India's Perfect Storm - And Its Likely Aftermath

India is facing a perfect storm from a combination of political, social and economic crises that are rapidly converging and have already begun to have an impact.

The political and economic crises are more tangible, but their resolution will be comparatively simpler. It is the social crisis that will have a much heavier long-term cost.

India's political landscape is fractured. 1984 was the last year when a general election resulted in a single party winning an absolute majority. Since 1989, elections have thrown up hung parliaments and only coalition governments have been the norm. The splintering continues unabated. Although disenchantment with the UPA coalition government has never been higher, there are strong doubts about whether the opposing NDA coalition will succeed in winning enough seats and allies to obtain a parliamentary majority and form the government. It is likely that the hung parliament that emerges after the 2014 election will be so badly splintered and (more importantly) irreconcilably divided that a government may not emerge. If one does, it will probably not last long, and fresh elections may need to be called mid-term, with no guarantee of a more stable result. In some ways, the election will probably clear the air by showing the vocal urban right-wing minority just how much of a minority it really is, but in other ways, the poisonous hatred between political groupings will only intensify.

There are mixed signals on the economy, whose heady 9% growth of just a few years ago has now slowed to about half that value, and I am not enough of an economics heavyweight to sift through the noise and form an independent opinion. In blunt terms, one opinion is that India is stuffed, and without drastic reforms that take place very quickly, is doomed to remain a poor country for the foreseeable future. The other viewpoint is that a whole swag of infrastructure projects is already in the works, and when these start to come on-line in the next 3 to 5 years, growth will improve and establish itself at a permanently higher level. As I said, I have no independent means to say which viewpoint is correct.

The third area, the social front, is where I am most concerned. The recent riots in Muzaffarnagar are disturbing, because they are a watershed. They were politically engineered of course, as all good riots are, but this one is probably the first to occur in a rural area. Communal riots have generally taken place in urban areas, usually in lower- to lower middle-class localities, where social cohesion between recent migrants has never been high. This riot has shown, disturbingly, how easy it is to sunder the more cohesive fabric of the hinterland as well. I have the uneasy feeling that a line has been crossed somewhere, and India will never be the same again. I can sense the bottomless sense of insecurity that a Muslim would now feel in post-Muzaffarnagar India. The Indian Muslim's native land has suddenly become an alien land. This India will suffer the negative effects of widespread minority insecurity for many decades. And it was totally unnecessary.

There is a way out of the political and economic logjam. That is to make the centre less relevant. The way government financing works today is untenable and cannot continue. I have the following information from a very knowledgeable friend and old classmate:

a.  70% of all tax revenues collected go to the Centre. All the states share the remaining 30%.  This is as per a Constitution mandated Finance Commission.
b.  The centre during our socialist era under a strong Mrs Indira Gandhi used this money leverage to kill state leadership and play power politics. But since the 70s, her Congress party has been vanquished in several states.
c. The tax sources for states primarily revolve around real estate taxes, octroi and excise duty (euphemism for booze). So states that have gone outside of government sources to do stuff, have typically leveraged land - e.g., Gujarat, Tamil Nadu, Rajasthan. Other than land and waiving taxes there is not much they can do, money wise.
d.  States can't borrow directly on their own books - they don't have a revenue base worth talking about and don't run surpluses, by and large. All big foreign aid has to be approved through the Central government's Ministry of Finance. 

I wrote before that India's salvation would be a true federation of states, where states have much more power and autonomy vis-a-vis the centre. In that post, I neglected to mention financing arrangements, because I did not have my friend's depth of knowledge. After reading his inputs, I believe the regional parties must get together in the next parliament, and regardless of other affiliations, vote for an amendment to the constitution to give the states more financial independence. A part of all tax revenue collected should compulsorily go to the state where the revenue was generated. The states should also be free to solicit and get funding from overseas sources without having to go through the central government. This will free them from political interference. When the states compete for investment, the free-market energies that have been shackled by decades of socialistic central planning (which was needed in the early stages of development) will be unleashed.

Which party forms the government at the centre and who becomes prime minister will then be much less relevant to the daily life of the average citizen, because the centre's role in daily life will have been much diminished. Smaller states, each with financial and political autonomy, closer to the local people and more accountable, will become more efficient units of governance that will deliver quality of life improvements much faster. [I remember a relative from the US telling me that in any US state, "the governor is at least ten times bigger than the president."]

That single change could solve India's political and economic problems within a couple of years and place the country on a permanently faster path to growth and prosperity.

Which leaves us with the serious social problem. I blame the Congress party for pandering to Muslim leaders (as opposed to instituting measures to improve the life of the average Muslim). I also blame the Hindutva parties for stoking a problem that they cannot resolve, which will benefit them electorally but cost the country dearly. Together, their short-sightedness has seriously damaged India's social fabric and will continue to do so.

India has a significant Muslim minority of 15%, or about 180 million people. Any sensible and realistic person will see at once that such a large minority cannot be wished away by any means, no matter how fascist one's rhetoric may be (e.g., "let them all go to Pakistan", "drive them into the Arabian Sea", etc.) Coexistence is the only practical way forward. For coexistence to be viable in the long term, what is needed is a strong system of social justice, civil rights and fairness in all dealings by the state (government and judiciary). And this should have been easy, since India's diverse society has been inherently predisposed to coexisting. On the ground, there has been remarkable social cohesion between the communities, otherwise for a population of this size, there should have been widespread and bloody clashes occurring every day with a death toll going into the hundreds of thousands. The fact that violent incidents are so few and far between means that there is no inherent social tension.

