Some questions require critical thinking to answer. Such questions are by definition rigorous- a rigorous question requires answers that are beyond a hypothesis.

Then we have yet another class of questions- questions that are like nagging doubts – these cannot be answered fully and most likely suffer from having failed to become what is popularly known as a Fermi problem.

A Fermi problem is a question so designed that it generates a well judged proximate response. Elsewhere, in this blog – I have discussed how proximates are good enough to make decisions. Anyhow, what (Enrico) Fermi was good at and what Fermi problems are meant to do is to test how strong a set of assumptions are and how they bear out without the availability of much data.

I see this happening around me all the time, a good project manager has to in some sense answer Fermi problems everyday.

Why don’t people follow procedures when they have been explicitly laid out? Why don’t households opt for credit schemes which are to their obvious advantage? Why don’t risk-sharing designs work on the ground the way they do in development economic models? Is money supply endogenous? Will Lehman cause the next great depression? Why does income and saving vary across groups to which discrimination models don’t apply?

The great art to project management is unlearning the science of sufficient assumptions, it is to accept constant refinement and probably much more.

Unless you are a qualified professional or an IT person in India; chances are you can identify with what I am just about to say.

You begin job hunting –  you’ve spent a fair sum of money obtaining a higher education, a bunch of degrees, you’ve been a good and dedicated student and an active participant in extra-curricular activities. By no means are you a blithering idiot or a fool and therefore you feel entitled to a well paying job.

Now here’s the problem- every job you look for and feel qualified for will state minimum requirements along the lines of “5 to 8 years experience”.  If students are busy getting qualified how are they supposed to have that kind of full-time experience? Unless of course they are expected to also work while studying, which is against collegiate law in most full-time university courses.

Higher education is supposed to qualify you to handle jobs that simple graduates cannot- which I gather is why people spend time and money doing it. If you emerge from a higher degree and still find the job market biased towards a decade of experience how are you supposed to deal with it? Simply put, where do students get this decade of experience? If no one wants to pay or hire articulate, young and bright yet inexperienced people – how do they become the ‘experienced’ people these companies want?

One solution is the ‘internship’ idea which works remarkably well in some cultural and national contexts, for example, in America. The only reason it works is because potential employers are willing to consider internships in lieu of full-time working experience. Most times they do; they also carefully consider waitress experience, window-washer experience and even the experience of planning a wedding!

A career counselor in Washington asked me rather quizzically why the  ‘internships’ on my resume were simply not put-down as ‘work-experience’. I had a hard time explaining that in India internships are not generally acceptable as quasi work-experience qualifications; at least employers don’t see it that way. In my lifetime – I am yet to see an Indian company hire a data quality person who has McDonald’s on their resume.

So we have a problem. One plausible explanation is that Indian internships, except at premiere institutions, are simply not ‘good enough’. Employers demand such exorbitant years of experience because candidates with lesser experience are simply not good enough.

This however seems like a fairly poor explanation to me two counts; the first one is best explained by an analogy to Indian sports (think Beijing Olympics) — how is it that a billion people seem to be able to produce only three world-class sportsmen? In a similar vein, what is it about the Indian education system or the job market that makes the vast majority of college graduates unemployable? The second reason for my skepticism is simply that the explanation is not intuitive enough to be true.

The truth seems to be mid-way and is really an economic phenomenon. Increasing the ‘experience required’ section narrows the pool of applicants which makes an HR person’s job much simpler. Just as most of the hiring in any company is done first through network exploration and lastly through the Internet.

Understanding this simple truth is like crossing a huge ice filled river with deep dangerous crevices to arrive upon a gigantic smoking sausage and a cup of hot chocolate. Strangely enough most job seekers begin their job searches on the Internet and turn to their networks last. In my case which I suspect is rather ‘normal’ this has more to do with self-esteem than extreme stupidity.

In India reducing the HR executive’s load is a vital exercise mostly because we turn out a huge number of potential employees from educational institutions, who are at the very least ‘formally qualified’. Reducing the number of applicants is therefore one way of reducing huge transaction costs and makes things easier.

Unhappily for a job-seeker, the incentives too are designed to make this system work and sustain itself. Because people are seldom paid what they deserve and even less so in response to the amount they actually work; there is a fairly large pool of people with a decade plus of experience who will work for peanuts. My network mostly consists of such people, which, explains the bit about self-esteem.

There are other powerful incentive structures in place to skew the job market and the economics of hire-and-fire. One of the more apparent of these is the simple fact that by hiring people with ‘at least half a decade or more of experience’ companies bypass training costs for their employees. A new recruit is almost always more costly than a more experienced one, especially in a situation where jobs are fewer and farther in between than there are people to claim them. By increasing the amount of experience required of potential candidates employers offset training costs to themselves at the expense of a prior company who actually invested in the recruit when he/she was new.

This, of course, is of no consequence whatsoever to the average job-seeker who jumps at the opportunity of a marginal pay raise in a new company. There is nothing surprising about this sort of behavior. Indeed a systematic study of the resumes of people ‘forty and above’ versus ‘thirty or below’ will reveal similar truths.

The vast majority of those who started working before higher-education exploded (which is vaguely linked to the arrival of the computer generation in India and the persistent presence of the government in higher education) have changed as few as three companies in their entire career spans, the more eccentric of these get to five. Contrast this with the BPO happy crowd and you will see a plethora of companies all over their resumes, a vast majority of these companies don’t even make it to the candidate’s CV thanks to space concerns and a ‘job-hippy’ tag.

