The Third Pillar: How Markets and the State Leave the Community Behind

by Raghuram G. Rajan

As a result of slowing growth in output per hour and the slowing growth of the labour force, US economic growth has been slowing steadily since the 1960s, from an average annual growth rate of 4.5 per cent in the 1960s, to about 3 per cent in the next three decades, to about 2 per cent in this century. While there has been a lot of debate about whether we are underplaying innovation and productivity by under-measuring growth – we don’t fully capture the quality of new cars or the safety of air travel, and we don’t put a monetary value on many of the services the internet provides us for free – the emerging consensus is that these effects are too small to account for the drop in productivity growth, and that the decline is real.26 Of course, nothing indicates it could not pick up again, and techno-optimists believe we will eventually see the fruits of the ICT revolution reflected in greater productivity growth, though probably not at postwar rates.

Growth rates trends

economies suffered both stagnant growth and high inflation – quickly termed stagflation. The reason was simple. Keynesian stimulus worked well when the problem was insufficient demand – cutting interest rates would make people spend more thus restoring growth. In the early 1970s, though, the problem was supply – the lack of competition was beginning to tell. In the immediate postwar decades, the reallocation of labour to more productive sectors, coupled with greater capital investment and more effective production techniques, had allowed supply to keep pace with strong demand. Now, inefficient management practices and overstaffing began to limit what could be supplied at a price people would pay. More demand stimulus under such conditions would just result in more inflation, not more growth. The misery index, the sum of the annual inflation rate and the unemployment rate, climbed across the developed world. It reached its highest level in the postwar United States under President Jimmy Carter. Taming inflation was now a political imperative. Carter appointed Paul Volcker as chairman of the Federal Reserve, and Volcker embarked on a no-holds- barred fight against inflation, raising the federal funds interest rate to 19.1 per cent in 1981, a level that had not been seen postwar (or since). That did the job, though the United States suffered a double-dip recession. As the United States brought inflation under control, central banks across the world made low and stable inflati...

Stagflation & misery index

The European integration project was running out of steam in the mid 1980s, and Mitterand’s government now transferred its energies to reviving it. Three important impediments to a unified European market were a plethora of rules and regulations that differed across countries, impediments to the movement of firms and labour across countries, and currency fluctuation. In a series of negotiated agreements, starting with the Single European Act in 1986, the Maastricht Treaty in 1991, and the Treaty of Amsterdam in 1997, much of Europe agreed to merge into a Union which would implement the four freedoms – the freedom of movement of goods, services, people, and capital across the borders of the signatories. They agreed to a common European citizenship, over and above national citizenship. In addition, a subset of the countries decided to adopt a common currency, the euro. The hope was that as barriers came down between countries, new sources of growth would emerge that would relieve the politicians of hard decisions. Moreover, as cross- border competition picked up, countries would reform, but they hoped in a more gentle way.

European integration project

In their rush to integrate, leaders were all too willing to suspend disbelief about one another’s behaviour. The Stability and Growth Pact was intended to make sure that no country became a charge on the others by overspending and running large fiscal deficits. The pact, however, imposed little fiscal discipline when truly needed. Some countries like Greece hid the true extent of their deficits before they entered. Moreover, there were sixty-eight violations of the terms of the pact before the Global Financial Crisis without any action being taken against the violators.29 Large countries like France, and yes, even Germany, ignored the rules imposed by the Stability and Growth Pact when it impinged on their policies. Without discipline on wages or fiscal deficits, the countries in the euro area had very different levels of inflation. The overspending southern periphery, not surprisingly, had higher inflation. Nevertheless, all countries had similar interest rates since they had one common central bank, and no one believed any country would default. Greek government bond rates approached German government bond rates. As we will see, differing inflation and common interest rates was a recipe for disaster because it made borrowing seem very cheap in the high-inflation periphery. Another source of potential friction was the free movement of people within the Union. With widely differing social protections, countries worried that those with stronger social protections would attr...

Why EU faced problems

At the same time, national policies were undercut in two immediate ways. First, the Union agreed that a country could not ban an imported product that conformed to quality and safety standards in the member country in which it was produced. For example, Germany could no longer keep out Belgian beer because it violated the Bavarian purity law of 1516 banning additives.30 Second, in order to expedite policy agreement as the membership of the Union expanded (and to prevent small countries from blackmailing the Union for extra funds, as had been the practice for some), the Union did away with vetoes for each country for many policies and went to majority rule. Countries now had to implement commonly agreed Union policies, even if they were against it. All this introduced a new form of inequality and resentment in the Union. Essentially, small countries had given up some of their sovereignty to the Union bureaucracy and to the powerful large countries that could influence Union policy. In summary, then, Europe bet more on integration, on a supranational Union with a common integrated market to deal with slowing growth. While the European Union harmonised rules and regulations, national governments still took major decisions. Europe was trying to have it both ways – enjoy a seamless common economy while retaining some degree of national political autonomy. It did not work well.

