Saturday, January 30, 2010

Two paths to good cities

There are two paths to nice cities: to take a messy old city and fix it, or to start from scratch.

The process of solving the problems of an old city is hard. Some cities started over owing to the destruction caused by war, an earthquake, or a great fire. We wouldn't wish that on any city. So there is going to be no opportunity to start over.

The other strategy consists of building new cities from scratch. This has traditionally been a troublesome problem. Cities like Chandigarh or Brasilia haven't worked out too well. The designers who dreamed up these cities did not understand the complexities of the genuine urban life.

I don't know if Bandra-Kurla Complex was intended to be an attempt at urban planning. But if it was, the designers surely knew nothing about what makes a financial centre. All they have there is a few towers housing large corporations. The entire ecosystem of finance - myriad small firms, service providers, even coffee shops - is missing.

There are people who think differently. There is increased confidence these days that it's possible to start from scratch and build good new cities. In India, the most important experiment of this nature is GIFT, which is near Ahmedabad/Gandhinagar. It will be interesting to see how this works out. Read Greg Lindsay's article in fastcompany.com on these radical ideas and opportunities.

Another experiment which is taking place in India, with the establishment of a new high-quality city, is Lavasa.

The real challenge is that of going beyond a first sensible urban plan and some sensible urban infrastructure. Once the machine is set in motion, how will it continue to work? It will inevitably run into problems of urban governance. How can we be sure that the problems of governance and elections, where Bombay has failed so badly, will not bedevil Lavasa?

Here again, there is a slow long path and there is an attempt at a short solution. The slow, long path is to undertake deeper reforms. The 73rd and 74th Amendments to the Indian Constitution began that process but a lot more needs to be done.

In China, the biggest cities (Beijing, Tianjin, Shanghai and Chongquing) have the status of provinces. This idea, of a direct-controlled municipality' is equivalent to cities like Bombay, Delhi, Calcutta, Madras, Bangalore being states who directly elect a state government and directly get Finance Commission funds from the central tax sharing. This would be a big step forward in improving urban governance in these giant cities.

In some countries, governance is so bad that such reforms are inconceivable. Some countries are just not able to figure out how to do urban governance. Paul Romer's 2nd big idea is: Would it help if a country like Sweden or Canada was given a 50-year lease on a 100 square kilometre block of land, where it would build a high quality city with first world urban governance? He calls this charter cities. I have a blog post which engages in an alternative history on such a theme.

Saturday, January 23, 2010

Obama's left turn

I wrote a column in Financial Express about Obama's left turn.
Also see:

Wednesday, January 20, 2010

A perennial debate rages in India, about the merits of the traditional family-run business versus the knowledge of the fancy-pants consultant or MBA. A remarkable paper by a group of economists sheds new light on this question. I wrote a column in Financial Express today titled Are Indian family businesses well run? where I describe these results and interpret them. Also see this column by Nirvikar Singh in Mint on the same subject.

Wednesday, January 13, 2010

The Internet changes everything: Research edition

An amazing story of Internet-scale collaboration to prove a theorem in mathematics.

Friday, January 08, 2010

How leftist is India?

I wrote a column in Financial Express today: How leftist is India?. This draws on the data shown in this previous blog post. I just noticed a piece in The Economist which dwells on related themes which is well worth reading.

Many people wrote me email about this piece. An important criticism of this evidence is that individuals parse questions differently across countries. In India, it's easy to construct questions such as: The government must setup more PSUs so as to give jobs to the people where it will seem that there is overwhelming support for a more socialist position. The main advantage of the Pew data is that they are doing it, across time, and across countries. More fine-grained measurement of political attitudes would surely be nice to have. But we don't yet have such household survey databases in India. The CMIE Consumer Pyramids is good data - but on politics they ask really only one question, that of the most favoured political party.

Thursday, January 07, 2010

Understanding the crisis

As the months are going by, we're slowly building a better picture of what went wrong and why. If you want to only spend two hours on figuring out the financial crisis, then listen to this interview with Charles Calomiris, and read this interview with Raghuram Rajan.

