Usury English style = Inclusive growth

In an editorial titled Microfinance and financial inclusion, the Financial Times says, "A crackdown (on microfinance in South Asia) would not help anyone, except perhaps traditional moneylenders and feudal landlords… Microfinance's advantages over traditional sources are that loans are cheaper and free of the social conditions attaching to credit in feudal relationships… As to the charge of gouging, microlenders have small margins in spite of their high interest rates… Evidence suggests the Indian suicides were the result of borrowers taking on too much debt from multiple sources. Credit practices must be improved to prevent this. Lenders should disclose interest rates to stimulate competition. This requires intelligent regulation.

Microfinance brings a crucial service to poor people. Rather than being attacked, it should be helped to do an even better job of assisting them to assert their financial autonomy."

The piece raises a number of obvious questions. First, why do microlenders have small margins in spite of high interest rates? Is it because their overhead costs are high? Or do borrowers default in large numbers? Or are they plain badly run?

Second, if credit practices were improved, would microfinance companies be able to charge the high interest rates? If I knew the probability that a borrower may default, can I still charge him a high rate? For instance, credit card companies in India justify charging usurious interests to all customers with the excuse that credit ratings are unavailable in India (without ever bothering to explain why they haven't developed ratings of their own over decades of operating in India): They cannot do so in civilised countries because credit scores are available.

Third, what does 'financial autonomy' mean?

Finally, why are people committing suicide when overwhelmed by loans? As per FT, microfinance is 'free of the social conditions attaching to credit in feudal relationships.' So what is it not free of? What are those borrowers afraid of? (Let's say you put money into my scheme, which doesn't work out. Now, I'd be sorry about it, but it's quite unlikely that I'd be so ashamed or petrified by failure that I'd kill myself… unless you had some abnormal bodily or psychological hold over me. What hold do these microfinance companies have?)

That South Asian politicians, in particular, and people, in general, are incurably corrupt is truer than the sun's rise in the east. Nonetheless, it does not logically follow that everything they say is to benefit landlords and usurers, more so when microfinance can offer far bigger bribes than the former.

9% growth… from selling the country

“Rajeev Chandrashekhar, a Rajya Sabha MP and former FICCI president, has pointed out that agriculture has grown at a dismal one per cent and manufacturing at no more than three per cent. The so-called miracle has been achieved through phenomenal growth in mining, real estate, construction.” So says Neelabh Mishra in his article in Outlook, titled The Banana Sheikhs.

Read this with Jagdish Bhagwati’s lecture The Unfinished Reform Agenda. The good professor says nothing about the sources of growth, even while  he rages against Indian novelists being allowed to write on the economy.

When ordinary people cannot see the growth they are supposed to be enjoying, who do they turn to, economists with figures or novelists with facts?

Why the CWG was like the Second World War

Unnecessary. If one chap can run faster than another, why should a billion other chaps care? But we do. Same with war. Always Caesar's; never ours. But there has never been any shortage of cannon fodder.

Pyrrhic victory. Rs 75,000 crore – Rs 65,000 per Indian, when our per capita annual income is Rs 44,000 - plus several score lives, and untold misery for the workers and the citizens of Delhi. Enormous opportunity costs all around. How does it matter whether the games were successful?

Wrong victors. Chinese died. Russians died. We died too, more than Americans and British put together. In terms of fraction of  population,the Yugoslavs and Poles were bothered. But Errol Flynn won. With a little help from Churchill. And anyone who doubts that is a racist or a communist. Just as anyone who wants Kalmadi investigated is a traitor.

Well, the Greeks had a successful Olympics in 2004; by last year, they were bankrupt. And other Europeans wanted to degrade them to Arab status, that is, they were no longer fit to be whites, never mind the foundations of Western civilisation and all that.

What will be our fate? We start brown.

Sao chuhe khake billi haaj ko chali

I was quite liking this discussion (everyone’s corrupt, not just us) till the Nigerian investigator pointed out that China and India were now the new corruptors of Africa, even as governments in developed countries enforce anti-corruption drives. And the whites just started off.

