Saturday, June 20, 2009

The Indian economic debate


Three approaches to economic development
in India

After liberalization of the economy in 1991 India has grown at a rate that is roughly twice the world average in the same period. The growth rate was around 6% initially and touched 9% in recent years before dropping to 6.7% this year due to the global recession. This is a big improvement over the 3% growth rate that India had before economic reforms were introduced in the 80s and 90s. The high growth is usually attributed to the end of the era of excessive bureaucratic regulations that were required to set up and run businesses in India (the License Raj) and the opening up of the economy to foreign investment.

These reforms have visibly transformed the lives of many middle and upper class families in urban India. This has led to a growing sense of optimism among those of us who have benefited most from these economic reforms. In a country where nothing worked our generation has seen pockets of efficiency emerge. The mainstream media tells us how more and more Indians are overcoming their instinctive fatalism and are becoming more "aspirational". There are frequent reports that tell us how India will soon surpass major economic powers to become one of the three largest economies in the world. Those of us who are concerned about the large number of poor in our country are assured by the media that prosperity of the rapidly growing Indian middle class will slowly but surely trickle down to the poor people.

The intellectual underpinning of this model of economic development is provided by supply side economics. Supply side economists believe that the most effective way to grow the economy is by providing incentives to industries to produce (supply) more by removing unnecessary regulations, reducing corporate taxes etc. They argue that prices of goods come down because of greater supply and as industries grow they employ more and more people so that wealth eventually trickles down (where I use the term in a purely descriptive and not pejorative way). In India proponents of this view support measures that encourage industries to grow like privatization, deregulation, allowing more foreign investment etc. They are skeptical of government spending on subsidies and social programs and say that most of this money is wasted as it never reaches the poor because of poor implementation and corruption. Thus, they say, the only effect these social programs have is that they increase the budget deficit which in turn stifles growth. They point out that in India even a perfectly equal distribution of the net income would mean that every person would earn only about Rs 3000 per month so that rapid economic growth is a necessary condition for poverty alleviation. The fact that we have almost tripled our pre-reform growth rate of 3% (the so called Hindu growth rate) is therefore a big achievement. Thus they believe high growth itself is the best strategy for poverty eradication pointing out that while there was virtually no change in the percentage of people below the poverty line in the 'socialist' phase till 1980, with the introduction of reforms this fraction has steadily dropped ever since (from 51% in 1978 to 28% in 2005 according to official figures).

The Indian Left is, however, highly skeptical about what these figures mean and doubt that there has been any real change in the lives of the poor. For instance if poverty is measured according to number of calories consumed one finds that 75 % of the Indian population was getting less than 2400 calories in 1999-2000 compared to only 56% in 1973-74 (see this article for an explanation of these figures by a pro-reforms economist). In fact India has a very poor record in reducing hunger and according to a World Bank report houses "about 49 per cent of the world's underweight children, 34 per cent of the world's stunted children and 46 per cent of the world's wasted children". The report goes on to note that much higher economic growth in India compared to Sub-Saharan Africa has not translated to a better "nutritional status of the Indian child". Leftist commentators think that the reason for all this is that India has experienced a highly lopsided growth which has benefited mainly the top 20% of the population. The growth has been led by the services sector which employs only about a quarter of the population (most of whom live in the cities) while agriculture which employs 60% of the population has grown at a much slower rate of about 3%. They point out that the great performance of the Indian industries has not been through employment expansion but due to a manifold increase in the output per worker (without a corresponding increase in their wages). Compared to a growth rate of 1.2 % in the period 1983-94 the fraction of people employed by the organized sector has actually shrunk at a rate of 0.3% per annum in the period 1994-2005 ! But the organized sector only employs about a tenth of the Indian workforce. What about the unorganized sector? Noted leftist economist Amit Bhaduri believes that only the big industries can produce goods and services, such as ACs or spas, that meet the growing demand of the rich. Thus the poor people, most of whom are in the unorganized sector, cannot participate in this economic growth either as produces or consumers. The Left is also infuriated by incidents like Nandigram and Singur, where farmers were forced to give up their land for the sake of industrialization, and stories of small scale producers who are unable to compete with big global corporations. Bhaduri asks "Why should the very poor who are least able, bear the burden of ‘economic progress’ of the rich ?"

