Knowledge: why less is more

Guest Columns by Sauvik Chakraverti,

The Newindpress on Sunday, 2007-2008

Knowledge: why less is more

Before paying the education cess willingly, we Indians need to see how wealth is created in the market economy and how knowledge is used and developed therein. If we do so, we will discover that state education of this kind will actually harm the poor. They will waste our money, many years of their own lives, yet emerge with no useful knowledge. Instead of optimism, enthusiasm and economic independence, they will be left hopeless, ignorant and dependant.

Wealth is created in the market economy through specialisation. When there are tailors, carpenters, farmers, fishermen and so on, each produces a ‘marketable surplus’ for the consumption of others. These surpluses make society rich. A journalist like me, who only produces words, has a car, television, food, drink and clothes – my ‘wealth’ – because these are the surpluses of other specialised people.

What is often missed is that this process of specialisation, which political economist Adam Smith called the ‘division of labour’, is accompanied by a simultaneous ‘division of knowledge’. Each specialised economic actor, be he a dentist, journalist or restaurant chef, operates with his own specialised knowledge. This has important implications.

If we look at an isolated Robinson Crusoe, his need for knowledge is enormous. If he wants to eat fish, he must know how to catch it, gut it and cook it. He must know how to fell a tree, make planks, and build his house. He must look after his cow, feed it and milk it. He must know how to grow his own food. And so on. Thus, the more isolated one is, as with a villager, the greater the amount of knowledge each individual requires in order to survive.

The obverse also follows: the more specialised and integrated the exchange economy, the less the knowledge required of any individual. He just needs to know his own field of specialisation well. For everything else, he can happily rely on the knowledge of others. For example: a musician. If he is adept at his instrument, he has no need to learn anything else. If he wants a car, engineers build it for him, a chauffeur drives him around, and mechanics keep it in good repair. If he wants a grand house, architects design it for him, masons build it, and interior designers furnish it aesthetically. As far as he is concerned, he knows how to play one musical instrument well. About everything else, he is ‘rationally ignorant’. He needs to learn nothing else.

The most obvious implication of this ‘division of knowledge’ in the exchange economy of the free market is that the hugely diversified ‘generalised’ (and politicised) curriculum of Indian schools is actually harmful for the prospects of the young, and especially so if they are poor. Even the 3 R’s of reading, writing and arithmetic can be brought down to 2 R’s today, thanks to cheap electronic calculators. Thus, a kid who has no interest or talent in math need not study it at all – and yet survive pretty well.

Instead of general schooling from the state (with a free lunch thrown in with a biased history book: feeding bellies, poisoning minds), children need to learn specialised skills of their own choosing, with which they can flourish in the market. The government can never even know this vast array of possible skills, forget teaching them. The task can only be done by the market: indeed, this is how our software techies learnt their stuff. In the market, either through paid tuition or apprenticeship, a poor kid can learn anything he sets his heart upon. Rather than wasting 10-12 years on an ‘education’ of zero market relevance, children trained thus will be able to stand on their own feet at a very young age. This is crucial in a poor country, where life expectancy is low. As economist Sudha Shenoy says: ‘‘Where life ends early, it must begin early.’’

Second, free trade is an essential means to knowledge. If there had been free trade since 1947, our mechanics would have learnt much more about cars and motorcycles. Without free trade, but with state-sponsored IITs and IIMs, we Indians did not gain an iota of real, usable knowledge in our socialist heydays. For example: all the IITs and IIMs could not produce a good car. Thus, state education in a closed economy is a recipe for total disaster.

Third, a free market must be ‘free’ if all of societal knowledge is to be used. Poor people already possess lots of knowledge today that is denied entry into the market – from Mumbai’s dancing ladies to all the toddy tappers on our coasts. Poor people know exotic recipes that can help them flourish only if street-food explosions occur in our cities.