Europe (EU) was trying to have it both ways

To build the capabilities in their children that the market demands, people who have the incomes and the choice are tempted to move out of mixed or declining communities into communities of people like themselves. This is a phenomenon that can be seen in the United States, but it is also happening elsewhere. While the truly rich have always lived apart, the upper middle class has also been pushed to secede into their own enclaves. Even as job opportunities become more unequal, economic diversity within communities has fallen while diversity between communities has increased. This sorting of human capital across communities has increased the inequality in access to the capabilities necessary to compete in the market. Inequality, not just in economic outcomes but in opportunities, has therefore become an enormous problem. In the United States it shows up between residents of big cities or rich suburbs and small, economically devastated rural towns, between workers in big young successful service firms and small older struggling manufacturing ones, and between the top earners and the rest. The roots of this inequality lie not only in technological change, but also in the failure of the community and the state to balance and modulate markets.

Inequality economics

We often think about technological change assuming the aggregate amount of work is fixed, and therefore what is displaced by automation will increase unemployment. Economists sometimes refer to this as ‘the lump of labour’ fallacy – that there is only so much work to go around. To the extent that progress makes products cheaper, there could be more demand for them, and the overall quantum of human work can even increase. The new work will, however, be different. Of course, this means some kinds of workers will no longer be needed, at least in their old jobs – the afore-mentioned accountant, for example. Even so, as routine work gets automated, there is more demand for skilled people who can handle the nonroutine exception that is thrown up.5 In Ford’s time, mechanics who truly understood cars could set up repair shops, where they diagnosed and fixed the unique problems that each mass-produced Model T developed through wear and tear. Similarly, the accountant who can go beyond the routine can find employment at the tax-preparation agency or the tax-software firm to handle special-situation queries – for an additional fee. Since such accountants don’t really do routine work anymore, they need more capabilities and enthusiasm than the ordinary accountant, but may be better rewarded for it. Thus the direct effect of technological change,

Lump of labour fallacy

The data certainly are consistent with an increase in the number of jobs at both ends of the skill spectrum, and a decline in the middle. Both better-paid managerial, professional, and technical jobs and lower-paid service jobs have increased significantly in the United States as a share of jobs in the last three decades, even while middle-wage jobs have fallen.6 This polarisation of jobs, with low-pay/low-skill occupations and high-pay/high- skill occupations gaining at the expense of jobs in the middle is not just a US phenomenon. Studies find that in fifteen of sixteen European countries for which data are available, high-paying occupations expanded relative to middle-wage occupations in the 1990s and 2000s, and in all sixteen countries, low-paying occupations expanded relative to middle-wage occupations.

Top & bottom of the jobs are growing at fast rate

As communications and information technology improves, more and more service value chains will be subject to the same competitive scrutiny as manufacturing value chains. Providers will reexamine what can be outsourced and what ought to be retained. As economist Alan Blinder has argued, all impersonal services that can be delivered electronically at a distance, with little or no degradation in quality, are potentially vulnerable.16 What will be harder to replace are human creativity, customisation, and human empathy.

Human creativity, customization & empathy r irreplaceable by bots

Let us look at job losses in a developed country, specifically the United States, more carefully. Job losses can be a sign of a dynamic free enterprise economy, not necessarily evidence of an economy in decline. Around 40 per cent of all US workers were in agriculture at the beginning of the twentieth century, while only 2 per cent were thus occupied at the end of the century, but the 2 per cent produced significantly more than did the earlier 40 per cent. Similarly, with all the talk of the United States losing competitiveness, few realise that employment in US manufacturing peaked in 1944 at 39 per cent of the labour force and has been on a steady decline since then to 8.5 per cent of the labour force in 2017 (this probably overstates the decline since aspects of manufacturing ranging from product design to factory cleaning are now done by specialised outside firms and relabeled manufacturing-related services). Nevertheless, the share of real US GDP coming from manufacturing has not fallen in the last fifty years.

Job losses in agriculture & industrial production In developed nations

Perhaps more important than hard work and a good education, technological change helps explain the rise in inequality at the very top – it has created a ‘winner-take-most’ economy. When a farmer wants his fruit plucked, the more workers the better (until the orchard becomes overcrowded). Each worker contributes, no matter how unskilled and how many fruits he picks, and can be paid accordingly. On the other hand, if the farmer wants to listen to music, one good fiddler is far preferable to ten mediocre ones. Furthermore, for such activities, the larger the accessible market, the more the performer will get paid. As markets expand and become more integrated across the world, and communication becomes easier, the best singers and sportsmen can use myriad channels to reach households everywhere. While there is still some charm in watching a live performance by a moderately talented local artist in a small local theatre, more of the household budget increasingly goes to watching supremely talented international superstars. Sherwin Rosen, the Chicago economist who first analysed the growing superstar economy, noted that Elizabeth Billington, the star of the London Opera in the 1801 season, earned between £10,000 and £15,000.38 When adjusted for inflation, that would imply an income of between £680,000 to £1 million, or between $825,000 and $1.25 million today. In comparison, Forbes reports that Taylor Swift, the top-earning music diva, pulled in $170 million in 2016, while Adele...

Winner takes all phenomenon

Milton Friedman was characteristically bold in his answer to these questions: ‘There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.’40 Since profits are what go to shareholders, Friedman was saying management should maximise the value of the corporation’s shares, allowing each shareholder the maximum freedom to use her valuable shares to fund causes dear to her heart. Let her support the local football team in her neighbourhood or donate to the firefighters’ fund if she chooses to, Friedman insisted; after all, it is her money, earned from bearing risk. Friedman’s dictum had an ‘invisible hand’ aspect to it – by maximising the value of the only claim to the corporation that was not fixed, management would not just be maximising shareholder value but also the corporation’s value, and thus the corporation’s contribution to society. Fried-man firmly rejected any role for the corporation in helping the state do its job, for example, in containing inflation, or in undertaking charitable activities, especially if it impinged on its profitability. Friedman’s views had enormous influence, both in academia and outside. The notion that corporate social responsibility began and ended with the corporation maximising shareholder value was very clear and was consistent w...