Any problem that exists today has been politically manufactured. Political parties stand to gain by polarising the electorate and sharpening communal divides. The Congress has done a fair bit of damage over the years by yielding to hard-line Muslim leaders (as opposed to listening to and ensuring the welfare of ordinary Muslims). The shameful Shah Bano case comes to mind, in which the Rajiv Gandhi government overturned a secular court decision on granting alimony to a poor Muslim widow by deeming such issues within the purview of Muslim personal law. The widow then got no money under Sharia law, which weakened the average Muslim citizen's rights compared to other Indian citizens. The only beneficiaries were the hardline leaders of the Muslim community (who did not speak for the majority of the Muslims in any case), and the Hindutva parties, who gained from the Congress party's appeasement of the Muslim leadership by stoking and exploiting Hindu outrage. The Hindu parties have exploited every Congress mistake and gained from every incident since then, including the court-ordered unlocking of the Babri Masjid, which they then demolished a few years later, and went on to commit more and more aggressive acts, winning votes for themselves from a larger and larger segment of polarised Hindus, but weakening the country's social fabric in the process.

The Muzaffarnagar riot was in a way an expected consequence of the fractured four-way vote split in the state of Uttar Pradesh. Clearly, a more effective carving of the pie was called for, and what better way than for two of the four to gang up against the other two? The BJP and SP, nominal enemies, seem to have conspired to play the roles of majority spokesman and minority protector, aiming to win votes from the Hindus and Muslims respectively, at the immediate cost of the Congress and BSP.

Both the Congress and the RSS-led Hindutva parties have mortgaged India's long-term future to win short-term electoral battles. There was a time when I trusted in the wisdom and sagacity of the average Indian voter to see through these games when voting in aggregate, and ensuring sanity of political results. Alas, I no longer believe that the electorate is, in aggregate, wise. I fear that infection by communal poison has crossed a tipping point, and the average voter is now more self-destructive than wise. In this climate, the BJP has dropped the mocking term it earlier used ("pseudo-secularism") and begun to use the word "secularism" itself as a pejorative!

In summary, I think India has a chance to weather its political and economic storms with a simple change to the way states are financed. But its fractured civil society will probably never heal, and could lead in the future to a bloody civil war.

As a bankrupt Pakistan struggles through what could be its last decade of existence as a viable country, it may have the bitter satisfaction of seeing the Two-Nation Theory proved right after all. Hindus and Muslims can never live together in one country. Cynical politicians from opposing camps have cooperatively moulded the will of the people to a self-destructive end.

Saving Economics from the Economists

I just read a column by a purported economist that makes me see red. In case the link isn't publicly available, the comment that Robert Gottliebsen makes in the context of the ACCC's decision to block NAB's takeover of AXA is this:

But when the share analysts start to think more deeply about the issues raised by the ACCC decision to block NAB's offer while giving the green-light to AMP's alternative offer, it becomes clear that, over a wide area, mergers in Australia are now going to be much more difficult. What we are seeing is a dramatic widening of competition policy and shareholders' interests can sometimes be cast aside (italics mine). The best illustration is telecommunications where [ACCC Chairman] Graeme Samuel and the government are reshaping the industry and shareholders in Telstra are the sacrificial pawns.

I can't believe it - Gottliebsen seems to be saying that what's good for consumers (i.e., competition) is bad for shareholders!

On the contrary, Mr. Gottliebsen, you should surely know that the lack of competition benefits neither consumers nor shareholders. Oligopolistic markets are known to be wasteful, paying shareholders less than their due and charging consumers more than their share.

When the US Justice Department broke up AT&T in the early eighties, shareholders actually saw the value of their shares go *up* after a few years, thanks to the improved efficiency forced on the company's parts.

These are not just idle comments by one without skin in the game.

I'm both a customer and a shareholder of Westpac's and I believe the ACCC's lack of teeth with regard to the St George takeover has impacted me adversely on both counts. The spread they gain through their increased oligopolistic position is simply frittered away on inefficiency and waste. Where, indeed, is the impetus to improve when the landscape today is far less competitive than just a couple of years ago?

I'm both a customer and a shareholder of Telstra's and I applaud the government's surprisingly tough stance against it. It couldn't happen to a nicer monopoly!

I'm both a customer and a shareholder of NAB's. I'm happy about the ACCC decision to block NAB's takeover of AXA but I believe the same ban must also extend to AMP. We need more competition in every market, not less. It's not just consumer protection but shareholder protection as well. It shouldn't take an economics degree to see this.

I think Australia's status as one of the most diffused shareholder bases in the world has created a class of shareholder-consumers afraid to revolt at higher prices because they falsely perceive a benefit from that as shareholders. That fallacy owes much to the demagoguery of economists like Gottliebsen who, for reasons known only to themselves, continue to peddle the myth that the interests of consumers and shareholders are somehow opposed. The only real opponent is oligopoly and its resultant waste. Both consumers and shareholders stand to gain when waste is eliminated, and competition is the only way to achieve that. Surely a free-market economist should be able to see that.

To paraphrase Raghuram Rajan, it seems we need to save Economics from the Economists.

Economic Principles that Work

I have had discussions with various friends about broad-brush Economic philosophies such as "Capitalism" and "Socialism", and we have agreed that these labels are largely meaningless because different people understand them to mean quite different things.

We then talked about "goals" being more important than "isms", but again, different people may believe in different goals for a society. For example, is it more important to first eliminate poverty (through government intervention if required) or to set up a functioning market economy without distortions?