Children, especially those of the poor, need to be told that they do not need long, arduous and boring years in school. Rather, that they should select avenues in which they want to specialise and seek the knowledge relevant to those fields from the market. This will give them enthusiasm and optimism. The search for knowledge will not seem an enormously uphill task, driving many today to suicide. Further, they must be informed that specialisation is maximised in cities and towns, where the high population makes for a big market: you cannot be a taxi driver, plumber, Thai chef or musician in a sleepy village. They should see India’s future as urban: that Gandhi’s rural utopia of self-sufficient villages is actually economic suicide.

The state will never teach them these things: even in 12 years of school. State education will make them ignorant and dependant. They will never achieve their full human potential. Thus, as with everything else, so too for knowledge, we must turn to the benevolent market. The education cess must be strongly opposed.

(Sauvik Chakraverti is the author of Antidote: Essays Against the Socialist Indian State, and its sequel, Antidote 2: For Liberal Governance. He can be contacted at sauvik@epmltd.com)

A case for liberalism

Guest Columns by Sauvik Chakraverti,

The Newindpress on Sunday, 2007-2008

A case for liberalism

At a time when politicians are universally despised, allow me to recall one who is a towering inspiration, the greatest ever, who offers valuable lessons to our own morally and intellectually bankrupt netas.

Sir Robert ‘Bobby’ Peel (1788-1859) was the first liberal politician in the world. He stands tall in history for three unprecedented policy measures he undertook as Britain’s prime minister. First was free trade: by repealing the ‘Corn Laws’ that prohibited imports of wheat into Britain, he made bread cheap for the working classes. Thanks to Peel, Britain prospered through unilateral free trade, which continued right up to WWI.

Second, through his ‘Peel’s Act of 1844’, which forced the Bank of England to redeem its notes in gold, he attempted to usher in ‘sound money’.

Third, Peel took an important step towards a rule of law society by creating the first-ever police force in the world, the unarmed ‘Bobby’ of London (named after him), a loyal friend of the citizen and an unrelenting enemy of crime. These ideas – free trade, sound money and the rule of law – still remain central to the liberal agenda, and in Britain were espoused by every liberal statesman that followed Peel, from Gladstone to Thatcher.

What is remarkable about Peel – and in this he is radically different from the heirs of our Congress dynasty – is that he moved away from the Tory statism of his father. Sir Robert Peel the Elder had dedicated his first-born to politics hoping he would carry forth his ideas, which demanded a huge role for the state. But the young Robert developed into a classical liberal as a result of his own intellectual convictions. Historians credit his change of heart to his tutor at Oxford, Edward Copleston. Thus, while his father had supported war, he preferred trade; and while his father had supported the notion that government debt leads to national prosperity, he pruned the debt and upheld sound currency.

Classical liberal ideas did not remain isolated in Britain. They came to India through the Indian Civil Service. A detailed study by the late Professor Ambirajan has proved that the ICS was steeped in classical liberalism and made every sincere attempt to set up, in India, the minimalist state that liberalism prescribed. Thus, under the ICS, we had free trade, free enterprise, sound money (which Nehru inherited but destroyed) and basic law and order. The ICS intervened in setting up public works like roads and canals (as Adam Smith had prescribed) and never ever contemplated the sort of ‘maximalist state’ that independent India came to be burdened with, thanks to Nehru. The ICS did very few things, but did them well, and were therefore admired and respected. The socialist IAS attempted too many things and failed in all of them, hence they are the butt of ridicule today.

If the IAS needs an example of a truly liberal civil servant in our own times, the career of Sir John Cowptherwaite in colonial Hong Kong stands out proud and tall. He was sent to Hong Kong immediately after WWII, and the colony then was not only extremely poor, but swamped with refugees. The Labour (socialist) government back home had instructed him to use his powers to alleviate the sufferings of the poor, but he unilaterally decided to follow a policy best called ‘benign neglect’. In his memoirs he recalled that upon arrival in Hong Kong he found that ‘‘the poor were getting along quite well without me’’; this convinced him that all he needed to do, as the state, was not get in their way. Without any WTO, Hong Kong embraced free trade unilaterally: zero import duties.