Milton friedman's view on responsibility of corporations

Coupled with the finding that CEOs earned so little of the value they created for shareholders, Friedman’s arguments opened the way for boards to pay management enormous amounts of stock-based compensation. The rationale was that this would align management incentives with shareholders. In practice, this raised a number of concerns. There is no clear guidance on how much is enough. Usually, in a competitive market, a worker is paid on the basis of the value he adds. However, if a new CEO enhances the company’s share price by $10 billion more than would normally be expected, does she deserve to be paid the entire $10 billion? How much growth is because of the unique assets and workers the firm possesses, which the CEO only pointed in the right direction as opportunities came along? With no real guidance, corporate boards could engage in a compensation race, which they often did by asking their compensation committees to make sure their CEO was paid more than the industry average. As many did this, the industry average escalated. High CEO pay sent a strong signal to employees, and to society more generally, that money was the central measure of worth. To the extent that money could only be made by doing the right thing by society, Friedman’s dictum was beneficial. There were many other ways of making money, though. Most immediately, if corporate management could ‘manage’ their boards and their compensation committees, payouts could be enormous, and totally unrelated to long-...

Friedman's arguments were taken advantage of as well

corporations follow Friedman and focused solely on profits, they undermine the private sector’s ability to be a political force for social good. Friedman was right that a fair amount of corporate social responsibility substitutes for actions the state should take, and panders to the specific charitable interests of a firm’s top managers. This is not beneficial for the firm. Yet the firm exists in the community; if there is a local earthquake and the state is underprepared, the firm cannot keep its earthmoving equipment off the roads, regardless of whether it will ever get paid. More substantially, Friedman enjoined corporations to take the rules of the game as given, which meant they ought not to protest if a government turned authoritarian or despoiled the environment. Presumably, he believed nothing so drastic would happen in the United States. Yet, when an enormous source of independent power, the private sector, is passive, or worse, rendered suspect in the eyes of the community because its every action has to be in pursuit of corporate profits, there are fewer checks on the arbitrary power of the state. Clearly, corporations are not meant to be political organisations, and should not attempt to be so. Nevertheless, they ought to stand up and be counted when the fundamental tenets of society are at risk, for in the long run, this will affect everyone’s ability to make profits. An overly narrow focus on firm profit maximisation will ensure that when needed, many will be...

Corporations, community & state

The average US public firm today is three times larger, even after correcting for inflation, than it was two decades ago.47As a number of studies have shown, US industries are becoming more dominated by a few large firms today – they are becoming more concentrated, in econ- speak.48 For example, between 1982 and 2012, retail trade saw the share of the top four firms double from 15 per cent to 30 per cent. In the critical sector of information technology, media, and communications, the Economist magazine found the top four firms now accounted for nearly 50 per cent of the revenue.49

Concentration of revenue in sectors

It is hard for researchers to tell monopoly power from efficiency since an increase in a company’s revenues for a given amount of input costs could be because the company has raised prices unduly or because it produces more, higher-quality output at the same costs. The former is a sign of monopoly, the latter a sign of productivity. At this point, it is fair to say that a mix of higher productivity and monopoly power is responsible for the higher profitability of industries that are dominated by large firms, with the importance of each explanation varying by industry.55 Health care in the United States has more monopoly and less productivity, while consumer products are the reverse. Regardless, as industry sales concentrate in a small number of firms – dubbed ‘superstar firms’ – a substantial portion of the rise in inequality of worker incomes that we discussed earlier seems to be largely because highly paid workers work at firms that pay their average worker better:

Monopoly versus efficiency for superstar firms

However, once a firm comes to dominate an area after an initial flurry of competition, for example because consumers find it hard to switch away from it because it has their data, the market may come to believe in its continuing dominance. This could make the monopoly self-fulfilling, as Luigi Zingales and I argue.57 In part, this is because the stock market will bid the firm’s share price to stratospheric levels in view of its expected monopoly profits. The firm’s high-priced shares will then give it the currency to buy up any threatening competitors, way before they get to a size where an acquisition might raise antitrust concerns. Indeed, in the pharmaceutical industry, firms even undertake ‘killer’ acquisitions whereby they acquire targets only to shut down promising drug projects that would compete with their existing drugs.58 If the competitor is stubborn enough not to sell out, the dominant firm could threaten a prolonged price war or blatantly mimic the competitor’s product, secure in the knowledge that it has the resources to afford a lengthy court battle over intellectual property. Independent innovators will consequently have a lower incentive to innovate, knowing that their access to the customer is blocked by the dominant firm, and knowing they will eventually have their product replicated or be forced to sell out to it at a discounted price. Indeed, venture capitalists refuse to fund start-ups whose projects lie within a ‘kill-zone’ that can be replicated or ...