So while the Left acknowledges the importance of high economic growth they are not happy with the nature and composition of the present growth. So what does the Left propose? Contrary to their usual media portrayal some in the Left do have a positive agenda. They advocate a Keynesian demand driven approach to economic growth. Keynesian economists believe that in certain situations (such as if there is a recession) it is advisable for the government to spend money (even if it leads to a deficit) to employ more people, increase the aggregate demand and thus stimulate the economy. Such a program for economic growth in India has been described in detail in Bhaduri's articles and his book Development with dignity. He says that the government should guarantee jobs for all. This would increase the purchasing power of the poor which would lead to a growth in the rural demand. The nature of the demand would help small scale producers and industries that cater to the demands of the poor leading to a growth of rural markets. Such an economic growth would be more broad based and inclusive. Where would the money to finance such a massive government program come from? Bhaduri argues that the government should deficit finance the program and that the deficit would not lead to inflation in an economy with unsold foodgrain stocks, unemployed labour and unused foreign exchange which can be used to import necessary goods which are not present in excess like steel (inflation is caused if there are not enough goods to meet the demand). The essential difference between this model of economic development and the earlier supply side approach is that while in the earlier approach economic growth leads to employment generation, in this approach employment generation leads to economic growth.

A third approach to economic development which is neither anti-liberalization nor against social sector spending is gaining a lot of support after the convincing return of UPA in the 2009 polls. It is hard not to interpret the election results as an endorsement of UPA policies by the people of India. As psephologist Yongendra Yadav notes, in a country where incumbent governments have been thrown out 80% of the time "in almost every State, the Congress has finished at the upper end of the band that it could have performed within." Even in non UPA states the ruling party has won if it has governed efficiently as in Bihar and Gujrat .

So what is this third approach? The most illustrious proponent of this approach is probably Amartya Sen. Sen supports globalization but says that it must be complemented by policies that build a safety net to protect local producers who are suddenly thrown into the highly competitive global market. He notes that in the years (2004-2005 to 2006-2007) which saw unprecedented growth rates (7.5 % , 9% and 9.4%) government revenue has expanded at an even faster rate (12.5%, 9.7% and 11.2% after correcting for price change). Sen wants the government to use this money in critical areas like health services, education and physical infrastructure. Thus proponents of this view believe that reforms are not undesirable. In fact they think reforms are necessary if India has to raise the resources needed to overcome its major social challenges. Unlike supporters of the first approach, however, they believe that we should not wait for the market to distirbute the fruits of economic growth to everyone and believe that the government has a major role in this. In the last five years which saw high growth rates the UPA government spent massive amounts in the social sector. They started the National Rural Employment Guarantee (NREG) scheme and waived loans of millions of farmers. While some of these policies might have been the result of the pressure from the Left parties the election results seem to have convinced UPA that this is the right direction to take in the future The UPA government has already made it clear that it will continue to spend massive amounts in social programs including a Rs 50,000 crore food bill and a plan to make India slum-free in five years. At the same time, however, they have clearly indicated that they want to relax foreingn direct investment (FDI) caps in various sectors and disinvest PSUs (public sector units) to raise the money needed for the social sector spending.

This approach is beginning to gather some support from both the economic Left and Right. The Left has seen some of its long-standing demands like the employment guarantee scheme being finally implemented. That the Left would welcome this recent emphasis on social schemes is of course expected. What is more interesting is that a growing number in the industry are also favouring these schemes. In 2008 the industry and the mainstream media was very critical of the "populist" tone in the budget and were especially disappointed by the farm loan waivers. Until very recently the media coverage of the NREG scheme was very negative focusing mainly on poor implementation of the scheme. Attitudes began to change even before the elections after India was hit by the global recession. The ideal time for Keynesian, demand side policies is of course in a recession when there is a drop in demand. The farm loan waivers and NREG incomes effectively acted as a stimulus to the rural economy which hardly felt the effects of the slowdown. In March new cellphone connections hit a record 15.6 million mainly because of rural consumers. Hero Honda motorcycle sales directed at rural buyers are also significantly up. The increased rural buying has helped sustain the aggregate demand thus ameliorating the blow of the global recession on the Indian economy. This explains the sudden change in attitudes of the pro-industry group.

The UPA may find it much harder to please everyone again this time. The global environment, which was probably the most important reason for the high growth rates in their first term, may be far less encouraging this time in the aftermath of the worst global crisis since the Great Depression. The fiscal deficit may cross 11 % this year. What would the UPA government do if the economy does not perform so well in the coming years and the deficit does not decrease ? Would the government cut down on social spending and thus enrage the Left ? Or would the government maintain the social programs even at the cost of high deficits and thus disappoint the Indian industry?

PS: As a friend pointed out, by "the Left" I do not mean the Left parties or what the media usually means when they refer to "the Left". Unfortunately the saner Left viewpoint discussed here does not get much exposure and one has to spend a lot of time on the internet to find these arguments.