Why does this happen? I reckon this has to do with the fact that job loyalty has hardly any benefits in India. This too is a consequence of the large pool of candidates companies can choose from. The costs of re-hiring, conventionally known as ‘menu-costs’ in economics, in the whole scheme of things are now negligible.

Little wonder then that more and more young people desperate to beat the ‘experience barrier’ fake everything from degree divisions to references and now increasingly ‘experience’ on their fancy templated resumes written on pirated versions of Microsoft Word. You have to admit the temptation to do so is strong – so strong in fact that there is unlikely to be a better man-made designed incentive structure to get people out of their beds and to work every single day of the week.

Companies are now moving towards investigative firms that do ‘background checks’ – which is all rather pointless given the incentives for these companies to ‘fake’ background reports themselves is astronomically high.  India will have yet another informal information market functioning in the blink of an eye and it will be perhaps be one of the most effecient prototypes the world has seen so far.

Its taken me almost ten days of travel on the Washington metro to realize that it is a public transportation system that actually uses peak-load pricing rather effectively. Traveling from Crystal City to Dupont Circle everyday at office hours (between 8 a.m. and 10 a.m.)  in the morning, for example, costs $2.16. Coming back the same way not at office hours (sometime in the afternoon) costs $1.60.

The difference between prices seemed curious at first and I was baffled how someone would potentially calculate and plan their expenditure for the week on transportation if the prices changed so arbitrarily. For a while I even thought it was gas prices causing the price to go up till I discovered the lower price on a fine Thursday afternoon, only to feel stupid when I realized that these metro trains run on electricity not gas. That would be all too unreliable in India where electricity outages are an everyday phenomenon, not true here though.

Prices change depending on the time of the day you travel. Rush hour tickets are more expensive than taking an empty yellow line to Georgetown in the afternoon. Peak-load pricing is a great example of how economics uses incentives to better everyday existence. At office hours in the morning, a train on the metro line is a scarce commodity with a lot of people competing for space on it. Those who ‘really’ need to get to work on time pay the premium and access the metro, those who can wait- do, and get the benefit of lower price when the commodity is not so scarce and therefore not so fiercely competed for.

In some sense this is the market allocating a scarce resource efficiently through prices as the signaling system. Its also a great de-congestion method, providing a disincentive to travel on the metro on peak times- the higher costs mean that at least some people will look for alternate ways to travel- by road, bus or walk. I sometimes wonder why heavily congested roads in India aren’t just converted to toll roads with peak-load pricing. Electricity too is a commodity that responds well to the idea of peak-load pricing and actually encourages the conservation of electricity well.

In India peak-load pricing works beautifully for the Internet and Telecommunication- most Indians’ are familiar with free calls from 9 p.m. to 6 a.m. schemes on cellular services and free night-time surfing from Internet Service Providers. Watching peak-load pricing work in a public transportation system that I use everyday is fascinating and makes me wonder why this powerful tool isn’t used more often in Indian infrastructure and public utility provision.

Chennai is all set to host Sir Nicholas Stern and his team for a discussion on what is what is known (in)famously in the climate change circles as the Stern Review.

The Stern Review (for the uninitiated) is a 700 page long document on climate change, global warming and the like. Released on October 30th 2006 (the October Revolution, which was neither in October nor much more than a Bolshevik coup), the Stern Review was undertaken for the British government by former World Bank chief economist.

The Stern Review discusses at length the impact of global warming and climate change on the world economy. A leading member of the Stern Review will speak at the Clive Dupleix Hall, Taj Coromandel from ten in the morning on Friday, the 23rd.

The report suggests in its conclusion (the only human- readable part) that a 1% of the world GDP would be required in investment every year to tackle carbon emissions failing which the loss in pure GDP terms would be somewhere between 15-20% of the global GDP. Upfront I guess, this is great news for environmentalists, there is much evidence though that the Stern Review is really nothing much more than an alarmist publicity stunt.

The Stern Review has received much praise and criticism (rightly so). A more momentous environmental milestone though that most people don’t talk about also took place on the 30th of October, 2006. The Copenhagen Consensus Centre headed by Bjorn Lomborg ( a statistician by profession and of Skeptical Environmentalist fame, a book I highly recommend to anyone who seriously intends to do anything about the environment) held a session with United Nations ambassadors from twenty four nations “representing fifty four percent of the world’s population”. These nations, were both developed and developing, large and small.

Lomborg asked them a single question, “If you had an extra $50 billion to be put to good use, what problems should be solved first?” The question was meant to reflect national priorities. Unhappily, for the blissfully unaware Sir Stern, mitigating climate change was nowhere close to the top five or even the top ten national priorities. I could easily suggest that this was because climate change by definition is something that requires international and transnational cooperation. And yet, you and I both know that this argument is flawed. If climate change was really bothering people, action would be happening.

The ambassadors in question unanimously agreed that “diseases, sanitation and water, malnutrition and education,” ought to be addressed first. Most ambassadors agreed that getting this baseline right also meant that mankind at large would be better equipped to deal with climate change at a later stage.

The Stern Review is problematic on several fronts which I will eventually discuss, what is more upsetting though is how this so called ‘green-agenda’ is being pushed forward aggressively and lapped by the media at that. I study and work with Public Policy, the vast majority of my teachers unfortunately derive their opinions from newspapers. And why not? Newspapers supposedly report facts, the opinions are therefore theirs, right? Not so.