Killer aquisitions in pharma using their superstar stock price

Neither traditionally disadvantaged communities like the minorities, concentrated in city ghettos, nor newly disadvantaged workers from the majority community in semirural areas, have been able to take advantage of the liberalised economy. Indeed, across the developed world, as we will see in the next chapter, an elite upper-middle class looked to its own interests while abandoning the economically mixed community. From leading the fight against vested interests, the upper middle class became part of the vested interests. The unfettered market was now in ascendance, with an ideologically and fiscally constrained state and a weakened community offering limited check. The developed world had opened itself to the risk of radical populism once again.

Upper middle class joined the vested interest

At the risk of caricature, left-wing populists tend to see everyone other than the dominant elite as the oppressed. Their aim is not to overturn the system, but to get a greater share of the benefits for the masses. They do not seek revolution, only a reorientation of the system, with the government typically doing more and the market less. A left-wing populist leader like Bernie Sanders, who ran for the Democratic Party nomination in the 2016, saw free trade as hurting the American people. He wanted less of it. He also campaigned for universal health care and free public college education, and for more humane treatment of immigrants. Left-wing populists do not distinguish among people in the country; they typically want a better deal for all the oppressed. Right-wing populists, on the other hand, are more discriminating in the objects of their ire. For instance, in the United States, right-wing populists do not necessarily target the very rich such as wealthy businesspeople.1 Instead, they reserve their anger for the administrative, professional, and intellectual elites, the upper middle class, whom they believe have tailored public policy to favour themselves as well as their favourites – women, minorities, and immigrants – and elevated these above the native- born non-Hispanic white male. There is both an ethnic and a nationalist component in these views.

Left wing va right wing populism

Why does location matter so much in this age of technological wizardry? Can’t people in communities that lose jobs simply telecommute? After all, isn’t one element of the technological revolution the increasing ability to work at a distance? My daughter seems to accomplish everything she can do in her office, even while staying a continent away from it. As another example, Mitchell Petersen and I found that the average distance between a small-business owner in the United States and the bank branch she borrowed from had been increasing steadily since the 1970s, and recent work has confirmed that this pattern continues.8 The reason obviously is that banking transactions went from being conducted in person, to being conducted on the phone, then online, reducing the need to be nearby. Somewhat paradoxically, though, despite being able to work at a distance, more and more skilled people seem to be attracted to places where there already are plenty of skilled people.9 Perhaps this is because serendipitous human interaction still matters. Today, it is rarely the lone inventor, beavering away in his basement, who comes up with the revolutionary break-through. Instead, innovation emerges from teams of productive people spurring one another on. Perhaps they need to be in the same room to generate ideas. Perhaps teams are cross-fertilised by other competing teams of smart people nearby, through meetings in bars and parties, or by simply poaching their members. That the whole is grea...

Why does location matter so much even now

While earlier, doctors married their nurses and managers their assistants, now professors marry professors (as I did) and consultants marry consultants. These couples entered into marriage carefully, and sometimes hesitantly, but they had the dual incomes to take the economic stress and uncertainty out of daily life and make marriage work. Often, they planned children carefully. Importantly, they had the ability and desire to invest in them, thus maintaining the hope of progress for the next generation.

Concept of marriages has also evolved

The famous Stanford marshmallow test and follow-up studies suggest that professional families give their children more than just learning – they give them trust and self-control. In the early 1960s, Walter Mischel and his graduate students gave little children from Stanford University’s Bing Nursery School the choice between eating a marshmallow immediately, or waiting and getting a second marshmallow after fifteen minutes or so if they could hold out. Videos of the torments children go through as they stare at the marshmallow have been an enormous source of entertainment for adults, but Mischel found something more. Those who held out typically did better later in life, with higher SAT scores, less likelihood of substance abuse, and lower body mass index thirty years after the test.14 A later study at the University of Rochester qualified Mischel’s findings.15 Those researchers conjectured that for children in crowded homes, surrounded by predatory older children and with no adults around, the ‘only guaranteed treats are the ones you have already swallowed’. In contrast, in a stable home where parents promise and deliver on treats, promises may be more credible, and children more willing to wait. To test this, the researchers divided children into two groups, one set to whom a researcher defaulted on a promise to give stickers, and the other to whom the researcher delivered on the promise. When these two groups were subjected to the marshmallow test, the group which obtai...

Drilldown of walter michel marshmallow experiment

The study tried to understand how well children were learning, attempting to identify factors such as funding, teachers, fellow students, or family that influence educational outcomes. The conventional wisdom emphasised the criticality of a school’s physical facilities and its funding. These were not unimportant, Coleman found, but far more influential in contributing to learning were the school’s student body diversity as well as a student’s home life. Coleman argued that children, especially from poorer backgrounds, performed better if the school brought together students from very different social and economic backgrounds, for a student’s learning was a ‘function more of the characteristics of his classmates than those of the teacher’. As important as what happened in school was what happened at home, where the family’s educational background was the most important factor in bolstering what was taught in school. Both James Coleman and James Heckman emphasize the importance of family education and environment for a child’s subsequent learning. Smart, well-educated parents will likely give their children the necessary head start and continuing support that researchers believe is important for learning. Furthermore, Coleman’s work suggests that the better the caliber of other students in school, the better an entering student’s learning experience. So keeping other things constant, the more that other children in the school come from homes with smart, well-educated parents...

