Who’s More Powerful in Asia: US or China?

The Lowy Institute’s new Asia Power Index makes for intriguing reading. For starters, it offers a good definition of power.

“Power is defined as the capacity of a state or territory to direct or influence the behaviour of other states, non-state actors, and the course of international events. It is the capacity to impose costs and confer benefits that shape the choices of others.”

The authors then assess the overall power of 25 key Asian states based on their weighted average across eight specific measures of power. These are:

  • Economic resources
  • Military capability
  • Resilience
  • Future trends
  • Diplomatic influence
  • Economic relationships
  • Defence networks
  • Cultural influence

The findings offer much food for thought. For instance, while the US and China are neck-and-neck on the measure of economic resources, there is a serious gulf between them with regard to military capability. Add to that the fact that while the US tops the defence networks measure, China ranks a low eighth. This is indicative that despite China’s rapid military upgradation and attempts at projection of might, Beijing is a long way off from catching up with Washington.

The two surprising areas where China trumps (pun intended) the US, however, are diplomatic influence and economic relationships. While the latter in Asia is understandable, one wonders whether the former is merely about Donald Trump’s America First approach or is a systemic change underway.

China also does rather well on the measure of resilience, which includes threats to internal stability, scoring 85.9 to the US’s 91.4. In the short-term, I’d agree with the authors on that. But I’d contend that Xi Jinping’s personalised control over the Party-state structure poses a serious threat to long-term stability.

India, meanwhile, ranks 4th in the overall assessment, just a shade behind Japan. And there’s some very good advice being offered for New Delhi to rise up the table, i.e. focus on converting its sizeable resources base into strategic gains and improving defence networks.

Elaborately Learned Superstition

Check out this excellent paragraph from that Jane Jacobs masterpiece, The Death and Life of Great American Cities. Talking about the urban planners of her time, she writes:

And to put it bluntly, they are all in the same stage of elaborately learned superstition as medical science was early in the last century, when physicians put their faith in bloodletting, to draw out the evil humors which were believed to cause disease. With bloodletting, it took years of learning to know precisely which veins, by what rituals, were to be opened for what symptoms. A superstructure of technical complication was erected in such deadpan detail that the literature still sounds almost plausible. However, because people, even when they are thoroughly enmeshed in descriptions of reality which are at variance with reality, are still seldom devoid of the powers of observation and independent thought, the science of bloodletting, over most of its long sway, appears usually to have been tempered with a certain amount of common sense. Or it was tempered until it reached its highest peaks of technique in, of all places, the young United States. Bloodletting went wild here. It had an enormously influential proponent in Dr. Benjamin Rush, still revered as the greatest statesman-physician of our revolutionary and federal periods, and a genius of medical administration. Dr. Rush Got Things Done. Among the things he got done, some of them good and useful, were to develop, practice, teach and spread the custom of bloodletting in cases where prudence or mercy had heretofore restrained its use. He and his students drained the blood of very young children, of consumptives, of the greatly aged, of almost anyone unfortunate enough to be sick in his realms of influence. His extreme practices aroused the alarm and horror of European bloodletting physicians. And yet as late as 1851, a committee appointed by the State Legislature of New York solemnly defended the thoroughgoing use of bloodletting. It scathingly ridiculed and censured a physician, William Turner, who had the temerity to write a pamphlet criticizing Dr. Rush’s doctrines and calling ”the practice of taking blood in diseases contrary to common sense, to general experience, to enlightened reason and to the manifest laws of the divine Providence.” Sick people needed fortifying, not draining, said Dr. Turner, and he was squelched.

It is my case that bloodletting in the 19th century was like government regulation in the 20th and 21st. There exists a “superstructure of technical complication” that makes wonks and boffins believe in their omnipotence, but they are as wrong as Dr Rush.

We will look back on this with wonder 100 years from now. Dang, I feel like I’m trapped in the wrong century. That said, better this one than any that came before.

Do Coasian Solutions Work in Real Life?

One of my students from the Graduate Certificate in Public Policy – Satish Terala (@satisficed– wrote a rejoinder to my Pragati blog post on why I should get compensated by my neighbour who is building a house. While he is sympathetic to my cause, he believes that the trade will not actually takes place. His post follows:


Anupam Manur in his post “Dealing With Construction in Your Neighborhood” sets up an interesting problem – construction activity in his neighbourhood undertaken by his neighbour is disturbing the peace and tranquility of his life. Anupam then rightly concludes that his neighbour’s actions are imposing a negative externality on him (actually the entire neighbourhood) and then invokes the Coase Theorem to solve for it. The solution would involve the offending party (his neighbour) paying Anupam a certain amount. Anupam would then promptly buy a new pair of heavy duty earbuds, soundproofs his house and perhaps gets some extra cleaning help.

