Dani Rodrik

"There are three ways in which ideas shape interests. First, ideas determine how political elites define themselves and the objectives they pursue – money, honor, status, longevity in power, or simply a place in history. These questions of identity are central to how they choose to act.
Second, ideas determine political actors’ views about how the world works. Powerful business interests will lobby for different policies when they believe that fiscal stimulus yields only inflation than when they believe that it generates higher aggregate demand. Revenue hungry governments will impose a lower tax when they think that it can be evaded than when they think that it cannot.
Most important from the perspective of policy analysis, ideas determine the strategies that political actors believe they can pursue. For example, one way for elites to remain in power is to suppress all economic activity. But another is to encourage economic development while diversifying their own economic base, establishing coalitions, fostering state-directed industrialization, or pursuing a variety of other strategies limited only by the elites’ imagination. Expand the range of feasible strategies (which is what good policy design and leadership do), and you radically change behavior and outcomes."

- Dani Rodrik

Organ Markets

This is my initial response to the organ markets debate. I am still reading up on the topic and will post again on the same topic after I have developed a more nuanced opinion.

A friend has put up arguments for establishment of organ markets on his blog, this post  is a rebuttal to that. Let me try to identify the supply side of this market, which group of people would be desperate enough to sell a vital organ of their body for a price, the most obvious answer is the poorest of the poor. This where commercialisation becomes a form of exploitation, my friend had made an argument that with the access to organ markets the donors will receive access to safer and qualified medical facilities but what he fails to realise that it is precisely among these groups all institutional mechanisms breakdown and this effect is magnified among developing countries. An analogy can be made in this context; setting up of organ markets is similar to legalising child labour, where a failure of the state and the economy drives people to a desperate situation that   they is forced to send their children to work. In this case similar to organ markets people don’t factor in the future consequences of the act and worse they lack the capacity to foresee the consequences, thus commercialisation turns out to be an extremely unjust process. First we create a society in which certain sections are desperate enough to sell their organs, then instead of improving their condition we provide a means through which their vulnerability is taken advantage of by a privileged few. In addition, the problem of desperate parents selling organs of their children will be unsolvable.

FDI in retail: An analysis

In the recent past there has been a lot of debate in the public domain pertaining to the government’s move to implement a new set of reforms, Foreign Direct Investment in the retail sector being one of them. I will try to weigh the arguments given by the government against the drawbacks of the policy and try to assess how this policy would affect the economy in the long run. The arguments that have been put forth by the government are-

1.      The FDI in retail would bring in investment into supply chain management and thus making it efficient as there is a substantial loss that is incurred in this area. Thus controlling inflation,

2.      It would raise employment

3.      Better prices to farmers as the middlemen would cease to exist

There are two sides to this story i.e. how the move will affect the backward linked markets to the retail sector and how the market for the retail will undergo a change by the entry of big retail.

Supply side story-

We have to accept the fact that our supply chain management is highly inefficient. At present the procurement for retail sale takes place in the following way, the small and marginal farmer is given a loan by the local money lender at an interest of about 36%, who hooks him up with a local middleman to whom he sells his crop. It is the journey from the middleman to the retail store is where the prices are jacked up; it is because of the absence of this process that makes farmers ’ markets beneficial to both the customer and the farmer. Now when the big retail firms enter the market, they will directly deal with the farmer or have their own contractors, and will eventually push the existing middlemen out, once this happens the big retail become a monopsony (single buyer, many sellers) or an oligopsony. These firms which get into contract farming, will have the power to reject the crop on quality basis, or with the excuse of a glut in the market and the firms will be able to force the farmers to produce unwanted crops like BT crops. In the short run the farmers might get a higher price for their crops but in the long run the market forces will give the retail chains enormous power which will manifest in lower prices to the farmers. Hence by allowing big retail firms to come in, we are replacing one oppressive structure by another oppressive structure. An alternate to this might be, the government itself investing in supply chain management, setting up of farmers cooperatives for procurement of loans and selling their products.

Demand side story-

There have been claims that the big retail firms will not lead to the ouster of the local mom & pop stores on the basis of the following arguments-

1.      The mom & pop stores have a personal connection to the customers which will enable them to give informal credit to the customers.

2.      The country is too big and can accommodate both the big and small retail.

3.      Big retail will be positioned at a geographically inconvenient location ( they will be located on the periphery of the cities as real estate prices will low)

All the arguments fall flat when we look at the modus operandi of big retail operates, they engage in competitive under-pricing to wipe out local competition. The ability of the big retail to firms to take losses for prolonged periods enables them to cut product prices by half or even by three fourths, prices at which the small retail shops cannot survive as they operate at the margin. So a lower middle class family which would save Rs.500 on a month’s groceries will opt for Wal-Mart. We have historical evidence of this behaviour, the strategic under-pricing that Pepsi and Coca Cola had engaged in, to wipe out local competition like Goldspot, Campa Cola, Thumbs Up and others led to the creation of a monopoly in the beverage industry, these two MNC’s are hugely profitable now. There is evidence from Indonesia, where 77% of the local retail stores were forced to shut down.  After they eliminate all local competition, the retail giants will eventually raise prices; surveys done in Madagascar have shown a 50% rise in the prise of products after the entry of big retail firms. The claim that the entry of large retail firms will raise employment is true in the short run but as the local small retail stores are pushed out of the market, unemployment will rise in the long run.     