Peers at school & home affect outcome

none of this sorting would happen if the less-well-off could follow the better-off into their enclaves. There would be no escaping the mixed, integrated community. In the United States, the price of housing, maintained at a high level by zoning laws that effectively limit the construction of low-income housing, keeps the unwanted lower classes out of a higher-class neighbourhood or out of a desirable city. Conversely, in declining communities hit by trade, we have seen that the better-educated management workers move out, accelerating the decline in the remaining community. The net effect of all this is that in an economy that increasingly requires workers with stronger capabilities, access to acquiring capabilities has become highly unequal, with the children of those who already have strong capabilities more likely to secure them, and the children of those with modest capabilities unlikely to have much hope for their children. The market has subverted the community’s role in providing equal access by creating unequal communities. We have moved toward a hereditary meritocracy.

Hereditary meritocracy

A reduction in job opportunities for men tends, therefore, to increase the percentage of unmarried mothers, as well as of children living in single-parent households. Interestingly, while Wilson offered this explanation for the social breakdown of poor black urban communities starting in the 1970s, recent studies document a similar social breakdown in the largely white semirural communities that we discussed in the last chapter.24 Once again, albeit with a gap of a quarter of a century or so, the reason seems to be economic, as manufacturing jobs have disappeared because of trade and automation.25 Without stable families, communities are greatly weakened. Too many men, without the anchor of family and responsibility, have turned to substance abuse and crime, resulting in an early hopeless death, both in the black community that Wilson analysed, and in white semirural communities today.

Joblessness & its affects on community

In Europe, the move toward a common Euro currency allowed all countries to benefit from the low common nominal Euro interest rate. It was low because everyone trusted the inflation-averse European Central Bank to keep overall inflation low. Yet, in countries at the periphery that had historically not maintained a tight control over inflation, inflation was still high. This further reduced the effective cost of borrowing in those countries, for borrowers had inflated revenues to repay cheap Euro borrowing. Having endured the discipline (or cooked the books) to meet the entry requirements into the Euro, a number of countries abandoned caution as they found they could now borrow easily and cheaply. In Greece, the government splurged, expanding both government spending and government jobs.39 Not all European countries that got into trouble relied on government borrowing and spending. In Spain, a combination of a private-construction boom fuelled by easy credit and spending by local governments created jobs. In Ireland, it was primarily a bank-lending-fuelled housing bubble that did the trick. Regardless,

Making of euro crisis

These are dangerous times. If people have lost faith in their ability to compete in markets, if their communities continue to decline, if they feel that the elite have appropriated all opportunities for themselves, both by monopolising the markets and by monopolizing access to capability building, popular resentment can turn to rage. Democracy requires equal access, and when access is unequal, democracy reacts. More populist radicals will be elected. Of course, if these radical populist movements push for reforms that include rather than exclude, that tackle the cronyism and the usurpation of opportunity by the elite – as did the Populist and Progressive movements in the nineteenth-century United States – they would be very healthy correctives for restoring the balance. More likely on offer are populist nationalist movements led by charismatic leaders who seek to exclude rather than include, and thus tend to skew rather than restore the balance. While the populist nationalist does not offer lasting solutions, she still has the power to damage. Institutionalised checks and balances may contain new Napoleons for a while. Yet rare is the institution that can stand up to popular will for a sustained period of time, without support from other sources of power. A key element of the populist nationalist’s agenda is to undermine those sources. Authoritarian crony capitalistic states, hostile to the ties between nations that come from trade and the flows of people and capital, host...

Dangerous times

The Communist Party took over China after the Second World War. At about the same time, India became democratic and independent from the British Empire. In India, every government has to fight periodically for a renewed mandate, which has meant that the government is more constrained in its actions, not just by the power of democratic protest and numerous civil society organisations, but also by institutions like the judiciary and the opposition. Critics like Lee Kuan Yew, the creator of modern Singapore, have argued that poor countries cannot afford democracy. Indeed, in the race between China and India for growth, it would seem that authoritarian China beats democratic India hands down. Simple extrapolation then suggests India should never be spoken of in the same breath as China; China has an economy as well as a per capita income (since the two countries have about the same population) that is nearly five times as large as India’s at market exchange rates. Yet, there are more similarities between the two countries’ growth paths than we allow for. Both China and India were government-dominated systems with weak markets at the beginning of their respective reforms. China’s government, under the centralised control of the Communist Party, was more able to execute, while India’s markets and private sector were a little stronger at the outset. The initial liberalisations, prompted by the end of Maoism in China and a financial crisis in India, greased by corruption since bot...

China's growth is institutionl vs india's household story

death of Hu Yaobang, a leading reformer who had been forced to resign for being too liberal, was the trigger for protests in Tiananmen Square in Beijing in the spring of 1989, where unhappy workers joined students. For a while, it seemed that the protesters might force the party to back down. Students of the Central Academy of Fine Arts erected a statue of the Goddess of Democracy in the square, facing the huge official poster of Mao Zedong. Yet, when Deng was faced with a choice between political liberalisation and continued Communist Party control, the man who had been purged twice chose the party. The army was called in, and on a bloody June 4, 1989, cleared out the square. Many students, workers, and their supporters died in and around the square. A tank pushed over the Goddess of Democracy, and it was soon reduced to rubble. Key protest leaders were arrested, the worker leaders were tried and some executed, while the better-connected student leaders got jail terms. The liberals in the party such as the general secretary, Zhao Ziyang, were purged and hardliners gained influence. There was no longer any question of distancing the party from the government. The party would govern.