Of the several classes I attend, one has to do with ‘Environmental Policy’. This class is taught by a beautiful woman who has an empty mind. She started out as a student of Economics, moved on to what she undoubtedly thinks is Philosophy (her lectures abound in references to a return to Wilderness, Deep Ecology, feeling for the Earth and of course Buddhist Ethics), then went to America and joined the Audubon Society dancing around camp fires with indigenous Americans.

My problem is not with Deep Ecologists, the Audubon Society or indeed with American Indians. My problem is with the perception of environmentalism. My problem is that all these collectives represent but one side of the story. For every developed and so called overtly consumerist nation there has also been an environmentally disastrous and state regulated USSR, China and so on. The point is that while Deep Ecology addresses an environmental gap in the more affluent nations where perhaps ‘returning to the land’ is a culturally important value, this is not global. In India for example, environmental problems are livelihood and human rights problems first. At any rate, this is a discussion for another day.

This particular woman, has been, like several other environmentalists brainwashed into guilt. She persistently talks about equity and believes that economic growth is evil. She will only talk about redistributions, but doesn’t see the argument about increasing the size of the economic pie. Don’t get me wrong, I’m not anti ‘green’; as a matter of fact I think the environment is a vector of several very valuable and scarce resources.

I’m merely suggesting that perhaps E.F Schumacher’s most valuable contribution did not lie in his questioning why mankind cannot live within a GNP many times in size now than it was for older civilizations, but instead in how to live within our means– through appropriate technology, something only an economist or otherwise solution driven mind could arrive at.

The value of Buddhist ethics similarly lies in their ethic of environmental conservation not in ‘connections with the soil’, and the value of the Sierra Club in its land acquisitions for environmental preservation. These are valuable lessons, and they are about strategy and method not about feelings, though I concede that feelings are a powerful means to action which brings me back to the Stern Review.

Among the many things wrong with the Stern Review, let me begin with the global GDP and the 1% figure which made the headlines. Current estimates of the global GDP stand at about $45 trillion. One percent of that figure is some $450 billion every year. Mind you, we’re talking about catastrophically bad weather at the very least a century away. The Stern Review suggests that at this cost Green House Gas (GHG) emissions could be stabilized. One way to look at this, or at least the Stern way to look at this figure is to say that four hundred and fifty billion dollars isn’t very much for the world. I disagree.

Any investment is undertaken at some cost, this cost is popularly known as opportunity cost. What could the opportunity cost of four hundred and fifty billion dollars be? Health, poverty, peace? The operating principle which prompts the hideous suggestion of spending this money on a phenomenon that doesn’t have any scientific consensus at all is what is popularly called the precautionary principle. You and I call this erring on the side of caution. What I want to know is this, should governments actually decide policy on a precautionary basis? Should our governments spend billions on developing anti-alien defense systems, because we suspect an inter-galactic attack?

Like all climate scientists, the Stern Review scientists based their report on climate projections and models. Much of climate prediction is itself circumspect. Weather and climate are complex, non-linear systems that do not conform. Predicting their patterns beyond a few months with any degree of accuracy is a mathematical joke. Our meteorological departments can’t get fishing weather forecasts right beyond a couple of hours let alone predict climate change and its effects a century down the line. The fault does not lie in the system, or in the maths–but in the fundamental understanding of chaos theory, unpredictability and in assuming variables to be static when they really are quite the opposite!

To understand this better; the Stern Review combines worst case climate model predictions with worst case economic model predictions, which is whence the predictable disaster arrives. The economic analysis is based upon what is called the A2 storyline. The IPCC Special Report on Emissions Scenarios describes a series of plausible ‘worlds’ of which A2 is one.

The A2 storyline is a world wherein relatively slow economic growth dominates, IPCC puts the figure around 2%. The world is a pretty dismal place with global economic self sufficiency (economic self sufficiency is suicide), continued population growth, and close to no technological growth. Call it a Malthusian nightmare. From this picture, we are to expect that by 2100 global per-capita GDP would rise by a paltry sum of $ 16,000 making the global GDP $243 trillion dollars. The population would be close to 15 billion and income would be inequitably distributed.

This is one scenario, and I might add rather improbable, if one were to remember Paul Ehrlich’s bet or indeed wonder why what Malthus predicted never came to pass. There are other ‘worlds’, the A1 scenario of the IPCC which is far more happy and indeed plausible discusses strong economic growth, trade in a globalised world, the population stabilizing and indeed outstanding technological progress which we have seen in the last century.

Contrast the A1 scenario GDP with the dismal picture, the projected GDP stands at $550 billion with a per capita income of $80,000 for the same time span. I am often amused in the class I discussed above– because I have to tackle an activist who takes every shot to call me ‘anti-people’, only ‘growth-oriented’, ‘right-wing’ and indeed everything short of evil, as though my horns are visible!

I’m assuming though that any reasonable person would want to avoid the A2 scenario and therefore would logically realize that the best way to deal with climate change and a shrinking natural resource base is to create greater capacity for future generations. In that vein, it is surely obvious that best policies are those that encourage economic growth. Here’s another weltanschauung– with wealth future generations can make and use better technology to deal with climate change, if it happens! I’m suggesting, that it makes for good policy to move from slow growth to high growth even if you are green, red, blue or indeed any other political color!

Economists concerned with the environment like Sir Nicholas Stern consistently talk about the poor in South Asia, especially Bangladesh. Its funny how the only thing in recent times to have made a difference to the average poor Bangladeshi is entrepreneurship and the availability of credit capital through from micro-finance, but I will let that pass. Let’s assume that Sir Stern gets to raise energy prices through a carbon tax, what is the immediate impact? An economic growth slowdown, by a trifle let’s say about 1%. How would a 1% fall in the growth rate of a third world nation like Bangladesh matter?

