Tuesday, July 31, 2007

Community Halls and poverty

There are numerous studies which conclude that the poor tend to spend a far disproportionate share of their meagre incomes on festivals, weddings, funerals and other personal functions. The latest addition is an article in the Journal of Economic Perspectives, by Esther Duflo and Abhiit Banerjee of the MIT, who find that the poor spend over 10% of their income on such occassions. Naturally, it becomes an area of concern for policy makers and implementors. The challenge will be to incentivize the poor to spend less on such functions and channelise these savings to other more productive areas like food, children's education etc.

In stark contrast to this imperative, we at Vijayawada Municipal Corporation (VMC) have been for some years been doing exactly the opposite. We have been incentivizing the poor residents of slums to spend more on such functions, by covering all the 150 odd slums in the city with community function halls. On the face of it, this appears a laudable effort, with the local residents and the area councillors being its most vociferous supporters. But I will argue that, far from helping the poor this has been to their detriment.

The poor people in slums have historically had their well established way of organizing their family and community functions. These functions used to be held in small open grounds, which now house these community halls or along the more wider road margins or even the street itself. A shamiana and a makeshift stage used to be erected. Even the private individual functions of each household used to be organized as community functions with active participation of all the neighbours, apart from the relatives. The neighbours used to share resources like vessels, chairs and tables, apart from their voluntary physical labor. With limited space available, the numbers of people attending such funcitons also used to be smaller.

Into this environment was introduced the community hall. The VMC built these community halls under the British Government assisted ODA program. With the arrival of these larger community halls, the character of the private and community functions took a different turn. In contrast to the road-side, neighbour assisted community function, every event now shifted to the community hall. With all the requirements of a full fledged auditorium, the logistics increased. The number of people attending these private functions increased. Since the VMC had leased out these halls to private individuals to maintain, the rental charges became an additional burden. The community hall lease holder started supplying food and other logistics for the function, at a cost. With all these the expenditures soared.

There are some comparative figures. A traditional road-side, neighbour involved private function would cost about Rs 5000-6000, by way of function logistics. In contrast, the community hall function costs around Rs 10000-12000. The loss is not merely monetary. These functions were a useful occasion for the neighbourhood and the community to get and bond together, thereby generating valuable social capital.

Now, critics may argue that this is another of those arguments which tries to romanticise the practices of the poor. But my contention is simple - community halls have made slum functions more expensive and therefore willy-nilly makes the poor spend more on their functions and festivals. It is undoubtedly true that increasing consumerism and the spread of television channels have contributed considerably in creating this trend. But the Government have also surely contributed its share by providing greater opportunities for the poor to spend more.

Monday, July 30, 2007

Doping in Sport

The latest edition of the Tour de France is in news more due to a series of doping scandals, than as the great sporting spectacle that it always is. The Tour de France is not just the premier event in the cycling calendar, but is the ultimate test of human endurance (6000 calories consumed per day). It is not just a sporting event with appeal cutting across sporting boundaries, but a cultural and social event without parallel.

For the uninitiated, the Tour de France is a 3550 km long cycling race, started in 1903 and spread over three weeks and watched live by over 15 million people. The riders average a staggering 40 km per hour over the 20 gruelling stages, which include steep mountain climbs on the Alps and the Pyrenees. The winner of the Tour is resented the Yellow Jersey in front of the Arc de Triomphe along the Champs Elysee.

The 104th edition of the Tour has been dogged by controversies even before it started. With last year's winner Floyd Landis' status still up in the Malibu courts for final adjudication, the Tour started without a legally valid defending champion. A series of doping revealations early this year by previous Tour leaders, set the stage for a "Tour de Dopage". Bjarne Riis, the 1996 winner, Erik Zabel and Rolf Aldag confessed to having used blood booster EPO. Former King of the Mountains, Ivan Basso, was banned for two years following revealations of his role in a Spanish doping scandal.

After the race started with "Le Grand Depart" from London, the scandals continued to unravel. Pre-race favourite Alexandre Vinokourov and his Astana team were thrown out of the race after tests showed he had a blood transfusion prior to Stage 13, whose time trial he won. Then the race leader Michael Rasmussen was sacked by his Rabobank team for lying about his whereabouts during the build-up to the Tour, when he missed crucial drugs tests. Similarly the Cofidis team also pulled out after one of its riders, Cristian Moreni, tested postive.

Despite intense efforts, doping continues to remain one of the most important challenges in all sport. Rigorous and mandatory testing before and after individual events and random testing in team events, has had little effect in controlling the doping menace. The Tour de France, for instance, has introduced blood tests every morning and normal anti-doping tests in the afternoon on all drivers. In an attempt to monitor sportsmen on a continuous basis, out-of-competition tests have become the norm in all sports. In fact, though every imaginable regulatory solution to eliminating drug abuse in sport has been tried, doping continues to remain the major challenge facing modern day sport. However, all these attempts to address doping has been from the general framework of banning and eliminating drug use from sport. Now, the time has come to try out something different.

The incentive sytem in modern day sport is responsible for making it so vulnerable to such malaise. Sportsmen compete not for the sake of mere participation or any utopian notion of Olympian spirit, but for winning. The stakes are very high, with massive sponsorship and television and media coverage of sporting events. The returns on winning are so high that any attempt to squeeze out even the last ounce of output, including performance enhancing drugs, is worth its weight in gold. For all the rapid advances in dope detection technologies, there have been significant improvements in dope-masking technologies.

We therefore need to structure a system of incentives that while accepting the reality of doping, tries to ensure that the results truly reflect human sporting skills and abilities. This incentive structure will need to cost in the drug factor and penalize sportsmen who indulge in dope. A scientifically derived schedule of penalty factors for each category of dope offence, in every sport, can be tabulated. The penalty factor could be in terms of time and distance penalty in athletics and racing sports, goals or scores in team sports, and points in racket games. This factor should be on the higher side, so as to serve as a deterrent on drug use. For example, an Alexander Vinokurov, caught with 3 units of EPO in his blood smaple could be penalised 30 minutes, or 10 minutes per unit of EPO found. The challenge is to make the cost of using drugs prohibitively higher than its benefits. Any incentive structure will have to persuade sportsmen to give up drug use, and this is the only sustainable way to controlling drug use in sports.

Critics will say that this will rob sport of all its thrill and suspense, since the final result will be conclusive only after the dope tests. This arguement is fallacious since in any case now that is the reality with considerable number of sports events decided well after the drug tests. Administrators will simultaneously have to come up with strong enough penalties to deter sportspersons from using these performance enhancing drugs. Ultimately, modern sport is after all entertainment and theatre, packaged to make it even more alluring, and despite drugs, sporting events and performances will continue to generate spectacular thrills and suspenses.

In any case, it is hard to believe that doping and drug abuse is new to sports. The testing procedures have improved and the benefits of drug use has increased substantially over the past two decades, resulting in more sportsmen using drugs and more positive cases being detected. But sportsmen in all ages have relied on external agents, be it amphetamines or brandy or the more potent performance enhancing drugs of today, for some form of stimulation. There is an excellent article in the Guardian by Dan Geister, "Bad Drugs, great sport", on this.

Sunday, July 29, 2007

Coping with natural disasters

Britain has been ravaged by what is being called the worst floods in the last hundred years. These floods have affected nearly a million people and has resulted in losses worth billions of dollars. The entire Government machinery has been paralysed by the enormity of the catastrophe and the unprecedented relief effort challenge.

This scale of catastrophe and Government paralysis in its wake is not new, even in the rich developed world. The aftermath of Hurricane Katrina is the most infamous example of ill managed rescue and rehabilitation efforts after a disaster. In the case of New Orleans, the problem was compounded by George W's policy of packing the Federal Emergency Management Agency (FEMA) with his cronies, who do not have any professional knowledge or experience in such activities.

For long, natural disasters have been thought to be the exclusive misfortune of the poor, developing contries of especially Asia and Africa. Floods, landslides, earthquakes, drought etc are annual events in many of these countries. In fact, many of them are intimately linked in the disaster management study circles with specific disasters, like Bangladesh with floods. But increasingly, natural disasters have stopped discriminating economic and political boundaries, and have been affecting European countries and even the United States.

These annual disasters across the developing world are occasions for the western print and electronic media to decry and drive home the utter inefficiency and ineptitude of these governments to protect their own citizens. Now with the same story being enacted in their own countries and similar (in case of New Orleans, it was worse than the worst that Bangladesh Government ever managed) ineptitude becoming evident, questions are now being raised about the inherent nature of disaster management.

Having managed three major floods in Bhadrachalam (banks of River Godavari), one very big and another smaller one in Vijayawada (banks of River Krishna), my belief is that practical, field level disaster management work, both during and in the immediate aftermath, is a highly labor intensive activity with no substitute for painstaking and concentrated human effort. Both Bhadrachalam and Vijayawada, like New Orleans, are protected to some extent by flood bunds and levees with gates, whose operation and maintenance is critical in controlling water ingress during floods. I have seen many a sleepless nights spent by officials trying to manage these gates, so as to prevent leakages during floods. In this there is no substitute for human effort and continuous vigilance.

