Leadership Challenges – the Fog of Economics

Think like a wise man but communicate in the language of the people.

– William Butler Yeats

The world’s biggest issues today are economic issues. They are about growth, inflation, unemployment, income distribution and so on. Many other issues are not directly about economics but are indirectly so – like climate change or immigration in the US. Even terrorism ultimately is linked to economics – people with nothing to lose are easy prey for those who preach hate.

As the world’s governments deal with these thorny economic issues, they face many challenges. The one that is peculiar to economic issues is that most voters don’t understand the economics behind these economic issues.

For contrast let’s take a social issue that does not involve economics – abortion. Should abortion be legal or not is one of the most polarizing issues on the American political landscape. But it is a well understood issue. People know what is at stake. It is just that their beliefs are different and so they have different positions on the issue.

On the other hand take the matter of free trade, again in the US. There is no question that millions of jobs have been lost to free trade over the last two decades. Yet over the same period that these jobs have been lost, millions more have been created that have more than made up for the lost jobs. Unemployment rates in the US continue to be low. Inflation is low. GDP growth has been solid. The evidence so far bears out economists’ abiding belief in free trade as a good thing for the economy.

Now imagine yourself as an average American citizen in the mid 90s. Chinese manufacturing or Indian outsourcing is still small but rising. You read the newspapers regularly and the news from corporate America is not all good – a lot of it is about shuttering plants and laying off workers. You wonder if this might happen to you. There is other “informed opinion” out there that argues the case for free trade, but who are you going to believe – your local newspaper or some Harvard economist quoting David Ricardo? Can you be blamed if you believe that free trade is the enemy?

Most economic issues are similar to the example above. In the best scenario, they are just complex. In the worst, they are counter-intuitive – they can mean one thing to economists and just the opposite to the average citizen. And as you know, average citizens have many more votes than economists.

India is a developing country and every major issue today is economic in nature – unemployment, inequitable growth, infrastructure and even reservations are all economic issues. This is good for India. It cannot afford to be distracted by non-economic issues like a war with Pakistan or another brush with Hindutva. Let me take a handful of such issues to illustrate how befuddling they can be:

Land acquisition – If jobs have to go to rural areas, factories have to be built there. Building factories needs land and with India’s density of population, there isn’t a whole lot of fallow land lying around. Therefore, agricultural land will have to be acquired to build factories. For this land, even if a fair price is struck with the landowners, the agricultural labour will lose their jobs. Some jobs will be lost, others (perhaps fewer but higher paid factory workers) will be created. An economist will say that this is good, this is progress. But anyone who saw the Singur drama on TV probably won’t agree.

Labour flexibility – My views on labour flexibility are pretty clear. But they are similar to an economist’s views (untrained, in my case). US style labour flexibility, which is praised by economists and business leaders, creates more jobs and lower unemployment than continental Europe’s hidebound labour laws. India is far from where the US is in this respect. Our labour laws protect well-paid organized labour and create disincentives to investments and to bringing millions of workers in the unorganized sector into the organized sector. It is bad for workers. Now take a deep breath and imagine yourself explaining this to the average Indian citizen. His likely response is going to be – “Layoffs should be legal and that is good for workers?! Tell that to someone else.”

Small-scale sector – By excise exemptions to small-scale industries we protect a few ‘handloom’ jobs in every industry that has this protection, but will never get of the higher productivity of the ‘powerloom’ technology. Wages remain low and the industry is not able to compete in global markets. Soon employment too declines. Sounds pretty straightforward to you and me but if this protection was taken away suddenly, most voters would connect the large scale loss of jobs to something that the government did and fail to follow the rest of the argument. And of course, the media even if they get it themselves, know that portraying misery sells better than a debate on economics.

I could go on but I think I’ve made the point. The major issues facing India are shrouded in the fog of economics. Far from there being consensus, there isn’t even a certain level of understanding about the issues. What implications does this have for the leadership of India?

Get your message right.

These issues aren’t going to go away. They impede the country’s progress. The easy ones like dismantling industrial licensing are all done and taken care of. What are left are issues that need us to make hard choices – which can only be taken if there is debate and a certain level of support from voters for them.

Begin the process of educating people on the nuts and bolts of economics, starting with legislators. Simplify things (how about a rendition of the budget for the common man). Encourage debate. Participate in it. When you implement something, stick to your guns, if you know you are right.

And, oh, next time try and get a simple majority (whichever party it is). It helps.

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11 Responses to Leadership Challenges – the Fog of Economics

  1. Abhinav says:

    Very true Basab, But I would like to point out a few more important issues india faces today:

    1. Reform of criminal justice system is much needed, This is not a easy puzzle to solve. A good start can be made by speeding up of litigation process in our courts, everybody knows that it takes years to get a decision on any case in India. The police side of the reform can be taken up after that.

    2. There is a burning transparency in the land/property market in india, currently a large proportion of transactions in property market happen in black money, anybody who has dealt with any property in india knows that. We need to start with a system of lower stamp duty and tough enforcement of laws to make sure the thriving black market in property is controlled.

    All these issues are inter-related and should be attacked at the sametime.

    Regards,
    Abhinav

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  2. Abhinav says:

    One correction to my previous post, sorry for this.