Bangladesh’s growth rate is about 6% per year, so if this were to become 5% for say the next half century till carbon levels stabilize what would the GDP growth difference be? The math is really easy. At 5%, after fifty years Bangladesh’s economy will grow by $575 billion, at 6% it would be close to a $1 trillion. Its the trivial little 1% that makes the huge difference. Now let me ask you, what are Bangladesh’s or indeed any third world country’s most pressing problems? Is it really how “a warming world will cause rising sea levels to flood much of that country”? If the concern is really over flooding, I wonder how a whole host of Scandinavian countries including the Dutch actually manage to keep their low lying countries out of flooding with a GDP of just 500 billion dollars!

Actually, maybe I’m being a tad unfair. Sir Stern is a very competent economist and has pointed out several times in the Stern Review that raising the price of energy produced from fossil fuels could very well produce net economic benefits. Look at this as some form of competition, new technology and a huge market demand for low carbon alternatives. The point is that, here too the idea of opportunity cost still stands. As I write (and in some sense the very fact that the Stern Review ever took place implies that), there is a gradual progression to cleaner fuel.

Therefore choosing to make energy costlier through taxes doesn’t change much except maybe saving some time. In the mean time- human beings everywhere are losing money they could’ve otherwise spent on food, water, sanitation, education, housing etc. In other words we’d be taking away social primary goods and subsistence provisions for climate change a hundred years down the line! The Rockefeller University here, has an excellent write-up on energy and de-carbonisation that discusses some of the issues surrounding energy consumption, much more eloquently and on much firmer ground than I can.

Pondering upon Bangladesh, improving people’s lives involves boosting economic productivity and that definitely does not include a 1% growth rate sacrifice for climate change! The Stern Review is insane on several other counts, and not just unethical. Amongst other things –

1. Stern wants the world to pay close to four hundred and fifty billion dollars every year to mitigate climate change on the basis of a phenomenon which has no scientific consensus concerning its causes. Contrast that with the Kyoto commitment of a hundred and fifty billion dollars per year which is failing.

2. The Stern Review suggests that unless something is done about it, global warming will destroy anywhere between 5% to 20% of the world’s economy. Incidentally, economical losses we can blame on “climate change” in the present are equal to zero within acceptable error margins.

3. The Stern Review advocates among other things a form of pigouvian taxation. The important thing about a pigouvian tax is to remember that it is not a the levying of a punitive tax to make people change their behavior. It precludes incentives, although in the long run it might serve as an disincentive.

All that a pigouvian tax does is insist that the costs currently external to the price and market are included within them. The problem is that green taxes on driving and flying have a marginal impact, which is the point. Pigouvian taxation is not meant to stop people doing something or to price them out of an activity. It is simply to make them pay the full costs of what they do.

It is undiluted nonsense then to talk about raising taxes or prices to stop people from flying, for example. No such thing happens, all that happens is that the carbon costs of a flight is exactly what determines the tax rate. There are lots of practical problems with this sort of taxation, the most obvious one is also the hardest to overcome. How is a government supposed to set correct figures for carbon based taxation? Recall what Hayek said, it is impossible for a government to possess such vast amounts of symmetrical information.

One part of this problem is to use estimated costs of Co2 emissions, and these do exist. Eminent environmental economist and incidentally one of the loudest critics of the Stern Review Nordhaus estimates one tonne of Co2 at $2.50, the Stern Review estimate stands at a whopping $85!

At Nordhaus’s estimate incidentally in every country airline passenger duty is already too high. At the Stern Review’s estimate, it’s about half what it should be. There are all sorts of problems with the Stern number, to begin with it is larger by leaps and bounds when compared to similar estimates of the same tonne of carbon emissions.

Now, if people were to be taxed purely upon the CO2 externalities (for fuel, for instance) prices should drop. Of course, we are not taxed purely and solely on that one externality. Theoretically a green tax would also include additional charges for, particulates, congestion, noise and so on.

I’m however, still willing to bet that a pure green tax will be lower than present rates of taxation at least on fuel and transportation. Here’s why, when you pay a flight surcharge, you pay for what the airline gets charged by the government for operating in license costs, regulation, land and so on… you also pay for the service. A pure green tax is, therefore, cheaper but impossible. So much for prices changing behavior.

The assumption behind the green tax idea is simply that we tax the rich more. The rich fly, so airline taxes are huge. Take a look at Indian airports, throughout the city parking rates for cars are either nominal or nil.

At the airport you can choose to pay 120 Rs, for an hour of premium parking or 60 Rs for regular parking. Now that is a hefty user charge. User charges are good things, but not when differentially implemented to tax the rich. It doesn’t work. Consider this, almost every passenger, budget airline or not, carries luggage in India and so comes to the airport in a car or a taxi. All equity is lost.

4. Let’s go back to the IPCC scenarios for a bit. Why is it that the projected savings from a 15 billion people and a global GDP of $ 243 trillion plus a savings rate of 20% is a better idea than other worlds? Something makes me think the reason is simple. The Stern Review chose the lowest future wealth because the discounting make current expenditure look good. To understand what I mean, we need to look at the discounting debate on the Stern Review.