The difficult work conditions and the constraint of resources makes rescue and rehabilitation incredibly challenging. Sophisticated machinery and logistics can be of only limited help in rescue, rehabilitation and relief (RRR). The field level experience and commitment of the RRR personnel cannot be substituted by anything. Being vulnerable and repeatedly exposed to such disasters, coastal and earth quake prone areas in developing countries have established mechanisms in place to combat these challenges whenever they strike. Such mechanisms include both the formal institutional arrangements of the Government and the societal and community networks that complement the former. These mechanisms are irreplaceable and are absent in most developed countries without frequent exposure of such disasters.

While we constantly complain about corruption and Government apathy as compounding the problems posed by natural disasters, the situation in the richer nations confirms that we do not exercise any monopoly over these attributes. Sample this from the Independent (Geoffrey Lean: Get used to floods - the worst is yet to come)

Half of all housing built in Britain since the Second World War - covering a total area the size of the West Midlands - has been sited on land prone to flooding. Councils and ministers have constantly disregarded warnings from the Environment Agency about unwise developments. The consequences are plain to see; most of the houses inundated in this summer's floods have been relatively new, erected in the wrong place.

Yet, even now, nearly one in every six new buildings is being placed in flood zones - and present plans suggest that this will rise to almost one in three between 2016 and 2021. The Association of British Insurers wants houses planned for much of the Thames Gateway to have their living areas on the first floor to keep them dry.

To compound the danger, successive governments have neglected Britain's flood defences. A report by the National Audit Office last month concluded that only 57 per cent of them - and just 46 per cent of those most important ones, such as those protecting towns, are in good condition.

Worse, ministers have consistently refused to give the Environment Agency the money it needs to build enough new ones, causing vital schemes to be delayed for years. Last year, they even cut the budget. In the wake of this summer's floods they have increased it by a third; but this won't take effect until 2010 and will still fall far short of what is required.

All these factors mean that the number of British homes at risk of flooding is projected to rise from two million to 3.5 million over coming decades.

Replace Britain with India, and you have more or less the same situation here. Population pressures and scarce land availability have led to massive encroachments on river, canal, and tank bunds and even beds. The disaster management agencies are starved of resources and hence chronically ill-equipped. Flood and natural disaster insurance (cat insurance) is in its incipient stages.

Friday, July 27, 2007

Auctions and Winner's Curse

Winner's Curse refers to the problem wherein the winner of auctions often overpays for his successful bid. Winner's Curse arises in auctions where there is uncertainty in the value of the item being auctioned. In its absence, the bidders are unsure about a successful bid value. If the value of the commodity is known or if there are many identical items being auctioned off, there is less likelihood of winner's curse.

There is this famous example from the Journal of Petroleum Technology (1971) explaining the Winner's Curse:
"Suppose several petroleum firms are bidding on the drilling rights to a piece of tundra. No firm is sure how much oil is underneath the property, so they hire a team of engineers to poke at the surface rocks and make a guess. The guesses will likely range from too low to too high. Some firm's engineer will probably guess right, but that firm won't win the auction. The winner will be the firm whose engineer was the most overoptimistic. The winning firm won't ultimately get as much oil as their engineers promised, meaning the firm paid too much. In short, the auction "winner" is ultimately a loser."

Auctions are an interesting case of departure from standard economic theory. Auctions with a large number of participants are more likely to cause inefficient outcomes, because the competing bidders invariably bid large and end up with a bad deal. Internet auctions, with the possibility of large number of participants, are especially vulnerable to the winner's curse problem. In fact, larger the number of participants, larger the potential for winner's curse. Alternatively, if an auction has to strike the right bid price for the winner, either there must be limited number of participants or the particular bidding process should keep off most potential bidders. But both these conditions go aginst the standard economic principles of competition.

There is also the rational bidder assumption. If any bidder turns out to be irrational, it has the potential to drive up a chain of irrationality, thereby severely distorting the price. Therefore, while theoretically auctions are the most ideal way of bringing buyers and sellers together, there are many pitfalls associated with them.

In the Vijayawada Municipal Corporation (VMC), we recently conducted a series of auctions to lease out our many vacant shopping complexes. The previous practice was to call for tenders and invite sealed bids on the goodwill amount. Since this process was not generating adequate response, it was decided to go in for auctions. These auctions were initially only single-bid, ascending (English) price auctions. But later, some of the auctions were held as single bid descending (Dutch) price auctions. There were also a few second-bid auctions, where the highest bidder gets the shop, while paying the second highest bid as goodwill amount.

It was observed that when the competition is intense, the ascending price auctions fetches better prices for the VMC. The single-bid auction appears to be the better option when the competition is neither stiff nor weak. But when the competition is limited to two or three bidders, as is the case many times, it is more beneficial for the auctioneer to hold Dutch auctions. In such Dutch auctions, the reserve price can be kept at two times the minimum goodwill amount, and the first bidder wins the bid. It is observed that in case of limited competition, ascending auction bids rarely go much beyond the reserve price. Whereas in Dutch auctions, by marking up the reserve price and thereby changing the bidding framework, we incentivize (or anchor) the bidder to quote more.

Wednesday, July 25, 2007

Health and Education Sectors

Continuing from an earlier post (What ails our health and education system?) on the problems faced by the education and health system in developing countries, I have certain observations about the inherent nature of health and education sectors, and Government activity in general.

One, unlike other sectors, increasing investment in social welfare service sectors like education and primary health care, does not by itself necessarily translate into better quality of service delivery. Though hard infrastructure assets like building, teaching materials and medical and diagnostic equipments are important, they are not the critical factor in ensuring quality service delivery in these sectors. The crucial role is that of the teachers, doctors and nurses, or more generally the human resource. Just as the knowledge industries, health and education sectors too need to place a premium on human resources development. It is their motivation, skills and initiative that determines the quality of services delivered. While typically Government interventions in education and health care focus on the physical assets, limited attention is paid to the aforementioned more softer dimensions. But, even with more focussed attention, there are no short cuts to instilling the aforementioned skills in these functionaries.

Second, health care and education suffers from what is commonly called "Baumol's Disease". It refers to the phenomenon whereby in sectors where productivity is flat and is relatively inelastic with respect to investment, the costs and prices keep going up. This also means that even when Government spending keeps increasing, the outcomes do not improve by much. Both sectors are labor intensive, in so far as we cannot significantly reduce the staff strength, either by improving their productivity or using technology, without adversely affecting the quality of service delivery. Further, while productivity improvements are smaller, the wage increases are more regular and always higher.

This gives the impression that health and education sectors eat up more and more revenues without commensurate improvements in quality of services. The reality is that typical Government sectors like health, education, policing, regulation, general administration are low productivity growth sectors. Thus Government share of expenditure will always tend to be higher, due to the inherent nature of the actrivities it does!

Tuesday, July 24, 2007

Transnational Risk Premiums

There are two interesting articles in The Guardian. First, by Professor Ulrich Beck of the LSE, In the new, anxious world, leaders must learn to think beyond borders, exposes us to the new world of transnational challenges.
The other article, "Blog of all blogs" by Anthony Giddens is a compilation and clarifications on all his previous blogs on Third Way, multiculturalism, inequality and social mobility, public intellectuals, New Labor, and international politics ranging from Iraq to Nicholas Sarkozy.

Monday, July 23, 2007

What ails our health and education system?

I have read or seen any number of articles and TV discussions, wailing and complaining about how the bureaucratic and political system in India has messed up, among other things, our health care and education. It is a common refrain that though we have excellent policies and programs, our bureaucracy and politicians fail us in implementation. Interestingly, even I used to believe in the same diagnosis till I became a bureaucrat myself. With an insider's perspective, now I have a different opinion on the issue. No, there is no vested interest here, but an attempt at a honest introspection.

I will try to illustrate my case with an example. The Integrated tribal Development Agency (ITDA) of Bhadrachalam is spread out over 12175 sqkm, and has a population of over 8 lakhs. There are about 847 schools, with nearly 5000 teachers, and 70000 children in 2006-07. Among these 847 schools, 645 are elementary and often single or two teacher schools, scattered across the villages in the tribal area. The health logistics is equally massive. There are 49 Primary Health Centers, over 300 sub centers, 10 Government hospitals, and 2 Tertiary Care Hospitals. These hospitals employ over 75 doctors, 350 nurses and other paramedical staff, and 2189 Community Health Centers (CHWs). This is a more or less representative sample of education and health infrastructure in rural India.

Now, I will stick out my neck and argue that no amount of regulation and supervision alone, will abe able to control the activities of nearly 3000 health and over 5000 education staff, spread over the 12175 sq km area of Bhadrachalam. This requires calling on the inherent strength, capacity, and discipline within the entire system and its functionaries. It also requires vibrant demand side interventions and vigilance.

What are the typical problems observed in health care and education? Infrastructure and logistics are rarely the problem, though a lot more still remains to be done on that front. But the major issue is at the cutting edge, in the physical delivery of these services. To be more specific, I am referring to the quality of teaching and health care services delivered to the students and the patients by the education and health functionaries. This quality is abysmal and universally so, in all its dimensions.

For a start, a good majority of teachers and health staff do not regularly attend to their duties. Even when they do, they often shirk repsonsibility and the quality of service delivered suffers. Further, for various reasons, teachers and medical staff are poorly trained and even more poorly motivated. Many of the schools and health sub-centers are located in remote areas with poor or even non-existent roads, which are often inaccessible by any mode of public transport. There are limited or no proper accommodation facilities available, so that the teachers stay elsewhere and have to commute long distances daily. This is an immediate incentive for not attending school or hospital under some pretext or the other. Further, houses and habitations are scattered and in the absence of connectivity, it becomes difficult to traverse without personal vehicles.

