Development Economics

One of the highlights of the MPA course at the Lee Kuan Yew School was the module on Development Economics. I found myself quite often feeling a sense of wonder and exhilaration in the class that I didn’t feel in any other class and that I didn’t expect to feel in a classroom. 

It is hard to pin down where the feeling came from. I think it was the approach and worldview of economics, applied to areas that I was particularly interested in, like education and health. As I got from the course, the approach was to try to get at human behaviour in these situations and figure out what a rational individual would do to maximise their well-being. Then try to capture that in equations and you got a working model of the world. Get data from the real world and see how well things seem to fit. 

For example, in education: the basic way of looking at it is that education is a way to improve your earning capacity. So you invest now in education in order to improve your later earnings. Then it becomes an optimisation problem: how many years of education should you invest in now (and forgoing current earning opportunities too) so that your overall life-earnings are maximised. Then you can start adding complexity to the model: the situation varies from person to person - some people get more out of their education so the returns from education have to be parameterised by a person-specific co-efficient. And then you get into why education increases your earning capacity - could be through direct increase in your capability to create wealth or could be through a ‘signalling’ effect, where the fact that you’ve passed some exams etc. shows that you have some intellectual capacity. And more such stuff.

On the empirical side, many people have looked at how average incomes of large groups of people vary with education. One study in the US arrived at a figure of a 7% increase in earnings for every additional year of schooling. 

In health it works like this: health is something you invest in, in time (with its opportunity cost) and money. It also depreciates on its own every year. Good health lets you earn more, and enjoy leisure more, thereby contributing to your utility/well-being. And there are competing demands on your money other than health - like daily consumption, leisure activities etc. So again its an optimisation problem of how much you invest in it in order to maximise your utility. 

This modelling also, in theory, shows the role of public policy. People do what they do to maximise their personal utility. However there are externalities to health and education and government wants people to have more of them. So government needs to intervene in these equations :-) , in the appropriate way so that people consume more of these goods than they otherwise would. 

We also looked at other things like agriculture and credit markets. For example, the landlord/tenant relationship in agriculture can be of different types: landlord can pay for part of the cost of raising the crop, he could get a fixed amount each crop irrespective of the actual profits, or there could be profit (and loss) sharing arrangements. Its possible to model these and theoretically arrive at conditions where different types of contracts are preferred. There are some nice papers that show that the theory seems to hold in practice. 

Another highlight of the course for me was the paper reproduction exercise. Good academic papers nowadays are accompanied by an upload of the actual data and the software code used to analyse the data. So its possible to reproduce the data analysis done in the paper and see if you get the same results. There are levels of complexity to this:

• you can run exactly the same code using the same data. Of course that’s not too much fun 
• you can fiddle with the code a bit and try to do slightly different things 
• in special cases you could collect the data yourself and reproduce the results from scratch. There’s a celebrated case in academia of a famous papers’ results being proved wrong in this way.  This article nicely describes that : http://www.bbc.com/news/magazine-22223190 

I chose to do a paper on water that was co-authored by the very well-known economist at J-PAL , Esther Duflo. It was a very fulfilling exercise and I found some minor discrepancies too, which was a big kick. 

The original paper is here: https://www.dropbox.com/s/4u37kptdcdjrund/%2BDuflo_2012_Happiness%20on%20tap.pdf?dl=0 

My report on the replication is here: https://www.dropbox.com/s/jcv96iatph8ze9r/Paper%20Reproduction%20Report.docx?dl=0 

Yvonne Jie Chen was the teacher, and her enthusiasm for the material was infectious. 

The course textbook was “Development Economics” by Debraj Ray. Well-written, erudite as hell and an enjoyable read but pretty uphill going for me atleast because of the intellectual level of the subject matter. I finally read less than 10% of the book, but it was still pretty good! 

Notes, Further Reading:
For a compilation of resources on studying public policy in general and at the LKY School, see: http://despoki.blogspot.in/p/studying-public-policy-and.html 

On (Not) Living in the past

Life’s experiences leaves their mark on us. Most of the time we think of this as positive - learning from life. But experiences also distort our thinking. Someone who has been through severe poverty may go through life always insecure even if rationally they have made enough to feel secure. Someone whose parents have had a difficult marriage or who comes from a broken household will likely carry that over to their own marriage. They have no other experience on which to base their behaviour in marriage. 