The discussions seemed to be getting nowhere, so I decided to take a leaf from the book by Al Ries and Jack Trout, a book called "Bottom-Up Marketing." In it, the authors argue that rather than start with a grand strategy and derive tactics from it, the most successful military and business ventures have taken successful tactics and built strategies around it. The German strategy of Blitzkrieg was based on the observed capabilities of the armoured tank and of newly-improved radio communication. It was not a strategy derived from blue-sky thinking.

Perhaps in similar fashion, we can find examples of economic principles (shorn of ideological "isms") that work, and these can be put together into a coherent economic policy for a country. I admit that I have cheated a bit. I'm fortunate to be living in a country (Australia) that has enjoyed about 20 years of uninterrupted growth even as the rest of the world has undergone boom and bust cycles. The two striking features of the Australian economy are a near-constant budget surplus throughout this period, and a stated policy by the independent Reserve Bank of Australia to manage interest rates so as to keep inflation in the range of 2-3%. So finding economic principles that work has been largely a matter of describing the features of the Australian economy, but of course it wasn't just that.

So here goes. This is my list of principles, some of which have been proven to work, some of which could work under certain conditions, and some of which have been discredited. Obviously this has serious biases. It's my opinion, after all ;-).

1. Principles that are known to work and should no longer be controversial:

Principle: Prudence
Lay description: Don't spend more than you earn.
Label(s): "Fiscal conservatism"
Features: A balanced or surplus government budget, cost/benefit analysis of projects, sound project management
Notes: The Australian federal budget has been in surplus for many years until the fiscal stimulus of 2008-2009 and is projected to be back in surplus by 2014-2015.

Principle: Accountability
Lay description: (1) No one is above the law. (2) Deliver results to stakeholders, or else.
Label(s): "Democracy", "Rule of law"
Features: Institutionalised checks and balances, regular elections, power of recall, strong opposition, independent judiciary

Principle: Transparency
Lay description: Eliminate corruption, build faith in the system.
Label(s): "Transparency"
Features: Formal processes, Right-to-Information laws, office of auditor-general/public ombudsman, free press, legislative review

Principle: Market efficiency
Lay description: Ensure that no buyer or seller (or small group thereof) can skew the market.
Label(s): "Free market", "Liquid market", "Competitive market", "Efficient market"
Features: Competition watchdog (with teeth), strong antitrust law
Notes: Perhaps this is the one area where the Australian economy is wanting. The lack of competition in the banking sector is only just being realised and discussed. At the same time, the telecom monopoly is finally being addressed and will hopefully be dismantled.

Principle: Stable growth
Lay description: A central bank manages interest rates to contain inflation in the 2-3% band.
Label(s): "Responsive monetary policy"
Features: Independent central bank, stated inflation target
Notes: This focus of the Reserve Bank of Australia (RBA) together with a near-constant budget surplus has delivered 20 years of consistent growth even during periods of global recession.

Principle: Risk management
Lay description: Systems to identify and protect against various kinds of risks (mainly economic).
Label(s): "Diversification", "Risk regulation"
Features: Markets with breadth and depth, multi-skilled workforce, demographic diversity, risk management regulation, culture of risk management
Notes: There are many aspects to risk management, but its existence is generally a hallmark of a sophisticated economy.

Principle: Basic education
Lay description: Compulsorily educate all children.
Label(s): "Compulsory universal primary schooling"
Features: Fee-free public schooling upto and often including high school
Notes: All children must be afforded at least primary education, because literacy and numeracy are life skills and uneducated adults are a cost to society.

2. Principles that are controversial but can work provided they don't violate the first set:

Principle: A fair society
Lay description: This is one of the most misunderstood and variously interpreted principles, attracting a number of labels depending on the aspect being highlighted or criticised.
Label(s): "Meritocracy", "Affirmative action", "Equal opportunity", "Welfare state", "Social Security", "Egalitarianism"
Features: Constitution, bill of rights, independent judiciary, unemployment benefits, universal healthcare, tolerant society
Notes: As long as the budget stays balanced, these need not have downsides.

Principle: A skilled workforce
Lay description: Working age people have skills of a high quality that are productive in the economy.
Label(s): "Knowledge society",
Features: Universities, polytechnics, culture of higher education, incentives for higher education
Notes: Higher and technical education help a nation compete, but should not come at the cost of a deficit budget.

Principle: A healthy populace
Lay description: Affordable health care (prevention as well as treatment) for all.
Label(s): "Welfare state", "Universal healthcare", "Socialised medicine"
Features: Various mechanisms - single payer, compulsory private insurance, Medicare, etc.
Notes: Universal healthcare is an emotive issue, but should not be sought at the cost of a deficit budget. Prudence pays better long-term dividends.

Principle: A world market
Lay description: Free trade based on the principle of comparative advantage of nations.
Label(s): "Free trade"
Features: Low tariffs, low administrative/bureaucratic barriers to trade
Notes: Governments need to ensure both competitive/liquid markets and adequate diversification to maximise gains and reduce risk.

Principle: A regulated economy
Lay description: Government intervention in the functioning of the economy through a variety of mechanisms.
Label(s): "Mixed economy", "Public sector"
Features: Government ownership of enterprises, regulation of commercial activity (antitrust, price-setting for utilities, etc.)
Notes: Often criticised by advocates of a "free market" (itself a vague term), government intervention, if done well, can aid market liquidity by keeping commercial players honest, and can also provide much-needed services not provided by commercial players.

Principle: Wealth creation
Lay description: Tax incentives that benefit the well-off rather than those of more modest means.
Labels: "Supply-side economics", "Tax breaks for the rich", "Regressive taxation"
Features: Relatively low tax rates, modestly progressive tax slabs, tax-deductibility of investments, high income disparities
Notes: Taxation can often be a disincentive to wealth creation, but winding back taxation should not result in a deficit budget.