On the demand side, with the domestic economic and social compulsions, children frequently drop out and back in, and it becomes a serious challenge to retain children in schools. In many villages, there is no serious demand side pressure and a lack of manifest collective will in ensuring that the school is run properly. Even if the collective will is present, the community is often powerless to have its own way. School and Hospital Committees, wherever present become ornamental and get captured by vested interests.

There are no simple solutions for these very diverse and challenging problems. No Government machinery or political and bureaucratic system can wave a magic wand to solve them. No regulatory or bureaucratic solution can get teachers to visit school everyday or pay attention to the progress of each child. Neither can it get para-medical staff to cover every child and mother with all basic RCH care, or follow-up on all malaria and TB patients without any omission.

While the regulatory and supervisory mechanism is undoubtedly important, of more relevance is the inherent capacity, responsiveness, sense of civic duty and discipline, within the system and its stakeholders. The initiative and responsiveness of the teacher or the paramedical staff is the crucial determinant in the quality of service delivered in an elementary school or health sub-center. No amount of monitoring and supervision, regulation, review meetings and reporting formats, can be a replacement for the sincerity and committment of a field functionary. We need to build capacity among field functionaries through continuous, more focused and meaningful trainings, significantly raise motivation levels, and foster competition and commitment within them. There is also the need to develop social capital and civic responsiveness among the local community and citizens.

Amidst all this gloom and adversity, and the challenges posed by scarce resources, there are glowing examples of well run schools and health centers. These schools are shining models because of the exceptional personal commitment and initiative of the respective teachers and the civic responsiveness of the local community. For these teachers, each child is not a mere statistic, but an opportunity to shape the future of a child whose fate has been placed at their hands. Similarly, there are para-medical staff who cover every ante-natal and post natal case within their jurisdiction, and who have achieved substantial success in delivering high quality RCH and general primary health services. These successes, in the sea of failures and poor quality service delivery, are testimony to the commitment and initiative of the field functionaries and the community.

Now, many people will claim that things are changing and demand side repsonsiveness, in particular, has become more robust. True, but not in the scale for it to create a substantial and widely felt impact. Typically, aid agencies and opinion makers are exposed only to the successfully run school or hospital systems, where there is harmonious convergence between the functionaries and the community. It is understandable, but misleading to draw grand conclusions from these "show piece" models.

With due respect to poverty experts, I am convinced (since I am part of the system which does this) that except for a very small minority, the majority of them are paraded or get to visit only the more sanitised and successfully run models. This is understandable since the NGOs or the Government agencies have a clear incentive in showcasing the successes, so as to impress the funding agencies or donors, and also to enhance their reputations. The impressions they carry back home and propagate are therefore skewed and deceptive.

Yes, bureaucrats and politicians have contributed more than their share in spoiling the quality of primary health care and education services delivered by the Government. But blaming them for all the malaise is a gross simplification of the reality. The diagnosis lies elsewhere, and the prescription is not very easy to implement.

Sunday, July 22, 2007

Media and the Free rider problem

It is cliched but unarguably true that for the mainstream mass media, good news is mainly the bad or the sensational. Thanks to this trend, the role of the print and electronic media in shaping the terms of agenda on issues of civic concern is fast diminishing. (Though the role of the emerging media, mainly linked to the Internet, is becoming important) At the risk of being politically incorrect, I will stick out my neck and argue that unless there is proactive intervention (by whom and how is a different issue), the mainstream mass media will not supply adequate amount of space for issues of civic concern. Before you accuse me of being anti-democratic, in the best traditions of democracy, let me lay out my case.

One of the most evident consequence of the proliferation of mass communication media, has been the race towards the bottom or the lowest common denominator. The touchstone for a successful or "newsworthy" news item becomes its ability to stimulate or evoke the extreme passions within the reader or viewer. The substance of the issue or its appropriate perspective is only secondary or even, in some cases, irrelevant. Only the sensational, gory, provocative, controversial, exceptional news stories are considered worthy of capturing the major space in our news media. Call it by whatever name, the driving force behind this trend is economics, and the media are only responding to the existing incentive structure.

In the circumstances, any newspaper or TV channel that ventures out to publish or bring out a story on an issue of civic concern, which does not conform to any of the aforementioned parameters, is being irrational in going against the incentive structure. Not only does it not get any benefit from covering such issues, it also loses out readership to its competitiors. Thus issues of civic concern, or a public good, does not get adequately reflected in popular attention, and is therefore under-supplied by the media. Economists would call it a free-rider problem.

Public goods are those which are non-excludable (supplier cannot exclude those who do not pay for its from consuming it) and non-rival (the same news item can be seen or read by many people at a time, without affecting each one's utility). They suffer from the problem of free-ridership, in so far as the market does not provide these goods in the required quantities. The under supply arises from the producer's inability to recover the full or even partial cost of production from the consumers. Such a situation is called a market failure. Free riders are agents who consume more than their share of resources, or who do not bear the proportionate cost of production of any good which they and the society benefits from. The free rider problem therefore arises from issues of incentive compatibility, which leads the suppliers to under supply the particular good.

The mainstream mass media tries to free-ride on the more socially responsible media channels, who supply the public good despite the adverse incentive system. The social goods, like propogation of issues of civic and public concern, are public goods and hence its supply is not compatible with the existing market incentive structure for the mass media channels. They suffer from the issue of free-ridership, in so far as every mass media group thinks that it can shirk and let others deliver this public good, which does not fetch it any economic return from the market. These goods therefore tend to be under supplied by the mass media market.

Not only does the market under supply news of social and public concern, it will also over supply garbage. After all what significant difference does it make to anybody other than her relations, as to what Paris Hilton is doing in jail or when she will come out of jail? What great social purpose is served by being bombarded with a live broadcast of the antics of Shilpa Shetty and her Big Brother colleagues? The age of pure media groups is over and increasingly media channels are controlled by consortiums or various corporate interests. In the circumstances, it is only understandable that all shades of opinions on issues do not get reflected in any balanced and equitable manner, and the news worthy items are those which pander to the lowest common denominator. Further, such interlocking external interests also means that mass access to dispassionate and objective delivery of news information will become difficult.

Quite apart from the purely economic incentive structure and unlike other goods sold in the market, mass media have certain social and civic responsibilities. The unique access conferred on media goods to the entire public realm, makes mass media very different from any other commodity supplied in a market. The owner of any mass media channel has access over a social space, populated by the minds of all citizens, and is therefore in a position to exercise influence over them. That this influence has important socio-economic, political and civic implications means that it has to be exercised with restraint. It also means that such mass media are the most effective means to disseminate messages, spread awareness, generate debates, set agendas and build public opinion.

So we need to orient the incentive structure to make it attractive for the mass media channels to deliver such public goods. The simplest way is to regulate that each newspaper demarcate some space and each audio-visual medium set apart some time for delivering these public goods. Another way is for governments to sponsor such spaces within the existing commercial mass media. This has the danger of the message losing focus and being inferior in the content standard, and also being marginalized within the particular media. The most extreme solution is for the Government itself to deliver such messages through its own channels. Here the problem is of credibility and again standard.

Whatever the solution, the objective of the post is to only highlight the fact that, increasingly issues of public and civic concern will be marginalized in the mainstream mass media channels, as the inexorable logic of the market winds its way through. We will need to proactively identify and demarcate space for socially useful information and messages, because left to itself the mass media market willl not supply it in the required quantities.

Update 1
Matthew Ellman and Fabrizio Germano argue that advertising has seriously interfered with the quality, accuracy, and breadth of content and programming in the media and calls for vigorous competition in media markets and public funding of informative media as a public good.

Friday, July 20, 2007

Advertisements and product sales

There are a number of very interesting advertisements currently doing rounds in our television channels. Whereas previously advertisement films used to be small, few second clips, increasingly they are becoming longer films. While small clips bring out the message directly in a precise and succint way, the longer films drive home the message through a narrative which can be story or an event. As an audience to them, I feel that with longer films the message often gets dissipated in the hype and impact surrounding the narrative. The narrative itself becomes the central theme, rather than the message it is supposed to deliver. The force and impact of the narrative often overwhelms the message and even the brand recall capacity!

Advertisement 101 says the touchstone for the success of any advertisement film is its brand recall value. But is it really that simple? In the ultimate analysis, the brand recall has to reflect in bigger sales numbers. The more pertinent question to be asked in evaluating ad films is how much of the brand recall generated by the film is translated into sales of the product? It is evident that there is some distance to be travelled before the former is translated into the latter.

There is another dimension here. Increasingly, carried away by the trend of the spectacular narrative with its focus on brand recall value, the ad films tend to lose sight of the product they are trying to sell. A grand and spectacular narrative may enhance the brand recall, but does little by itself to distinguish the product vis-a-vis other similar products. There are only a few advertisements that directly brings out the specific characteristics of the product that marks it out from its competitors. This ultimately is what makes customers pump for the product at the expense of its competitors. Rare are those ad films that directly communicates the characteristics of the product being promoted. In fact, it seems to be a fashion to scorn on ad films that directly communicates its message to the audience.