Well, well, well… Anyone asking how much white money is invested in these Chinese and Indian companies, and in these evil economies? And where does the fruits of our evil eventually go?

China’s Head of Press & Public Affairs in the UK writes in today’s FT: “In 2009, foreign-funded enterprises in China accounted for 55.9 per cent of the country’s total exports, contributing almost two-thirds of China’s trade surplus… Take “Barbie dolls” as an example. A Chinese-made Barbie doll sells for $ 10 in the US, out of which the Chinese manufacturer gets only 35 cents.”

(The diplomat does not say whether the Americans are making nearly 2760% profits on dolls, or explain why they may not be doing so, but that’s another matter.) 

It reminded me of a wedding in a very rich family. The bridegroom was, most probably, a graduate from a western business school, and understood that as long as your books were ok, white people will willingly look the other way while doing deals with you. But he needed black money for his wedding expenses. Of course, in India there is no distinction between company and family money.

So he hit upon a bright idea: He made his suppliers do the shopping, and asked them to bill him. (I don’t remember how he adjusted the tax. Most probably he expected the suppliers to grin and bear it.) And you had ad agencies ordering a ton of flowers and chemical companies ordering jewels.

Look ma, my hands are clean! What rubbish.

In 1947, India was ahead of China…

Almost every article on the Indian economy reminds us how far behind India is from China.

But how many articles have you seen that note how we lag France, Germany or the Czech Republic? The whole idea is absurd, given that historically (i.e., in the last 200 years) these countries have been so much ahead of India.

Why is comparing India and China ok? Well, both have over 1 billion people – and, far more importantly, India’s per capita income exceeded China’s in 1947 and 1948 when India became free and China became communist, respectively. Hence, the history of modern India begins from 1947; and that of China from 1948.

Do they?

Because drawing back a few decades shows a quite different picture, and shows just how much difference war can make, even to a colonised country. Why is it so easy to forget that, in relative terms the second world war (which began at least 10 years earlier in China than it did in Europe), hit China and India quite differently, and that was bound to reflect on macroeconomic indicators? (Relative is the operative word here; in absolute terms, India probably lost more people to war than the rest of the Commonwealth combined.)    

Hans Rosling’s TEDtalk Asia's rise -- how and when graphically shows exactly what I mean. What’s happening becomes clearer still if one notices how USA and Japan do during and just after the second world war. The former’s growth parallels India’s; the latter’s plight parallels China’s.

I am not suggesting that Indians should take any comfort from these figures. I am, however, suggesting that leads and aberrations do matter. And to deliberately leave them out is a travesty of both economics and history.

(Incidentally, how did Rosling estimate those numbers?) 

Broken families and rich individuals

In the video RSA Animate - Crises of Capitalism, David Harvey, a Marxist says that the present crisis has everything to do with fall in real income per family in the Western world; in this one, Crisis of Capitalism, The Critique,  someone debunks Harvey by pointing out that income per capita has increased and that the fall in income per family is simply because there are more families now, that is, if a population of 100 were split into 25 families of average size 4 (persons per family) 30 years ago, now that same population is divided into, say, 50 families of average size 2.

I have heard the same explanation from the Kublai Khan of capitalism, Jack Welch.

It looks too easy to be right.

First, where is the data? Let’s say fewer people are getting married in the West these days. Does that also mean that the size or nature of the family unit, on average, has changed drastically?

Second, if the income per family has dropped, why should one not worry about it? Doesn’t the amount a person spends, and saves, depend enormously on whether he or she is in a family?

Just take rent or mortgage. Suppose a family of four spends x by living under one roof (average spend per person = 0.25x); and a pair of divorced parents with the two children living with their mother spend 1.2x (father’s rent = 0.4x; mother and children’s rent = 0.8x; average spend per person = 0.3x, 20% more than the average for a 4-member family). Does that not make a significant difference?

Plus, the mother’s income may be less than her married counterpart’s because she has more on her plate (no-one to share her load with).

The father, on the other hand, may be spending more on conspicuous consumption than his married counterpart does.

In fact, both parents may be spending more on sex (wining, dining, gifting, grooming to entice mates, or straight cash) than they would have had they been in a family, where sex it is essentially a bonus (free gift?) of family life.