    In the second point I meant “Burning need for transparency” not “burning transparency”.

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  3. Gordon says:

    I agree with you Basab on the points you have made, but I don’t think unveiling economics to Indians will help. Economics will never make sense to a person about to be laid off, even if they can anticipate change in a globalised world. This is because in a country that is overpopulated and which lacks infrastructure it is not his fault if he wasn’t able to gain the skills/education needed for an alternate career. I would say a certain amount of cultural and social baggage is also responsible for this mess.

    If I, for example, were a mill worker with a family to feed, I wouldn’t be able to fill their stomachs with dreams of a better India. I would have been brought up in a different India and since that India (pre ’91) is so much different from this I will have adjustment issues with ideas like capitalism. I am thus a victim of society and since it’s not my fault why should I absorb the aftershocks?

    Put plainly we are lucky to have been brought up in a very different environment, which has made us more competitive and adaptable to change. But till the older generation phases itself out there is not much economics can do.

    On a tangential thought, the US is made up of a bunch of risk-taking entrepreneurial people who left Europe for better pastures. We on the other hand are a fairly conservative crowd and have been run over by almost every power: the Greeks, the Aryans, the Afghans, the Persians, the British and in some places by the Dutch, Portugese and the French! Thats a huge difference in mindset and its deeply seeped in our DNA. We have come a long way since then, no doubt. But it will take some time till we are truly globalised.

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  4. Krishna says:

    “If jobs have to go to rural areas, factories have to be built there.” Oh, really ?

    Industrialization has often been mistaken for economic development. Give credit to the policies and methods of the industrialized western nations where its due, but broad-brushed assumption of success of those models in India, or anywhere else is a bit far fetched. The picture would certainly not look so rosy here if one considers constituent demographics, urban congestion, infrastructural hurdles, power situation, poor agricultural yield (not necessarily because of reasons of soil health or fertility). US model may work, but it has to be comprehensive, not just as in liberal hire and fire – for starters, how about Social Security as in the US ?

    In any populous country, alternatives for rehab initiatives should also form part of recommendations for productivity enhancement – and any attempts to convert farmlands into industrial zones, would only result in protests of the kind witnessed in Nandigrams (WB) and elsewhere.

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  5. I was reading the Business Today Magazine where they have an article on CEO bloggers.I read about you and your blog there today.

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  6. Basab says:

    Gordon, I don’t expect the affected people to agree with the economic logic of anything that impacts them adversely. What matters is what does the aam aadmi think. That’s what needs to be addressed through better communication. No change or change without communication are both non-options.

    And btw, while you paint a harsh picture of a mill worker out on the streets, I don’t expect the solutions to be heartless. I expect there will be a safety net – compensation, retraining etc. – I didn’t go into that because it wasn’t the thrust of the post.

    Interesting take on our loss of entrepreneurial DNA because of generations of foreign rule. How do you explain our successful entrepreneurial communities – gujaratis, marwaris etc.

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  7. Gordon says:

    If you are talking of the media moulding public opinion on such issues I agree with you.

    And well, the successful people you mention are those who shifted base to the US, Europe and in some cases Africa. Yes there are a few exceptions in the case of the Birlas, Tatas and Ambanis but they are too few for a country our size. British bureaucracy, the ancient Roman system of licenses, etc. influenced our business for a long time.

    Also till recently almost every child in an Indian household was expected to study hard and get a good job. The focus has never been on wealth/job creation but job security. It was this mindset I was referring to.

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  8. Rajeev says:

    Basab

    I agree with the broad thoughts in your article. But, I dont agree on one issue you have raised – rural economy, land acquisition, etc. Why would an entreprenuer (farmer, landowner) lose his enterprise to become a worker/slave (security job or peon job in a company) – doesnt make sense for him. Especially, when he has seen that when he has sold his land for x today, the same land is worth 2x or 5x in anywhere between 3 to 5 years’ time. No, the entrepreneur is smarter now. What is the answer to this.

    An alternative: Make the entrepreneur an entrepreneur again by making him part of the growth story. Form a corporation of landowners in a particular rural area and make them stakeholders in the proposed enterprise so that they get part of the upside of land price increase and continue with other sops like one job per family, etc. Corporations have to be diligent, honest, and a bit more socialist to do this. Otherwise, land acquisition will not work in today’s high real estate price scenarios. After all, the only investment that Indians make when they have lots of money and the only investment option that an average Indian understands the economics of reasonably well is the real estate investment.

    On another issue, I dont understand why Government have to SELL land to industries at rock bottom prices. Why dont they LEASE land on a long-term basis (say 50 years). That way industries are promoted (lease costs may not be high). PLus the public/government gets back the land at the end of some period (presumably when it has reasonably developed). This will also end the craze of some corporations to amass low cost land and utilize so little).

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  9. Saumitri says:

    Rajiv,

    You make an important point. I too believe that its important to understand the small entrepreneur in our traditional societies and make them inclusive in this growth we are witnessing today.

    I like your idea of shareholding of landowners and i already see the motivation as you mention – its not just the cost motivation but the urge to be on your own. I guess its only a matter of time before this starts happening.

    Like

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