Watching a discussion the other day in NDTV on advertisement films, I could not but help wonder whether the narrative canvas was taking precedence over the main objective of the advertisement. It is understandable in a way given the multiple actors involved in making an ad film. The core strengths and objectives of the film maker and the creative/marketing director are obviously different. For the former the narrative is more important than the brand recall dimension, while for the latter it is the other way round! Serious recent marketing research has revealed the highly versatile and heterogeneous nature of consumer preferences and responses, and this poses complex marketing challenges. It becomes important therefore to reconcile these differing objectives.

Let me give you an example. The Hutch advertisement of an Eskimo search on its mobile service leading to the physical appearance of a group of eskimos, is a wonderful narrative. But isn't the film too long (and maybe its narrative too independent) for the message and the brand name to stand out in the glowing canvas of the narrative? Further, does the specific narrative of the eskimo search and their appearance, enhance the brand recall for Hutch, and if so by how much does it translate into sales of Hutch? I am not convinced on any of these counts, though the basis for it is more conjecture than empirical analysis. As a lay audience, I get a feeling that at the end of the film, the beauty and the strength of the narrative overwhelms the specific message conveyed about the uniqueness of the Internet services offered by Hutch.

Are advertisement films becoming an exercise in ivory tower marketing? Are ad films increasingly becoming a vehicle for its makers to merely exhibit their creative skills? Is brand recall translating into increase in sales? Given the difficulty in segregating the utility of the film in increasing the bottom line, these questions are inevitable. We need more searching examination of different examples, by controlling certain parameters, before we can draw meaningful conclusions. My objective is only to outline a possibility, which I am certain exists, because I am also one of the target audience for these films!

Thursday, July 19, 2007

Bundling collection of user charges and taxes

A typical city resident pays a number of taxes and user charges to different agencies of the Government. Though these levies are predominantly charged and collected by Government agencies, increasingly private agencies are sharing or taking over some of these functions. All these agencies devote considerable human and financial resources to billing and collecting these charges. In fact, in many utilities tax collection becomes the de facto immediate and primary goal, at the cost of even the basic objective for its existence. The most common and most regular form of payments are the user charges levied for delivery of civic utility services.

Let us list out the common payments periodically made by the citizens to Government (and now increasingly private) agencies. The direct tax payments include Income Tax, Wealth Tax, Gift Tax, Property Tax, Vacant Land Tax, Motor Vehicles Tax, Profession Tax, etc. User charges collected include water, sewerage, electricity, telephone, Cable TV and bulk garbage generation charges, road tolls, and even insurance premiums. These taxes and user fees are collected by agencies as varied as Municipal Councils, Government Departments and Corporations, Utility Service Providers, and private agencies. While the direct taxes are generally collected semi-annually or annually, the user charges are usually collected monthly or bi-monthly.

Yhis multiplicity of revenue streams and collection agencies are a massive drain on resources and represents an economically inefficient system. The basic service of billing and collection of the billed amounts, is common to all these revenue streams. It is therefore an ideal setting for clubbing the multiple collection streams and having a single, unified system. The respective agencies will continue to administer the details of each connection or user, add new connections or users, and set the user tariffs or taxes. This unified collection has many advantages.

First, typically every service provider has a separate and dedicated or clearly demarcated user charge or tax collection establishment. Considerable amount of man-hours and resources are spend in administering these collections. By having a unified billing and collection machinery we can avoid the massive duplication of this more or less common administrative machinery. Second, the transaction costs associated with each utility payment is significant for both the individual and the utility. A single bill and payment mechanism can help eliminate this. Third, it will help link up the databases of all the different utilities. The benefits from such a unified database are manifold. For a start, it will help detect pilferage and evasions. Thus any house with an electricity connection, but not yet assessed for Property Tax, would immediately get detected.

Fourth, certain utility payment streams are more assured and collection mechanisms are robust. In contrast, the billing itself of many other services are suspect and less said the better about their collection. By bundling other payments, we can bring in more discipline to the more inefficient utilities. Fifth, enforcement machinery becomes more effective. Some utilities like electricity have considerable leverage over the consumers due to their immediate importance for them. An economist would say that the payment elasticity of electricity tariffs is very high. Thus a threat of disconnection of electricity can be an effective tool in collecting other more inelastic dues like Property Tax.

Sixth, all agencies conduct periodic surveys to take stock of their consumers. A single comprehensive survey is much more effective and cheaper than separate surveys by individual agencies. Seventh, a separate billing and collection mechanism would also serve the useful purpose of insulating the collection from political and other pressures which are responsible for poor collections in many utilites and local bodies. Eighth, the service provider or utility can concentrate on its core objecive of delivering certain civic services, without being sidetracked by the downstream collection problems. Ninth, it would also be to the benefit of the citizens that they can pay all their dues in a single transaction, instead of having to make multiple visits to different payment centers. Finally, a unified billing and collection machinery would make the entire system more professional and efficient. It would also willy-nilly distil into the citizens the civic responsibility to pay all their taxes and user charges.

There could be an opinion that since many of these utility services are being privatized or are being already delivered by private agencies, it may not be appropriate to bundle the collections from all utilities. I differ, for precisely the same reason. Administering the billing and collection of any revenue stream is perfectly amenable to being outsourced. The billing and collection services of many private service providers are already outsourced. It becomes all the more financially attractive for private outsourcing agencies to tag on other revenue streams into their collection mechanism. Bundling revenue streams would be a compelling imperative for even the inefficient agencies to improve their collection efficiencies or even outsource these services.

The more ideal solution would be for the Government to bundle all the payment streams from its citizens into a single billing and collection outsourcing contract. This would straight away free up substantial resources which can be better utilized elsewhere. While the respective utility or civic service provider will continue to administer the service upto billing and collection of charges, the contracting agency will be the single point node for billing and collection. It would make the billing and collection machinery much more professional and efficient.

Tuesday, July 17, 2007

The paradox of shopping discounts

I get a little confused when I see rows on rows of malls and retail stores simultaneously offerring shopping discounts. Retail Marketing 101 teaches us that while selling the same product, it makes sense to differentiate ourselves. And here we have, a discount season where all sellers try to differentiate themselves in the same way, and end up not differentiating anyone! Can different retailers not have different discount sales strategies?

Assume you are the owner of Defector Mall, selling consumer durables, apparel and clothing, and is now faced with the prospect of offerring discount for the coming diwali season. With all the competitors preparing for the seasonal discount sales bonanza, Defector Mall is faced with an interesting sales dilemma. If it joins the seasonal discount sales bandwagon, it will surely profit from an increased sales. But if it defects and does not offer discounts, then it risks losing a large market share which would very adversely affect its profitability. But is this only an illusion?

Why not adopt a contrarian strategy of offerring discounts, say a month or two before the diwali season? Attractively marketed discount offers will attract customers, irrespective of the time. Numerous studies have shown that a substantial portion of the festival sales arise from deferred consumption savings. People exhibit rational expectations and postpone their purchases in anticipation of the coming discount sales. By declaring sales discounts before the coming sales season, Defector Mall puts itself in a position to prematurely lure out a large number of festival shoppers, in addition to the regular discount shoppers. As basic economics teaches us, in a market with few competing bargains, Defector Mall will emerge a winner. It would be able to optimize its sales with this strategy than if it had joined the discount sales bandwagon.

Maybe you can also attract a number of those shoppers who prefer not to shop in an overcrowded mall, jostling for space and rubbing shoulder to shoulder with other customers. And mind you, this category is not a small one, and they will have a higher purchasing power and shopping propensity than your regular customers. If everything goes according to the aforementioned premise, Defector Mall could optimize its timing and position itself to attract the right kind of customers, and thereby make a substantial addition to its bottom line.

There is need for a more detailed analysis of consumer spending patterns and motivations before we can draw substantial conclusions. What percentage of shopping during festivals are gift purchases? What are the more popular categories of gift purchases? What is the proportion of seasonal sales as opposed to regular sales? Is Indian retail shopping market so seasonally concentrated as the US market is with say Christmas? What are the optimum sales seasons for different categories of products? How much would a shop be able to attract in additional sales by reducing prices, than it would have by not offerring discounts? Of the annual sales figures, how much will profitability be affected by offerring discounts at the same time, as opposed to staggerring it?

Increasingly, shops promote massive discounts, but restrict the actual discount offers to just a few categories. Indeed the discount sales offers in many malls are confined only to those goods which are less in demand and whose stocks have hence piled up. Along with these goods, the mall displays all its new and regular materials to the customers attracted by the promotion. Given the psychology of modern promotion driven consumer shopping, taking the customer to the product is half the job done! If this sales promotion strategy succeeds the shop gains on two counts - it is able to sell off its less popular products and also have a larger number of customers visit it.

This brings us to an important, but less noticed characteristic of mass maketing. The immediate objective that drives discount sales promotions is obviously that of increasing sales of particular categories of goods. But more strategically, it also brings larger number of customers to the shop, than otherwise would have come. With a captive customer audience, malls have an opportunity for aggressive sales promotion of all categories of products. The discount sections in malls are as overcrowded as the non-discount sections are empty. Even the sales staff are absent from the non-discount sections. There is no structured or consciously worked out plan that will incentivize shopping in the non-discount sections and dis-incentivize shopping in the discount sections. (assuming over crowding is no dis-incentive) There is an immediate opportunity wasted here. There is the parallel to be drawn from the story of the rude waiter in the cheaper section of the restaurant, whose behaviour is an incentive for eaters to patronize the more expensive eating section and stay away from the cheaper part. (Tim Harford in Undercover Economist)

Here again, I am inclined to believe that the day is not far off when we have shopping discounts, spread out over the entire year and not restricted to seasons. Each Mall could have a strategy to differentiate itself and to optimize its sales. Even if such a strategy may be difficult to pull off for mass products, it makes great sense for more niche products, whose sales are spread out over the year.