The question to be asked now is over the necessity of FDI in retail and the source of its demand. It comes from, the elite middle class in the urban centres, who desire to have an experience out of grocery shopping, the Indian government which wants to sell the brand of India to spur animal spirits among investors and most importantly the politically influential Indian big capital who will own the remaining 49% of the retail chains. I don’t see any economic reason to replace the current local mom & pop stores, which operate in close to perfect competition conditions, which employ about 23million people with the big retail giants, other than political reasons.

   
                        

'Increasing the size of the pie', explained.

In the last 40 years economies around the world have been witnessing a rising trend in inequality. Form the USA to China and India,  have seen a rising gini coefficient(measure for economic inequality. Reducing inequality, keeping in view the recent changes in the global economy, has become imperative for various economies to get back on long term growth path after the recent global economic crisis. ). In this post I will try and explain the most commonly stated advantages of shrinking inequality, the argument in common parlance is metaphorically stated as ‘increasing the size of the pie’, pie here is the economy. First I have to explain some basic economic concepts.

Every person tends to consume a certain part of their income and save the rest, but this tendency begins to change as the person’s income rises. In economics, the proportion of income that a person consumes is called Marginal Propensity to consume (mpc), the fraction of every additional rupee spent for consumption, for a wealthy person mpc is quite low and the mpc for a poor person is high, to understand this, think about what a wealthy person would do if he was given thousand rupees? he would save most of it, wealthy people tend to save most of every additional rupee that they earn as their basic consumption is already taken care of; on the other hand if we give a poor person the same thousand rupees he would use it to buy goods for consumption, rather than putting it in the bank. When an economy has high inequality, a larger portion of the economy’s income is going to a small fraction of the population, as a result, we see the absence of purchasing power for a majority of the population, and this creates the classic Keynesian problem of insufficient aggregate demand.

When we shrink inequality the domestic demand is boosted thus leading to the growth. While rising economic inequality presents a slew of many other problems one of them is a rising inequality of opportunity which is explained well by David Brooks in this NYT article. Nobel laureate Joseph Stieglitz explores this in a much more detail in his book the Price of Inequality 

http://www.guardian.co.uk/books/2012/jul/13/price-inequality-joseph-stiglitz-review

Google and a new form of market failure

"Google has been accused in both Europe and the United States of using its dominant position in search to unfairly promote its own products and services -- from travel and shopping comparison engines to advertising and mapping.

These accusations have been well documented and extend from successful American internet companies such as Yelp, Expedia and Nextag to European start-ups like eJustice.fr and Foundem."

The above news piece reports an unprecedented phenomenon in the realm of market failures. As far as textbook economics goes, there only three forms of price discrimination that firms with monopoly power, engage in, to exercise there monopoly power, but what Google has allegedly engaged in, is a new method* to use its monopoly status to distort markets. Google has used its position as the monopolist in one market, to thwart competition in other markets.

This form of market failure has been made possible by the proliferation of the advanced communication technology and the economy's reliance on the internet. All the e-commerce websites rely heavily on Google for their survival, owing to Google's position as the biggest internet search engine, which is there primary mode of marketing. I don't have any solutions to correct this market failure,but more research is warranted in this area.

For the complete story click on this link.

* I have not come across any specific name for this form of market failure, if any of you do find more literature on this topic please place it in in the comments box.    

On Ajmal Kasab's hanging

Yesterday Ajmal Kasab was hanged to death for his involvement in the 26/11 Mumbai attacks. There was a sense of revelry around the country, when it actually is poignant moment for all of us. The debate on capital punishment is one which has been going on for ages, and I don’t think I can offer a new line of argument, but in the light of recent events I feel compelled to put out my thoughts. 

Before that, the question that begs for attention is that, whether Ajmal Kasab was the ‘rarest of the rare’ case that required the capital punishment. Among the many categories of Normative ethics, the branch of philosophical ethics that investigates the set of questions that arise when considering how one ought to act, morally speaking, are Consequentialism and Deontology. Consequentialism theorises that the consequences of the person’s acts are the ultimate judge of the morality of the act. One of the major reasons for any judge to pronounce a death penalty is because it acts as a deterrent for potential criminals. Ajmal Kasab’s death is in no way going to stop the strategists from plotting another attack, as he was just a pawn who was ready to die anyway.

Deontology on the other hand is the normative ethical position that judges the morality of an action based on the action's adherence to a rule or rules. What Kasab did is unquestionably abhorrent by any standard, but does he represent the worst of humanity for whom we reserve the death penalty for. We have to understand the circumstances in which the crime was perpetrated. Ajmal Kasab was 21 when he committed the killings in Mumbai, more than half of the boys of that age, under everyday conditions are not fully aware of their actions; Kasab was probably recruited early in his childhood and indoctrinated with a false ideology based on hate and violence. If I had lost someone dear to me in the attacks, I would have wanted Kasab dead, but the more evolved and humane response would have to be something else, he could have been sentenced for life; like in Norway which will keep its vile terrorist attacker, Anders Breivik, locked up for life. That would arguably have been a greater deterrent than hanging a man who had planned anyway to die. Our responses to such situations should reflect the soul and conscience of mankind, that which values life itself more than anything, rather than temporary public anger.

To come to the death penalty itself, when a court in any country pronounces a death penalty it actually is trying to wipe clean its blemishes. A human being considered worth executing by the society, is actually a result of the failure of the institutions of the society. If we have people who cross all limits of civilised life, it is because the society in large has created circumstances for their creation. It is the failure institutions like the judiciary, legislature and also the institution of family or an absence of it. When you take part in ceremonious killing of a fellow human being, we refuse to gauge the inherent value of life itself.                         

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