Tuesday, November 27, 2007

The only thing I will ever write about communal violence

is that almost whichever way you look at it, it is quite pointless. Even if one was to evaluate it from a my-community-first 'strategic' perspective (and there are just so many things that are wrong with such an aproach - but let's stick to the logic within the layer), it would fall flat. For the simple reason that those that came at you were not the ones you will go for. And those you go for will not be the ones who will come back at you, in the given phase or later. You will satisfy only bloodlust, not vengeance. And your actions would become the tipping point for some of those that were yet undecided.

Besides, mob violence is one of the only two forms of violence that takes no courage.

Friday, November 23, 2007

From this week's finance and macroeco classes

1) Libertarians with knowledge of the financial markets, it's question time. I'm guessing you know what circular trading is. Explain a ban on circular trading from the first principles of coercion and/or fraud. And if you do not support the ban, explain how you propose to solve the inefficiency in the markets resultant from circular trading.

2) It is fashionable among a lot of theorists to assert that if you are philosophically on the wrong footing, no amount of mathematics will help you out. The example of P C Mahalanobis is given to substantiate this point. Now this assertion has typically been a little difficult to digest, expecially since I am given to romantically believe that mathematics is the only true philosophy. Turns out that in the case of India's five year plans and P C Mahalanobis, I may not have been very off the mark.

You see, the Indian government, pre-liberalization, was an almost entirely fiscal policy focussed administration. The guiding principle of our macroeconomic policy was apparently the IS/LM model. This is, in very general terms, a series of dynamic equilibriums of real national income with real interest rates. But, the interest rates were administered. We had neutered one of the two axes of the mathematical model that we used and yet we hoped to be correct. For decades, we were doing one of the mathematically stupidest things possible.

Resultant aphorism - faults of philosophy will manifest themselves as mathematical idiocies. One only needs to try harder.

Monday, November 19, 2007

Nilu's smartest move

was to get Avataram to write for his new blog. Why do I say this? Read on.

This piece gets rave reviews here and here. Now blogger no. 1 unabashedly loves everything that Mint publishes but I was a little surprised to see Aadisht recommending the "Bangalore is Coasian" line. I read the piece, and wasn't interested at all. I tried to figure out why - one obvious reason is that one could replace Bangalore by Gurgaon in the article and it would still remain the same in its substantive claim. Or one could replace Bangalore by Nagpur and have no answers to why Nagpur doesn't fit the claims. The article reduced Bangalore to a syntactic tool, devoid of any semantic significance. It doesn't answer the fundamental "Why Bangalore?".

But I was still searching for THE reason I disliked the piece. Avataram provides the answer, in a short piece that explains the title of my post. Of course, this is it. ALL cities are Coasian, dammit all forms of organization are Coasian. In the memorable words of Prof. Datta, even marriage is an institution that minimizes transaction costs. Thus, an argument along the lines of 'outsourcing is Coasian, Bangalore is all about outsourcing and hence Bangalore is Coasian" is so superficial that it does not even begin to scrape any surface whatsoever.

Avataram also has this sagely advice from Wittgenstein's Tractacus to offer - one which I'll try to follow more often - “Wovon man nicht sprechen Kann daruber muss mann schweigen” - “Whereof one cannot speak, thereof one must remain silent”.

I'm convinced. Recursive Hypocrisy is so much better off with Avataram. Nilu has indeed made the smartest move he would ever make.

Sunday, November 11, 2007

Two aphorisms and an observation

Aphorism 1 : There are no infinite recursions, only incomplete base cases.

Aphorism 2: All economic activity tends to an equilibrium, yet the distance from the equilibrium is the primary economic incentive.

Observation : It is universally acknowledged that it is far easier to critique than to construct. Hence, one moves from the critique to the construction. Yet, one notices that the critique invites more attention than the construction. Now one could believe that this is in part due to the inherent unattractiveness of one's construction. But when one has read a bloody 180 page report, gone through the fine print of a diplomatic document, and spent considerable time and energy to develop the construction, a conceited view of reality makes a lot more sense. Hence, one assumes that the construction is so faultless that no one could possibly come up with a contrary viewpoint, and that people comment only when they have contrary viewpoints.

Saturday, November 10, 2007

Of child labour, property and worldviews

Blogger no. 1 writes about child labour - please go read. I have a small point to make. One of the reasons why people feel compelled to rescue children despite knowing that many of them start working by their own volition or that of their parents, is this - many children indeed start working due to poverty, but many of them are forced to stay on due to coercion. Even if one does not support the ban on child labour, one has to think about the conditions in which these children work and what can be done to improve them.