Such contrarian strategies could have interesting conseqences and will surely add to the competition and will benefit the consumer. The day may not be far away when we need not look in eager anticipation for the annual discount sales, but can have a bouquet of discount offerrings to choose from right through the year! All malls would be Defector Malls!

Sunday, July 15, 2007

Economic Costs of Foreign Policy

James Surowiecki has an excellent article in the New Yorker magazine, Troubled Waters over Oil, highlighting how America's bluster inflicts huge costs on the American economy.

The recent sabre-rattling against Iran is only the latest example of US Middle East Policy initiatives contributing towards increasing the uncertainty in the international oil markets. History is replete with countless examples of such misguided and ill-timed US-Israeli collaborative adventurism in the Middle East, which have been critical in shoring up oil prices. This has resulted in periodic oil supply shocks, thereby considerably enhancing the bargaining power of the OPEC. An economist would call it US Foreign Policy generated oil risk premium. This premium has resulted in the transfer of billions of dollars of purchasing power from the American and Western consumers to the Arab governments. This transfer of resources has played a vital role in propping up dictatorial and autoritiarian rulers in many oil exporting nations, in West Asia and Africa. It is also not incorrect to claim that the uncertainty caused by American Foreign Policy and the attendant oil risk premiums have pushed back the forces of democracy in West Asia.

Neo-cons at Heritage Foundation, American Enterprise Institute or Cato Institute, advocating American foreign policy options to put the squeeze on Hugo Chavez, only need to pause and do a bit of introspection. President Chavez is presently visiting all the "friends of America", merrily doling out the massive oil bonanza that George W and his neo-con cronies have delivered to Venezuela. With oil prices rising seven or eight fold over the past decade, Hugo Chavez can afford to dole out social welfare largesse to his population, pour in massive resources into infrastructure investment in his country and simply buy off America's "rogue nations" to mobilize a coalition against his arch enemy. He can even summon the temerity to offer economic support for Blacks living in the ghettos of Harlem and Bronx. The policy option is to squeeze oil prices and not squeeze Chavez! So long as Chavez has his money, US has limited leverages to control him.

In fact American Middle East Policy appears tailor made to suit the strategic and economic interests of the oil exporters. Even Saddam Hussain or Mahmoud Ahmedinejad could have scripted a better foreign policy for their arch adversary. It would be illuminating if somebody could analyse and quantify the net effective transfer of resources from US and other oil importers to the oil exporting nations due to the higher prices caused by the instability and uncertainty created by the aggressive thrust and clearly perceived bias inherent in American diplomacy in the region. Another case for recruiting more economists at Foggy Bottom!

Friday, July 13, 2007

Kaldor-Hicks Test for Economic Efficiency

When faced with decision making, we rarely ever weigh economic efficiency concerns. This disregard for economic efficiency ultimately causes distorted and undesirable outcomes. Economic efficiency results when the costs incurred in the emergence of a final outcome (a good, a service, or an event) is the lowest. There are many measures for this economic efficiency, of which two are important for us - Pareto efficiency and Kaldor-Hicks criterion. It is appropriate if all the possible outcomes or options are tested against these tests, before we finalize our preferences.

An outcome is said to be Pareto optimal, if we cannot make one person better off without making another person worse off. This criterion for efficiency is thought to impose a very strict standard, since there are very few transactions in the real world which will stand this test. Most exchanges or transactions involve external costs, which on most ocassions imposes substantial costs on the society and its inhabitants.

The Kaldor-Hicks criterion, formulated by Nicholas Kaldor and John Hicks, imposes less stringent conditions and can be applied to many practical situations. The Kaldor-Hicks criterion is itself a mixture of the separate Kaldor and Hicks tests. Under the Kaldor test, an outcome will be efficient if the maximum amount the gainers are prepared to pay is greater than the minimum amount that the losers are prepared to accept. The Hicks test stipulates an outcome to be efficient if the maximum amount the losers are prepared to offer the gainers in order to prevent the change is less than the minimum amount the gainers are prepared to accept as a bribe to forego the change. The Hicks test is from the loser side and the Kaldor test the gainer side reasoning.

The combined test stipulates that an outcome is more efficient if those made better off could in theory compensate those made worse off, thereby resulting in a Pareto optimal outcome or atleast a Pareto improvement. It needs to be emphasised that, unlike a Pareto optimal solution, a Kaldor-Hicks efficient outcome can leave some people worse off. In so far as most exchanges end up making some people better off while making atleast a few people worse off, Kaldor-Hicks tests ask what would happen if the winners were to compensate the losers.

Further, while the Pareto efficiency requires that no party is actually made worse off, the Kaldor-Hicks efficiency only requires the possibility of compensation to exist. It is the discretion of the participants to execute the mutually beneficial transaction. We can conclude that any economically efficient decision should ideally conform to the Pareto efficiency test, or atleast to the Kaldor-Hicks test.

We need to be certain that the alternative chosen from a bouquet of options shoud be the most ideal and efficient solution to the particular problem. The Kaldor-Hicks criterion can be widely applied to policy and decision making situations. It can be the basis for cost-benefit analysis on investment decisions, redistribution policies (like subsidies), taxation policies and many other decisions.

Consider, Mr Polluter who wants to set up Pollution Factory at Nature Village. He has chosen Nature Village, because it confers on him certain advantages, as compared to other locations (Maybe, Nature Village has cheap land, or a rivulet stream which provides adequate water round the year). We are concerned about the costs imposed by Mr Polluter's factory on Nature Village, and how much the residents of the village have to be paid to persuade them to accept setting up the Plant there. Assume, Pollution Factory inflicts net external costs amounting to about Rs X, which is also the minimum amount demanded by the villagers to put in place the mechanisms to remedy the costs inflicted by the factory. Also assume, it would cost Mr Polluter and additional Rs Y to establish the Plant at the next best location. If Rs Y > Rs X, then there is the poossibility of a mutually beneficial bargain between the two parties.

Similar examples galore in urban areas. It is commonplace to have complaints against some objectionable shop or commercial establishment located in predominantly residential areas, causing inconvenience to its neighbours. (The Corporation typically gets 5-10 such complaints every day) There is a simple solution to this problem. Assume Mr Welder wants to set up a welding shop in Soundfree Colony. Assume also that the Plant generates costs on the neighbours amounting to Rs A, and it would cost Mr Welder Rs B to relocate elsewhere. If Rs B > Rs A, then there is a possibility for a mutually beneficial bargain between the parties and Mr Welder continuing his business in Sound free colony. (The cost could for example be the amount required for setting up sound proofing system)

I believe that instead of blanket regulation by the Government, we should encourage similar market negotiation between the parties so as to solve such problems. But this would require putting in place formal and informal mechanisms like Residents' Welfare Associations (RWAs), which can facilitate such negotiations and its enforcement.

Wednesday, July 11, 2007

Another rent-seeking paradox

I have a healthy respect for the vibrancy and versatility of the corruption economy, and its ability to exhibit all the diversity that human behaviour is capable of. In fact, the rent-seeking market is a Chicago economists' dream, and is a fertile ground for observing how humans respond to incentives, and how human behaviour also distorts the incentive structure. There was this interesting discussion I had with a friend about a few individuals whose are generally reputed to be fairly strict, though behind this facade lies an interesting paradox.

A carefully cultivated image of being strict and firm can be a valuable asset in enhancing your market value in the corruption market. A considerable portion of rental value of any official can be attributed to the ease or difficulty in accessing the individual. An easily accessible official in the corruption market loses this additional value that can be potentially generated. By putting a premium on access, agents in this market can substantially mark up their rental values.

Assume Mr Strict, with a forbidding reputation, working as a Vigilance Officer (VO) in the Prevention of Corruption Department. Assume also Mr Corrupt, with a licentiously liberal reputation, working as another VO in the same Department. For the same transaction, Mr Strict earns many times more than what Mr Liberal commands.

This dimension has been brought out in previous posts and again underlines the importance of the rational economic agent in the corruption market. A typical rent-seeking agent, by being indiscriminate in his transactions, ends up frittering away a substantial portion of his rental value.

Monday, July 9, 2007

The supply side analysis of India and China

Comparing China and India is a fascinating experiment. The dragon and the tiger, the manufacturing hub of the world and the outsourcing capital of the world, communism and democracy, the comparisons go on. While China has been growing at a breakneck double digit pace for nearly two decades, India is only now accelerating into that growth league. If viewed in its proper historical perspective, the Chinese growth story is frightening. In the economies of scales of production, manufacturing and construction, India is decades behind China. Let me give some examples.

While India generates 1,29,000 MW of power of a total demand of over 2,00,00 MW, China has a generation capacity of 622,000 MW. China added a fifth of this capacity, or almost equal to India's total generation, last year alone. India's total capacity addition in the full Tenth Five Year Plan period was less than 20,000 MW. Depsite all the hype surrounding the Goldern Quadrilateral Project, India added less than 2000 km of National Highways, whereas China laid 25000 km of National Highways in 2006.