And while married parents (or parents who operate as a family in spite of not being married) may save to provide for the future, parents who do not operate as a family may, for financial and psychological reasons, save little.  

I mean, the word income has very different meaning when applied to a person than when it is applied to a company (where it means profit). So why don’t Western commentators take that into account?

Public sector hotels and private hospitals

What are more important, hotels or hospitals? I’d say hospitals. But the government, which is supposedly incapable of efficiency or honesty, should be in defence, education and health and leave everything else to the private sector, whereby market forces will ensure efficiency and fairness.

But if we had to choose, wouldn’t we take efficient hospitals over efficient hotels every time?

Well, we use hotels every year, but hospitals very seldom. So maybe… Besides, if I die, it won’t matter if the operation succeeded or not. But I will probably survive dinner and so it does matter that it is good.

Anyway, Nehru was a fool. that much is sure. So if he got the satte into anything, it shouldn’t have been there. Because no fool can do wise things.

It doesn’t matter where India started from. It doesn’t matter where it reached under him and how much his daughter and grandson screwed up. It doesn’t matter that there are no parallels with which we can make a comparison. If India 1962 wasn’t UK 1962 or even China 2010, Nehru’s stupidity is self-evident.

The point isn’t whether Nehru was a fool or not. The point is getting the diagnosis right, because while Nehru is dead, I’m alive, and my future depends on fixing what’s wrong, not propaganda.

Indians are obsessed with saving face

How many times have you heard that? Many times? It’s true, isn’t it?

But my last nine months with Westerners and many years of reading Westerners’ accounts, about themselves and about us, tells me that there is another way of looking at it.

Everyone wants to save face. Them, us, everyone. But they don’t notice it when they do it. It’s normal.

But is a darkie argues back or refuses to do exactly as told, they can’t take it. It can’t be because he has a point, or his interests are different from theirs. It must be because he’s stupid. Or, if he isn’t, it’s because he can see the Westerners’ logic and his mistakes, but wants to save face.

A few days back, I read an article in which an Englishman argued that the UK should withdraw aid to India because (a) we do not import from them as much as we used to (in relative terms) (b) we have a huge defence spend and © young Indians do not have fond memories of Empire. He acknowledged that millions of Indians are desperately poor, but he put British trade first. 

I can’t see how the two are related. Should we trade inefficiently to buy British? Should we be defenceless because we are poor? Should help be dependent on commerce? If so, doesn’t it, to some extent, become a subsidy for the donor’s goods?

In short, I found the writer illogical and mean.

I’m sure an Englishmen sees the whole thing very differently. And I’m just as sure I feel this way because I’m obsessed with saving face, not because I have a different point of view.  

Palestines and Poles

When one read the FT’s reports and editorials on Israel’s attack on the high seas on the Turkish ships headed for Gaza, one is reminded of another mercy mission to a besieged population: The airdrop of arms and supplies to Warsaw when the city rose against the Nazis in the final months of the Second World War.

The Red Army was, as every Western commentator faithfully repeats, at the doorsteps of city, but did nothing to help the Poles. Nor did it allow the Americans and English to use airfields under its control to drop supplies.

In fact, one account has a Red fighter attacking an English plane, flying all the way from Africa to help the Poles.

The obvious is never mentioned. Like, being on the doors of a city is not the same as having it. Now knew the difference better than the Reds. The Nazis were on the doors of Leningrad for 900 days. And were kept out of Moscow and Stalingrad too.

Like, the Russians were at the end of their tether and were in no position to attack an entrenched German citadel.

Like, they had refused help to the Poles before they rose.

Like, everyone knew those airdrops were worth only propaganda, which the Russians could not have wanted.

Like, no matter how despotic and terrible Stalin & Co were morally, they were militarily right on this one.

The parallels with Gaza are obvious (the Reds are the Israelis, Hamas the Nazis, the Palestines are the Poles and the English speaking nations, Turks), except the ready sympathy and pragmatism the Israelis enjoy has been conspicuous by its absence on Warsaw over the last 70 years.