Cowptherwaite kept taxes low (a flat 15 per cent) so that the people could keep the money they earned and re-invest it. He refused to set up a central bank, opting for a currency board instead, so that two private banks issued the Hong Kong dollar, which was always convertible at a fixed rate against the US dollar: sound money. Paperwork to set up a new business took just 15 minutes! Yes, he built roads, set up an effective police and judicial system – but that is all he did. Thus, even with very low taxes, he always ran a budget surplus. Indeed, he even refused to set up a statistical bureau on the grounds that these statistics may be (mis)used by some ‘planners’ who may succeed him in the future. By the time he retired, the slums had all been replaced by high-rises; and the colony had a per capita ownership of Rolls-Royce cars higher than the colonial master. Capitalist Hong Kong was richer than socialist Britain!

On his departure, he was asked by The Far Eastern Economic Review as to the reasons for his success. His reply: ‘‘I did not do much. All I did was to ensure that whatever I did could not be undone.’’ So when Communist China took over, they had to contend with ‘‘One Country, Two Systems’’. Hong Kong’s free-wheeling capitalism, entrenched by

Cowptherwaite, can never be undone. Cowptherwaite recently passed away, and his obituaries recalled that he is the only bureaucrat ever to have been praised by an arch-liberal like Milton Friedman.

While India awaits a PM like Peel, we could easily have many administrators like Cowptherwaite. Liberalism at the district level requires a DM-SP combination that takes local politicians into confidence and refuses to enforce illiberal laws, thereby keeping the market free. Predation by the constabulary on street hawkers can be ended locally. District administrators can exercise independent judgement, and they must. Thus, even if the constitution does not recognise property rights, district governments can do so. As islands of freedom and prosperity mushroom, they will be living testimony to the truths of liberalism. Then, perhaps, our own Peel will arise. Anyone inspired?

The author teaches liberal philosophy at the Centre for Civil Society, New Delhi, and can be contacted at naturalorder@gmail.com

The big catch out there!

Guest Columns by Sauvik Chakraverti,

The Newindpress on Sunday, 2007-2008

The big catch out there!

I was walking down Goa’s Palolem beach when the fishermen returned with their catch. That is when the thought struck: Do these fishermen harm society when they ‘import’ fish from overseas duty-free? Would society gain if fishermen are debarred from venturing out into alien waters and ‘import substitution’ measures are put in place to ensure that all fish production takes place on land, through pisciculture. After all, the latter path would ensure more employment.

Of course, the very idea is ridiculous. Society loses nothing when fishermen sail abroad and return home with bumper catches. Indeed, the bigger the catch, the better for society, for prices fall and that is good for everyone. If this be true, then what is wrong if big ships and big aeroplanes do the same thing? If big ships and big aeroplanes sail abroad and return with oodles of ‘imports’ of all kinds of goods other than fish, then surely society gains in exactly the same way.

There is an abundance of goods in our markets, and every citizen gains when he goes out to make his purchases. If these imports are banned, every citizen loses, because he fails as a consumer. He works and works in order to earn his money, but when he goes about spending that money in order to fulfill his needs, he finds that the goods on offer are not only of poor quality but more expensive to boot. His hard-earned money is wasted.

One of the reasons why Indians are poor today is that we have not been allowed to import for over 60 years. We kept foreign goods out of our markets and opted to produce everything we needed on our own, native soil. This is not sensible economics; rather, it is stupid. For just as we go to market to buy, so do we enter international trade in order to import. We export what is abundant and cheap in our own land while we import what is not available locally and hence highly valued.

The people of the Kullu valley do not value the apples their region is famous for. They export these apples in order to import what is not locally available — like mangoes. It is in order to import mangoes, cloth, automobiles etc. that the people of the Kullu valley export their apples. It would be senseless if these people produced apples and sold them abroad and received no imports in return.

Similarly, we Indians have been senselessly engaged in ‘export promotion’ for 60 years, without any ‘import promotion’ in exchange. Indeed, this bizarre philosophy still marks our stand at the WTO, for we are leading a group of developing nations who want to export everything but import nothing. It is a case of the blind leading the blind. And it beggars the whole world.