A recent World Bank report titled, "Highway and Railway Development in India and China from 1992 to 2002," points out that in the early 1990s India's railway infrastructure was actually ahead of China's in terms of total route kilometre and route kilometre per head of population. Over the next 10 years, however, China's rail network outstripped India's on virtually every parameter. In the period 1992-2002 while India's overall rail network grew by only 1%, length of double track by 10%, and electrified lines by 48%, the corresponding figures for China were 24 %, 69 %, and 50 %. Investment in the railways in China during this period was estimated at $85 billion, compared to $17.3 billion in India. China is set to build 19,800 km of new railway lines by 2010 in addition to upgrading 15,000 km of existing lines. In 2006 alone, $19.7 billion was invested in railway construction allowing 912 km of new lines to be completed and 1,016 km of lines to be double-tracked, besides starting work on 1,609 km of new lines.

While India is struggling to establish 150 kmph rail corridors, China already has 5,370 km of tracks that can take speeds of up to 200 kmph, in addition to another 14,000 km where trains can run at speeds of 160 kmph. Over the next five years, China aims to raise further the speed of passenger trains to 200 kmph on an additional 13,000 km of existing rail tracks.

The annual cement production of China is nearly 1000 mt, whereas the Indian production was only 160 mt in 2006-07. India's steel production of 40 mt, pales in comparison to China's production of 400 mt in 2006.

In contrast to the breakneck, almost suicidal pace at which China is growing, we have a serious problem getting to overcome our snail's pace. We struggle to build even 2000 km of world class six and eight lane highways a year, or 5000 MW of power, or 2000 km of railway lines. In fact, except for telecommunications, the growth of our infrastructure sector has been as abysmally poor as China's has been spectacular.

This can be extrapolated to closer home, in Vijayawada Municipal Corporation (VMC). Among the different agencies in Vijayawada, including the private sector, the VMC is the largest provider of construction contracts. In the past three years, the VMC has done capital works worth Rs 22 Cr in 2003-04, Rs 28 Cr in 2004-05, and Rs 37 Cr in 2005-06. Then in March 2006, Vijayawada became one of the cities selected for the JNNURM Project. In 2006-07, the VMC was sanctioned Projects worth Rs 750 Cr, to be completed over the next 2 years. Given the existing capacity, both internal and external, and even with the most optimistic projections, it is difficult to imagine more than Rs 200-300 Cr being spent under the Project over the next two years. Even this would be some achievement, being 3 to 5 times the present expenditure.

On the demand side, achieving these targets would require extensive outsourcing of many engineering services, besides personnel augmentation. Innovative solutions like Project Monitoring Software can help the existing system monitor and execute much larger quantities of works. It would be necessary to carry out radical streamlining and liberalisation of the existing tendering and contracting procedures, so as to expedite awarding of large amounts of works. I had touched upon some of them in a previous post.

But going beyond the aforementioned demand side problems, we have more difficult supply side challenges. Do we have the resources in terms of contractors, skilled manpower, construction materials and logistics available to execute these works? This question has to be answered in the context of a massive boom in construction activity in real estate and infrastructure, including urban infrastructure.

Let me illustrate this with a few examples picked up from our experience in VMC. As I had mentioned in a previous post, there are no Readymix Concrete (RMC) Plants in the entire District, and only two for 4 districts. Even the smallest capacity RMC plants can produce 30 cubic meters per hour, as against 15-20 cubic meters produced the whole day with site production. There is a lone contractor in Vijayawada who owns centering material (required for storm water drains), and he has only material for 1500 m. Under the JNNURM, we have about 50 km of storm water drains sanctioned. Given this severe scarcity, the material is being rationed out between the ongoing works, thereby severely retarding the progress of works.

The example of Under Ground Drainage (UGD) sector is typical of the capacity problems faced by the system. With massive spurt in real estate construction activity, there is a severe shortage of stoneware pipes which form the major share of a UGD network. Faced with this demand pressure the prices for stoneware pipes have skyrocketed. There are only a handful of manufacturers with the required size dies for casting RCC pipes of 600 mm and above diameters. A single manufacturer monopolises the market for Ductile Iron (DI) pipe (required for water and UGD pumping lines) across the country. There are only two manufacturers in India of centrifugal and submersible pumps used in sewerage systems. In addition, the number of sewerage contractors with the capapbility of taking up major UGD works is also very small. The picture with water sector is only slightly better.

Severe demand strain is being put on the existing quarries for supply of 40-20 mm stone chips. Cement manufacturers are also not able to respond quickly to supply deficits, thereby driving up cement prices. Same is the story with steel and other construction material requirements. Over and above all this is the shortage in the number of experienced and qualified contractors for executing these works. After all, the same pool of contractors now have many times more works on their hands. Our pool of qualified and experienced structural engineers, environmental engnieers, and other professional experts is very limited. Even the best construction and consultancy firms are rationing the one or two qualified personnel they have, among the many Projects which they bid for. This severely affects the professionalism of these firms and the quality of their work output.

All these aforementioned indicate that the Indian economy is stretched out to its seams, and raises serious questions about our ability to move up to the next level of economic growth or even sustain the current growth momentum. It is therefore necessary for us to swiftly and steeply ratchet up our capacities in every sector, if we are to move up to a higher growth trajectory. It is only then that we can start dreaming about catching up with the Chinese economic miracle.

Sunday, July 8, 2007

Capturing value from hotel visits

All of us would have experienced the frustration of waiting to find a table in restaurants during weekend nights. In fact, in Hyderabad it is fast becoming some achievement to find place at certain popular eating places, even on weekday nights. I am sure, a popular eating place would be turning away a good number of people over the night. What strikes me about this massive demand for restaurant tables is the amount of deadweight loss due to the failure in capturing the full willingness of customers to pay.

The utilities (for eating at the particular restuarant) of those on the waiting line would obviously be varying. There will be the group of eaters, willing to pay a premium for jumping the waiting line. The ardent fans of the restaurant would derive additional utility from eating there. Some others are there to check out the place and would be indifferent to eating there or elsewhere. There would be others with demands on their time, and therefore not willing to accomodate long waiting times. In contrast there would be those willing to hang out, and patiently wait out their turn.

A restaurant that does not discriminate between this wide spectrum of customers is surely losing an opportunity. For those indifferrent to the outcome, it does not matter when they eat, or even whether they eat at all at the restaurant. Any outcome that does not take into account the differential preferences of the consumers, lowers the utility gain of even those willing to pay the premium. With uniform pricing, we will therefore have a situation where more people are worse off than with any system of differential pricing. Those disappointed are more disappointed, than those happy are happy!

If we try to capture the full willingness to pay of the customers, a few options come to mind straight away. Would it not be a good idea to have differentially priced eating areas, so as to capture those customers willing to pay more than the regular menu fares? Maybe, during the weekends, when the demand is much higher, the prices can be marked up from the regular fare. Or else, the restaurant could have a higher rates during the peak hours, say between 9.00 PM and 11.00 PM. How about even auctions among those waiting in the ques, with the option of three to four categories being put for bid?

Sounds simple. Then why are not restaurants implementing the same? Difficulty in implementing cannot be a reason, since administering it appears fairly simple. (Though a few embarrassing situations can emerge, if not properly managed) I am inclined to believe that one reason is that it conveys a wrong impression to the customers. An eating place which appears to put profit over its customers, may put off its customers. There could also be the fear of seats going empty, with the retaurant pricing istelf out of the market. There is also the general inertia to not deviate too much from a well established market and its conventions. Thus differential pricing may paradoxically end up turning away more people than it is able to attract. But I suspect that the resurant business is waiting for the tipping point, where a few such deviations from the norm and their demonstrable success will make differential pricing the norm.

Friday, July 6, 2007

The Wal Mart effect and the retailing race

Here is an interesting article in the online magazine, Salon, by Andrew Leonard, about the race to the bottom that Wal Mart has started, and which its clones like "Reliance Fresh" are replicating. It is estimated that Wal Mart makes a profit of just 4 cents on every dollar of sales. But its high volume, profiting from economies of scale, model has been extremely successful and is being replicated across the world.

In India retailing is fast becoming the sector to be in, and in the glorious tradition of "irrational exuberance" of a vibrant market place, all and sundry have been piling on. The massive boom being experienced by real estate in Indian cities has only added to this attraction, as business houses see the potential for a double killing. Many of those entering the market have little expertise nor their existing businesses have any linkages with mass retailing. This retail push by a number of major groups in India, seems to be another bubble in its initial stages of build up. Fast forward, three or five years and do not be surprised if we have Indian city landscapes littered with massive unoccupied retail floor space.

I do not know whether there have been enough detailed studies about the potential market for mega retailers, about the shopping trends and patterns in existing malls and mega retail outlets etc. We need more information before drawing any meaningful conclusions about the challenges and opportunities in Indian retail industry. For the time being sample this extract from the article by Andrew Leonard:

The Communist government of Kerala is threatening to ban "retail giants" from setting up shop in the Indian state. The measure, which appears to be backed by all the major political parties in Kerala, is chiefly aimed at India's version of Wal-Mart, Reliance Industries. The concern is that a proliferation of large retail outlets would drive tens of thousands of mom-and-pop shop operators out of business. Kerala made headlines not so long ago for attempting to ban Coca-Cola; the state has a long history of pursuing its own unique path to development.