Jobs that cannot be exported to China and India

Every American politician wants jobs that cannot be exported. Well, do they ever ask themselves what happens when they buy oil from Saudi Arabia, or coffee from Brazil, or timber from Canada. They pay. And when they pay, the money goes to employ someone in the country that imports.

In other words, every time America or any other country imports anything, it exports jobs. Of course, it can be argued that if America had a trade surplus it would be a net importer of jobs. But it isn’t quite so because the per capita income in the US is higher than that in most countries it trades with.

The point is that the whole argument is ridiculous, more so because those very same politicians want free trade, exports and what not.

Was Friedman an anti-capitalist saboteur?

I had heard so much about The Social Responsibility of Business is to Increase its Profits that I was quite sure that 99% of the people who talked about it had never read it. I was wrong. He did indeed write what most people think he wrote. 

What about the underlying deal?

Our readings in business ethics includes a series of case-lets featuring ethical dilemmas in poor countries. What must the Western company’s manager do? Not once does the author ask, “How ethical was the deal for which the favour was being sought?”

Why can’t managers be sued for neglect?

If your dentist picks out the wrong tooth, you can take him to court. If the CEO of the company you own shares in ruins it, the most you can do is present him a golden parachute for his troubles. Strange. 

Why are the Greeks protesting?

Daddy’s partners have done him in. So daddy has two options. Declare bankruptcy, and perhaps never get another chance, or to pay off his debts, penny by penny, through hard work and harder living.

He chooses the latter. This means no more chauffeured cars and new clothes for you, but it does mean you will grow up in honour and when you enter the cruel world, you will not be burdened with a stigma.

If you are good boy, you bring your little toys to daddy and ask him to sell them off. And he’ll weep and kiss you. And go back to his backbreaking labours. And you’ll never never complain.

But the Greeks are complaining. Why?

Perhaps because there is more to it than meets the eye.

The Greeks must be thrown out of the EU to teach them and the other PIIGS a lesson they’ll never forget. Very well.

Liar Liar
Pants on fire
Your nose is longer that a telephone wire

But what were they doing in the EU in the first place if they were such a financial risk? If the Greeks were pulling figures out of their hats, did no one notice that those figures belied reality? If yes, European economists are not fit to be described as such. If no, then Germany and France deliberately turned a Nelson’s eye to skullduggery and the rest.

Why? Some say it was because they needed growth figures ‘maturing’ economies could ‘credibly’ provide the EU. In which case, there must have been an pact, explicit or implicit, that when the bubble bursts (inevitable), there would be no punishment.

The Greeks don’t see the other side of the pact being kept, and are understandably furious.

So why is Merkel being so difficult? A godfather who doesn’t take care of his jailed hoodlums’ families will soon find himself in trouble. Why does the Chancellor of Germany not get that simple thing?

Well, one reason can be that the indignation could be window dressing for domestic consumption. The other could be that the Greeks, like the Icelanders, over stepped. The latter took Englishmen for a ride. Surely Tony wasn’t going to put up with that. Maybe the Greeks were over-naughty too.

Mosquitoes and darkies

“I won’t eliminate mosquitoes because we do not know how the ecosystem will come out if something is taken out.”

Well, why do you want third world countries to completely change their economies in a matter of months, even when history shows that such changes always bring crisis in their wake?

Everyone but right-wing economists are wrong

In Law’s Order, David D. Friedman writes (while discussing contracts), “...consider a case that has recently been in the newspapers—the attempt by a Spanish judge to extradite Augusto Pinochet from England in order to try him in Spain for crimes he is accused of committing while dictator of Chile. Legal rules that immunize ex-dictators make it less expensive for them to commit crimes while in power. But legal rules that hold ex-dictators liable for such crimes make it more expensive for dictators to give up power. Pinochet is one of the rare examples of a dictator who voluntarily relinquished power to an elected government. If he ends up in a Spanish jail as a result, the next dictator may not make that mistake.”

Q 1.1.  Besides applying economics to a criminal case (which deals with irrational man), perhaps the argument stops short of good economics? Would the extradition not have deterred dictators in power and those with dictatorial ambitions from doing wrong?