3. Principles that sound great but are observed not to work in practice:

Principle: Job security
Lay description: Legalised protection of jobs.
Label(s): "Socialism", "Protectionism", "Trade unionism"
Features: Strong trade unions, strict labour laws, no hire-and-fire, high import tariffs, tight immigration controls
Notes: Minimising unemployment has instinctive appeal, but the goal may be better reached by focusing on other targets, e.g., low inflation. The direct approach often has the opposite effect.

Principle: Unregulated markets
Lay description: Government stays out of the market altogether.
Label(s): "Capitalism", "Free market", "Laissez-faire economy", "Libertarianism", "Small government", "Monetarism"
Features: Limited government interference/intervention, unchecked market distortions (oligopolies and monopolies)
Notes: Recent failures in several economies with unregulated markets have shown the folly of this principle. Some regulation seems to be necessary, especially around keeping markets open and competitive and subject to risk management discipline.

Principle: Equality (as opposed to equal opportunity)
Lay description: Ensure that incomes, lifestyles, etc., are not too divergent.
Labels: "Socialism", "Communism", "Classless society", "Egalitarianism", "Tall poppy syndrome"
Features: Disincentives to wealth-building, limited private ownership, demonisation of "elites"
Notes: Fairness and equality of opportunity are more pragmatic principles that lead to an egalitarian society, where even the lowest-paid have an adequate standard of living to maintain their dignity and all have equal rights. Force-fitting an entire society into a mould of artificial equality only succeeds in making everyone equally poor, as the example of the communist countries has shown.

That's the lot, as far as I can tell. The question I have for the rest of the world is, if Australia can do it, why can't you?

How Brakes Can Make a Car Go Faster

I recently attended a talk on Governance, Risk and Compliance at which Forrester analyst Tim Sheedy said something interesting and original.

He likened the Risk Management function in an organisation to the brakes in a car, and asked the audience what brakes do. The answer of course was that brakes slow down or stop a car. He agreed and said that's how organisations have seen the Risk Management function, i.e., as something that slows down business.

He then asked the audience how fast they would be willing to drive their cars if they knew the brakes weren't working. The answer was "very slowly indeed".

And so Sheedy pointed out that brakes actually make it possible for cars to go faster! In similar fashion, Risk Management helps business do more rather than less.

This reminds me of a couple of similar ideas I have heard.

One is around a way to prevent deaths due to car crashes. The conventional solution is to place an airbag in the steering column to protect drivers. The unconventional solution is to place a sharp spike on the steering column, with the effect that drivers will then drive very carefully indeed!

Another idea I have discussed on this blog earlier is about how Economics differs from Physics. You often make something happen by enabling its opposite. If you want to conserve hard currency within your economy, then you don't prevent people from taking it out (that will have exactly the effect you don't want). You should in fact make it easier for people to take hard currency out. That will ease the fears of investors who will then more readily bring hard currency into the economy, because they are assured that they can take it out whenever they want.

India, Inc. should sell off its loss-making Kashmir division

If you were the CEO of a multi-trillion dollar enterprise and you had a division that was making losses for years, diverting resources from more profitable divisions, creating bad press for the organisation and contributing to poor employee morale, what would you do?

India, Inc. is an enterprise in exactly that situation. For sixty years since Independence, Kashmir (or more correctly, the Kashmir province of the Indian state of Jammu & Kashmir) has been a black hole consuming endless resources in terms of both money and human life and providing no tangible benefits in return. It's ironic that India, the back-office of the world, which is selling the business benefits of outsourcing to a host of global corporations, has failed to apply the same hard-nosed business principles when it comes to its own affairs. Have the CEO (the PM), his management team (the cabinet) and the board (members of parliament) been managing the enterprise in the best possible way to further the interests of their shareholders (the Indian people)?

This is a case fit for a business school discussion. What should the management do with this chronically loss-making division?

I don't believe the Kashmir question has ever been phrased in business terms before, which is why it has so far been a taboo subject that "patriots" have been expected never to question.

At long last, a section of the intelligentsia has begun to think the unthinkable and voice their thoughts in print. Vir Sanghvi, Jug Suraiya and Swaminathan S Aiyar are 3 prominent columnists who have written up some very eloguent arguments about "letting Kashmir go". I particularly like Vir Sanghvi's article. The well-known activist and author Arundhati Roy (who wrote "The God of Small Things") summed up the collective national fatigue with Kashmir by saying "India needs aazaadi (freedom) from Kashmir as much as - if not more than - Kashmir needs aazaadi from India."

And it's not just a flight of fancy by some elites sitting in their ivory towers. The response to this idea from the general population has been dramatic. A recent poll conducted in 9 Indian cities showed that fully 30% of the country's (urban) population agrees with the idea of letting Kashmir go. So much for an unthinkable idea! I'm sure as time goes on, the idea will gain more supporters. After all, the debate has just begun, and there is already so much pent-up support.

Imagine the benefits that can ensue when a loss-making activity is stopped and funds are immediately available for profit-generating ones instead. India badly needs investment in infrastructure, especially in transport, power and communications. Investment in infrastructure is a multiplier in economic terms. It accelerates economic growth. China has shown the world that growth rates in excess of 10% a year are sustainable. India needs to aim for such a target, and throw every spare resource into achieving that target. The prize is the potential status of being not just the world's largest democracy (already achieved), not just the world's most populous country (projected to happen by 2050), but being nothing less than the world's biggest economy! With a population potentially greater than China's and with more favourable demographics, this is not a pipe-dream. But it requires vision, planning and investment to get there. Worthless diversions like Kashmir are an unaffordable luxury to a country with a far greater tryst with destiny. Kashmir is a needless drain on India's precious resources.