Let's switch venues. The safety of Chinese-made products is in the news again today, as China's government announced that a whopping one-fifth of the products on the shelves of Chinese stores were found to be substandard or tainted. The immediate, and understandable impulse, is to blame the health hazards of Chinese products on the lack of regulatory enforcement in China, a state of affairs exacerbated by state corruption, a weak judiciary, and a general absence of effective checks and balances in Chinese society. But that's only one-half of the picture. The other half is the imperative, in the biggest markets for Chinese exports, that demands ever-lower prices for everything.

In "The Wal-Mart Effect," Charles Fishman makes a compelling argument that Wal-Mart's market power inevitably forces its suppliers to cut corners on quality in order to deliver the lower and lower prices that Wal-Mart demands. So those suppliers close their American manufacturing facilities and start sourcing their products in China -- if they don't, they'll lose their place on Wal-Mart's shelves.

So whose fault is it really that so many problems are cropping up with Chinese-made products? Of course, the factory owner in China who authorizes the insertion of toxic chemicals in toothpaste and pet food bears a heavy liability, as does the government official who looks the other way. But shouldn't the Western mega-retailers fighting for market share with their "pro-people" low prices also be held to account?

Maybe tougher safety standards and enforcement of legal liability all the way up and down the supply chain, from China to the retail store, is a better answer, ultimately, than attempting to ban chain stores altogether. But the symbolism of Kerala's "bold" move, however quixotic, is still potent. Markets left to themselves do not deliver perfect outcomes. Sometimes government has to push back.

The Nimitz affair

Reading an article by Siddharth Varadarajan in The Hindu, "Between the Nimitz and the deep blue sea", I could not but help wading into the acrimonious debate raging in India over the past few days surrounding the visit of the US Navy's Aircraft Carrier, USS Nimitz. Some of the ideological explantions for opposing Nimitz like India's long and principled stand aganist Nuclear Weapons, are so shallow and even leaves us open to charges of hypocrisy.

Mr Varadarajan writes about the American propensity to put pressure on India and thereby wring out concessions that are detrimental to our interests. He brings out the American modus operandi of nuanced diplomacy that offers sweeteners while squeezing out our consent on issues of concern to the US. There is even a description of how the Americans have adopted a policy of creeping emergence of a new defence framework.

In a sense, the history of the Nimitz’s visit goes back to 1991, when Lt. Gen. Claude C. Kicklighter, erstwhile commander of the U.S. Army Pacific, handed over a set of proposals for army-to-army cooperation with India. These involved reciprocal staff visits and schooling and training for commanders as building blocks for more comprehensive U.S. access to Indian facilities. The 1995 ‘Agreed Minute on Defence Relations’ added joint exercises and held out the prospect of greater technology transfer but the Indian side soon discovered the U.S. was interested only in deepening service-to-service relations...

After India’s offer of military facilities to the U.S. for offensive operations in Afghanistan, the relationship took a new turn. The Pentagon preferred Pakistan as a staging post but used India’s offer to push for a logistics support agreement, as was acknowledged by Admiral Dennis C. Blair in February 2002. The pace of naval and air exercises shot up. However, the U.S. side realised a new charter was needed to tap the full benefits India offered. In particular, Pentagon planners knew a more relaxed policy on arms transfers was needed, not just as a sweetener for the Indian side but as a vital element in the pursuit of interoperability. As early as December 2001, senior U.S. military officials also floated the idea of an adjustment to American domestic nuclear legislation as an incentive for the Indians to cooperate.

Two weeks before the July 2005 nuclear deal, India and the U.S. signed a ‘New Framework for the Defence Relationship,’ which envisaged an action plan ranging from joint exercises, collaboration in multinational operations, “expand[ing] interaction with other nations” (i.e. U.S. allies such as Japan and Australia), enhancing capabilities to combat the proliferation of weapons of mass destruction, collaboration in missile defence, and so on. Two years on, several elements of this action plan have begun to fall into place. Though India remains opposed to the Proliferation Security Initiative (PSI), the last two ‘Malabar’ naval exercises have seen PSI-related drills such as maritime interdiction and VBSS (visit-board-search-seizure) operations. Quadrilateral security meetings have begun. The recent sale of the USS Trenton (rechristened the INS Jalashwa) — now the second largest ship in the Indian inventory — will allow the Indian Navy to deploy a landing platform dock for the kind of multinational operations the new defence framework envisages. Hercules transport aircraft have also been purchased from the U.S. On the anvil now is the contract for 126 multi-role combat aircraft (MRCA) for which Washington is mounting an aggressive campaign...

That is why the bargain it proposes is this: the U.S. will ‘help’ India become a major world power in exchange for India doing all its can to ensure the ‘American century in Asia’ becomes a reality. The July 2005 nuclear deal was partly motivated by this aim and the same rationale is propelling the incredible bonhomie on the military front.

I have no problem with this bargain, if the deal is that US "helps" India become a world power, while India help promote US interests in Asia. The only note caution should be that the promotion of those US interests in Asia should not come at the expense of India's core national interests in the same region. We can accept this line argument only if we give up our ideologically tinted pre-conceived notion, that any US role in Asia will be detrimental to the geo-political balance in Asia and the interests of Asian countries. For this we need to acknowledge that Asian and Indian interests need not necessarily be the same, and also that the balance of power game is not a zero-sum one. If the US has goals that squarely conflict with our interests, the onus is on us to not accommodate them. But I am sure that the US is too mature and seasoned a player to understand India's strategic importance to hold the bilateral relationship hostage to any single issue.

Indian foreign policy has yet to realise the importance of "engagement dipomacy", where outcomes do not emerge in binary black and white terms, but is often the result of long drawn out dialogue. Such dialogues are characterised by pressure tactics and brinkmanship, compromises and mutual adjustments, so as to accommodate differring view points, while at the same time not ceding ground on the core national interests. Any engagement diplomacy would be a series of two steps forward and one step backward movement. Every compromise has to be accompanied by a commensurate gain. The final outcome of any such engagement process is generally beneficial to both sides and is rarely a zero-sum game.

I cannot see anything wrong per se with American fighter planes or warships entering India as part of a diplomatic exchange nor in formalizing the bilateral relationship through treaties and agreements. It is in America's interest to institutionalize the engagement with India by means of legally binding agreements. It is in our interest to also do the same, but by negotiating out favorable terms which do not compromise our national interests nor constrain our ability to act in accordance with it.

American national interest in relationship with India would have many dimensions. India is an emerging economic powerhouse and hence presents many challenges and opportunities for the US. India's political stability and deomocratic polity means that it is a valuable and potentially reliable ally. India's own geo-political compulsions, especially vis-a-vis China and Pakistan, provides the US interesting opportunities to promote its own geo-political interests. The emergence of China and the dynamics of the new Asian balance of power considerably enhances India's utility. Our proximity to the volatile West Asia and our internal security challenges would not have missed the attention of US policy makers. America also realizes the challenges posed by our economic growth concerns. We need to engage with America knowing fully well all these and even worse. Therein lies the success of our foreign policy. We need to be forewarned to be forearmed.

The assumption that if we become close to Israel or US, we could alienate countries like Iran or China, is flawed and without basis. The onus would be on us to engage in bridge diplomacy with these countries, so as to assuage and reassure them with all the available levers of our diplomacy. However immoral as it may appear, we will need to learn to straddle different boats at the same time, play same games with different rules with different partners, all the while carefully balancing all of them. International relations is not a morality play. It is about hard-nosed bargaining and defending 'amoral' national interests. The foreign policy establishments of most countries, including China and Iran, are aware of the need to comprosmise for accommodating the concerns and interests of their partners.

We will need to exercise our ever growing prowess in economic diplomacy to engage Iran and cushion the Indo-Iranian relationship from the Indo-US engagement process. India will have to accomodate some of Iran's geo-political concerns and play it up, so as to nullify any negative effect of the progress on Indo-US front. Minuses in the relationship will have to be counteracted with pluses. After all the Chinese have played the double game in its relationship with countries like Iran, Iraq, North Korea, and Cuba, very effectively. While they have engaged these countries in a relationship, they have also aggressively reached out Israel and the US and even voted against the interests of these countries in the United Nations Security Council. We need to be keep in mind that, despite any brinkmanship arising from a closer Indo-US relationship, Iran realises its interest in engaging with India. A mature and seasoned practioner of engagement diplomacy like the US would easily understand our interests with China or Iran, and not let the progress on thoses relationships affect Indo-US ties. Stronger the engagement dialogue, the more shocks will the realtionship be able to withstand, without rocking the boat.

Siddharth Varadarajan himself appropriately describes the characteristics of the US strategic diplomacy thus,

When it comes to nurturing an ally, however, the U.S. has the stamina of a long-distance runner. It took 16 years after General Kicklighter’s visit to India for the USS Nimitz to drop anchor in Indian waters. The U.S. knows th at the more engagement it thrusts upon India, the harder it becomes for India to refuse incremental demands. In military terms, it has two goals. First, to make sure the Indian armed forces never become an obstacle to American hegemonic interests either by themselves or by bandwagoning with other Asian powers. And second, to outsource low-end tasks of hegemony, such as patrolling, humanitarian relief, peacekeeping, and stabilisation.