This holds true at a societal level too. Certain ideas have strong hold on the national imagination and it is difficult for people to think rationally about this. Examples include the Kashmir issue in India and the Israel-Palestine conflict. 

One of the most valuable services that a human can provide another is to free them from this grip of the past, to help them to drop their 'baggage'. To quote from Landmark, to be “informed by the past, but not limited by it”.  To help a person to design their future, outside of the constraints of the past. However, the requirement for such a service is not even widely recognised today, leave alone provided. 

On a national level, I see an impact from this, for poverty alleviation and national progress, economically and otherwise. In particular, moving people out of poverty can be quite challenging because of the mindset changes required of the poor.  If societies as a whole could provide  service, it stands to reason that, freed from the ‘demons’ on the past, individuals and therefore societies will progress much more rapidly and in a  win-win way, than they could otherwise. 

With his favourite uncle

In April in Singapore 

Responsible tourism

When you travel, you have an opportunity to use your money in a way that supports the local people in their livelihoods. There are two theoretical concepts in this connection:

1)leakage: this is related to how much tourism money stays in the local economy and how much goes out. If the money goes to local people and they in turn use that to pay other local people, the money benefits the local economy more and more. This is good.

2.) who benefits locally. Ideally it would be nice if our money could support those lower on the economic ladder as much as possible 

As an example, I noticed that the comparatively small town of Aurangabad has some pretty fancy hotels. Of course this is because its the nearest base for the Ajantha and Ellora caves. So I can visualise that rich tourists would fly into Aurangabad, go to a fancy hotel, then take a rental car, go to Ajantha and Ellora and then back to the hotel and then back to the airport and out. If you analyse the money they spend, you can see that most of it leaks or doesn't stay in the local economy:

- flight : money mostly goes to aviation fuel, trained airline and airport personnel 

- vehicle : mostly towards fuel (a good that comes from outside) and the driver (money stays locally hopefully)

- hotel : high-end hotels usually use a lot of men and material from outside the local area, both in their construction and running. 

When you think about it, responsible tourism is pretty hard to do in India. We would like to stay in reasonably decent places, which are clean, hygienic and pleasant. Unfortunately, this isn't part of the culture in India generally it seems (see : http://despoki.blogspot.in/2016/08/a-new-kind-of-hotel.html     ) . In our food too,  given low food hygiene standards in India , we obviously would tend to try to go to as upscale a place as possible to be safe, and give the local mom-and-pop shops a miss. 

So it can be a challenge. But I think with a little thought and with crowdsourcing of ideas, we could come up with quite a lot of good ways to support the local economy as much as we can when travelling.  Here's some to start with:

1.) Homestay and hostels: These are quite interesting staying options until my "new kind of hotel" becomes a reality. The negatives of bad hotels don't seem to apply to a large extent to households in India. So the idea of homestays ( where you stay at someone's home, not a hotel) might work out quite well, though its still in its infancy now. Youth hostels tend to be decently maintained and run and are another option. So are hotels run by the tourism department, though the quality of these varies widely in practice. 

2.) Buying the local traditional arts and crafts: This is a no-brainer and something most of us love to do anyway. The more research we do before going on a trip, the better in this regard. For example, to find producers who give their workers a decent wage and to find genuine products rather than cheap ripoffs. 

3.) Hire a good tour guide please, when you go to a historical monument or area. This is an excellent way to contribute, while enhancing your own experience of the area

3.) Another idea, not for the faint-hearted, would be to give a fraction of the money you spend on your trip to an NGO or other deserving cause in the local area.  10% would be a nice starting point, and 50% would be pretty cool :-) 

In general, the longer you stay in the area and more you get to understand and appreciate the local people and culture, the better, it seems to me. Hurried in-and-out and weekend trips don't serve anyone very well, it seems to me 

I paid Rs350/- for this collection of nice geological specimens to a  random salesman on my recent trip to Aurangabad. Coral, quarts and agate he told me. I am quite happy about the purchase but I wonder how this thing works. How much time does it take to find these pieces, who does the search, whom does the money go to ?