But the idea is still a wrenching one. I grew up in India and the image of the Indian map in my mind is the (untrue) official Indian one with an undivided Kashmir shown as fully Indian territory. That became the "look" of India to me and, I'm sure, to hundreds of millions of Indians. I could almost see a person standing with their left arm around Bangla Desh and face turned westwards. Foreign publications that showed a truer map with the actual line of control as the border were rubber-stamped with the bristly phrase "The external boundaries of India as depicted are neither correct nor authentic", or something of that sort. Yes, the Indian map without Jammu and Kashmir looks admittedly ghastly. It looks like India has been beheaded. That would be my initial, emotional response. A map with Kashmir alone gone would look like India has (literally) lost face. But I can swallow that and look beyond it.

When you analyse and break them down, I guess the only reasons against a sell-off would be national security, logistical complexity, national pride and what I'd call "sunk costs".

The "sunk costs" argument is the easiest to debunk. Essentially, this is saying, "India has spent so much money and sacrificed so many lives to retain Kashmir. If we give up Kashmir now, it will be a waste of all that money and all those brave soldiers would have died in vain." The argument against it is simple: "We should stop throwing good money after bad, and we will prevent even more soldiers from dying unnecessarily by putting a stop to this pointless exercise." After all, the Kashmir situation doesn't look like it is going to turn the corner anytime soon. Why put up with this haemorrhage in good money and good men indefinitely?

National pride is a trickier issue. There's no rationalism here, so it's hard to argue with someone with a strong opinion. However, the issue can be reframed in a number of ways.

1. The prosperity of India is far, far more important than the retention of Kashmir. Our national pride should be in our socio-economic achievements, in bringing prosperity and egalitarianism to an already democratic society. Kashmir is tiny compared to the current and potential achievements of India.
2. Kashmir is needlessly giving India a bad name. We are being equated with a colonial power. We, who struggled to get the British out of India! We, who sympathise with Tibet to the extent that the Dalai Lama and his followers have enjoyed political asylum in India since 1959. We, who are overwhelmingly opposed to the American war in Iraq. How can we now behave the same way as a colonial oppressor and stay on in a place where we're clearly not wanted?
3. Even the Soviet Union allowed its republics to secede. Where is the shame in letting a recalcitrant province go its own way?

I don't know how convincing these arguments will be, but as I said before, the debate has just begun, and there will be more and better arguments.

That leaves national security and logistics.

The national security argument can cut both ways. What I call the "domino theory" held by many hardliners says that giving up Kashmir today will require India to give up other territories tomorrow. I'm not convinced, and I think this is just paranoia. Secessionist movements in other parts of the country have been tamed without territorial concessions, and it must be remembered that none of them has been a festering wound like Kashmir. [We will create more festering wounds unless we move quickly to redress the legitimate grievances of victims upon victims of communal violence in our country.] The point is, the Kashmir situation has probably deteriorated beyond the point where a solution can be found within the framework of the Indian union.

On the other hand, consider the fact that Kashmir has always been the single most important irritant between India and Pakistan, responsible for every single armed conflict between the two countries (except the 1971 war). There has been no progress on a South Asian free trade zone thanks to the antagonism between its two biggest countries. A huge economic bonanza awaits the region once the Kashmir issue gets settled. When the economies of the region get inextricably intertwined, war becomes an increasingly distant possibility. Strategically, there is in fact a strong national security argument in favour of letting Kashmir go.

Finally, the tricky issue of logistics. We remember the horrors of Partition in 1947. The last thing we need is another massacre with the body count running into the millions. India needs to float the idea of a coming "velvet divorce" gently and years in advance. It will allow people to make their plans and execute them without panic. There's also the messy issue of compensation for hundreds of thousands of Indians who have been forced out of Kashmir by the threat of violence. That's actually a tractable problem. Displaced Kashmiris within India can be generously compensated with a fraction of India's budget for Kashmir for a single year.

I know I'm advocating that India should let Kashmir go, but my guess is that most Kashmiris, faced with a stark choice, will vote with their feet and wind up in India anyway. India is the biggest engine for economic growth this side of the Himalayas. The Kashmiris' options are unfortunately quite limited, and uniformly unsatisfactory. They can either create an independent landlocked state for themselves with no resources and no industry and be an instant basket case, or be absorbed into a troubled Pakistan with its sputtering economy, perilous law-and-order situation (which puts it on a collision course with the US over terrorism) and very uncertain prospects overall. As an independent country, they will probably be humiliatingly dependent on India anyway, and the terms they receive will be far less generous. They're probably best off where they are (a much-pampered province within India), but I (just like an increasingly large number of Indians) am now skeptical whether the status quo is in the best interests of India.

If the Kashmiris finally get what they have been agitating for, it could turn out to be their worst nightmare, and India's lasting relief.

My Economic Philosophy - 5 (The Greater Freedom, redux)

It looks like the debate about which is the greater freedom (a freedom without restrictions or a freedom that cannot be taken away) is taking place again in the context of blog netiquette.

The incident that triggered this latest debate concerns technology persona Kathy Sierra. (I owe a personal debt of gratitude to Kathy for her excellent book "Head First Servlets and JSP" that helped me achieve my Sun Certified Web Component Developer for J2EE certification. I have also read and enjoyed her other books "Head First Java", "Head First EJB" and "Head First Design Patterns").