Without the extradition, the logic runs thus: “I will torture to my heart’s content. When I am done with it, I’ll give some off some of my ill-gotten gains to the corrupt official of a democratic country, arrange for my exile, and ‘voluntarily relinquish power to an elected government’. History shows nothing will happen to me, because the reward for that is immunity from persecution.”
Extradition would change that, wouldn’t it?

Q 1.2.  On the other hand, when a smaller criminal gives himself up to the police and confesses, he is dealt with leniently. So is there a question of scale (unjustifiable extrapolation) here too?

In Monsieur Verdoux, Chaplin says, “Wars, conflict, it's all business. ‘One murder makes a villain. Millions a hero.’ Numbers sanctify.” By not applying the rules for common criminals to ex-dictators, we can prevent exactly that. (Anyway, voluntarily relinquishment is no more than a euphemism for being sacked by Uncle Sam.)

In The Economics of Law, Cento Veljanovski (while discussing adaptive responses to regulation) says, “There is now fairly conclusive evidence that seat-belt laws have not had a significant impact on road safety. This is not because they are ineffective in protecting vehicle occupants but because they encourage risk-taking and accidents by drivers. Road accidents are the result of the interaction of roads (their construction, topography, lighting and safety features), car design and use, and driver and pedestrian actions. As the roads and vehicles are made safer there is a natural inclination for drivers to take more risks by driving faster and less carefully, and braking too late. They substitute free, publicly provided road safety for costly, privately produced safety.

In the economic literature this effect was first recognised by Sam Peltzman in his work on the impact of compulsory seat-belt legislation in the USA. He argued that because seat belts reduced driver risks and injuries, drivers adjusted their behaviour by driving faster and with less care. This led to fewer driver fatalities and more pedestrian fatalities and injuries, and damage to vehicles, thus increasing accident costs. The economics of the drivers’ decision is simple to explain. A compulsory seat-belt requirement decreases the expected loss of an accident, and leads to offsetting risk-taking by more aggressive driving.

Peltzman tested this simple economic proposition using the US National Traffic and Motor Vehicle Safety Act 1966, which made the wearing of seat belts compulsory. Using statistical analysis, he found that occupant deaths per accident fell substantially as expected, but this reduction was entirely offset by more accidents to those not protected by seat belts, i.e. pedestrians and cyclists. While this finding was ridiculed at the time as fanciful, subsequent research by economists and traffic safety engineers has confirmed that compulsory seat-belt legislation has not resulted in a measurable decline in road fatalities.

Indeed, Peltzman18 has revisited his original research to note that the annual rate of decline in highway deaths in the USA was 3.5 per cent from 1925 to 1960, before the legislation was enacted and at the height of Naderism; and between 1960 and 2004 it was also 3.5 per cent!”

2.1.  Again, this analysis may be inadequate. First, distasteful as it may seem, the lives of people in automobiles may be more valuable (i.e., contributing more to the eonomy). Hence, the law does net good.

2.2.   Second, Peltzman didn’t check crippling injuries. Such injuries may be far costlier than deaths, more so if the latter is instantaneous (in which case the accident merely pre-pones the inevitable funeral).

2.3. Mental gymnastics apart, safety belts may have led to saving time (the most precious resource?) for motorists and their passengers, thus enriching the world. Shouldn’t he have looked into average speeds (assuming time saved is directly proportionate to that)? 

Idiot salesmen and financial crisis

Whenever there is a crash in any sector of the financial market, or the market as a whole, commentators rush out to condemn the big guys, the bosses with million-dollar salaries and billion-dollar bonuses.

Obviously, they are to blame. But blaming them doesn’t help at all because they are beyond the reach of any authority. They did as the liked and will do as they like, no matter how loudly the rest of us scream.

Perhaps a better target are the idiot salesmen who peddle these financial products to unsuspecting laymen. These salesmen have no idea of finance, probability or statistics and should not be allowed within miles of insurance policies or mutual funds.

Instead they are given nonsense scripts to convert into useless advise. Their real sales tool is their natural gregariousness, which they use unashamedly and perhaps unknowingly to play with people’s trust.

