Issues in Infrastructure Development Today: The Interlinkages

Brings out the issues in infrastructure development in India linking market failure, policy, regulation, and privatisation in India c. 2000. Is the lead article in the India Infrastructure Repor

Agriculture: A Perspective from History, the Metrics of Comparative Advantage, and Limitations of the Market to Understand the Role of State in a Globalising World

Multilateral agencies and economists with much influence have been urging laissez-faire in agriculture. While success with the rich countries has been minimal despite the commitments under the WTO, many poor countries with much agricultural potential in the long run have been coaxed to adopt near free trade in agriculture with disastrous results especially for the poor in these economies. There are fundamental problems in achieving even global (leave aside optimum for any particular country) optimality through world trade in agriculture given the immovability of land. Additionally the fact that poor countries start their transformation process with much of their population engaged in agriculture imposes special requirements upon agriculture. Incomes have to rise in agriculture to overcome poverty and to constitute rising domestic demand for modern manufactures and therefore the infant industry argument holds with additional force. We bring together the historical experience of agricultural development, the relationship between economic development and agriculture, trade in agriculture, the role of state action especially in the late industrialisation context. The differences between land endowed and land poor countries are recognised in their analyses. We develop a perspective on the comparative advantage of nations in agriculture and the evolution of the same. The metrics of agriculture and trade, arising out of the dynamics of the share of agriculture in GDP, the dependence of agriculture on land endowments, the biological limits to consumption of agricultural products, underlie a dynamic structural model of the revealed comparative advantage which is developed and tested using panel data from about 100 countries. The nature of agricultural products on several dimensions – its long lead in production, its perishability in some cases, its storability in others, but above all the grouping of many agricultural products into low price and income elasticity of demand – is used. The purpose is to draw insights that can usefully inform the content of state intervention, and trade policy especially from the point of view of a country like India which is likely to lose its comparative advantage in many agricultural products as incomes rise. The comparative advantage of countries in agriculture is most usefully characterized as rising of the arable land endowments per person and declining as the per capita income rises relative to the worlds “average” per capita income. A structural model on the lines above is estimated empirically. The Model is also dynamic since the rise in per capita incomes at a faster rate in transforming countries can be used as data to predict with a high degree of reliability that they would see a decline in their competitiveness. Similarly countries with low arable land per person would see a rapid fall in their competitiveness. Yet land abundance in poor countries does not automatically result in high competitiveness. [The abundance of easily mined other natural resources like fuels acting through the balance of payments could lower greatly the revealed competitiveness of agriculture]. To realize the same, much land has to be brought under the plough and enhanced, a task where the role of the state is important. Irrigation development as also the use of machinery on land enhances the competitiveness of agriculture. And the former is dependent much upon the ability of the state to put together public irrigation and support private irrigation. Even more importantly the investments in storage, market support, transportation, information provision, demonstration of new technologies and extension all of which are required at the beginning of the agricultural transformation require active intervention of the state. The problem for the poor countries with land abundance is compounded by the large distortion of international prices resulting from subsidization by rich countries as they face declining competitiveness in agriculture due to very high incomes. The coaxing of land rich poor countries in this situation to embrace laissez faire policies by the multilateral agencies is shameful and nothing short of suicide for these countries. The costs of subsidization in the rich countries are very small and the political benefits very large, so a roll back of subsidization is least likely. Agriculture is the first industry where surpluses can arise to stoke development as such. The historical evidence that no country of substantial size has been able to industrialize without a prior or simultaneous agricultural revolution has to be noted. And the infant industry argument is valid for agriculture as much as for industry. Both these further condemn the laissez faire position. Protection of agriculture is therefore the least distortionary way for the “large” land-poor poor countries as they advance to protect their employment. Protection alone without active support of the state to overcome the significant market distortions in agriculture and its inputs may not be enough. Protection in land scarce economies ought to be scaled down only as such economies are able to absorb labour shed by an advancing agriculture in other segments of the economy. Functionality also demands that the role of the state in agriculture and subsidization recognizes not only the market failures arising out of the public good nature of many inputs, but also the perversities that low price and income elasticities, when combined with the long “lead” can bring to the functioning of markets. Similarly the structure of the value chain from production to final consumption in distant lands – especially the fact that the aggregators and processors in the value chain would be able to capture rents – creates the basis for a crucial role for the state in trading, stocking and processing. Shortages and variations in output again create the need for buffer stocking. Successful late agricultural transformations have been built upon the state playing these roles. The state’s role in processing while crucial has not generally been successfully realised, the complexity of the tasks being a basic bottleneck. Laissez faire policies in agriculture when without reference to the stage of development, and state failure to compensate for the market perversities underlie the disaster that agriculture has been for poor countries with much agricultural potential.