Tiananme square and bloody june

As China moves to the frontier of innovation, its businesses will have to make more mistakes. It will also have to close more of its old smokestack industries. The strength of markets is their ability to deal with mistakes and failure. The desire of the party to stay in control could undermine that strength. THE STATE, MARKETS, AND DEMOCRACY IN CHINA Democracy, as we will see in India’s case, makes it harder for the state to act in some cases. However, it also makes inaction easier. The party in power does not have to take responsibility for everything, and it does not have to maintain a pretense of infallibility since it derives its legitimacy from elections, not perfection. That allows it to deal better with market ups and downs. Certainly, democratic governments also intervene in markets, but every market crash is not a referendum on the government. Democracy therefore creates a separation between the state and markets in yet another way than the one we saw in the Populist and Progressive movements. It allows the state to be more decoupled from markets, and allows each, then, to function better without any cross-linkages undermining their functions. All this assumes that China will continue to have enlightened meritocratic leadership that enjoys the broad support of its people. In the absence of elections, the people have to rely on the internal processes within the party to produce the right candidates. There are important reasons to worry that the internal processes a...

Cost of non democracy in china

Apart from structures that promoted collective leadership, one tradition was a limit of two five-year terms for the national president. A second was that the current president’s successor would be determined in the middle of his term so that the succession would be smooth. Both traditions have been abandoned recently, corroborating the point that without sources of power in the country that are independent of the state, such norms are unlikely to constrain a determined leader. The party seems to be moving toward more control and centralisation. A Communist Party memo in 2013 entitled Document No. 9 warns about the perils from Western constitutional democracy, a free press, and other ‘universal values’ as ideas meant to undermine and even break up China.20 In a related vein, China’s ‘Great Firewall’ prevents radical ideas from the internet from seeping into the country, while China’s large internet platforms have to share their data with the government. China’s proposed ‘social credit system’ intends to combine all the data on a person through artificial intelligence to produce a score for each Chinese citizen, which will determine their access to private and social services. Whether political and social activity will be taken into account remains a source of worry. With facial recognition software, and ubiquitous cameras, there may indeed be no privacy for the citizen from the state, as well as no freedom from it. Hopefully, China’s commitment to economic growth will keep ...

China's centralised state & innovation

India got stuck at a per capita real growth rate of about 1 per cent – dubbed the ‘Hindu’ rate of growth. The private sector was inefficient and hugely indebted to the government for protection. Cronyism was rife – the state and markets coalesced into one. Did democracy not make a difference? Unfortunately not! India held elections every five years or so, but this did not mean that democracy gave a significant voice to the people. The Congress Party had led the fight for independence and people trusted it for a while, so the party dominated elections in most states. The lack of competition proved problematic. As Congress Party affiliation, rather than local policies, seemed to be more important to winning elections, decision making became more centralised. Indira Gandhi, the prime minister who probably arouses the most varied emotions among Indians, both positive and negative, appointed her chief ministers with a greater emphasis on their personal loyalty to her than on their competence or integrity. Strong independent regional politicians left the Congress Party for the political wilderness, while party positions were filled with sycophants. With the delivery of public services in India abysmal because of India’s ineffective state, patronage politics and public apathy that we encountered earlier in the book dominated. By the early 1970s, much of the wealth in the economy was either in the state sector, controlled by it (many banks were nationalised in 1969), or held by pl...

Drilldown of hindu growth rate

in March 1991, which started the process of dismantling the whole License Permit Raj system, Dr. Manmohan Singh said, ‘Let the whole world hear it loud and clear. India is now wide awake.’ His comment was a play on Jawaharlal Nehru’s speech on India’s gaining political independence, when Nehru said, ‘At the midnight hour, while the world sleeps, India will awake to life and freedom. . . .’ Essentially, Dr. Singh heralded India’s economic independence, as it threw off the economic shackles it had imposed on its own people.

91 Manmohn singh creates history

Perhaps an anecdote will make the point: When I worked for a while at the Indian Finance Ministry as the chief economic adviser, I was shocked by the heavy paper files that came across my desk – shocked first that we still used paper files in the twenty-first century, and second at the amount of back papers I had to read to understand the note tagged on to the front of each file that required my comments and signature. Once I commented and signed, of course, my comments would become required reading for the next recipient of the file. As I complained about this to a veteran bureaucrat, he gave me a simple solution backed by impeccable logic and experience: ‘Spend the least time on the thickest files. They are issues going nowhere, which circulate back and forth across desks, with everyone wasting each other’s time by adding yet more comments. That is why they are so thick. Devote all your time to the thin files. Those are fresh issues where a cogent opinion may actually make things happen.’ He was right but there is a broader message here. India needs to drop the thick files, and focus more on the thin files. The state can do more by trying to do less.

India runs on thick paper files

It could also focus some of its limited state capacity on establishing clean property rights in land, thereby easing ownership and sale, while giving up other activities it does less well, such as running an airline or bank. If it does this, India has plenty of easy catch-up growth still ahead of it, building roads, ports, railways, airports, and housing. Moreover, if it continues improving the education of its youth – and the quality of their learning needs to be the focus going forward – it will have the low-cost labour and the infrastructure to establish a larger presence in manufacturing, to add to its capabilities in services. Given the right reforms, India can still grow strongly for a long while.