Notes, References:

1. If you're going to Wayanad, staying at the Wayanad County resort directly contribute to the well-being of tribal workers at the associated plantation. Read the happy story:  
http://www.thebetterindia.com/66124/ias-officer-prasanth-nair-priyadarshini-tea-estate-tourism-hunger-malnutrition-tribal-people-wayanad/

Public art

While the classical vs. modern debate rages on, public art is one of the sites where it plays out in practice. Public art can be quite difficult to do well - you want to appeal to as wide a constituency of people, but serious art is often specialised and becomes inaccessible. 

Singapore seems to do quite well in doing good public art. Changi Airport always has something interesting going on. Below are three other pieces that I really liked:

This brilliant piece recently installed at the Lee Kuan Yew School of Public Policy. It uses just layers of wire mesh to create a likeness of the man.  The artist must have taken years to build up his competence in doing this

This clever installation at Gardens by the Bay gives the impression of figures that are hanging in the air

This quirky piece at a mall was done as part of some robotics demonstration. Screams 'Japanese aesthetic' to me

See http://despoki.blogspot.in/2016/01/many-thoughts-about-art-triggered-by.html for the previous post in the 'art' thread

A new kind of hotel - II

Just as I was posting  http://despoki.blogspot.in/2016/08/a-new-kind-of-hotel.html  , I ran into two nice illustrative examples. 

I stayed at the MSTDC resort/hotel outside the Ajanta caves, at a small town called Faradpur. The hotel almost perfectly captured what I was saying:

1.) Very clean

2.) Local flavour - the room decoration was excellent photos of Maharashtra tourist destinations. So nice decoration while also advertising their stuff 

3.) Beautiful high ceilings 

4.) Pretty decent furniture , mostly wood 

5.) Large clean bathroom, not fancy 

I really enjoyed staying at this place and paid about 1200/- (off peak, without bargaining).

I also stayed at a very nice modern hotel in Sholapur in Maharashtra. It was very new and everything looked fine, but my theory is that it will stop looking quite so fine very quickly. For example they had this nice luxurious bedspread 

but it already had got stained with oil

So now they are stuck with an expensive asset that can't be repaired easily and that they are going to be loath to throw aways, so that is going to piss off every customer who stays in the room in perpetuity.  

Fundamentals of healthcare policy

Basically copied from Prof. M. Ramesh's excellent slides on the topic :

Health Care is a “private” good which markets can provide efficiently in a technical sense. Free competition among providers and insurers would ensure that prices are as low and quality as high as possible. Households would get the services they want and can afford and society would benefit from highest quality and lowest prices

Yet there are many features that make health care an atypical private good : 

Many public goods features

Information Asymmetries  

make estimation of quality, costs and benefits difficult

allow opportunity for supplier-induced demand

Moral hazard

Adverse selection by consumers, users and providers

Those least able to afford health care have the largest demand for it. 

Possibility of “catastrophic” health care expenses

Nearly impossible to save for all health care contingencies

As a result, market allocation of health care would lead to

Higher costs and prices

Poorer quality (except for the frills that consumers can see)

Inequity (because access related to income)

Technically, government can address the above failings :

Directly provide health care with public goods features

Pay for or provide the necessary health care to those who cannot afford it

Adopt measures to limit the market participants’ ability to exploit information advantage

Eg. Require transparency in pricing and outcomes

Regulate adverse selection

Adjust provider payment and financing mechanisms to reduce moral hazard

However, there are practical limitations to govt intervention:

Limited financial resources

Incomplete information on consumer and producer behaviour and the different medical options

Lack of analytical capacity to understand needs of the sector

Lack of administrative capacity to implement policy

Lack of political capacity to deal with conflicting demands of various stake-holders (Consumers, physicians, managers, insurers, healthy, etc )

Considering the potential and limitations of both markets and governments, an effective health care system requires health policy that employs extensive role for both to offset each others disadvantages

An optimal health care market is characterized by:

Competition among providers to attract. But competition over value rather than frills. 

Limitations on providers freedom to prescribe and charge, so that they do not take advantage of patients’ ignorance

Limitations on insurers’ freedom to select risk or set premium, so as to prevent cream skimming or passing on of costs to consumers or government

Limitations on consumers, so as to minimize moral hazard

Establish risk pooling to ensure redistribution of resources from more healthy and wealthy to less healthy and wealthy. 