The foreign policy of any country is an exercise in managing a series of often mutually conflicting but interlocking relationships. But it is also increasingly acknowledged that the outcome of these interlocking relationships is not a zero-sum game. The strength of any relationship between two countries is increasingly being judged by the depth and intensity of engagement, rather than any shared historical or ideological concerns. Any engagment process has a life and logic of its own, and therefore has the inherent strength to withstand shocks. We need to base a relationship with another country using multiple levers of diplomacy, rather than base it on a single strand. We also need to underpin it with shared interests, rather than ideological or historical concerns.

The United States would obviously have an agenda, with clear terms of engagement with India. This agenda would be driven not by concerns of friendship and bonhomie with India, but by hard nosed calculations of national interest. That is the way it should be, and we can be rest assured that is the way it is with any engagement agenda put forward by the US. It is not friendship for friendship sake, but friendship for promotion of our national interest. We need to first accept that there is nothing wrong with this approach, and then formulate our responses keeping in mind the same principle that guides American (or Chinese or Iranian) diplomacy - national interest.

India needs to boldly chart out our foreign policy with the firm belief that we now pack enough economic and geo-political punch to be not cowed down or brow beaten by any country. Our foreign policy should be dictated by the firm assumption that India's strategic importance for any country is a fait accompli. There is also nothing wrong with compromises provided it promotes our national interests. If there arises a conflict between our long term national interest and our long held ideological beliefs, then the former should prevail. Always!

Thursday, July 5, 2007

Managing debates on change

In the 1960s, Daniel Bell proclaimed the "end of ideology". It proved a false dawn and it took three more decades for that great ideological schism of our age to climax with the fall of the Berlin Wall. In the euphoria surrouding that event, Francis Fukuyama re-opened the debate by claiming the "end of history", with the triumph of western capitalist liberal democracy. But since then, the forces of globalisation, liberalisation, and privatization have unleashed dramatic socio-economic and political changes across the world. These changes have generated heated and intense debates about their consequences, especially on those not equipped to tackle them.

These debates are often obscured by ideological shibboleths and slogans. In an age of commoditized media, it has become standard practice for us to see every issue in binary opposition. Whether it be globalisation-privatization-liberalisation, or those issues of more immediate concern like reforms in service delivery and improving efficiency in the utilisation of our assets, it has become the fashion to circumscribe our debate to a simple one of whether we should accept it or reject it.

Most often these debates cannot be adjudicated on such simple terms. For example, when the entire world is moving in one direction, we simply cannot afford to turn our backs and reject ushering in reforms and changes. The challenge before us is to accept them and try to work out how these reforms and changes can be ushered in at our terms and conditions. We should spend our energies trying to develop capacity in our citizens, so as to cushion them against any pain arising out of them.

I have been witnessing some of these unfolding debates in the recent months, and it has helped me better understand the dynamics of such debates. Over the past year or so, there has been fierce and growing debates in Vijayawada on a few issues like water meters, outsourcing, cost recovery , user charges and Public Private Partnership (PPP). Of these, water meters and PPP have generated the greatest opposition. This is happening in a context when, both water meters and PPP are fast gaining universal acceptance as part of the solution for reducing NRW in urban water supply and in leveraging private capital for augmenting the scarce resources available with Government.

In keeping with this trend, the Vijayawada Municipal Corporation (VMC) also initiated steps to install water meters and also take up development of government assets through PPP. The opponents of both immediately claimed that introduction of water meters would result in higher water tariffs and PPP would be a surrogate for Privatization and handing over of valuable public assets to private agencies. A debate got initiated. The Council of the VMC got into over drive and passed resolutions banning the fixing of water meters on houses and executing any project under PPP. Given the inevitability of both, instead of discussing about how we can use water meters and PPP to our advantage, we have decided to completely turn our back on them. In fact, the Council also passed resolutions barring any outsourcing of civic service delivery, or collection of user charges to achieve cost recovery.

Instead of wholesale rejection, we should implement outsourcing wherever it has evident economic and technical benefits, and that too at terms and conditions which do not place additional burden on the citizens and the VMC. Similarly, cost recovery and user charges can be adopted in certain sectors and for certain categories of population. Before erecting water meters, we need to have a well thought out tariff policy that ensures no extra burden on the common citizen. PPP can be an option in some sectors, where the Corporation does not have resources to invest upfront.

If we continue to stick to a position of dogmatic binary opposition, we could end up having both water meters and PPP implemented in VMC, without none of the concerns being properly addressed. In the absence of any debate, I would not be surprised if water meters gets implemented in Vijayawada with a tariff structure that would not take into account the genuine concerns about the burden imposed on poor households and universal access to safe drinking water. The concept of PPP could get adopted in undesirable and inappropriate projects, and not being utilized where its impact would be beneficial. We could end up with incomplete and harmful outsourcing contracts in the wrong sectors, which would ultimately fail and discredit the entire outsourcing concept.

We have witnessed similar debates before too, across the national scene. The debate on WTO was restricted to whether India should join it or not. There was precious little analysis and discussion about the issues on the agenda of WTO and how they were beneficial or harmful to India's interests, and how we could steer the debate to leverage our strengths. There was limited appreciation of the fact that the world was moving inevitably towards a multi-lateral trading regime and an inter-connected structure, and we had no choice but to join WTO.

Finally when WTO became a reality, we did not have our citizens and our private sector properly equipped to face the challenges arising from it. By not being ready with counter proposals, meeting our requirements, on a variety of issues ranging from the Multi Fibre Agreement (MFA), TRIPS, and liberalisation of trade in Agriculture and Services, we were not able to influence the WTO decision making process on these issues. We were left repsonding to proposals put forward by other nations, most often dogmatically opposing it. In hindsight, all of us would agree that we ought to have more proactively come up with alternate proposals suiting our requirements and structure the phasing out of MFA, or the schedule for accepting TRIPS or GATS.

It is in our interest that we are active participants in any debate on reforms and changes, if possible be even leading it. Indeed the agenda for the debate and its Terms of Reference should be set by us. Blind ideological opposition to change will not get us anywhere and will only result in our marginalisation in the debate, ultimately resulting in our being unable to shape the change in the way best suited to our interests. By refusing to participate in the debate we are effectively giving a free hand to our opponents to implement their agenda unfettered.

We need to move beyond this binary paradigm on most issues facing us today and focus on how we can manage these changes and reforms to our advantage, rather than rejecting it wholesale and in the process losing out fully. We need to be active participants in the discourse that sets the agenda for change, rather than play catch up. Policy making is about identifying your priorities, then setting the context and trying to influence the terms of the debate. By blind ideological opposition and refusing to even participate on a debate, we risk completely marginalising our position and waking up one day to find a changed world and without any of the support mechanisms necessary to confront it.

Tuesday, July 3, 2007

Market solution to more effective debates in Councils

One of the thing that strikes you about the debates in any Parliament, State Assemblies or even local Councils, is the amount of time that gets wasted in filibustering. In an age of live television feed and intense media scrutiny, playing to the galleries is understandable. This wastage of time results in inadequate time being devoted to discussing important issues. In the circumstances, we need to devise mechanisms that will ensure that grandstanding and wasting public time is minimized, while all important issues are adequately discussed and debated. How do we do this?

Political parties espouse issues and interests, with varying priorities. It is natural that if a Party has strong support base among fishermen, it would be more interested than other parties, in being part of any debate on issues related to fishermen's livelihoods. In contrast, political parties for whom fishermen's issues are only one among the many issues in their agenda, may not be as interested in the issue as the Party with strong fishermen support base. The later would at best be a disinterested participant in the debate. It encourages meaningless speeches, where representatives of political parties speak about issues about which they have little interest, only because they have been given their turn to speak.

The cardinal principle of equality demands that all shades of opinion be given an equal right of being heard. This would necessitate giving every Group or Party equal time for representing their issue.

Assume that there is a "speaking time" account maintained in an Exchange within the Assembly, Parliament or Council. Let us also assume that each Party or Group is allotted some total speaking time for the session. In a splintered multi-party system as ours, we can even categorize parties based on their representation, and then allocate time based on the category. The Exchange monitors the time utilized by each Party or Group, with respect to the amount of time allotted to each.

Now let us introduce a mechanism whereby Parties can trade speaking times. Those Parties, unable to utilize their allotted speaking time for a session, can now trade their unutilized times to a Party which is in deficit of speaking time. The incentive for a party to trade its surplus speaking time is that this time can be carried forward for the entire tenure of the Assembly, so that they can utilize their times more efficiently over this tenure. Further, parties refusing to trade their surplus times can be penalized by deducting the same amount of time from their allocation for the next session.

The aforementioned arrangement has many advantages. It would straight away ensure that parties and speakers put more value on their speaking times. Given the cap on the amount of time available, political parties will be forced to better manage and schedule their priorties for the session. Bluster and grandstanding could get reduced. Important issues will get focussed on their substance, and the quality of debates will improve. It is also more probable now that important issues which are not exercising the priorities of the majority, will get highlighted and discussed.

Critics would complain that it promotes parochialism and interest group politics. My answer would be that in modern day democracy, interest group politics is unavoidable. One of the more interesting ways of mitigating the influence of something we want to avoid, but which is inevitable, is to co-opt and formalize it. Trading in speaking times would only recognize this reality and formalize institutional mechanisms to take this into account.

There could be other more interesting incentive structures for trading times. But that is a question of detail. The larger point emphasised here is the utility of trading of speaking times, in enforcing discipline and containing filibustering in the houses of democracy .