A few people left disturbingly graphic insults and death threats on her blogsite, and the pattern of intimidation continued, with similar comments appearing on other blogsites, until she began to fear for her own life. The freedom of speech exercised by those who made the death threats resulted in a very real loss of freedom for Kathy, who felt compelled to cancel a speaking engagement and stay at home out of fear. My heart goes out to Kathy. I hope she recovers from the trauma soon and continues to contribute to technology and the world in general.

I guess this incident mirrors how a laissez-faire market can result in some players losing their freedom through the aggressive actions of others, even though those others may technically be playing within the rules.

Following the Kathy Sierra incident, Tim O'Reilly proposed a blogger's code of conduct, which I think is a good thing. One of the proposals in it concerns banning anonymous comments.

I have been a bit laissez-faire about comments so far, but (inspired by Tim's guidelines) I will ban anonymous comments on both my blogs from now on, and delete uncivil ones (but not comments that merely disagree with my views), in order to be consistent with my philosophy of the greater freedom. Because these are related concepts, after all.

According to a news report, Tim said the guidelines were not about censorship.

"That is one of the mistakes a lot of people make — believing that uncensored speech is the most free, when in fact, managed civil dialogue is actually the freer speech," he said. "Free speech is enhanced by civility."

Amen to that.

Protectionism's insidious appeal to decency

I had a minor argument with an Aussie colleague at work today. We were discussing no-frills brands in supermarkets such as Woolworths' Home Brand and Franklins' (what else) No Frills. I'm all for these brands, by the way, because they give me commodity functionality at a lower price than traditionally branded products.

My colleague stiffened visibly. "I don't buy these brands because I believe in supporting Australian producers," he said, and there was an undertone of reproach in his voice. I should have bitten my tongue, I guess, but I couldn't help expressing my preference for Free Trade. That got me embroiled in an argument with another Aussie co-worker who also believed in supporting Australian producers.

I was a bit saddened by the exchange because these are people I like and respect very much. They're decent blokes, and if they've been conned by the protectionist argument, then it sadly means that protectionism is a tax on decent and patriotic people, just as lotteries are a tax on people who are bad at maths.

So what I understand from this is that it doesn't matter how inefficient and uncompetitive I am as a producer. All I have to do is wrap myself in the national flag, and patriotic people can be counted on to bail me out. Their well-meaning patriotism becomes its own punishment. And they don't seem to realise that their support of products on non-economic grounds does the country a disservice by taking away the incentive to improve efficiency and competitiveness. Over time, the country loses its ability to compete in the world market. Protectionism always hurts those it is meant to protect.

I remember a similar situation in India, where I spent the first thirty years of my life. There was a popular nationalistic slogan that I saw everywhere as I was growing up - "Be Indian, Buy Indian." (Not that it was possible to buy foreign goods, heh. The import tariff on foreign-made electronic goods, for example, was 400%! A pox on Indira Gandhi and her mean-minded, wealth-destroying mindset!)

The only cars available in India for many years were the Ambassador, the Premier Padmini and the Standard Herald. These were based on European designs of the fifties. The Ambassador was based on a British design, while the Padmini was based on a Fiat model. I don't know what the Standard Herald was based on. The interesting thing was that these models never changed over 40 years! Indian car manufacturers didn't even bother to try the old Detroit trick of "innovating" larger tail fins. They just kept making the same models year after year and sold them at exorbitant prices. Only rich people could afford cars in those days. And the cars were gas-guzzlers to boot.

Finally, in the late eighties and early nineties, the Indian economy began to liberalise. Indian companies began to tie up with foreign manufacturers to bring out newer models. Within 15 years, the landscape was transformed. Today, the old models are nowhere in sight on Indian roads, except as taxis (for some reason, taxis are still stuck in nowhere-land). All private cars are now based on modern designs and international brands. What's more, many of the models are affordable by middle-class people. They're also more fuel-efficient.

I feel anger whenever I think of this and similar stories. These car manufacturers took the Indian consumer for a ride for four decades because they were shielded from competition and never felt the need to innovate and compete. They remained stuck in the fifties while the rest of the world passed them by. It was only when the Indian economy was opened up did change happen.

So what did being Indian and buying Indian achieve? Limited choice, stagnant designs, ugly, gas-guzzling monstrosities and high prices. All these problems magically disappeared when the economy opened up and competition appeared (which ties this back to my earlier piece on Liquidism).

Why should we buy a product just because it is Australian-owned or Australian-operated? What is the message we are sending to these people? That it doesn't matter how uncompetitive they are, they can still have our money?

As an obvious aside, I wasn't "Made in Australia" myself, but a free-ish market in labour was responsible for my migrating to this country under Australia's Skilled Migration Program and adding my talents (meagre as they may be) to the Australian pool. At a visceral level, I cannot agree with the "Buy Australian" sentiment, because it would have kept me out. In fact, I find that sentiment personally offensive.

My Economic Philosophy - 4 (Liquidism as "Extreme Economics")

(This is the fourth of n pieces on my emerging economic philosophy called Liquidism.)

In spite of its seemingly revolutionary approach, Liquidism isn't really a radical departure from current "best practice" in economics. The three schools of macroeconomic thought I referred to in my third post on this topic do not really contradict each other, either.

Those who assert that governments must not run deficit budgets are in fact agreeing with those who claim that inflation needs to be kept in the vicinity of 2-3%. Government budget deficits are known to be inflationary, so balanced or surplus budgets greatly assist central banks in their task of controlling inflation through the manipulation of interest rates.