Economic history reveals how nations got rich by importation. John Keay’s history of the spice route is highly instructive in this regard. The west discovered the sea route to India and Indonesia only in order to import spices. They had nothing to export in exchange except their gold. They traded their gold, which they had enough, in order to import nutmeg, cloves, cinnamon and pepper, which they had nothing, and which were therefore highly valued in their own land. Indeed, radical bullionists attacked the East India Company for exporting gold — which the bullionists wrongly equated with national wealth — in order to import what to them were mere luxuries and fripperies: our spices.

It took two centuries before the first classical economist, Adam Smith, revealed that the ‘wealth of nations’ did not lie in its stocks of gold; rather, national wealth consisted of the properties and possessions of all citizens. Adam Smith therefore championed free trade, for that was the only way by which every Brit could be possessed of all the goods available from all over the world, at cheap prices.

Similarly, Indians too would be wealthy individually if they could import goods that are cheap abroad (like used cars) while exporting their gold. We are one of the world’s biggest consumers of gold, but that is not making us rich. If we, as individual buyers in the market, willingly gave up some of our gold in order to buy cheap imported goods, we would each be wealthy in terms of our personal assets.

It is worth remembering that the Thames outside London in those days was described as a ‘forest of ship-masts’. If every Indian port was such a forest, and if every Indian airport was a forest of Boeing 747 tail-fins, and every Indian market was stocked with all the goodies the whole world had to offer, then only would every Indian be individually better off.

In such an open economy, every Indian fisherman would be well off too. I was gazing at the sunset from a hill next to Palolem beach when a traditional fisherman’s craft sailed into view. I was immediately transported back to 2000 BC. The fisherman’s boat was an ancient dugout canoe, the kind a Robinson Crusoe might have used.

We now have modern cars, modern planes and modern everything else, but whatever happened to our boats? Free trade in modern fishing vessels would improve the productivity of every Indian fisherman. Today, they are hobbled by import restrictions, and it is no wonder that those in the know say ‘fish die of old age in the Indian Ocean’.

If India embraces free trade, our greatest asset will be our twin coastlines, one facing west, and the other east. All along these coasts, many, many trading cities will mushroom, and the entire landmass will become the world’s largest duty-free shopping area. Every Indian shopkeeper — even our paan-bidi wallahs — will operate a duty-free shop, and every Indian consumer will gain. Getting there requires a new kind of lobbying.

We have had enough of exporters and indigenous manufacturers lobbying for policies in their favour. We now need a lobby of importers and consumers. Such a lobby will champion policies that will make India rich.

The navel and the WTO antidote

Guest Columns by Sauvik Chakraverti,

The Newindpress on Sunday, 2007-2008

The navel and the WTO antidote

Indian philosophers have stressed that only through 'contemplating the navel' can one arrive at the Big Truth. When I follow this advice and gaze upon my belly-button, the profoundest realisation I achieve is this: I am alone. As the poet Walt Whitman put it, I am 'a simple, separate person'. Through my navel, I was 'attached' to my mother, yes, but that was before I was born. From the moment of birth, I have been separate. From this realisation, various second-order deductions follow.

As soon as contemplating the navel reveals the importance of the Individual, it simultaneously establishes the limited utility of the word 'we'. Yes, my family and friends may be a group to which I belong, but even this 'we' is something in which we remain individuals. The 'we' in the case of family and friends does not override the 'I'. Many friends are dearer than family; many members of the extended clan I actually dislike. And then, beyond that, of course, the Big Truth hits you like a bolt of lightning: beyond family and friends, the rest of humanity are complete strangers. 'We' ceases to operate. My navel tells me that I am an Individual, always.

There are many seductive words in the political lexicon that look at the world the other way around and place the 'we' above the 'I', like communism, socialism and 'hindutva'. To liberals, these are horribly false world-views. Words like 'nation' and 'democracy' also invoke the false magic of 'we'. Liberals look at the world as composed of individuals seeking their existence in the voluntary, one-to-one, win-win game of trade.