Indian state needs to priortize

Leaders have an alternative to moving toward a liberal open- access society. And that is to exploit the populist nationalistic fervor that is latent in every society, especially as economic fears grow and disenchantment with the corrupt traditional elite increases. Both China and India have large numbers of people who have left their village community, and have moved to cities in search of work. These large young migrant populations, both tantalised and shocked by city life, and yet to be integrated into solid new communities, are ideal raw material for the populist nationalists’ vision of a cohesive national community. They become especially malleable in times of slow job growth, as they see the incredible opportunities that the better-educated upper-class elite obtain. Rural village communities are also not immune to modernisation. They too are intrigued and simultaneously repelled by the images they see on television of the lifestyles of the liberal urban rich. In India, the Hindu nationalist movement tries to tap into such people’s desire to anchor themselves in tradition. It also attempts to focus them on grievances that will shape them into a committed following. It exploits the sense among the majority Hindu population that they have bent over backward to appease minorities, especially Muslims.

Migration of ppl from rural villages to cities in india & china

When many countries engage in nostalgic nationalism, each pining for an era when they were strong, international relations become a zero sum game, and cooperative international action an impossibility. As countries assert a muscular nationalism, nations come closer to conflict. For this reason, the natural offset to an expansion in the market cannot be an expansion in the powers of the state, it has to be more a strengthening of the community through local empowerment. The centripetal forces within the local community have to be enlisted to offset the centrifugal forces of the global market.

Centripetal forces from local community vs centrifugal forces from international community

markets are based on destroying identity, on making everything commodity-like and transactional, while the community does exactly the opposite. They argue that markets and community can never be compatible. Yet although we have seen the tension between markets and the community repeatedly in this book, they do coexist. We trade anonymously in the market but then go home to volunteer for the school annual day festivities. We have multiple identities, as Amartya Sen emphasises – trader during the day and deacon in the community church in the evening. Moreover, technology gives us the means to create more identity in the market, while giving us new ways of binding the community better together. Without minimising the difficulty of our task, let us take hope from seeing that we undertake it in a different world than worlds past.

Anonymkus markets vs local commuty identityh

As nations get wealthier, women have fewer children, and have them later. Wealthy populations are, therefore, aging. As the population ages, the labour force shrinks, and fewer and fewer workers support more and more retirees. Forty countries now have shrinking working-age populations, including China, Japan, and Russia.2 Fear naturally sets in as middle-aged citizens wonder who will pay for their retirement. Japan is in the forefront of population aging, with its working-age population falling at 1 per cent per year, and nearly four hundred schools shutting every year.3 Thus far, it has adapted in two ways. Its workers are staying in the workforce longer, beyond the normal retirement age, and women are working outside the home at a greater rate. At some point, these additional sources of labour will reach their limits. Recognising this, Japan also plans to automate more, using robots to substitute for the lack of workers. For example, Pepper, a big-eyed humanoid robot made by SoftBank, can lead exercise activities for a group of the elderly, talk to lonely patients in nursing homes, and patrol corridors at night. There is another solution, though: allow more immigration. After all, humans are still considerably more flexible than robots in accomplishing a variety of tasks. Immigrants have children who can add to the shrinking labour force and stabilise it, well before the burdens of supporting the elderly become impossible. They also spend their wages on consumption, some...

Machines versus humans

the benefits of immigration are highest when a country can allow entry selectively to the kind of immigrants it needs. Countries like Canada, protected by oceans and distance from poorer countries, have the ability to be selective, and typically welcome immigrants. A country has no ability to be selective if a large fraction of immigration is undocumented or when it faces a huge wave of refugees. Following years of drought in Sub-Saharan Africa, farm workers and their families in recent years have braved stormy seas in rickety overcrowded boats as they look for refuge in Europe. Many have died on this perilous journey. Such immigration raises legal, moral, and humanitarian issues, not just economic ones, for pushing the starving, the fearful, or the persecuted back at the borders is simply inhumane. It may also create a wider security problem if stateless youth, with little to lose, take up arms and vent their anger against the unsympathetic world. And in these volatile times, today’s reluctant host could be tomorrow’s refugee. One of the most hospitable countries currently to Venezuelan refugees fleeing a venal incompetent regime is Colombia, which remembers how Venezuela took in Colombians when they were fleeing violence.

Today's host can be tomorrow's migrants

An interesting historical study by Luigi Zingales and others highlights the long-term benefits of localism.2 They find that Italian cities that achieved self-government in the Middle Ages have higher levels of social capital today – as measured by more nonprofit organisations per capita, the presence of an organ bank (indicating a willingness to donate) and fewer children caught cheating on national exams. They conclude that self-governance instilled a culture that allowed citizens to be confident in their ability to do what was needed and to reach goals. Decentralising powers to communities may thus reduce apathy and force their members to assume responsibility for their destinies rather than blaming a distant elitist administration.

Study on italian cities that had local govts

Different communities will have different views on business – for example, the kind of business they want operating in their communities. Some will want big-box retailers like Carrefour or Walmart, while others will prefer small local main- street grocers and shops, even if they cost more. Communities should have the power to determine the nature of local production (such as the production of retail services through big-box or small mom-and-pop stores), provided they do not directly impede domestic trade in goods and services. Local business will attempt to influence decisions on which kind of businesses can locate in the community, and they will do so keeping in mind their profits. Yet there will be two checks on these influences being excessive. First, so long as local residents can travel outside the community to patronise businesses elsewhere, and so long as they can order goods and services from around the country, the extent of profit local businesses can make will be limited by locals’ preference for convenience and timeliness. Second, the democratic decisions of the community will trade off the desire to help local businesses and preserve local ambience and jobs against the higher costs of goods and services. If the latter become excessive, the community can always allow more competition. So long, therefore, as there is no explicit barrier such as a tariff wall set around the community, the community should be allowed to determine business zoning decisions.