I can’t really explain discounting, the Wikipedia link should be able to do that just fine. Either way the basic idea is that one adjudicates if investments are worthwhile depending upon the discount rate used to evaluate them. It is generally accepted that if the opportunity cost of the investment is its consumption then the appropriate discount rate is what is called the social rate of time preference, if you don’t understand this you can take a look at this.

Now, this depends on a bunch of things;

1. Should society prefer current consumption to deferred consumption because current consumption is now? Several economists argue that this element ought to be set at 0. This is somewhat technical, anyhow what it implies is that Rs 100 of consumption is worth Rs 100 whenever it occurs regardless of time.

2. The other important question concerns the uncertainty about whether future generations will actually gain from the judicious use of resources now. Now this is a question of judgment. Personally I believe this is negligible, because better technology will ensure higher returns to future generations from lesser physical amounts of natural resource. Stern puts this element at 0.1, which by all estimates is rather high.

3. Then there is the question of who gets the Rs 100 to consume. I believe, Rs. 100 is worth more to someone who is poor rather than to someone who is rich. Either way, a parameter to express this value judgment is required. This parameter, which can vary, is then used to project the likely growth of consumption over time. The point of this entire exercise is to see whether an increase in consumption in the future is worth giving up consumption now for, even if those future people are richer, which I believe will necessarily be so.

At this point, there are two things we should remember about discount rates. Future generations will consume at a higher rate and states will plausibly become more welfareist and want to discriminate in the favor of the poor. Either will mean a higher discount rate.

Now, if one were to actually apply this notion to climate change and global warming it suggests that if (and I do) we believe in redistribution, we should definitely give to the poor now than redistribute the rich of future generations! In his brilliant paper, Sir Partha Dasgupta, argues precisely this: The Stern value of the parameter in question implies that we should redistribute from the presently poor sections to those who will be undoubtedly richer in the future, at the very least in relative terms.

If you ask me, I cannot think of a more unethical stance to take!

So what then you can ask me, at the end of this long tirade, can be done about climate change? Well, if you ask me, perhaps the best thing we can do about climate change and global warming is nothing at all. The Stern Review says that baseline economic growth will be twelve times as high by 2200 and I think that is enough. If we’re really concerned about equity, which is the sustainable development tune these days, there is nothing much to do except to make sure that the poor get a bigger slice of the pie, which will happen only when the size of the pie grows. Let capitalism reign, extend globalization and let there be enough and more capacity to generate wealth for everyone.

What makes me uncomfortable and keeps me up well past mid-night writing this is the fact that the climate change debate is no longer a discussion between the global warming skeptics and global warming scientists. It is between an honest reading of data and between alarmists who are all too clearly driven by a political if not economic agenda. I’ll end with this: The Stern Review is a “misguided” and “alarming” piece of research that has “no foundations in either science or economics”- OPEC.

PS. Download and watch The Great Global Warming Swindle, from YouTube or Google Video, amazing watch. There’s a torrent available here too, good quality video- from TorrentSpy so make sure you use an anti-virus after you download.

The documentary is fun, some factual errors but makes for a fantastic intro, especially for a virgin climate change skeptic !! Happy Watching, pip pip!

For more on Global Warming read NCPA’s policy digest here.

The budget was out a couple of days ago, most people are excited by the steady increase in the growth rate which now stands at a 9.2%. By all counts, this is a good reason to be optimistic. From a 2% growth just-post independence to a 9.2% is an impressive achievement, especially considering inflation has not been galloping away either.

Despite the reasons for optimism, I believe we still ought to be concerned about Indian agriculture a tad more. The reason statistically is rather straightforward–  The agricultural sector still employs 2/3rds of the population, its contribution to total income (GDP) is 1/5th though– roughly about 18%. Contrast this with the contribution of the industrial sector at 27% and  the much celebrated services sector at about 54%.

The contribution of agriculture to India’s GDP has declined from 39% to 22% from 1979 to 2004 and has continued to fall ever since. There are two ways to look at this, the first is to understand that the agricultural sector contributes only so much to the GDP, the second way is to recognise that it also only earns so much!

The reason that this distinction is vital is because, ordinarily if a bigger economic pie was all that mattered, then who contributes how much to a GDP growing at 9.2% is an irrelevant question.

Unfortunately, the size of the pie is not all that matters– in this case it means that 2/3rds of the Indian population earns only 1/5th of the GDP which is the amount of income available to them. Far too little to support 1/5th of a billion plus people!

One of the most important microeconomic principles is; Ceteris Paribus, if you increase a factor of production, output will rise at a declining rate till such time until it absolutely declines. Put that lesson along with the idea that wage rate is equal to the marginal productivity of labour and you’ll see why the Indian agricultural  scenario is a complicated task that needs looking at.

To understandlook at the IT sector in India as against the agriculural sector. Relative to other sectors, capital is abundant in the IT sector, labour on the other hand is scarce. The marginal productivity of labour is therefore high and hence highly paid too. This example holds for all sectors of the economy.

Obviously the marginal productivity of labour in the IT sector is also a reflection and the result of highly skilled labour. The connection between skilled labour and higher wage rates is something that cannot be over-emphasized. The agricultural sector on the other hand suffers from a relative over-abundance of labour.

Indian economic analysis traditionally chooses to ignore two important factors of production- entrepreneurship and land. Agricultural entrepreneurship, unfortunately in India is neither encouraged nor allowed by circumstances. Land is considered fixed in supply. Despite this, one can point out that India has vast amounts of un-arable land, much of which is arable given sufficient capital investment and agricultural R&D.