Which brings me to the 'whither trade organisation' that just met at Hong Kong and failed to come up with much. If it is individuals who trade, what is the need to get all the 'nations' - in the name of 'we' - involved in something so critical as a free, globally competitive world market? Do we need politicians and diplomats negotiating global trade deals in our interest? Or are our interests best served if these politicians and diplomats clear out of the way and let international trade freely occur between freely trading individuals?

Politicians and diplomats engaged in global trade negotiations hide behind the term 'reciprocity'. They believe that if trade concessions are not reciprocated, the 'nation' will lose. They represent the Big We: the nation. But hold it, reciprocity is meaningless when individuals trade in the market, and it can never be meaningful between nations.

Let us forget about the politicians and diplomats for a while, and imagine we are all shopkeepers in a big marketplace. I own a bar that also serves non-vegetarian food. Now, the tailor-master next door is a teetotaller and a strict vegetarian. He never gives me custom. The last 20 years that I have known him, he has never spent a paisa in my establishment. But I always go to him to get my shirts and trousers stitched. Am I doing something stupid? After all, he is the best tailor in town. Should I get my new suit stitched by that very drunken tailor, my very good customer, the last to leave my bar every night, whose hands shake a lot?

Similarly, the government of France disallows the entry of Alfonso mangoes. Does that mean we should not import French wines and cheeses? If we unilaterally open up trade, we gain by being able to consume French wines and cheeses; and the French lose by being forced to consume horrible mangoes from Venezuela, thanks to trade restrictions imposed by their stupid government! If politicians and diplomats stall trade in order to 'bargain' in the interest of the mango business, they will cause losses to all our wine and cheese importers (and consumers).

Similarly, if we import Laila basmati rice from Pakistan, and allow in their delicious mangoes and all the exquisite onyx Pakistan is famous for, we gain. If the Pakistani government does not allow us to sell their people our arecanut, paan masala, tea, coffee, spices, music… it is their people who lose, not us. If the US and the EU sell us subsidised wheat, our poor people get cheap food.

In the market economy, where we all interact is individuals, 'reciprocity' is meaningless. We are all free to take our custom wherever we please, with no obligation whatsoever to buy from those who buy from us. The word 'reciprocity' exists only in politics, and refers to the necessary conditions for establishing diplomatic ties. By trying to find reciprocity in the market, diplomats and politicians are extending their legitimate sphere, which is international politics, to an area from which they should be debarred: the global free market.

Hong Kong, where the WTO met, is a very good example of economic success through unilateral free trade. Without any negotiations, the former British colony plunged into free trade - and the rest is history. India should do exactly the same. As individuals, we all have enormous gains to expect from free trade. We should not allow the Big We to come in the way.

Remember, we go to the market as buyers. We work and earn in order to buy everything we need. Similarly, we enter international trade in order to import. All imported goods are more valuable to us because they are scarce. Unilateral free trade will give every individual Indian the opportunity to buy the best products from all over the world. Every individual Indian will find that his individual possessions have multiplied and also improved in quality.

If my reader is still in doubt, I suggest the following mental exercise: first, take an inventory of all the personal possessions of all the citizens of your town. Now, imagine unilateral free trade is instituted. Then, one year later, take another inventory. Will their total possessions increase or decrease? Of course, they will hugely increase. Thus, we do not need the WTO, and the Big We it represents. We need unilateral free trade for our own, individual interests.

The author teaches at the Centre for Civil Society, and can be reached at naturalorder@gmail.com

Sustainable development is nonsense

Sustainable development is nonsense

Leon Louw is a libertarian from Africa, where state failure is the norm. He runs the Johannesburg-based Free Market Foundation and is the director of the Good Laws Project. He was twice nominated for the Nobel Peace Prize along with his wife, Frances Kendall. These are previously unpublished excerpts from an impromptu interview with Sauvik Chakraverti when Leon was in Delhi to deliver the Julian L Simon lecture of Liberty Institute in 2002.