Second, and this is slightly more fundamental - poverty forces many parents to make their children work but many of these children do not want to work themselves. If we begin with the moral position that children below a certain age should not be working, does the parent have the right to send the child to work? Where does legitimate parental control end and coercion begin? And if we believe that the child's wish should be honoured, is this a strong argument in support of a welfare state and a safety net? There will definitely be inefficiencies and corruption in any such government initiative. Should the options then be evaluated by a cost-benefit analysis? Or is one of the two options significantly more correct from a first principles, moral point of view?

Apropos this, will any libertarian (or anyone, for that matter) explain to me what is the "moral position" on the distribution of property in the first place. I ask because any discussion on economic freedoms ultimately boils down to philosophical differences on property rights - what existing distribution of property can be accepted as correct and moral? Is there any moral basis for the heritability of property? Does it make sense to talk about economic freedom from a moral standpoint at all?

My worldview is this - the objectives of my ideal society are maximization of utility, liberty and equality of oportunity, in that order. I am right of centre, economically and politically, and a social liberal. I do not mind sitting on the fence on a lot of issues - it is a lot more honourable than it is usually made out to be. I try to work on certain first principles (which are close to the libertarian ideal), but I realize that given the constraints of a non-ideal reality, this is not always the best stand to take. I am wary of extreme positions. I admire balance - one of the biggest learnings from my short life has been that on either extreme of any world-view divide, one ends up contradicting oneself. I am a libertarian-centrist, so to speak. A consequentialist, a utilitarian.

Thursday, November 01, 2007

Interpreting the Truth: The Nuclear Deal

The nuclear deal with the US has disrupted public discourse multiple times in the recent past. It is amazing how our public discourse is typically filled with opinions flying left, right and centre – opinions that each one of us fits with our own world views – and the proverbial scratch on the surface reveals that not much exists beneath the surface at all. ‘Too much punditry, too little analysis’ is a description that characterizes the greater majority of our public debates, with even ‘informed’ analyses in reputed publications typically failing to connect all the dots.

There are broadly two axes along which the deal can be analysed - the first is energy economics and the second is strategy and foreign policy. I am convinced that the deal is favourable along both dimensions, but let’s look at the issues one by one.

First, the relevant facts – the duration of the deal is 40 years, and the proposed energy transfer in the period is about an installed capacity of 60,000 MW. Either party can terminate the deal with a notice period of 1 year in this interim 40 year period, and with a notice period of 6 months at the end of the deal. The objective of the deal is to “enable full civil nuclear cooperation with India covering aspects of the associated nuclear fuel cycle”. The resultant business is likely to be of the tune of $150 billion, of which the lion’s share is likely to go to American nuclear power companies.

So what are the implications for India’s energy scenario? To evaluate that, a look at our current position is necessary. We currently have an installed peak capacity of 160,000 MW, including captive generation sources. This implies a peak shortfall of 11.7% or about 21.2MW. (This is just the installed capacity, ignoring the severe T&D losses). The Integrated Energy Policy (IEP) report of the expert committee of Government of India, dated 9th August 2006, shows that even though the elasticity of per capita energy consumption per capita of GDP growth has been falling over the years and is less than 1 now (meaning that if x% is the annual increase in energy demand and y% is the annual increase in GDP, then x < y), the energy needs per capita are still likely to increase at a rate of 6%-7% p.a., averaged over the next 25 years. It estimates that in 2031-32, we will need an installed capacity of 800,000 MW. Where is this 800,000 MW going to come from? From “pursuing all possible fuel options”, in the words of the expert committee. The 800,000MW figure is inclusive of an estimated 63,000 MW of nuclear power, 150,000 MW of hydel power, and thermal power increase of 5.1% p.a. India’s uranium reserves are good enough for only about 10,000 MW, representing the limiting value for our PHWR reactors.

Opponents of the deal have continuously touted the figure of Rs. 11 crore / MW, the estimated costs of the nuclear power generated through imported fuel and reactors. This figure, they claim, is significantly higher than the Rs 7 crore / MW for power from indigenous nuclear sources, Rs 4 crore / MW for power from thermal sources, and the even lesser cost per Mw for hydel power. These figures are a little tricky. It is fair, for e.g., to ask why the relevant power figure for comparison was taken as 30,000 MW and not 53,000 MW (estimated requirement minus indigenous resources). Ventures with higher fixed costs (import of reactors, fuel etc.) become increasingly attractive for higher volumes. The long run marginal cost of producing 1 business unit (1 KWH) of energy through nuclear sources was estimated at about Rs 1.00 for nuclear energy and about Rs. 0.90 for thermal energy, (at 1984 prices) in a 1997 paper by Prof Y K Alagh. The comparison becomes favourable for nuclear power when the distance to which coal has to be transported exceeds a 1000 Km., due to the high transportation cost of coal.