Assuming that the argument about the relative over-abundance of labour in agriculture holds, one must discuss removing surplus labour from agriculture. To do so one must ponder upon two questions viz. why is there excess labour in the agricultural sector and to where can we relocate this labour?

Neither question is easy to answer. One answer to the causal question is readily provided by the un-skilled labour argument. Moving excess labour to the service sector, where labour is relatively scare and demand for labour is high is impossible- at least till we manage to get universal primary education going and can convert a large pool of unskilled labour to minimally skilled labour.

The answer in the meantime is to perhaps shift excess labour from agriculture to the manufacturing sector that employs semi-skilled labour. What kind of manufacturing sector industry? Certainly not steel and allied industries that require at the very minimum a polytechnic diploma. One industry that meets the requirement for un-skilled and semi-skilled labour is food processing and agricultural products.

The demand for semi-processed and processed foods like ready-made idli and dosai mava, heat-only rotis, pre-cooked pulao and rajmas is increasing. The advantages of the food processing industry are many; the first being that it solves the excessive employment problem in agriculture, it addresses a growing urbane goods demand and most importantly achieves all of this without requiring relocation of agricultural labour from rural areas.

The foremost problem of the farmer is the perishability of his products, food processing addresses this too. Consider this; for any other good a producer can typically wait for the right buyer willing to pay the right price. A farmer however cannot afford to wait for the right price, food processing increases the shelf-life of agricultural products by reducing perishability thus giving the farmer more of a time margin and the ability to bargain price.

Anyone who has ever bothered to investigate the difference between market prices and wholesale prices knows that the differences are huge. The benefits of this difference normally accrues to middle-men operating in the warehousing and storing of agricultural products. By getting agricultural labour to become a part of food processing-the benefits are likely to shift to the farmer.

Having said all this, all is not hunky-dory with food processing. Those of us who argue constantly about the roll-back of the state recognise that in some cases market failure takes place. One such instance is when the private provision of a public good or a service is unlikely. Typically, such goods are roads and other such public utilities whose costs are private and benefits are public.

In this context, setting up food processing industries in rural India and transporting them to their market-urban areas involves a substantial cost. One which the private sector will not willingly undertake. The role of the government then is to then actively encourage such industry and more vitally concentrate on marketing such products.

Eventually the market will take over thanks to the economies of scale. The presence of the government till such a transition takes place is essential, just as Modern Bread was in the bread market until not so very long ago. Perhaps one of the best things that the UPA government has done then is to concentrate on food processing with upto 30% subsidies available along with incentives to set-up food processing industries. I doubt, however, if this is enough.

One way to find out is to understand the role of credit in the agricultural sector. The role of credit is to ease out the difference between periods of income and consumption. This is particularly true of agricultural income, which is available in spurts while consumption is a constant and regular feature.

This fact is better understood in the light of agricultural seasons. All farmers plant in the same season and harvest in the same season. At that particular point in time, supply of agricultural products is high, demand pretty much is what it was (since agricultural products are relatively demand inelastic and necessary goods) which implies that prices fall.

With electricity, the same analogy applies. The supply of electricity is continuous, the demand however fluctuates during the day. With electricity, as is the case with agriculture there is a storage problem. The solution too in this case is to create capacities for greater power supply in times of high demand. To cover this cyclical phenomenon, rural agricultural credit becomes an important issue to tackle.

Now, if the income of farmers rise the benefits will accrue first to corporates in the form of an increased demand for goods and services. Think of this as Engel’s law in practice, with higher incomes the proportion of spending on necessary goods comes down.

The point then is to create such industries that can employ unskilled labour, this is a direct result of the fact that a negative marginal productivity of labour can only mean a rise in productivity in the agricultural sector sans excess labour.

From the capital point of view, if productivity goes up the farmer will borrow and invest in the credit market. This will happen if and only if there is a functional credit market in place.  Historically, money lenders have filled the need for a credit market in rural areas. A money lender though is only the second best alternative to a functional credit market, they represent for the farmer a whole host of  problems not just obscenely high interest rates. Hence, the importance of micro-credit in rural areas.

Spreading out risks between people i.e. insurance is equally important for farmers. The budget now includes new schemes for farmers insurance and rural insurance. Insurance for the farmer is literally a way to avoid debt-traps. A farmer may have had five whole years of good crops and yet be destroyed by one year of poor crop thanks to the lack of access to a credit market and any form of savings. The problem is so critical, that it is a question of survival not just making a living.

Consider the deadly mix that Indian agriculture stands at now; variable rains, no insurance, no credit, fixed land supply, perishable goods and so on. The time is ripe, it appears to me to ensure a sort of safety-net for farmers.

One way to to do all of the above (and perhaps the most efficient since the government does not appear to want to seriously do anything about agriculture) is to corporatise agriculture.

Invite private players to take over agricultural production. Farmers will still be employed by the MNC and farmers can lease their land. The advantages are clear- there is no problem of lack of credit, insurance or marketing that clearly the state faces.

One could ask of course, what about the marginal farmer, the subsistence farmer? My answer is, what is the situtation of the marginal or subsistence farmer now? The state does not care about them in any case, because they do not contribute the GDP in any case. Under an corporatised system, the productivity of a famer might actually be the bridge between subsistence and low profits.

From an ethical perspective, it is completely unfair for 2/3rds of the population to be always left behind in a 9.2% growth. Let the government stand counter-guarantor to land leases. The point is not to replace a public monopoly with a private monopoly or to allow for a cartel to develop and dictate prices– which is why rule of law and a regulatory framework is vital.

