Deregulation, Privatization, Social Security, and Banking reform

[Sanjeev Sabhlok <sabhlok@almaak.usc.edu>]

Utkarsh's views:
================
> For example, deregulation of Airlines industry in the US in the 80s were
> initiated by the US congress.  

While generally agreeing with the argument, I think that deregulation has
to be a second stage in most industries; the first still is privatization.
For example, our airline industry is still monopolized by government.
First these need to be privatized completely, by selling off their shares
at fair value in the market. Once that is done, of course, we need to
ensure that competition is further promoted and barriers to entry are
lowered.

  For the first ten years Airline industry went through
> layoffs and failures. Pan Am, Eastern and People Express were few of the
> casualities. This is what Indian politicians are scared to get into.

If inefficient firms do not see layoffs, i.e., our bankrupcty laws are not
simple and transparent, then the whole country will get "laid-off" as we
are today. Competition has two sides to it: the winners, and the losers.
The losers cannot be supported by state subsidies; that makes them fatter,
more lethargic and indifferent to loss. That is what has happened to many
of our industries. 

Nobody is saying that if you go into losses for one quarter you must
liquidate. But surely, it should be left to market forces (including the
banking industry) to decide upto what point they wish to fund a particular
company, and with what method/s. A losing company generally loses its
ability to get cheap debt; its equity also gets devalued. These are market
forces. If the lenders finally refuse to lend at any rate, the company
folds up, and the equity holders, who had risked their funds - knowingly -
into the company, take the loss. The loss is not borne by taxpayers, as it
is today in India. 

In Assam, for example, a paper mill has been payings its workers for the
past 15 (or is it 20 years?) now, called the Ashok Paper mills, and has
not produced a single piece of paper (correct me if I am wrong, Shantanu: 
our doctor friend from Guwahati: see his website:
http://www.indiaconsult.com/skylab). 

In all cases we must be clear: there are two kinds of people affected by
our decisions: the visible people and the invisible people.

For example (and I revert to this much "revered" topic), by imposing
minimum wages we might help a few workers who already have jobs, but we
hurt many more who do not have jobs at all, or whose jobs are eliminated
by such laws. Those, too, are people. I would always argue that it is
better that more people get the opportunity to work in the organized
sector where we can keep trying to improve their welfare, than that they
be forced out into the corners of the economy (informal sector), invisible
to us who drive to our factories and offices to work in our Mercedes cars
or chauffeur driven, police escorted, white Ambassador cars.

Let us remember that India exists not only in the organized sector, but
largely in the informal sector. The act of artificially supporting those
in the 'organized' sector, can only hurt the interests of those in the
informal sector who are deprived of the opportunity to get into the
organized sector by these barriers. 

Similarly, by being scared of closing down loss-making firms (anywhere in
the system, may it be public or private), we may benefit those who are
already in the "system" but we hurt - in a very big and perhaps
unimaginable way - those who are not in the system; those who are studying
fondly in the hope of getting jobs. By subsidizing any inefficient sector
of the economy, we do these three things: 

a) we reduce the overall rate of return on capital in the economy, which
is the same as committing suicide, but on a mass-scale.

b) we prevent the re-deployment of capital into those sectors of the
economy where it can be more profitably (efficiently) deployed. For
example, I cannot believe that in India there is no profit making
opportunity. Then capital should go those areas. Why do we need even one
loss-making project? Instead we have thousands, nay, lakhs of crores of
our precious capital, blocked into these sink-holes which suck in the
sweat and blood of taxpayers to subsidize a few million workers in the
public sector, and even in the private sector.

c) we support so-called "workers" who are doing nothing at all but cut out
employment of fresh blood.

I want us to be "fair" and to look after the interests of both the visible
and the invisible sector. That is why any proposal has to be shown to be
socially optimal and one in which the gain of one does not come at the
cost of another (also known as Pareto optimality). That is the bare
minimum that is acceptable. We want better outcomes, of course, that lead
to the gain of all, but the Pareto optimal criterion has to be always the
bare minimum.

Deregulation, social security net and social security:
------------------------------------------------------

> Another point to mention that even if government wants to get out of a
> industry, it has to be heavily involved as a refree in the initial
> phases of deregulation. 

I agree with this in principle. Please download and take a look at the
term paper "Sequencing of Macro-economic Reform: An Institutional
Perspective"  that I wrote jointly with Ganesh, a colleague from IIM,
Indore who had come for a year as Post-Doctoral fellow at USC. It is
available at: 

	http://www-rcf.usc.edu/~sabhlok/Termpap/termpap.html

In general, I agree both with Utkarsh and Charu on the arguments on this
issue, but we must at all times remember clearly that the concept we are
promoting is "competition," and not "control." 

About the social security net, we need to surely set up a social security
system in India. That is basically meant to cater to retirement of
workers. We can learn a lot from the lessons as indicated in the World
Bank book: "Averting the Old Age Crisis." In addition,  we need an
unemployment benefit - but of a very nominal nature. 