Reduce out of pocket health expenditure 

Costs affordable to the society as a whole, rather than the govt. Considers TOTAL (and not public) health expenditures

A good health policy is one that sets out appropriate incentives :

Incentivize providers to improve quality while containing cost

Incentivize users to moderate consumption

Co-insurance or deductible (subject to a stop-loss)

Encourage users to use primary care facilities

Incentivize insurers to get better deal from providers on behalf of their members 

Instead of passing on costs to users or the government

Such an optimal health policy requires a strong governance structure characterized by

firm government stewardship

Functioning markets, where possible

A new kind of hotel

From travels in small town India I have had enough experience of hotels in the Rs 2000/- and below range. With a few exceptions the experience has been uniformly uninspiring. 

Things that make the travel experience less than fun include:

• the hotels are grimy and dirty 

• rooms have cheap plastic furniture that ages very fast and looks shabby 

• cobwebs

• walls always have stains, discolourations or yikes, cracks 

• power cuts 

• kitschy out-of-place decor if at all. A hotel I went to recently had a life-sized wooden sculpture of the famous Marilyn Monroe image.  

• yucky toilets - of course the thing that most spoils a hotel experience. Smelly, leaky taps, non-functional plumbing,   

• highly dubious bed linen and blankets 

• Restaurants if-present , have the deadening standard pan-india menu , you find in countless hotels countrywide. I call it the ‘panneer butter masala’ menu 

There is a deep and pervasive lack of interest in maintenance (and it runs much deeper in India than just hotels). I wonder why this is. Is it so expensive to keep a room clean and have everything work the way it should be ? 

The other ‘design pattern’ is the choice of building and furnishing material that ages rapidly or starts looking bad quickly and easily. Flooring material, Nilkamal chairs, wall paint 

I therefore propose a new kind of hotel. The design philosophy is: 

austere, spartan, impeccable, fanatic about cleanliness, local culture and aesthetics 

Have less stuff or less facilities, but keep whatever you have looking good and maintain it 

Have a breakthrough in bathroom quality. 

Figure out how to keep the walls clean - maybe use whitewash which is cheaper and repaint more frequently  

Start working with a whole new set of materials that do the job  without degrading in appearance and quality rapidly over time  

Figure out a new menu tapping into local expertise and local traditions 

I read the logic of Tata’s Ginger chain of hotels somewhere and they seem to be on these lines. And pilgrim spots like Tirumala tend to work on these lines of austere and functional. We can build on these and other experiences  

My report on GST (Goods and Services Tax)

As the nation celebrates the passage of the constitution amendment bill on GST in the Rajya Sabha, let me mention the report I did on GST as part of LKY coursework.

One point that is worth making in the current congratulatory mood is that there is still a long road ahead for operationalisation of the GST, multiple bill passings at Union and State level and IT infrastructure to put in place.

Link to my report: https://www.dropbox.com/s/pdiqpfihfptm6db/GSTAssignment.pdf?dl=0  

On traffic

It has been good coming back to India after a year's gap and looking at the same everyday things with fresh eyes. In particular, this time around, I am looking at things from the point of view of finding something for myself to do.

Today's observation in this regard: I dived into peak hour Bangalore traffic (Cowtown and Indirangar).  Looking at the traffic policeman : who could possibly be motivated to do this job well? You see hordes of people in their swanky A/C cars honking impatiently and you are there in terrible working conditions all day and supposed to make their lives better. Is it surprising that they do a lot of extortion ? Actually, it should be the other way around. We should be liberally tipping them whenever we get a chance, passing by. That would motivate them to stick around at their jobs and do as good a job as they could. This idea could be thought through and pursued more seriously. It is a kind of reverse bribery, but it seems appropriate for India. Its a way of distributing private sector wealth a little more equitably, resulting in better services, without compromising on ethics 

Bangkok musings

I like Bangkok (like millions of other tourists). I like it not because of its tourist attractions, I like its feel. I would like to live in Bangkok.The numbers and geography tell you that its a huge city, but it has a human scale and a middle-class feel. Weighed down by its infrastructure problems, it has a melancholy. It feels like an Indian city, but better-off: a cleaner, better-fed and sexier India. 

Streetside shop

Giant candles in shop

Street at night

One of the many temples - seen from the river cruise

The Rama-Something Bridge, seen from the river cruise

The Graceful Spires of Wat Pho