One only has to look at why FDI in retailing is opposed in India. The argument is that small business holders will lose out, these are Kinara shops. Let me ask, what percentage of the population are small business holders anyway? There is evidence that Walmart (when it entered new markets) caused prices to drop by whopping 15 to 20% in places, this is a significant benefit to everyone not just the upper-middle class!

Ultimately it all boils down to the Kaldor-Hicks criteria, which says that an outcome is more efficient if those that are made better off could (in theory) compensate those that are made worse off and lead to a Pareto optimal outcome. All public policy benefits one section over another. The art and science lies in juggling the relative priorities. Efficiency as a criterion for social justice suggests that though some may suffer a bit, progress is still progress.

The Indian story of a country with billion strong population, facing severe under-employment in some sectors and over employment in another, is the story of a paradox like no other. How is that for a theory of agricultural justice?  

Couple of days ago I was called to participate in a discussion on reservations. Reservation in general, is a subject that causes much argument and such. By virtue of this it is particularly important to maintain what I like to call a semblance of objectivity. There were several things that made me particularly unhappy that afternoon. Importantly my stand on reservations or anyone else’s for that matter turns out to be irrelevant with regard to this.

To engage in meaningful conversation one first must make a commitment to intellectual honesty. This implies a) Knowing the facts 2) Not choosing to adopt a stance merely because everyone else has 3) Understanding that not all things are subjective and that some objective truths and objective rights and wrongs exist.

Now this discussion that I was a part of consisted of what was called the enlightened ‘youth’ of today. They were aspiring civil servants, aspiring lawyers, aspiring public policy makers and so on. Then there was a moderator. That man perhaps requires a line or two more for a description. Soap box orator, art of living guru, management guru and throw a couple of other fake disciplines in for good measure.

Here is what I heard at the discussion:

1) Reservation is bad because my dad, mom, sister, friend and NDTV say so. What facts do you have to back it up? “Hey, I’m well informed I have Wikipedia”!

2) Forward castes don’t have quotas… Ever heard of the management quota?

3) Alternatives? Silence.

4) Backward castes are not really discriminated against in India. Hallelujah!

5) Only we deserve the IITs and the IIMs and such…. hmmm, self interest.

Wait a minute, didn’t I say a couple of posts ago that I was anti-reservation too. Nope. I said I was anti-reservation the way it is enacted now. There is a subtle difference. Somehow in the whole discussion nobody seem to question the budgetary priorities of the country, nobody seemed to ask how we can create incentives in primary education for the so called ‘lower-classes’.

To top it all, the moderater in question was apalled when I said “dalit” and a friend said “shudra”. This discussion was so elite that we were supposed to thrash out solutions in twenty minutes to misplaced reservation outcomes without mentioning castes.

Pause for a minute and think why. To my mind it is because these words are now the new ‘un-unmentionables’ just like untouchables. Linguistic discrimination however is a powerful method of exploitation– take a look at how “Harijan” is now a casteist abuse.     

There are several reasons why this kind of thing is problematic. The top reason is this: What if these people get through the IAS or become policy makers? Where does India go then?

‘Environmentalism’ is a social phenomenon in a category of its own. Consider what happened to me today. My friend’s college makes social service mandatory for students– this implies devoting forty hours of her time in a term to some predefined, accepted and ratified ’cause’ as it were.I am one of those who feels little social obligations and hence I found the whole provision absurd. The friend in question requested me come along with her to help her through the remaining six hours left. So I did. She and I went to to volunteer time at a play school.

The little kids were celebrating ‘Earth Day’. Cute. Despicable. They went about with black plastic garbage bags, the ugly one’s that infest the Delhi middle class households including mine, collecting litter. Of course they had to be hygienic so they were wearing the McDonald’s style plastic gloves as well. They were chanting the environmental song.

I watched and helped them. I was then invited to be a part of the ‘esteemed panel’ that discussed the need to recycle. Speakers droned on and on about saving the environment and such– but what amused me was the ratio of the littler collected to the litter created by the whole ’save the Earth’ exercise. There was more plastic, several more cartons, more paper and many more chocolate wrappers flying around than before. This is the tragedy of recycling. One of the many of ‘environmentalism’. The litter created is always in excess, the costs are always more and somehow people refuse to see it.

Recycling does sometimes makes sense-for some materials in some places at some times. But the simplest and cheapest option is usually to bury garbage in an environmentally safe landfill. The politics of the Basel convention and indigenous waste managements set-ups in nations prove sufficiently that recycling offers short-term benefits to a few groups with vested interests. Take Germany for example, recycling has been a consistent lobbying issue for politicians, public relations consultants, environmental organizations and waste-handling corporations.

What happens in the process? Diversion of funds from genuine social and environmental problems. Yet, ‘recycling’ remains one of the favourite words of the environmental religion as it were. In our schools and universities we have embraced recycling as though it is the ultimate transcendental experience, an act of moral redemption. We’re not just reusing our garbage we’re begging for forgiveness and atoning for our sins of excess!

But there is a deeper reason for my horror. It is this: There’s no reason to make recycling a moral imperative. Mandatory recycling is bad for posterity. Read Steven E Landsburg’s article on the ‘religion of environmentalism’. While I am an environmentalist in some sense, it is not my religion. I am intersted in environmental problems, more interested in environmental solutions and least interested in indoctrination.