By the way, reverting to a pet theme of mine (to elaborate the concepts of
socialism and capitalism), in socialistic economies, by default, there is
no need to insure anyone against unemployment. Everyone is supposed to
have employment automatically; things are so "well-planned." On the other
hand, in capitalistic countries, one of the critical tools for survival
("reproduction", to use Marxian jargon) of the society, is social
security, which insures people against the vagaries of income shocks.
Capitalism or competition, leads to a lifetime of erratic income.  The
USA, by virtue of having a social security system, is a capitalistic
country, and not even remotely a socialistic country, as Charu seemed to
suggest, elsewhere.

Banking and credit for the poor:
-------------------------------

> Having said that, I would like to discuss as what steps will a
> government take in India to privatise banking. Going forward I would
> like to bring up issues which matter to average middle class citizens of
> India. I think average citizens goes through hell even to get their own
> money out and deposit in a bank. Any takers.  IF we all agree that
> banking industry is fine in India the way it is today, then we can move
> on. 

Great topic: Banking reform. Step 1. Get out of banking. The worry of
Charu that people need access to credit is genuine and I appreciate that.

Unfortunately, I have the direct experience (which very few among you, in
the USA, or elsewhere, have had) of implementing schemes designed to
promote this "cheap credit" (so costly for the society!) for the rural
poor. I am writing much about this in my book, but the essential argument
is: 

You cannot, sitting in your office chamber, determine whether a project is
credit-worthy or not. The credit-worthiness of a project is determined by
two things: an entrepreneur and the opportunity. The best person to decide
this is the farmer/ rural artisan/ agricultural laborer. But what do we
do? We set targets to subsidize a zillion of these people. The machinery
to direct funds to these people is huge and unbelievably corrupt. Even
assuming that no corruption takes place, what essentially happens is as
follows:

Rs.X is diverted from our national pool of capital into a project that is
ill-conceived, not feasible, etc., and the farmer is forced to purchase a
capital good that he/she either does not need, or is of low quality ...

[Please, Please, for God's sake (and this is in response to the lecturing
I have got from a member of this group, elsewhere, and in response to what
I have heard from some of our highly educated folk who sit in the USA and
dream of changing things by 'touching up' the system), don't try to preach
to me about how we need to 'improve' the implementation of our systems:
the people in Indian government are corrupt, corrupt, corrupt: because we
give them these golden opportunities to make money: I caught and jailed an
senior officer of mine for 14 days but he got out and retired 'honorably,'
snooking his thumb at me, all the time, I am sure, for being a fool and
trying to catch a slimy eel like him and others! So, Please!  Please,
don't ever tell me how to improve systems. I have not only done much, but
written a book on how I computerized the management of the IRDP program:
the method I used is still, I believe, perhaps the most innovative in this
field. An ideal example of the use of computers in this field,
perhaps(?!). Please download this book of mine from: 

	http://www-rcf.usc.edu/~sabhlok/Bk-daisy/daisy.doc

I really challenge anyone on this list and anywhere else in the country,
or even the whole wide world, to come up with a system that can select
market-worthy projects for the poor, convert the poor into entrepreneurs
without educating them, and then disburse cheap credit and capital goods
to them in an honest manner, through the hands of a pathetically poorly
paid bureaucracy.]

The outcome is in almost all case the same: complete failure of the
project.  Money goes into dust, actually. The farmer goes into debt. The
banker/ rural development department functionary becomes fat. The
Minister/ Chief Minster becomes fatter (I was Director of Rural
Development of Assam, handing budgets of well over Rs. 200 crores a year,
when I discovered that the primary "dhandha" of my Minister and my Chief
Minister, was to skim off money from my department, while talking golden
words of 'welfare of the poor' in front of TV audiences and on
Independence Day in the Parade Ground).

Consider the alternative scenario that I wish to promote. Let us take the
case of an educated farmer (we must educate everyone first), who decides
to start a fishery in his village. He is aware of all the risks and
returns from the project. He writes up his project - ON HIS OWN (not as
per a standard list prepared by the government) - and goes to the nearest
private bank (we can always insist that private banks have semi-rural bank
branches). The bank, realizing that the project can be profitable, but not
knowing the credit-worthiness of the farmer, charges the farmer a slightly
** higher ** rate of interest than would be charged to him/her if she were
Mr. Tata. This rate is of course still well below the rate charged by
local money-lenders (we can fix an upper limit to rates chargeable by
banks). But the rate is sufficiently high for the bank to make up for
possible losses on many of these rural projects. That keeps the bank
solvent without costing the tax-payer a penny. 

What has then happened? The following:

a) The farmer takes complete ownership for the project (capital goods
were not forced down his /her throat), and works hard.

b) The return on capital is the maximum possible, since the farmer works
hard to earn a profit and to repay the bank (both prosper). The country
prospers. Money is not converted into dust but dust is converted into
money.

c) Credit goes to the needy and not to those who have no need for it
(simply because a person is poor does not mean that he/she needs capital.
I, for example, do not need capital, because I have no entrepreneurial
ability nor any enterpreneurial idea).

Well, my fingers are aching. I type too much, too fast. More later ...

Sanjeev