According to the IEP report, Indian uranium is extracted from ore that has 0.1% useful content as opposed to the international standards of 12 -13%. This makes indigenous nuclear fuel 2-3 times costlier than imported fuel. With all these figures, it seems hard to accept the cost considerations that have been drawn for a capacity for 30,000 MW. The dissonance is futher magnified by the fact that the IEP report has suggested that India change its energy policy from “minimum initial cost purchase” to “minimum life cycle cost purchase”.

However, let us for a moment assume that comparison to be absolutely correct. Does that change things? Not really. The inherent assumption that we could use alternative sources to generate the 30,000 MW is itself flawed. The IEP report assumes 150,000 MW of hydel power, which is 100% of the known hydel power potential of India. It also assumes a constant growth of 5.1% p.a. for thermal power, which has been the current trend. India needs those 30,000 MW of nuclear power even after exploiting these alternative options to their reasonable maximum. The scenario that we are looking at, thus, is not one of high cost power vs. low cost power, but one of some power vs. no power. One is reminded of Homi Bhabha’s succinct remark that puts this situation in its proper perspective – “No power is costlier than no power”.

India’s mineable coal reserves are estimated to last another 45 years (at 5.1% growing usage p.a.) and known oil reserves are likely to last 23 years of production and 7 years of consumption. With increasing oil prices and depleting coal reserves all around the world, there seems to be no way except to go for nuclear power. The IEP report says that “Nuclear energy theoretically offers India the most potent means to long-term energy security”. It is true that energy security has to be achieved in the long term through indigenous sources, and that the indigenous thorium-based FBR program is theoretically the best way to achieve nuclear power security. However, to let go of the opportunity of imported uranium based power generation in the hope of an unmitigated success of the FBR program would be extremely damaging in the medium term, and implies continuing peak load power capacity shortfalls.

Next, we move on to the strategic and foreign policy implications. The opponents of the deal have raised four main considerations on this front, namely
1) The deal does not guarantee assured nuclear fuel supply, and only promises to “seek to amend domestic laws” to ensure the same.
2) The Hyde act is likely to prove a major bug-bear, and the necessity of “congruence” of Indian foreign policy with that of the US impinges upon our autonomy and will be interpreted as strictly as possible by the US.
3) In the event of a unilateral termination of the agreement by the US, we will be left with unusable nuclear reactors that will impose maintenance and safety costs for no benefits at all.
4) IAEA safeguards will continue in perpetuity even though the deal is terminable.

Let’s deal with the last consideration first, because the first three are closely inter-linked. What exactly are the IAEA safeguards that we have to adopt? Simply that any reprocessing performed on the nuclear fuel imported through this deal will be in a newly created reprocessing facility that will be open for IAEA inspection (typically, these inspections are inventory checks of weapons-grade nuclear materials). Any reprocessing done in this facility will be open for IAEA inspection. But do these safeguards extend to all reprocessing performed in India’s reactors? Not at all. It is perfectly possible for India to strike similar deals with other NSG nations and reprocess the fuel obtained through those deals at separate facilities with separate safeguards. Even if the US is likely to put pressure on most NSG nations to have similar safeguards, the option of Russia remains perfectly tenable.

The first three considerations all become relevant only in the event that the US goes ahead with a unilateral termination of the deal. Since large US business houses are going to have a stake in the profits generated by the deal, their pressure and lobbying is going to act as a deterrent to the possibility of this scenario. More significantly, the information and technology transfer is going to aid India on the path of creation of indigenous reactors that can process higher grade uranium that can be imported from non-US NSG countries. This acts as a genuine buffer to the shock of a unilateral termination.

Interestingly, this is what Article 5.6(b) of the deal reads like
(i) The US is willing to incorporate assurances regarding fuel supply …. which would be submitted to the US Congress
(ii) The US will join India in seeking to negotiate with the IAEA for India-specific fuel supply agreement.
(iii) The US will support an Indian effort to develop a strategic reserve of nuclear fuel to guard against any disruption of supply over the lifetime of India’s reactors
(iv) If despite these arrangement a disruption…occurs, the US and India would jointly convene a group of friendly supplier countries to include countries such as Russia, France and the UK to pursue such measures as would restore the fuel supply to India.

The language is ambiguous, but not by diplomatic standards. Please find me another instance where India has been able to negotiate a deal with a superior power with such major concessions. Is it at all possible for the US to guarantee fuel supply in contravention of its domestic laws? Can the UPA, for example, promise the US that the deal will definitely go through?