I have definitive reasons like several non-environmentalists to distrust the notion of ‘recycling’. First up is the fact that pure, clean and complete recycling is impossible. Recycling is a difficult, expensive and a hazardous practice. Take recycling plastics for instance– the process of recycling plastics releases toxic dioxin gases in huge quantities. Perur, a district of Chennai is choking under dioxins– incidentally it has three plastic recycle plants.

There is one thing I need to state before I begin to justify what I have just written. The idea of recycling is in fact great. If we could actually transform waste into products that are useful that is. The trouble is that the idea of recycling like many others is woefully subject to the law of unintended consequences. ” The Law of Unintended Consequences holds that almost all human actions have at least one unintended consequence. In other words, each cause has more than one effect including unforeseen effects.”

The process by which materials are collected and used as “raw” materials for new products. There are three distinct steps in recycling: 1. Materials are source-separated and collected. 2. Materials are processed and manufactured into new products. 3. Consumers purchase the goods made with reprocessed materials. On first sight this seems like a remarkably easy and good idea to follow and implement. A little green bin on your chip packet, chapters on recycling in your text books and the local garbage guy agreeing to segregate trash- great right?

Maybe not. The question is do the benefits of recycling outweigh the ease of disposing of waste materials in landfills? Selam, a small district in Tamil Nadu has implemented garbage segregation and trash recycling vigorously for the last decade.

The do-gooder in this case was an organisation named EXNORA. The EXNORA bunch at that point was a collection of local students who took up environmentalism when it was a fad. Today, after a decade of recycling Selam has contracted garbage disposal to a Swedish company much to the joy and relief of the localites. Why?

Weren’t their roads cleaner, the air less polluted and hadn’t they gained ecologically? Not quite.
Collection costs have make recycling a bad bargain for many localities because the costs often exceed the prices that the recyclables bring on the open market. Operating additional trucks to pick up segregated recyclables has caused EXNORA operations to increasingly go unfunded. What’s worse is that these trucks (and the in-depth localised reach of the recycle programme) has increased toxic diesel emissions, killing any environmental gains.

Of course economics are not the only consideration. Let’s look at paper. We want to save the trees right? We don’t want oaks, redwoods or the sal and the sandalwood disappearing right? Sure. But is recycling helping you do that? No. Most paper, doesn’t come from from the sal or the oak. As a matter of fact paper comes from what we call pulpwood. No actual timber is used to make paper.

Pulpwood comes from easily grown and cultivated forests of pine, shea and eucalyptus. These are not endangered. On the contrary, they are too many. They are ‘weeds’ in the natural forest and steal resources from unspoiled forests by competing ferociously for soil, sunlight, water, and minerals. So when we use them or cultivate them in separate enclosures, we protect them and other trees. These trees are fundamentally a renewable resource.

Is recycling paper more economical? No. Manufacturing paper from trees is a relatively straightforward process. You get pulpwood, use some chemicals and process it into paper. What about recycled paper? To recycle used paper as the definition from wikepedia says- there are several steps involved. “Paper must be collected, cleaned, shredded and treated chemically before it can then be turned into a paper that is generally of lesser quality than the original whence it came.”

Now here is what we never learnt in school about recycling. The treatment of paper to be turned into more paper actually used four times as much chemical than making new paper. Now because it has more steps and more chemicals – manufacturing paper is far far more expensive than making new paper.

You can contradict me on that point. Most people find recycled paper much cheaper than new paper. However there is a reason. The reason is a distortion in price, the cost is lower to the consumer because the government subsidizes its production. The unpaid additional costs are passed on to the taxpayer who happens to be you.

What about the ‘green house effect’? Unfortunately here too high school education fails us. Had we studied botany a tad more,we would know that trees don’t actually mitigate the green house effect. Like all other living creatures trees have a life span and an old-age. A young tree that’s growing does a beautiful job of turning carbon dioxide into oxygen.

 However you will notice that after the tree gets older it reached a stage of balance, they decay (leaves start falling) and when they decay they produce CO2. In effect what happens is that the amount of CO2 consumed by the tree equals the amount of CO being released by the decaying portion of it. Yet, we insist on keeping old trees!

I’m not saying that we should deforest. Merely that the solution to excess paper manufacture is not recycling but is e-offices. Most people would say that landfills are still terrible because they don’t for example allow the bio-matter in them to break down and decay.

But dumping chemically manufactured paper doesn’t decay any faster than plastic anyway in a landfill!

Bottomline: recycled paper costs more to produce, causes higher tax rates, increases chemical pollution, doesn’t save forests and has no effect on the green house phenomenon.

Informal recycling has existed in India for years and most of that is perfectly fine. Why? Because it keeps the scale in check. Recycling is not meant to be a mass phenomenon. Let’s look at India’s landfills. Landfill prices have decreased over the past several years, the reason is obvious.

As the environmental movement grows so does the demand for landfills, there is more demand and greater supply (more companies operating), so we now have more landfills but the law of diminishing returns tells us that just because there are more landfills it doesn’t mean there is more to waste or that consumption goes up. That amounts to less trash and more landfills–prices go down.

The cheaper the landfill, the harder it is to make a profit with recycling, this is a problem. Why? Because it means less incentives for environmental sustainability, since recycling is touted as a ‘environmental practice’. Perhaps we need better prices for recycled goods.

The economic issues surrounding recycling are at least quantifiable. The health and environmental benefits of recycling, including energy conservation, toxic emissions reductions, and preservation of resources are at best ambiguous. Advocates of recycling argue that the intangible benefits offer the most compelling case for recycling, I beg to differ.

Ultimately, over regulation and giving into a ‘popular’ policy, causes greater environmental costs than anything else.