Sounds simple enough. But why did that not happen in this case. I would surmise that getting his neighbour to understand the economics of externalities and Coase theorem is still not going to help matters here. Why is it that then perfectly rational actors fail to trade even when there are gains to be had by doing so. The answer to this comes from another equally important but not as famous theorem called the Myerson-Satterthwaite theorem.

In presence of private information about the value of certain good (Anupam’s peace and tranquility) to the buyer and the seller, Myerson-Satterthwaite theorem says that no mechanism exists that guarantees that a trade will always happen. The problem here is that of information-asymmetry. In a Coasian world, all information about the externality is public and bargaining will ensure that an efficient outcome for both parties is reached.

In Myerson-Satterthwaite’s world, people’s valuation of the good are private i.e. the buyer only has a vague sense of the what the seller is willing to accept and similarly the seller only has a notion of what the buyer is willing to pay (for the math inclined: buyers view of sellers cost is uniformly distributed on the interval [0,1] and vice versa). This private information induces sellers to act as if the costs of their goods are higher than they actually are and similarly for the buyer to act as if good is of lesser value than their private valuation of it. The theorem then shows that the gains of trade are not sufficient enough for either of the players to honestly reveal their costs and values. This implies that no fool proof mechanism can be designed that guarantees a trade will happen even when there is a price that would be agreeable to both parties.

Turns out that worst case scenario is the case of a single buyer and a single seller. As the number of buyers and sellers increase, these informational problems disappear and markets become ‘efficient’.

So Anupam might then just be better off buying those heavy-duty earbuds himself; Coase is not going to help him much in this case.

Note: While I highlight only the applicability of M-S theorem in case bargaining does occur, there are many other reasons why bargaining might not even occur. Social norms, inability to assign the responsibility of the externality, hold out problems and other issues often have large transaction costs dissuading the participants from even bargaining in the first place.

Satish is a technology professional based out of Boston. He has degrees from UC Berkeley and University of Toronto in ‘doing marginally useful things’. He still hopes to finish his GCPP – some day.

Why do Women get Charged More for Haircuts? Some Explanations

There is nothing so mysterious as the commonplace, said Sherlock Holmes. I was surprised by one such ‘commonplace yet mysterious’ incident reported in this article. The author, drawing on her personal experience, has reported that hair salons charge more (well, almost double) for the hair cut from women compared to men. Why would a barber, more interested in earning profit than anything else, want to charge more than the cost of service, even at the cost of being competed out?

There are two plausible explanations.

Basic economics tells us that when firms exercise market power, actual price need not be based on the cost of service. In fact, it is a standard undergraduate exercise that profit markup will depend on the willingness to pay (aka demand elasticity). If women, for some reason, are more willing to pay for their personal care products, it makes economic sense to charge differentially. This practice, known as ‘price discrimination’, is ubiquitous; it is the reason why book vendors charge differently for the domestic and international editions of their books (which have almost similar content).

The second explanation could be related to switching cost. Switching costs refer to the costs that must be incurred by the consumer for changing their current service provider.

Assume that, on average, men have greater mobility. They use modes of transportation which are more flexible and personalized (bikes, cars). When presented with a bad deal, they can easily say no and walk away. Now assume women, on average, use less flexible modes of transportation (say taxis or autos). Once they are in the salon, it will be more costly, both in terms of money and convenience, to say no and walk away. Knowing this, a barber would offer less favorable price deal.

In fact, this ‘theory’ can be empirically tested. If a number of salons are located nearby, the switching cost will be low and prices will be driven down to their cost of service by competitive pressure.

Sherlock Holmes has also said that it is a capital mistake to theorize before one has data. It is possible that none of the explanations make sense and something else is going on. But certainly it is a mystery that needs to be examined more closely.

Light-touch Regulation for Social Media

There’s suddenly a lot of talk about how governments need to regulate social media. From a public policy perspective, the immediate cause underlying this policy change is an egregious case of misuse of social media. Policy changes that arise out of crises can often go overboard in the policy instrument deployed.

Using the simple threefold classification of carrots, sticks, and sermons, it means that governments are more likely to use sticks rather than carrots or sermons in such cases. Under the garb of user protection, governments will use the ‘need for regulating the conniving social media‘ narrative to suppress dissent. So, assuming that at least a few governments will choose to intervene, which instrument should be used?

I would advocate for a sermons approach: the government can instruct social media companies to carry a user login banner which explicitly states that

the opinions on your timeline are not be verified and may not be reflective of the truth. User discretion is advised.

Think of the banner that appeared in the beginning of the World Wrestling Entertainment telecasts:

fights are performed by professionals solely for the purpose of entertainment. Any attempt by our fans to emulate our Superstars physicality is extremely dangerous and irresponsible.