What is your central message to environmentalists in the developing world?

Environmentalists are enemies of the poor. What the poor and future generations need is maximum economic growth, maximum technology, and maximum utilization of resources, now. So we can a) alleviate human suffering, and b) leave a legacy of technology and wealth with which to deal with environmental problems that may happen in the future.

What is your view on ’sustainable development’?

It is nonsense. The world ’sustainable’ has no intelligible meaning. Sustainable for how long and for whom, we are never told. Development is sustainable. What is not is the absence of development. Without development, people will, in fact, starve and the environment will be destroyed. The most developed countries are the ones with the cleanest air, the cleanest rivers, the least human suffering, the best conservation of nature, and the least endangered species.

What is your reaction to sustainable development’s underlying premise - that there is a shortage of natural resources and that these will finish if markets are free?

Resources are increasingly plentiful. There are more resources of every description today than there have ever been before. The evidence of this is falling prices. Almost everything in the world is now falling in price, even though currencies have been inflated.

The real way to consider this issue is to look at how much time a human being has to work to buy, for example, a pound of potatoes. Absolutely every resource that human beings want is now cheaper. That is to say, you can get more of it with an hour of labour than ever before in history.

Furthermore, the earth’s surface contains enough resources to last for millions of years. Even if we do ever run out of resources on land, we’ve still got the ocean. Even if the oceans’ resources were to be exhausted in, say, five million years, we can harvest the asteroids.

You have described environmentalists as racists. Please explain:

When they talk about overpopulation, they - that is, the white elites of the First World - never call Holland, Monaco, Britain, or Liechtenstein overpopulated. In fact, the most densely populated continent is Europe. They speak of my continent, Africa, as overpopulated; yet it has the lowest density of population. Africa has too few people. What they want to do is limit the number of people of colour.

Even more conspicuously racist are ozone concerns. White people worry about ozone depletion because they do not want UV rays on their skin. On the other hand, dark people are immune to UV rays. Even white people who are slightly dark, like Italians, Greeks, Portuguese, Spaniards or South African whites, are immune to ozone depletion.

Is Africa going the libertarian way or is it keeping with the environmentalist agenda?

Unfortunately, Africa is as subject as India to the eco-imperialism of the West. Africa, therefore, signs all the international treaties and protocols that ban trade in its own wildlife. Yet Europe can farm and trade its wildlife, namely cattle, sheep, goats and pigs. This is imperialism of the absolutely worst kind.

In his writings, George Ayittey refers constantly to the ‘vampire states’ of Africa. Is there any libertarian upsurge against big government in Africa?

Africa, thanks to people like George Ayittey, has turned the corner. Most African countries are now moving towards market economies. Fifteen years ago, there was only one democracy in Africa — that is, Botswana. Now, most African countries are democracies.

Fifteen years ago, most African countries were in favour of socialism. Now most of them are liberalizing and privatizing. The reward for this has been that the continent is experiencing positive growth — about 3.5 per cent — for the first time since colonial times. Those African countries, which have made the most substantial moves toward market economies, are growing even faster: Botswana, Mauritius, and Uganda.

George Ayittey is absolutely right in saying that black oppressors took over when the white oppressors left. The absence of white oppressors does not mean the presence of liberty.

However, we are finally getting real liberation in Africa. Liberation from oppression, rather than just liberation from colonial exploitation. I am optimistic.

(More on Ayittey here. Yazad)

How is the new South Africa faring in terms of economic and political freedom?

The giant achievement, of course, is the liberation of black South Africa from apartheid, discrimination and humiliation. So this victory must not be trivialized.

Unfortunately, in many liberation struggles, those who take over the ‘liberated’ country often perpetuate far too much of what they have inherited. They keep the very institutions that caused oppression and discrimination in the first place. They should, instead, attempt to change the entire legislative system to one based on objective rules and minimal legislation. In South Africa, sadly, we do not see this.

