Wednesday, August 29, 2012

Stray thoughts on PDS failure in India

Read this article this morning, and felt intensely despondent. 

The head-line is scare-mongering but the story is sobering. The real clincher comes when the author talks about how the PDS scam, morally reprehensible as it is, has barely made a dent in India's food stockpiles. India has excess food, but many of our people are still starving. India's hunger comes not from its scams and its corrupt politicians, it comes from the poverty of its citizens and the poverty of the ideas that make our governance framework.

Amartya Sen showed in the 80s that even in colonial India, famines were mostly a matter of income failures, not crop failures per se.

We have tried to overcome income failures by legislating it. Public distribution and price controls. Never works. The aim should not be to control the price of rice to 2 Rs./kg. It should be to let the price rise to 20 Rs./kg - or whatever the price would be - but to ensure that everyone in the country has 20 Rs. to buy that kg of rice. This is not so difficult as it sounds - a country that is self-sufficient in foodgrains quantity-wise also has, by definition, enough income in the aggregate to pay for those foodgrains. The question to be asked is, why do some people not have enough money to buy that food? And the answer lies in cash transfers and re-distribution of wealth and income, not price controls and public distribution and ration shops.

There's a comment in that article that illustrates the follies of Indian governance, and governance in general, better than any economics lesson could. 

“If you can buy a Pepsi in every village in India, why can’t the government get us our rations?” asked Vaish, who lives in Satnapur. “The reason we don’t is because the government doesn’t want us to -- they all get a cut.”

The activist has asked the right question, but arrived at the wrong answer. Everyone in the chain of providing a Pepsi in a village also gets a cut. The salesman, the distributor, they all get a 'cut'. The cut is what they work for. And that system works beautifully. It makes a Pepsi reach the innermost villages in India. Yet, the cut system does not work with the government. Why?

We might think that PDS failures in India are about delivery mechanisms and supply chains, and this would be right, but only partially right. We can fix the supply chain to temporarily improve outcomes, but eventually, another scam like would happen, another supply chain failure will arise and we will rehash the old arguments again. There's something in the logic of the profit motive and free competition that no amount of good intentions will help us replicate. 

If someone wants a Pepsi somewhere in India, and can afford it, Pepsi will try to make sure that it reaches him. Pepsi doesn't bother about the problem of whether or not that person can afford it. That's where the government's domain liesNot in trying to make sure that Pepsi or food reaches the villager, but in trying to make sure that he can afford it. There is no way that a system of governance can replicate the alignment of incentives that the private system creates - Pepsi's very survival depends on being able to meet demand, better than others, at cheaper prices or higher qualities than others. It's survival is tested everyday in the market place. The government's survival is not tested in the same manner. No matter how well intentioned individual politicians and bureaucrats are, the system's incentives are just not aligned with the incentives of those that it propose to serve. One election every five years does not solve the problem, especially when you can win the election by simply being of the right caste.

Milton Friedman used to joke that if you put the government in charge of the Sahara, in five years there will be a shortage of sand. I always thought it was funny but trivial. Recent events have made me re-consider the wisdom of that statement, though in a somewhat revised form. In China, there's a huge unsold housing and inventory over-hang, even as poor and even middle class people can't afford the houses that do exist. In India, some poor people face starvation even as the country's stockpile of food grains grows. 

How are these fundamentally poor countries where the basic needs of good food and good shelter are not yet satiated facing over-supply, of any sort? We're used to thinking that poor countries are somehow supply-constrained, often due to government interference in production and distribution, as implied by the Friedman quote above. But it's not just that. Poor countries that are somehow managing to overcome the supply constraints through a mixture of public and private efforts are showing a different form of governance failure. Despite there being enough supply in the aggregate, there isn't enough demand, due to the skewed distribution of income and wealth - which itself is, in part, so skewed due to the multitude of government-imposed restrictions on production and distribution. 

In India, this inadequate demand does not manifest as inadequate demand, because at the false administered price of near-zero, the observed demand is potentially infinite. It manifests as an artificial supply shortage and scams, with grains being 'diverted' to more profitable avenues. Price controls and public distribution are dysfunctional, because they cannot help but be dysfunctional. One can best understand the current PDS failure in India by analysing it *as if* the price of the food grains were their true market prices, and we had a large mass of people unable to afford grains at those prices.

Like so many other things in governance and the political economy, it is a failure of bad ideas, not just vested interests. 


W. Peden said...

Great post. How many countries have successfully developed because of honest politicians and civil servants? I struggle to think of examples.

Just as there's nothing about Hinduism/Indian culture that means that Indian GDP growth has to be slow (the "Hindu rate of growth" is a myth) there is nothing about Hinduism/Indian culture that means that you need that miracle of miracles (honest politicians) in order to feed each other.

It doesn't surprise me that, where the hand of government's grip is weakest (the service industry) the Indian economy is the envy of much of the world, while where the government's grip is strongest (e.g. food controls and energy) India mysteriously has "Third World" problems.

As you say, the problem is simple: poverty. The solution is also simple: (1) give the poor money, (2) get rid of price controls, and (3) have a dynamic market economy to fund part (1). The point about Pepsi is a particularly good one. Give the Indian poor enough to buy food at market prices, and businesses will rush like foxes to stuff food into their bellies.

Ritwik said...

Thanks. Singapore, perhaps? And maybe Hong Kong.

India's development is strange in a way. As a recent Lucas paper shows, at current levels of and growth in GDP, all other countries were significantly less agrarian.

India has to get at least one of two things right- significant human capital growth to dominate the 'services' part. Or significant labour and product market de-regulation to encourage rapid manufacturing/ urbanisation.

In either case, I'd look out most for the failure or success of our urban policy.

W. Peden said...

I don't know about Singapore.

Hong Kong may well be an exception, partly because they were essentially the last significant piece of the British Empire and benefited from a civil service tradition that was torturously developed in the UK in the 19th century.

I agree on the priorities for Indian developement and how India's development has been strange (a similar but much smaller example is the Republic of Ireland). I like to use India as a countercase to "stages of development" theories. India's development suggests that contingent facts like imperialist tyranny (and the subsequent spread of English) are what is important for development; most development economics and "stages of development" theory is economics at its worst.

I doubt that major deregulation in Indian manufacturing is politically possible barring a major crisis, but stranger things have happened. I only just heard that Benghal finally voted out their communists last year, which seemed impossible ten years ago.

Anonymous said...

The problem with Pepsi example is this : Pepsi intermediaries get a cut for ensuring the availability of the product, whereas a corrupt public official gets a cut out of siphoning it away. The latter's interests are in diverting the product itself unlike the former.