Big box vs mon n pop retail

With connectivity, a whole variety of economic activities becomes possible. For instance, with broadband connectivity, and with the support of logistics firms to transport goods quickly, small handicraft makers in remote rural areas can advertise their wares on e-commerce platforms, thus reaching a global market. Retired schoolteachers can remain engaged by tutoring children in the community without leaving home, music teachers can have pupils around the world, while angel investors from elsewhere can mentor local entrepreneurs. The death of distance makes so much more possible in remote communities. Connection to the national market also ensures communities are connected with one another.

Connectivity & e commerce

The United States needs to do better in providing all its citizens fast access to the information highway, for many of the solutions to community revival lie there. Indeed, allowing communities, rather than large private companies with distant headquarters, to take responsibility for some of the local connectivity infrastructure may solve two problems – it prevents the community from being at the mercy of a monopoly private provider, and it draws some economic activity and responsibility into the community. Similar approaches could be tried for other infrastructure. For instance, as decentralised solar or wind power becomes cheaper, more remote communities could manage it, relying on the grid only for balancing power.

Decentralksed grids of power or internet

For instance, an app called SeeClickFix allows community residents to report potholes, broken streetlights, abandoned vehicles, building violations and other civic complaints, using their GPS location to pinpoint where the problem is.8 The community webpage then displays the complaint for all to see, and reports when the local government actually fixes it. Citizens who lodge the most genuine problems can be acknowledged on the app, and even awarded prizes by the community. Apps like this allow local government to get to know of problems more quickly, involve the community, and make the performance of the local government more transparent to all. Even as I write, three open complaints have been closed in the City of Chicago SeeClickFix website. City officials could not find a car that was reported abandoned (perhaps not surprising because the officials arrived a month after the report was filed) and two instances of graffiti were removed (within a couple of days of the reports).

Seeclickfix app

In India, the I Paid A Bribe website encourages people to report situations where they had to pay a bribe, situations where they refused to pay a bribe, as well as recognise honest officers who did not ask for bribes (in some government offices, meeting someone who does not ask for a bribe is surprising enough to be commented upon).9 The website started by community activist Swati Ramanathan also produces reports on areas and communities that are most prone to corruption, and has a network of retired senior government officials who help publicise and rectify the problems the website has uncovered from its analysis of citizen reports.

I paid a bribe website

is easy to get overwhelmed by the prospects of technological change. Many jobs will indeed be automated, but which ones will they be? Experts believe there will continue to be a role for human empathy, flexibility, and creativity and that human combined with machine will probably beat human or machine alone.11 The average human therefore requires the skills to be able to complement the machine. Computers can read out loud, take dictation, spell-check, and do any mathematical calculation we ask them to perform, but we are still needed for them to communicate, stringing words into sentences, sentences into paragraphs, and paragraphs into an informative or persuasive message. Similarly, humans are needed to break down a problem into specific steps that our computers can perform. All this requires the human to have basic skills such as reading, writing, and arithmetic. Yet, even in developed countries, basic skills are not taught well to all students in schools today, so too many have no capacity to complement machines. The ICT revolution does require some to learn far more so that they have the additional skills to come up with breakthrough new ideas, processes, and programmes that the rest of us will use. There will be a premium to higher education. All too often, though, we are looking for higher education for everyone – a recipe for failure. Instead, in this environment, schools should prepare students with a solid understanding of the basics so that they have the flexibil...

Most ppl are only required to have basic education with a few for advance

The key resource in class is the teacher, and the key constraint is student time and attention. Rather than sitting passively in class, listening to the teacher lecture, the student could do that at home, perhaps even listening to nationwide star teachers assigned by the curriculum. By preparing for class at home (or in study hours at school if the students’ home environment is too disturbing), students can replay digital content as many times as they need to absorb difficult sections – new face-tracking technologies can also indicate to the teacher whether videos have been watched. Each student can learn at their own pace. The platform can assess their understanding regularly, and offer supplementary material either to challenge them or to remedy deficiencies. Individualised adaptive teaching is thus easy with well-designed platforms, sparing the teacher the quandary of whom to teach to. Class time is freed for the teacher to motivate students with interesting projects, help students as they go over assignment problems individually or in groups, and go over any issues the students find particularly difficult. Students will learn in class from one another and the teacher, and in the process fill in the gaps in their understanding. Since the teacher works closely with the students, she gets to know who is falling behind, if she does not already from automated assessments. The teacher’s role changes from lecturer to coach and designer, who combines the triad of human, machin...

New classroom paradigm

So do some governments; as part of its Skills Future programme, Singapore gives every citizen above the age of twenty-five an annual S$500 credit that can be used to pay for training courses provided by any of list of approved providers. The intent is to get citizens into the habit of lifelong learning.

Singapore lifelong learning program

We should not overvalue the credentials produced by education, and should not prioritise work with the mind over work with the hands or with people. After all, who knows where technological progress will take us?

Never overvalue work with minds over work with hand or with people