The result was that there was no ambiguity in the minds of the viewer that WWE was an entertainment show and not a gladiator fight. Perhaps, a regulation of this kind has some lessons that are relevant now.

Where do you get your money, Mr Politician?

Over the last year, the role of foreign entities in elections has become an important point of consideration. In New Zealand, a national MP Jian Yang came under fire for having undisclosed relations with the Chinese intelligence. The law in Australia has also changed to regulate political funding after revelations that 80 per cent of foreign funding came from China. And of course, there’s the open secret about Russian interference in the 2016 American elections. Rory Medcalf dubs this ‘sharp power‘ but the concept is not new. Countries have been meddling in each other’s affairs while peddling statements about justice and fairness since the conception of sovereignty.

In India, we may think that our elections are messy enough without the influence of foreign hands. Indeed, the Election Commission has its work cut out in regulating illegal cash flow by political parties during elections. But our system has been made all the more vulnerable by the 2018 Finance Bill. A sneaky little clause in the Budget disempowered the existing Foreign Contributions (Regulation) Act, 2010 retrospectively so that both the BJP and the Congress are cushioned from scrutiny. This makes the Indian system all the more susceptible to foreign influence. It may seem counter-intuitive to think of any external strings in the 2019 elections. But if the trends in countries like Australia and the United States are anything to go by, then they are not to be easily dismissed.

Dealing With Construction in Your Neighbourhood

Dealing with construction activity near your place is a real pain. There’s a house that is being constructed right opposite my place and it is alarming how much it has disrupted my life. My productivity and peace of mind has been severely affected. This is a perfect example of negative externality, where a third-person (me) is affected by a transaction of which he is not a part.

The construction noise, from digging the borewell to cement mixers, have made it impossible for me to work from home. I find it hard to think about regulating platform economies or give a webinar while a guy outside my place is hammering on iron. That adds a couple of hours of travel to work and back.  Then, there’s the problem of fine dust that is deposited in all corners of my house. I have to either pay extra to the domestic help or spend a couple of hours to clean it myself. Not to mention, the added health risk of inhaling the particulate matter. All of these presents a real cost to the neighbours of a house that’s newly constructed.

The externality presents a market failure. The price of a house (whether it is rent or the cost of production) does not include the damage/suffering caused to others who will not benefit from that house construction. How do you solve for this  externality?

Most people would silently go through the suffering with minor complaints made to the owner and a lot of internal whining. Very few would have the power to stop the construction or put significant hurdles in the way, so as to increase the project timelines. Neither of it is an efficient solution. The owner has a right to construct a house on a plot of land that he has purchased and the neighbours have a right to peace and quiet and a right to expect their house not to get inundated by cement dust.

The only solution seems to be a Coasian solution. The owner can pay an amount to compensate for the damage caused to the neighbours and carry on with the construction activities. The externality will be internalised this way. The receivers of the payment can use the money to hire cleaners, install an air purifier, or invest in sound proofing. The additional payment gets added to the cost of construction, which can be passed on to the eventual occupiers of the space. The rent can be slightly higher to reflect this charge or if the owners decide to stay there themselves, they will bear the cost over many years that they live there.

Now, I’m off to find the owner and give him a lesson on Coasian solutions to externality and try extract compensation payments.

India-China Collaboration on Railway Line in Afghanistan?

After the Xi-Modi Wuhan summit, there is a lot of buzz around the possibility that India and China might take up a joint economic project in Afghanistan.

This prospect has got many people excited. All prominent news agencies have reported this and yet there is little clarity on what exactly this project is all about. The MEA’s press release on the Wuhan summit in fact does not mention Afghanistan at all. The MEA spokesperson has been quoted in Times of India saying that the identification of this project is still in progress. The Hindu’s report vaguely mentions the possibility of a road link to Chabahar from Aynak via Hajigak.

But Praveen Swami in Business Standard has the most clear view about what this project might be. He writes:

Earlier this week, President and Prime Minister agreed to explore joint China-India work on a railway line in Afghanistan, with one spur carrying Mes Aynak’s ore to Torkham, and over the into Pakistan; the other in a great north-western arc, into Hairatan.

I created this google map to understand how this railway line might look like. Please note that this is only an illustration – I have no more details other than the above article.

Based on the May 4, 2018 report in the Business Standard [Click to expand]

Won’t such a project pass through Taliban-controlled areas? What is the security situation like in the areas that this railway line might pass through. To check that out, I overlaid the Jan 2018 BBC illustration showing areas under Taliban/government control over the route map. That looks as follows.

The speculated railway line pass through areas with Taliban presence [Click to expand]

The areas marked in brown are under full-Taliban control. Areas in grey are in full government control. The orange areas are government-controlled areas having open Taliban presence. The darker shade indicates higher risk (attacked at least twice a week). Lightest shade of orange represents areas that are attacked once in three months on an average.