Tuesday, January 05, 2010

Six rules for building good universities

In recent years, an empirical literature has begun to prise apart the management process of universities, seeking to identify the features which cater to excellence. In a previous blog post I summarised five useful ingredients that enable successful universities, from a working paper by Philippe Aghion, Mathias Dewatripont, Caroline M. Hoxby, Andreu Mas-Colell and Andre Sapir:
1. No government approval required for budget; budget-making happens at the university and university alone.
2. Reduced government role in the core funding of the university.
3. High inequality of wages: two academics of the same seniority and rank should get different wages.
4. Full flexibility in recruitment of students.
5. A big role for competitive processes for gaining funding for research.
Today, on voxEU, I read an article by Amanda Goodall which identifies a sixth beneficial feature:

6. It helps if the university president has strong scientific accomplishments.

Sunday, January 03, 2010

Exchange rate regime of systemically important countries

Many people believe that the exchange rate regime (i.e. the monetary policy regime) of each country is its own sovereign choice.

In the Great Depression, we saw the harmful effects of the exchange rate mercantalism that is feasible with fiat money. This was a key motivation for Keynes and others in their design of the post-war order. The IMF was supposed to be a multilateral body that would help bring pressure on countries to move towards good sense through ruthless truth-telling'. This didn't work out too well. The IMF got itself into a box where it would not say anything about exchange rate regimes. To some extent, by standing ready to help countries that got into a currency crisis, it has helped perpetuate exchange rate pegging.

For the present discussion, I want to emphasise the distinction between small countries who can pretty much do as they like as opposed to systemically important countries where actions have a significant impact upon the world economy at large. In this approach, the four interesting questions are:
1.  In the selfish maximisation of one country at a time, what is the optimal choice of monetary policy regime / exchange rate regime?
2. What the mechanisms and empirical magnitudes through which the exchange rate regime choice of one country imposes externalities on others? I.e. what is the consequence of the Nash equilibrium?
3. What is an ideal solution for the world, which combines optimality for the local economy with good system outcomes?
4. What international institutional arrangements can help push the system towards the right solution?
On the first question, some people believe that exchange rate mercantalism is good for the country. You don't find much of this amongst professional economists.. As Merton Miller said: If devaluations could make a country rich, Argentina would be the richest country in the world.  For a careful rebuttal of this loose thinking, done by one of the world's top economists, see these discussant comments by Michael Woodford about a paper with this view by Dani Rodrik. As Andrew Rose said in a discussant comments at the Neemrana conference about a similar paper by Surjit Bhalla: This is either a home run or it's totally wrong.

I feel that exporting is great for growth, but only when this exporting involves genuinely facing the market test of the global market. If a country exports based on subsidies of some sort - which I term fake exports' -  then the gains in productivity and capability do not come about (link, link). My sense is that in China also, intellectuals no longer buy the distort everything for exports' idea. Also see Lorenzo Bini Smaghi on this.

As with every other export-subsidy or protectionist scheme, this has more takers amongst non-economists than amongst economists. It's slow hard work, banging these down over and over.

On the third question, I have a comment on global imbalances'. Some people see big numbers for current account surpluses/deficits as being intrinsically flawed. I look upon them as being the success of globalisation, as a repudiation of the Feldstein/Horioka problem. It is in an autarkic world that you see Feldstein/Horioka problems, where capital flows are not large. If we are to get beyond the Lucas paradox, and get back to the massive development' capital flows of the First Globalisation, it's going to require large sustained BOP surpluses in some countries and deficits in others.

As an example, the best deal for ageing OECD is to buy securities in young countries like India today, thus spurring their growth today. Over the next 50 years, these securities would yield a flow of widgets back and thus support consumption of their elderly.

Hence, I would say the question is: How can the world be made safe for large BOP surpluses/deficits? This is a more interesting and important problem, instead of saying to ourselves: How can the world eliminate large BOP surpluses/deficits.

Friday, January 01, 2010

On 5 October 2007, I had written a blog post Does urban India favour liberal economics?, where I had used survey data released by the Pew Institute, which measures attitudes of roughly 45,000 people worldwide with roughly 2,000 in India. Their sampling mechanism has an urban bias.