At the same time, the absence of apartheid has created new opportunities and black South Africans have used these. In the informal, shadowy, underground economy, there has been an explosion of enterprise. Fortunately, they just ignore the government. In South Africa, ordinary people just pretend that the government is not there. They run their businesses, taxi services and so on without licenses and trade wherever they wish. In India, by contrast, people seem to take the government too seriously.

Why are legal reforms essential for developing countries?

One of the great transitions that have not taken place in the former colonies is the key element that has made developed countries prosper. This is the rule of law. We have identified a list of twenty-five jurisprudential components of what we call ‘good law’. They have nothing to do with ideology. Every lawyer agrees on the principles of good law. Most developing countries have failed to maintain these principles.

From your studies of regulatory systems, do you think they impose more costs than the benefits they provide?

Yes, this is almost always true. Certainly, since countries have introduced cost-benefit analysis for new laws, it is quite shocking to find how many new laws, that were taken for granted before, would not have been adopted.

In the real world, regulations have more costs and disadvantages than advantages. This is because regulation is subject to what political scientists call “goal substitution”, in which those implementing it have their own objectives and agenda. It is very rare indeed, in the real world, to find any regulation for which the advantages, properly calculated, outweigh the disadvantages.

How do you look at the impact of globalization, particularly from the perspective of the economic and political prospects of the poor?

Globalization is not new. The world was completely globalized up to the First World War, when capital, wealth and people could move freely across borders. Between the First and Second World Wars, borders closed for the first time in history. So what we now call globalization is a small modest shift towards what was commonplace and taken for granted by our grand parents. What they experienced as being normal, we now seem to think of as some new, scary concept.

What the poor want is maximum globalization. They want to be able to sell their products to everyone on earth. They also want to be able to buy from anyone who sells anything.

The opposition to globalization is completely inhumane. People who have seen real poverty cannot possibly support restrictions on trade. Globalization is, by far, the best hope for the world’s poor, and the quicker it happens and the more of it they get, the better.

Minor editing, title and links added by Yazad. Thanks also to Amol Hatwar who helped sort out an irritating formatting problem with MSWord

India Needs FDI In Retail

India Needs FDI In Retail by Sauvik Chakraverti 

25 Oct 2005, 0000 hrs IST, 

Foreign direct investment (FDI) in retailing is opposed by many. Under the A B Vajpayee regime, it was disallowed because a vocal lobby of Hindu traders spread the fear that it would spell doom to small shopkeepers. 

Today, even West Bengal chief minister Buddhadeb Bhattacharjee, otherwise "market-savvy", and not very Hindu, opposes FDI in retailing. Perhaps a little economic analysis of retailing, especially in poor countries, will clear the air. 

To start with, let us take an astonishing statistic (and this is an industry statistic, and not the handiwork of any government bureau): 70 per cent of shampoo sold in India comes in little sachets. This reveals a lot about the nature of the market, especially in developing countries, and is something that Lord Peter Bauer noted a long time ago. 

The distributional chain, of which retailing occupies the final position, is engaged in "the breaking down of bulk": Goods leave the factory gates in containers (bulk) while the final customer departs with just a little sachet from the retailer. 

Now, as Lord Bauer observed, this process of "breaking down bulk" is inordinately long in developing countries because most people buy their needs on a daily basis, being unable to invest in buying a month's groceries at one shot. 

Lord Bauer, who pioneered the study of what we now call the "informal sector", noted how in India people often buy loose cigarettes. In Africa, he found, even matchsticks are sold loose. 

He reported on the armies of small traders that cater to the needs of the poor so well, and he marvelled at how statisticians never mention, in their reports, how millions and millions of small traders exist in rural areas: They over-report "agriculture". 
Retail supermarkets, the world over, shrink the distributional chain. They buy in bulk and sell cheaper than small retailers, thereby passing off significant economic gains to the consumer. 

They make the distributional chain economically efficient. But there are strong reasons to believe that in India, they will not be able to mine what C K Prahalad called "the gold at the bottom of the pyramid". 

While big-time retailing will definitely succeed in India, and bring with it great benefits to middle and upper-class consumers (and associated spin-offs like real estate development), the armies of small traders who "break down bulk" even further to cater to the numberless masses will continue to thrive. 