Societal Change, States and Governance: Insights from History and other Societies

The nature of governance has differed widely across societies, and what is more interesting, within any particular society depending upon the stage of development. Governance is better defined in functional rather than in value terms. Functional governance aids and abetts industrialisation. Industrialisation is the one change that all societies have to necessarily strive for. Without it no development is possible In contemporary societies which are also democratic and trying hard to industrialise, that insight needs to be tempered with the limitations of the state that is a coalition of many classes. More importantly just because functional governance was not the good governance of today, in many countries and societies in the past, does not mean, that it today cannot be both good and functional. The point though is that unless it is functional it can never be good. Functionality of governance is best assured when the policies followed by the state in its drive to industrialise the economy are correct. Therefore the main lesson from history is that the first thing to do (for both functional governance and for the industrial transformation) is to bring about the initial conditions necessary for the industrialisation of the economy. The key bottleneck here is tenurial relations in land which stand in the way of output increases from the poor farmer. The egalitarian income distribution that land reform brings, ensures that nearly all the poor are particpants in the market. All other conditions necessary for the unambigous transformation already obtain today in India. We also describe the process of change and the sense in which the economic is primary to societal change. That does not mean that there is no scope for individual or collective action. It only means that there are particular ways in which individuals and small groups including reformers can bring about change. It is important to recognise the specific ways in which small groups including elements with government can bring about change. In any discussion of corruption and governance the case of China which despite being highly corrupt society grows can hardly be avoided. Corruption there is the means by which a bourgeois society is being born in China today. Because much of the rents are invested there is no dysfunctionality to this corruption. It would though soon become dysfunctional, since, once the party elite have all become capitalists, the gain to them and to society as a whole is greater in a non-corrupt society. That is already happening, and corruption can be expected to decline soon.

The Challenge of Governance of India Today

This paper attempts to delineate the possible role of goverance oriented reform in India today. We raise conceptual and historical difficulties with the notion that sees governance failure as the cause of poor economic performance. We discuss why there are certain regularities in the occurance of good governance, distinguishing the same from functional governance which aids and abets industrialisation. Next we go on to discuss the interlikages between institutions, economic development and governance in India, and why internal attempts at reform thus far have failed.. Finally we bring out the current failures in governance that are actionable and suggest that they are largely corrected by changes in economic policy and some intitutional initiatives. Attention to governance as such is warranted only to build organisations and initiatives for commercialisation and privatisation, and for appropriate changes in the law and in the development of frameworks for regulation and contracting out.

Issues in Infrastructure Development Today: The Interlinkages

Brings out the issues in infrastructure development in India linking market failure, policy, regulation, and privatisation in India c. 2000. Is the lead article in the India Infrastructure ReportIndia; infrastructure; regulation; market-structure; coordination; state-failure; subsidies

A Study of the Regional Determinants of Foreign Direct Investments in India, and the Case of Gujarat

We discuss the determinants of FDI over the regions of a large economy like India, and develop a framework drawn from the advantage concept of Kindleberger and from location theories rooted in regional science. We specifically use Stephen Hymer’s understanding of the parallels and relationship between the international organisation of a global firm and the locational choices for the same with the spatial aspects of location of economic activities in general. We apply the same to the situation in India of large FDI flows since the reform began in 1991-92 to arrive at a tentative explanation of the regional patterns of FDI. Essentially we argue that for all investments (other than those strictly confined to locations due to their requirements of either natural resources or the need to be very close to markets) it is the regions with metropolitan cities, that have the advantage in ‘headquartering’ the country operations of MNCs in India, that therefore attract the bulk of FDI. Even more than the quantum of FDI, the number of cases of FDI, as also the employment effects, and spillover effects are large for such regions. Empirical support for this hypothesis is provided by a study of the foreign investment intentions, and the distribution of investment projects. Gujarat has been particularly handicapped in not having a large and metropolitan city unlike the southern states which have Bangalore, and Hyderabad besides the older metropolis of Chennai. The area around Delhi, and Maharashtra its two metropolitian cities - Mumbai and Pune, have large advantage. Adjusting for these factors the FDI into Gujarat was large enough over the period when the state had grown rapidly in the first six years following the reform of 1991-92. Since then the slow down of the growth has been a retardant to FDI since the kind of FDI that Gujarat can hope for are largely industrially oriented. Similarly regulatory uncertainty especially with regard to gas, but also electric power and more generally in the physical infrastructure sectors had hurt Gujarat more than other states. We conclude by suggesting that there are vast gains to be made by attracting FDI, especially in services, high tech, and skilled labour seeking industries, because then the resulting operations are more externally oriented, and the investments arise from competing firms. Gujarat therefore needs to worry about these investments can come about. Its fortunes are likened very closely with the growth of manufacturing in the country as a whole.

Issues in Real Estate and Urban Management – A Note

This note raise many policy issues related to real estate and the urban sector. Urban issues and the very high cost of real estate in India have deep rooted problems that have their origin in the policy, law and working of government. The potential of high growth to deliver benefits to people but especially the poor have to a large extent been negated by the large perversities that underlie the real estate sector in India. These have been compounded by structural problems in governance. Without correction it is unlikely that India would be able to face to the challenges in rapid urbanisation that lies ahead.