And what about the Hyde act? Without delving into legalese, the essence of the matter is that the act is definitely restrictive, but as explained by Dr. G Balachandran of the IDSA, four prominent exemptions have been granted to India. The first one was the exemption of the requirement of IAEA fullscope safeguards. The second was an exemption that made sure that India’s detonation of a nuclear device after the passage of the Atomic Energy Act (1978) of the US does not hinder the deal. The third waived the sanction on exports to India. The fourth exemption ensures that India’s unsafeguarded nuclear activities that are independent of the nuclear transfers as part of the deal cannot be invoked as a reason for termination. The Hyde act remains an issue of contention, but seems like one that has to be negotiated with, rather than something that can be made a reason to ditch the deal.

The arguments in favour of the deal are many, the detractions few. It would be a great loss to India if the left succeeds in its attempts to stall the deal.

I'm still alive

and kicking.

Just to stay in the game, a couple of mini-fisks, of bloggers whom I otherwise look up to.

1) Ravikiran, theorising about Indian democracy, says (among other things)

If we are honest with ourselves, we will have to admit that no one has a clue about which way the Indian voters vote, and once they have voted, the process of translating the votes to seats makes it pretty much impossible to draw a causal chain between the intention of the voter and the “Popular Will” as expressed via the seat position in the legislature.

If pollsters and pundits cannot call an election a month in advance, it is very likely that those in the government will be unable to take a guess as to which policies will win them the next election five years away. If democracy means that rulers govern according to the will of the people, then India’s democracy is broken.

Now this statement rests on the assumptions that
1) Politicians are not significantly more competent in knowing the popular mind than pollsters, and do not understand the votes to seats translation better than the average citizen.
2) Policy making and implementation in the government are a fucntion of five-year (or similar medium term) strategies of political parties, strategies optimized to give them votes.

Both are wholly unreasonable assumptions. Pollsters survey people, extrapolate data and make predictions on that basis. The sample sizes are typically so small as compared to the size of the elctorate that statistically the interval of confidence should prevent you from making any estimates. However, the TV demands a number. Hence, the pollster quotes a mean, neglecting the variance. Political parties have teams of workers working at multiple levels - they do not need to understand the scientific model or the mean or the variance for their data is far more representative and most parties know what is going to happen in the election, irrespective of what they may claim on TV. Plus, a Brahman+Dalit combine in the Up sweeping the legislature elctions there was pretty much predicted by everyone, wasn't it?

Anyone who has any close relative working in the steel frame will tell you why assumption no. 2 is false. On a daily basis, the work of the government is largely independent of the strategy of the party. The issues and stands that highlight the ideological(?) differences in the parties and become controversial are largely tactical in nature, and far lesser bearing on policy formulation and implementation.

2) Shruti Rajgopalan talks about how the market itself corrects market failures far better than governments, even in the case of public goods. The crux of the matter - people used to crowd in to listen to tour guides in Prague, even those people who hadn't really paid for their services. This is a nuisance because it is free-riding, and it can even cause legitimate tourists to miss the guide's detailing due to crowding. To solve the problem, tour guides now use small microphones and headphones are given to the touring group, thus preventing the free-riders from listening in.

Shruti believes that this is a wonderful example of a market corecting a market failure, and shows us the following dystopian situation as the government's possible solution

"How would the government deal with this problem? They would regulate the number of tourists each guide can have in a group. Furthermore they would regulate the distance each group must maintain and each individual must maintain from the groups. Then they would issue licenses to guides and have Tourist Inspectors for enforcing the regulations and ensuring the correct distance is maintained."

Oh dear god.

She calls the tourist guide's service a public good because it is "non-exclusive" and rival.

"It is difficult to exclude other tourists who are also at the monuments and the consumption may be rival as those who paid for the guide get crowded out"

Three points

1) Excuse my pedantism, but the term is non-excludable, and not non-exclusive(trust me, there's a significant difference)
2) A non-excludable, rival good is called a common property resource, not a public good.
3) The fact that a tour guide finds it difficult to physically exclude the non-paying tourists does NOT mean that his services are non-excludable. He is charging a fee for his services, and can easily deny his service to anyone. This by definition implies that his service is excludable. The problem, thus, is one of logistics (the fact that denying the service is physically difficult), and not economics and market failures(where denying the service is practically impossible, for example fishing in a sea).

The tour guide's service is in fact rival and excludable, a pure private good if there ever was one. It is a smart solution to a problem of business logistics, and not a romantic success of the market against its own shortcomings (atleast not in the free market vs government context that Shruti tries to provide her text).

I am now convinced of two things. One, ideological extremism, of any form whatsoever, is such an over-riding factor that it can totally impinge upon reason. Centrism is pretty much the only way out. Two, very few people have truly internalised what they learnt in their microeconomics course. People choose convenient bastardizations of a sound theory to criticise at will. I am reminded of Prof Deodhar's remark to us about trying to avoid the abuse of terms like moral hazard and adverse selection.

p.s : Some problem with blogger. Wll put up the links to their respective posts a little later.