Supermarkets will typically cater to car-owners who buy up a month's supplies at a time. They will buy big bottles of shampoo, cartons of cigarettes, and big sacks of rice. The small traders will sell products in little sachets, loose cigarettes, half-a-kilo of rice, and so on. Their numbers will flourish and grow. 

Even in rich nations, small traders manage to compete very effectively withsupermarket chains. In London, almost every "corner shop" is owned by an Indian. We are the shopkeepers to "a nation of shopkeepers"! It does not behove a nation of such splendid shopkeepers to fear foreign supermarkets. 

The upshot of it all, of course, is that for the nation to progress, efficiency gains in distribution are a must. Inordinately long distributional chains make trade slow, expensive and cumbersome. 

As India progresses, it is vital that this chain sees shrinkage. What could very well work in the interests of both the small traders as well as their poor customers are wholesale supermarkets, like Bangalore's Metro Cash & Carry, which caters to small traders and has therefore located its sprawling stores outside the main city. 

Such wholesale supermarkets will enable small traders to increase their margins and also pass on some of their gains to the final customers. 

The distributional chain will shrink, but not at the cost of the small traders. Rather, it is the inefficient wholesalers and sub-wholesalers who will see a loss of business. Wholesale supermarkets will be able to mine "the gold at the bottom of the pyramid": but their product mix will vary immensely from retail supermarkets. 

In either case, in all our cities today, wholesale markets are invariably in parts of the "old city": Congested and inaccessible. The real estate development that will accompany FDI in retail as well as wholesale trade will make it possible for a redrawing of city maps, with all these supermarkets sprouting all around the periphery. 

This process of rebuilding the civic architecture around which urban commerce works will give us a golden opportunity to get things right for once as far as city trade and traffic management is concerned. 

We can learn lessons from Seoul, where wholesale supermarkets stay open all night, enabling small traders to come in from the surrounds after the evening rush and depart with their wares before the morning rush hour. 

If at all the government is genuinely concerned about "small traders", then it should implement policies that make them invulnerable to the hafta brigade that milks them of their surpluses. Like every other Indian, they too need the state off their backs. 
The writer is an economist.

Market Justice

Market Justice by Sauvik Chakraverti 

7 Apr 2006, 0000 hrs IST, 

The gross miscarriage of justice in the Jessica Lal case is symptomatic of the fact that Indian socialists have an extremely warped notion of the role of the state.

To liberals, the only role of the state in a free society is to go after the bad guys. Our socialists have allowed the criminal justice system to go to seed because to them this was never the most important aspect of the state's functions.

Unlike the state, the market is deeply interested in keeping us alive. The biggest firms in any market economy are insurance companies and they want their clients to live long and keep paying their premia.

These big firms can effectively substitute the state's justice system. Insurers today protect us from fire, theft, accidents, natural disasters and the like. To this must be added aggression.

If we pay premia for aggression insurance, we will be much more secure. How would a case like the murder of Jessica be handled then? Under free-market capitalism, Tamarind Court would not be an 'unlicenced' bar: There would be no licences at all.

Thus, the Ramanis would insure their premises, and the insurance company would insist they hire a good agency for private security. These private guards would ensure that a man with a gun is denied entry.

Whereas the police only reacts after a crime is committed, with insurance there would be a great deal of crime prevention.

If an armed assailant still obtained entry, and then murdered someone, these guards would be responsible for apprehending the assailant and handing him over to the insurance company.

The insurance company would first pay the family of the victim to the extent of the full sum assured. It would also pay the owners of Tamarind Court.

Then, it would exercise its rights of subrogation and make monetary demands on both the assailant as well as the private defence agency that failed to keep the premises secure.

These cases would be brought before a private arbitration agency, whose decision would be binding. The assailant would have to pay a lot of money to the insurance company, the victim's family and her employers.

Instead of the state meting out 'punishment' in the name of 'society', this would be 'justice' to the actual 'victims' of the tragedy.