Similarly, those who believe that the most important parameter is low unemployment, and therefore clamour for growth-oriented economic policies are not disagreeing with the other two schools of thought. Growth occurs best in an environment of stable and low inflation. Witness the example of Australia, the clever country (not the lucky country, by the way, because Australia's prosperity is the result of smart management, not undeserved good luck). Australia has enjoyed an unprecedented 15 years of nonstop growth, while the rest of the world has seen periods of both growth and recession. Unsurprisingly, during this period, the Australian federal government budget has been largely balanced or in surplus, and inflation has been vigilantly maintained in the 2-3% range by an alert and active central bank.

So we seem to have stumbled upon the magic formula that reconciles seemingly different schools of macroeconomic thought. Keep inflation low by constantly tweaking interest rates, avoid contributing to inflation by running budget deficits, and you will achieve steady growth that will keep unemployment low.

Liquidism only carries this argument one step further, because all the above techniques, impressive though their results may be, do not succeed in driving inefficiency out of the system. Inefficiency, in the terminology of modern software development, is a "smell" that suggests that something is wrong somewhere.

Lest anyone think that I'm a blind devotee of The Australian Way, take a look at the Australian banking sector. It's an oligopoly, with only four major banks. I have a unique inside view into the functioning of these organisations, having worked in two of them. I will not jeopardise my current employment by going into specifics, but most activities in these organisations are highly wasteful, compared to similar activities in organisations in more competitive industries. And yet the big four banks remain highly profitable! If organisations can show huge profits year after year while being extremely inefficient and wasteful (as is obvious to an insider), it's a "smell". Something is rotten in the system, and it's not a problem with the banks themselves. Their inefficiency is a symptom, not the problem. The problem is with the competitive environment. Less competition, less efficiency. Wealth is vanishing from the system, being eaten by the friction of inefficiency between its wheels. In the case of the banks, customers are picking up the tab and paying more than they should, while shareholders are earning less than they should.

What do we do? Let's take a leaf from the software development industry, specifically, a recent methodology called "Extreme Programming", called XP for short. The father of XP, Kent Beck, explains the technique in these words:

"When I first articulated XP, I had the mental image of knobs on a control board. Each was a practice that from experience I knew worked well. I would turn all the knobs up to 10 and see what happened. I was a little surprised to find that the whole package of practices was stable, predictable, and flexible."

We now know that certain economic practices work well. Keeping inflation low is one of them. We also know that competitive (liquid) markets are efficient, while oligopolistic or monopolistic (illiquid) markets are inefficient. How do we, in Kent Beck's words, turn all the knobs representing good macroeconomic practice up to 10?

1. Turn the fiscal knob up to 10 (manage spending and income to avoid a deficit budget at all costs)
2. Turn the monetary knob up to 10 (actively manage money supply through the interest rate vehicle and keep inflation within 2-3%)
3. Turn the market efficiency knob up to 10 (aggressively enforce antitrust and keep markets liquid)

I believe that Liquidism represents the "complete" macroeconomic philosophy, with its inclusion of the final leg in the triad of macroeconomic policy.

It's not a rejection of current economic thought, but merely the next necessary step in our thinking.

It's "Extreme Economics", if you will. And if the vaunted results of Extreme Programming are anything to go by, it could be wildly successful.

My Economic Philosophy - 3 (Les droits inaliénables)

(This is the third of n pieces on my emerging economic philosophy called Liquidism.)

Pardon my French, but if we're going to talk about two distinct definitions of freedom, and the first is called laissez-faire (a freedom without restrictions), what do we call the second (a freedom that cannot be taken away)? Droits inaliénables (inalienable rights)? Quite a mouthful, so I'll tell you what. We'll call it Liquidism.

Why? Because as any student of economics knows, the system where no individual player has the power to force any other player to act against their will is called Pure Competition. A market that demonstrates Pure Competition is said to be liquid. Oligopolistic and Monopolistic markets are highly illiquid.

Want a system where players' rights can never be taken away? You're basically asking for Pure Competition. Is that too idealistic?

Look at the Free Software/Open Source ecosystem. The GNU General Public License (GPL) guarantees a freedom that cannot be taken away. Most other licenses (BSD, MIT, X11, Apache, etc.) represent freedom without restrictions. Which is the more successful in practice? About 68% of all software projects on SourceForge (the world's largest repository of Free/Open Source software) have adopted the GNU GPL, which shows that most Free/Open Source software developers seem to believe that a freedom that cannot be taken away is in fact the greater freedom.

I think this latter view of freedom is an idea whose time has come. Economists of every shade have been brandishing their single favourite economic parameter. Some claim that a balanced government budget is the holy grail, with government controlling both spending and taxation to achieve this goal. Others claim that inflation must always be contained within 2-3%, with the central bank flicking interest rates up or down to keep inflation in its place. Yet others claim that full employment is the state to be aspired to, with all economic parameters primed to encourage constant growth.

So let me throw my hat in the ring. I want a free market, and I don't mean a laissez-faire free market. I mean a free market whose freedom cannot be taken away. And that means an activist government unafraid to wield a powerful instrument - Antitrust.

Liquidism's distinguishing feature is a highly competitive market, maintained if necessary, by aggressive antitrust enforcement on a hair-trigger.

I know it sounds radical, and it conjures up a vision that may be deeply disturbing to some.
See an emerging monopoly or oligopoly? Break 'em up!
Receive a merger proposal between major players? Deny permission.
Detect a pricing cartel? Throw the bosses in jail and ban them from holding similar office in future.

It may seem like a wild-eyed, revolutionary and ultimately impractical idea, but is it? In the fourth piece on Liquidism, I will argue that this is merely the next evolutionary step in modern macroeconomic thought.

