity (per capita GDP).
* http://en.wikipedia.org/wiki/Tipping_Point; http://en.wikipedia.org/wiki/Mark_Granovetter
http://en.wikipedia.org/wiki/The_Tipping_Point [Malcolm Gladwell]
** The University of Chicago Press, 2004
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