Role of Trade and Macroeconomic Policies in the Performance of Special Economic Zones (SEZs)

Special economic zones following the enormous success of China have been widely imitated. But it is to be entirely anticipated that the results would vary greatly. Earlier avatars of SEZs in the form of Foreign Trade Zones (FTZs) and Export Promotion Zones (EPZs) were important in the export led growth of east Asia especially South Korea. But more than SEZs or EPZs per se it is the pursuit of “export led growth policies” which underlie the success of exporting and hence of SEZs. SEZz / EPZs can be seen as a (not necessary) microeconomic and spatial initiative in the pursuit of ELG under rather special circumstances by China, and South Korea and Taiwan to more limited extent in their early phases of transformation. In other countries not pursuing ELG the success of SEZs/EPZs has been rather modest. The roles played by the SEZs/ EPZs etc whatever their original purpose were constrained and determined by the macroeconomic policies, trade policies, and regional alignments. There is little meaning in studying SEZs beyond their layout and design without reference to these broader trade and macroeconomic policies. Thus early pioneers like India could make little out of their EPZs since the policies are severely biased against exports. We characterise export led growth (ELG) as the strategy that has allowed the late twentieth century industrialisations, which is far from both import substitution (as conventionally understood) and laissez faire, and to be the simultaneous pursuit of both IS and EP. With this framework we are able to understand the role and evolution of SEZs in a wide variety of countries. These help us to explain and anticipate that unless the policy turns sharply to favour exports (more correctly tradables over non tradables) the success of Indian SEZs would be modest and nowhere near that registered in China. Following from our characterisation of Import Substitution, Export Led Growth and Laissez Faire we also bring out the nature and performance of “special zones” when these are promoted under the very same regimes.

Comments on the Draft Electricity Bill 2001

These comments on the Draft Bill 2001, had been widely circulated in September 2001. Discussions on the Bill have again revived in the media and elsewhere, as the reform of the power sector has made little headway, and there is much concern that something needs to be done. Little progress or changes have been made in the Bill, so that most of the comments made then remain valid. Essentially the Bill is maimed because it is not clear enough, does not lay a path for reform and for the evolution of the sector, and in no way reduces the policy and regulatory uncertainties. While it attempts to bring about open access, that objective would not be realised since cross subsidies are to be loaded on to the transmission charge thereby killing whatever little prospect there is the Bill for a market in power. There is no specification at all of the mode of transmission pricing and the crucial role of transmission pricing is not recognised in the Bill. The Bill does not recognise that cross-subsidies via differential prices would continue to keep open the "price-arbitrage" opportunity (the root of corruption and the source of all ills in the system), so that no real change would be possible. The Bill gives legal status to far too many "authorities" and bodies, some of them quite unnecessary and vestiges of the past. The coordination problems between these are likely to take the system (if ever what is envisaged materialises) far from the optimal. The special opportunity in inter-regional trade in power cannot be realised unless the law limits the barriers to interregional trade. Most importantly the Bill virtually rules out incentive regulation of the modern varieties such as price cap regulation. Through the sub-clauses it brings in cost plus regulation. Cost plus regulation has been particularly problematic in India, and can be expected to bring inefficiencies and cost padding if not regulatory capture.

Competition, Regulation and Strategy in Industries with Consumer Side Scale and Scope Economies: An Essay in the Context of the Information Technology Industry

The IT industry (both software and hardware) is characterised by `vast consumer side scale and scope economies which are incomparably larger than in other industries with supply side network economies like pipelines or electricity distribution. In IT the supply side economies are also incomparably larger because the marginal cost of an additional unit of the software or hardware especially the former is very small. But its uniqueness arises on the demand side. The interaction of these two economies, in a situation of heightened technological dynamism, imposes a greater degree of contingency, and hence path dependency in the developments in the industry as a whole. In this respect these industries are therefore distinguished from nearly all other prior industries. It makes possible giants line Microsoft and CISCO. Even as they extract significant part of the scale economies in the form of large profits, such firms are competitive in the more relevant dynamic sense. The endogeniety of critical points in the development of the industry implies considerable scope for strategy on the part of such large firms. It also means that inter-firm linkages dynamically develop and thrive even in societies like the US that have been abhorrent of extra-market links, and have had the conceptual space to recognise only two kinds of economic coordination - within firms (managerial hierarchies) and through markets. Path dependency implies that physical clusters in IT have a far stronger economic logic, and the difficulties in the emergence of new clusters are far more severe. Traditional anti-trust like regulation or price regulation is entirely outmoded for the development of these industries. To challengers (countries and clusters) few independent options exist. Strategies with the most potential would involve promoting inter-firm linkages, promoting industries with the least need to be in contact with other firms, in fresh clusters. The effort has to be to lower the time and cost of networking with the dominant cluster. The costs of disassociation are too large even for large countries attempting to have a role in the evolution of IT industries, so that closed-door approaches are almost entirely unworkable.