My Economic Philosophy - 2 (The Limits to Rand)

(This is the second of n pieces on my emerging economic philosophy called Liquidism.)

I was a latecomer to the philosophy of Ayn Rand. I completely missed reading her novels in college, when everybody else seemed to have their noses stuck between the pages of "The Fountainhead" or "Atlas Shrugged".

Then one day, when I was almost 40, I stumbled upon the website "www.capitalism.org", and the ideas I read there almost blew me away. This site is dedicated to spreading the philosophy of Ayn Rand, Objectivism, which Rand believed was the capitalist ideal.

I was gobsmacked as I read the material on this site because I had till that point always thought of Capitalism as an economic system, as something to do with money and who controlled it. Wrong, it turned out. Capitalism is a political philosophy, and the economic system that is often confused with it springs naturally out of this philosophy.

And what is this political philosophy?

In two words, individual freedom. That's the core value of Ayn Rand's capitalist ideal. At this level, she doesn't talk about money. She does talk about "wealth", but wealth at this level means much more than just money. It is the sum total of all the kinds of satisfaction that one can derive.

There's more.

Reason is the source of all "wealth", and everyone is entitled to the wealth generated by the exercise of their reason. The only thing one may not do is restrict the freedom of others. The initiation of force is prohibited, and one may only acquire the wealth of another by one of these means - willing gifts by the other, through persuasion (not coercion), or through trade. Of these, trade is the best. Coercion and deception are taboo.

To say that I liked this philosophy would be an understatement. It resonated deeply within me. It struck me as the fairest of all possible systems. I even wrote an article defending the Capitalistic credentials of Free/Open Source Software called "The Capitalist View of Open Source", demonstrating the software model's scrupulous adherence to the principles of Ayn Rand.

But even at the height of my admiration for Rand, I was never completely in agreement with her.

She claimed animals had no rights, and I beg to disagree. I in fact expected her to extend her philosophy to include any living creature, not just humans.

She stoutly upheld the right to life as a fundamental right of every human being right from their birth, that no one had the right to take, but instead of expressing honest ambivalence about abortion, she glibly claimed that foetuses were not human and therefore had no such right. The mother, according to her, had the "right" to abort her foetus and this freedom could not be denied. I found this sophistry a little intellectually dishonest. Abortion is a tricky subject and I'm not sure there are any "right" answers. At what point exactly does a foetus with no rights turn into a new-born baby with full rights? For Rand to proclaim one viewpoint with an air of moral certainty didn't do much for her credibility in my eyes.

And then there was the ultimate "What was she thinking?" moment. When I read about Ayn Rand's essay "America's Persecuted Minority - Big Business", I knew that she had either lost her marbles or been coopted by that persecuted minority into advocating their cause.

So I remained stuck with an intellectual model that was almost perfect, but not quite. Until I read the other article, the one that posed the question about the two types of freedom.

My Economic Philosophy - 1 (The Definition of Freedom)

(This is the first of n pieces on my emerging economic philosophy called Liquidism.)

I won't lay claim to the following piece of wisdom - I remember reading someone's article (dashed if I can remember who it was!) where he asked a most profound question:

"Which is the greater freedom? A freedom without restrictions, or a freedom that cannot be taken away?"

He was asking this in the context of a big argument among advocates of Free Software and Open Source. Though Free Software/Open Source software is "free" (and I mean freedom, not price), there are actually two very different kinds of freedom implied by the term, and the two major categories of software licences tend to reflect this dichotomy. One set of licenses grants users full rights to do anything at all that they want with the software. The other set allows them to do anything except make proprietary enhancements to it. That's because such a right will give a one-way benefit to those making the proprietary enhancements and always place the users and developers of the original, free version at a disadvantage.

[I won't discuss the software issue in greater detail because this is not a technical blog, but I can't help citing another brilliant document at this point. This one is a highly technical software critique, by the way, which may go over the heads of even techies (I had to read it a few times to understand it), but the best thing it did for me was introduce me to the phrase "usefully contrary trade-offs" (See the section titled "The API Fallacy").]

The two definitions of freedom we talked about make usefully contrary trade-offs in what they offer to recipients of such freedom, but my eyes didn't open until I read the question posed in this way.

A freedom without restrictions is a laissez-faire system. Anything goes, as long as fundamental rights are not violated. One side-effect of giving freedom to all players is that, through entirely legal means, some players will ultimately end up with much more power than others. Then those others will find that they have very little freedom, after all. They are left with only their fundamental rights, but without much economic freedom, they must pretty much agree to any conditions imposed on them, "of their own free will".

Contrast this with a situation where basic economic freedom is guaranteed to all, so that no one can be forced to do anything against their will. This goes beyond fundamental rights, by the way. Obviously, to protect such freedom, restrictions must be placed on all players to prevent an aggrandisement of power such as what would happen under a purely laissez-faire system. So some freedom is being denied to all, in order to preserve a minimum of freedom for all. By way of example, most countries have a Restrictive Trade Practices Act or the equivalent, which limits what market players can do, in a bid to protect the freedom of others.

That's the crux of the issue. Both systems claim to value freedom, but they are talking about subtly different concepts. One is a freedom without restrictions (with the risk of that freedom being taken away by other players through entirely legal means). The other is a freedom that cannot be taken away under any circumstances (with some consequent restrictions being placed at all times on what players can do).

We will return to this dichotomy again and again, because understanding the philosophy of Liquidism requires an understanding of these two usefully contrary trade-offs. Before you read further, think for a moment about the difference. Which do you think is the greater freedom?