As is clear from this graphic, India, China, and the Afghan governments have a tough challenge ahead of them if they are serious about this project.

Inducements in the Political Marketplace

The Quint reports:

In one of the many attempts by Bengaluru citizens to raise awareness among voters in the city, the Karnataka Associated Management of English-medium Schools (KAMS) has proposed a very interesting incentive to get the parents of their students to vote in the 12 May Assembly elections.

According to reports, KAMS has decided to award extra marks to students whose parents have voted.

D Shashi Kumar, general secretary of KAMS, said, “We will record the details of the students and the parents and award 4 marks to them in the Part B section of internal assessments.” Some schools expect parents to report to the school right after voting, while some can wait until schools reopen to show their inked finger to ensure the children get the marks.

As I mention in my new AMA episode of The Seen and the Unseen (embedded below), voting is a privilege and not a duty. What’s more, the political marketplace is… a marketplace.

If a school was to announce that kids would get grace marks if their parents bought shirts from so-and-so mall, that would be considered ridiculous. A parent may go to that mall, fill all the shirts substandard, and refuse to buy one.

The political marketplace is no different. If I don’t like any of the candidates, I don’t have to vote — and what’s more, my not voting sends a signal to potential political entrepreneurs, who can see the percentage of non-voters, that there is a gap in the marketplace. They may step in to fill that gap. So if I want new forces to emerge in politics, it is reasonable to not vote.

Of course, I am neither in Bengaluru nor do I have kids, so I am immune to such pressures. How I wish I could have a positive reason to vote, though.

 

Formal Employment Data Sources: New and Old

Ajit K Ghose has an article in Business Standard on why payroll estimates data does not accurately represent job creation in the Indian economy.

What I found most interesting was that he has listed all the sources of formal employment data in India in this article. It is very rare to find all employment data sources, old and new, in one place. So, I’m noting them down here:

  1. Monthly estimates of payroll account derived from the database maintained by the Employees’ Provident Fund Organisation.
  2. Surveys of employment and unemployment conducted by National Sample Survey Organisation (NSSO).
  3. The Labour Bureau conducted a survey similar to (2) for 2015-16.
  4. Starting 2017-18, NSSO has launched a periodic labour force survey to produce annual estimates of formal employment in the country.

The Government Should Regulate Cooks

Yet another wedding, yet another truckload of wasted food. If, in reality TV show style, we were to try to identify the “root cause” in this instance, it was the cook (or the team of cooks, rather). Each of the seven respondents this correspondent surveyed expressed their displeasure at the quality of the food. One even called it her “worst ever Indian wedding dinner”.

This wedding was only one isolated instance – it is all too common an occurrence in these parts for copious amounts of food to be wasted all because of a cook who ended up cooking badly. And it is all the fault of the cooks, most of whom have never gone to culinary school (we don’t have too many of those in India), and many of whom haven’t gone to school either.

When thousands of people in India die of hunger everyday, and farmers continue to kill themselves in Vidarbha (and elsewhere), this wastage of food is indeed criminal. It comes at a high human cost. And that it comes out of sheer incompetence of unregulated cooks makes it indeed tragic.

There is only one solution to this – the government should regulate cooks. Not just wedding cooks – since wastage of food at weddings and other parties are only part of the problem – the government should regulate anyone who wants to cook. The other day my daughter refused to eat an idli. We decided to salvage our karma by feeding it (the idli) to the neighbourhood street dog, who took one bite and promptly ran away.

Whether you want to make yourself a 2-minute Maggi, or Shantavva in Santemarahalli wants to make a ragi ball, or chef Madhu Menon (hope he doesn’t edit this bit out) wants to make bloggers’ b***, you should need a licence from the government, which certifies that you are a cook of a high enough quality that what you cook will not go waste.

That’s the only way we can save millions of our population from hunger. There is already enough wastage of food because farmers cannot coordinate on what to grow, and because of inefficiencies in the food supply chain, and because of the way agricultural markets are regulated. We don’t want badly cooked food to add to the wastage. And the only way to ensure that is by having the government regulate cooks.

PS: As Ravikiran Rao, a former editor of the former avatar of this publication, likes to put it, “#thatzwhy we need strong regulation

PS2: Some readers might be advised to consume irony supplements along with this article

The Ten Commandment for Economists and Non-Economists

This is a fascinating set of rules I came across in Dani Rodrik’s book Economic Rules:

The Commandments

I really liked the 6th commandment for non-economists, which states “When an economist uses the term “economic welfare,” ask what he/she means by it”. While you are at it, make sure you ask them what they mean when they use the term “structural reforms” as well. It seems to be the single greatest solution to all of mankind’s problems. The specifics are often missing though, and perhaps, therein lies the reason why they have not been carried out.