Today, I saw current information, and cross-country comparisons, on their website.

Support for the free market

The wording of the question was: Please tell me whether you completely agree, mostly agree, mostly disagree or completely disagree with the following statements: Most people are better off in a free market economy, even though some people are rich and some are poor. Agree' combines "completely agree" and "mostly agree" responses. Disagree' combines "mostly disagree" and "completely disagree."

The results, showing the proportion of those polled who Agree':

In 2002, India was halfway in the list with 62% support. In 2009, India is at the top of the list, with 81% support.

Support for international economic integration

The wording of the question was: What do you think about the growing trade and business ties between (survey country) and other countries - do you think it is a very good thing, somewhat good, somewhat bad or a very bad thing for our country?. Good Thing' combines "very good thing" and "somewhat good thing" responses. `Bad Thing' combines "somewhat bad thing" and "very bad thing."

The results:

Here also, India is now at the top of the list in terms of support for plugging into globalisation.

Why is this happening?

I think there are three factors at work.

First, everyone in India instinctively knows that when we tried our hand at socialism, GDP growth crashed, and vice versa:

 1950s 3.59 1960s 3.96 1970s 2.94 1980s 5.58 1990s 5.68 2000s 7.22

The worst of India's years -- 2.94% average GDP growth with a fast growing population -- were in the peak of Indira Gandhi's socialism of the 1970s. As India stepped away from that, things got better. This process began with the Janata Party in 1977, was carried forward by following governments, and yielded results from the early 1980s onwards.

These changes were big enough and rapid enough that they are as persuasive as a natural experiment. Comparing socialist India vs. unsocialist India is almost as persuasive as comparing East Germany vs. West Germany. So the ordinary citizen, who does not know the GDP data, knows in his bones that getting away from a big State made sense.

The second factor is that a random sample of India has a lot of young people in it, who are less influenced by our socialist baggage. When you look at the political leadership, bureaucracy, academics or media, the views of old people have a lot more importance in shaping positions and the external perception. Old people in India seem to have more socialism, autarky, and unconfidence. Opinion polls show an unfiltered picture of India as it is.

Here is some data, from the CMIE household survey database, about the age distribution of Left supporters:

The CMIE data, with a tiny share of the population which supports the Left, is consistent with data from election vote shares and the Pew data. All three information sources thus increase our confidence in the basic message.

In your mind's eye, you need to think that India is a young population, with a lot of people below 30, and declining cohort sizes beyond. So the early years in the graph are disproportionately important.

In the overall population, Left support stands at 5.36%. India's future is young and urban -- but these two regions are where the Left support is the weakest.

However, another hypothesis can be cited: Maybe it is the experiences of young people which convert some of them from being un-Left when young to being Left supporters in middle age. Maybe political attitudes are not stable through time; maybe the young of today will turn left when they reach their late 30s and early 40s. In coming years, as the data of this survey builds up, we'll be able to evaluate this hypothesis.

The third dimension is about the welfare state. India does not have a welfare state and is unlikely to build one.

Voters do not seem to want a large welfare state. Political scientists say that a homogeneous population is more likely to support population-wide welfare programs: Each voter intuitively feels that the benefits of the program go to people-like-him. In countries with heterogeneity along the lines of ethnicity, class, religion, etc., voters are less inclined to favour population-wide welfare programs, because the picture in their mind of a recipient of welfare is not a person-like-them.

The intellectuals are not pushing a welfare state. In Western Europe, in the 1930-1960 period, the best intellectuals pushed the welfare state as an antidote to the brutality of the communist or Nazi ideologies. That sort of problem has not been an issue in India, where support for communism seems to be ebbing away.

The implementation capability is weak. When politicians have tried to setup large systems -- SSA or NRHM or NREG come to mind -- the limited administrative capacity has come in the way.

The bottom line is that India has a small expenditure/GDP ratio, and there is no welfare state that is under stress. Elsewhere in the world, there is a conflict between retaining the welfare state vs. plugging into globalisation. The gains from international economic integration are weighed against the perpetuation of the welfare state. In India, that conflict of interest is absent: people only see the gains from globalisation.