In recent years, some industry bodies (like the ones for insurance and mutual funds) have introduced qualifying tests. But companies take great pride in how they negate these. It’s either “Everyone passes” or “The ones that pass are not the ones that sell. The agent makes his wife give the test and get the certificate, then he goes out and sells. What you need is feet on the street. Why do you need any knowledge? It’s all theoretical (i.e., rubbish) anyway.”

So tests are no good.

Unless they are applied on-the-spot.  

Imagine something like this: An agent comes to see you for product A; you log on to a site that generates 10 random multiple-choice questions about products of that type; this agent has to answer those questions; his score comes up immediately; if it’s below, say, 5/10, you don’t talk.

It can actually work, if the tests are not administered by an industry (i.e., sellers’) body but by a (for-profit?) testing organisation.

Alternatively, such tests may be administered to everyone buying a financial product, i.e., either the buyer or his agent has to take the test. A low score won’t stop sale, but the buyer would know that he (or his agent) doesn’t know, and shouldn’t complain later.

Will people take these tests? No. Or they would have read something now, which they never do. But at least governments would have an excuse.

Also, these tests can be used on samples from time to time, and the scores published (like JDPower ratings), so as to put pressure on companies to pay attention on training.

Progress or democracy?

On the day (April 7 2010) FT reported Naxals had killed more than six dozen soldiers in Jharkhand, it ran a piece titled Progress and democracy collide in India by David Pilling. It was a shoddy piece which said no more that what readers could easily find out by Googling.

The title was the worst part.

How is taking away aboriginal land for mines without consent or compensation ‘progress’? If the government is forced to rethink on such evictions, why is that a  collision between democracy and progress? Cannot progress happen with a fair deal?

Singur is repeated ad nauseam. Does anyone in the West, or even in India, bother to explain what the rabble who threw away the gift of industrialisation from the heavenly Tatas want?

I am not saying the farmers were right. I am not saying the Tatas and the state government were wrong. I am not saying the farmers would have acted as they did even if Mamata Bannerjee & Co hadn’t muddied waters. I’m saying readers don’t know what happened and commentators cannot keep on repeating Singur without telling them.  

Or must capitalism take the form of slavery in the Third World? And anything remotely different should be condemned as indulgence in the luxury of democracy, one brown and black people cannot afford.   

Why artists are greedy with millionaires but let fellow artists have their work as gifts

Perhaps the amount isn’t important per se to the artist, but it is important because of what it means to the payer.

The artist gives what he values most, his craft; in return, he wants what the buyer values most, his money. In that fashion, and not through words which are empty to the buyer, the latter must show the former respect. And respect matters most.

With a fellow artist, the trade is in recognition and genuine prise.

Maybe the heart and head are not so different after all.

What is the real price of corporate social responsibility?

In recent years, a great deal has been said about CSR. Many have welcomed it; the right has damned it, blaming the fall of capitalism on naive do-gooders who allow themselves to be distracted from the holy duty of business: earning profits for shareholders.

Question: Has anyone cared to find out how much time and money businesses spend on doing good? How many businesses can be listed that may have lost out on profits because the managers were too busy saving the world? Did businesses wholeheartedly dedicated to enriching shareholders do a better job at enriching shareholders than the politically correct but economically illiterate stakeholder lovers?

We’ve heard the illuminating case studies of wonderful companies that went down the drain because the CEO turned saint. How about some data now? 

My guess: The hot air battle is so tempting, nobody’s gone out to find the numbers.

But consider this: Many successful professionals generously contribute time and money to good causes. They do not seem to suffer professionally because of that. In fact, they get publicity and contacts. Can that not hold for a collection of professionals, i.e., a business?

Anyway, I am a bit tired at the brilliant right railing against anything that contradicts Economics 101 (“I don’t care what it is; if it’s not in the textbook, it can’t exist; if it somehow does, it won’t or shouldn’t.”) blissfully forgetting the difference between models, simplifications and approximations (which all sciences are) and sacrosanct Gospel truth (which no science, thank god, is).