Friday, May 15, 2009

Can consciousness be explained by science? -II


Part II: Why some aspects of our consciousness cannot be described by science.


In part I of this post I argued that all our mental activity (our thoughts, feelings, sensory perceptions etc) must correspond to definite physical processes in our brain. But does knowledge of these physical processes tell us everything about consciousness?

Let me try to answer that by giving a well known example. A neuroscientist specializing in colour vision knows all about how the brain perceives colour. She knows for example everything about the physical changes that take place in a person's brain when he sees the colour red. The scientist has, however, been confined to a black and white room all her life. When she comes out of her room for the first time and sees the colour red one has to agree she learns something new, something that was missing from all her previous scientific knowledge.

In other words what it is like to see the colour red or to hear a particular sound is something beyond any scientific description. In fact these subjective experiences cannot be described in any kind of language. Let me elaborate by giving another well known example. Think of a person to whom everything red appears green and everything green appears red. Thus to him strawberries appear green (see picture on the right) and leaves appear red.


If you think about it he will never realize that his sensations are inverted with respect to the rest of us. This is because he will never be able to communicate to the rest of us the subjective sensation itself that he has when he sees something red or green. All he would be able to convey is that roses and strawberries have the same color or that leaves and grass have the same color. No one will of course ever dispute that.

Similarly what it is like to smell a flower or taste something salty can only be felt but not really described in words. These subjective experiences are called qualia (singular 'quale') by philosophers. Many would consider what it feels like to be angry or sad also to be a quale. To a scientist who wants to explain everything in terms of theories of matter qualia are a big, perhaps insurmountable, obstacle. The laws of physics do not tell us which physical events should have qualia or that qualia should exist at all.

These qualia- colours, scents, tastes, sounds etc are of course the fundamental building blocks of what we perceive as the external world. The world of our senses, however, is not the external world. The colours and sounds exist only in our heads and not in the world outside. In the world outside there is nothing qualitatively different between electromagnetic waves of wavelengths 350 and 450 nanometers but in the world of our senses the latter corresponds to blue light and the former cannot be seen. In the world of our senses the sensation of sound and the sensation of hotness/coldness are utterly different but in the world outside both are at a fundamental scale atoms and molecules in motion. The world that we perceive through our senses is nothing more than a simulation of the external world which encodes very limited information (that is important for our survival) about the world outside.

Aliens who have evolved under different circumstances may have very different sense organs and very different ways of perceiving the external world. The world that these aliens perceive would not be composed of images, scents and sounds but of the qualia related to their own senses to which we would be 'blind' and 'deaf'. We imagine everything in terms of images, scents and sounds so the world of their senses would be completely beyond our imagination. What would it feel like to perceive the world of their senses? Unfortunately no amount of scientific investigation of their brains will ever tell us the answer.

PS: (1) In the last example I did not need to talk about aliens. Many creatures, most notably bats, have sense organs which are very different.

(2) As is going to be the case with many other posts my knowledge on this subject is very elementary. It seems that this issue is far from settled among philosophers. There are counterarguments to many of the things that I have written here. I did not have the patience to go through these arguments but you can read them here and here.

Friday, May 1, 2009

Links

Friday, April 24, 2009

Can consciousness be explained by science? -I


Part I: Can the mind exist without matter?


In the first part of this two part blog entry I would try to argue that all our conscious activity must correspond to definite physical changes in the brain. In other words if neuroscience were to ever reach a stage such that all physical changes in the brain could be observed and monitored (a goal that may be practically unattainable) we should be able to tell what a person is seeing, hearing, feeling and thinking by simply observing her brain.

Neuroscience may be far from reaching such a stage but discoveries already made in the field strengthen the case for the above proposition.

In a 2002 study British neuroscientists asked subjects to look at photographs of real faces and objects. Using fMRI, a technique which uses MRI scans to locate active regions of the brain by detecting increased blood flow, they identified regions of the brain (see figure on the right) that are active when a person looks at a face (marked fg) and the regions which are active when he looks at an object (marked pg).



The subjects were then shown Rubin's famous Vase-Face illusion (see figure on left). By simply looking at which regions were active in the MRI scans the scientists could predict whether the subject was perceiving the image as two faces or as a vase!

You may be thinking that while discoveries like this (see V S Ramachandran's BBC Reith lectures for many other equally fascinating examples) are definitely suggestive, my initial proposition is still a big extrapolation if it is based only on such findings.

There is in fact a more fundamental reason for my belief, a reason that I have learnt to appreciate because of my training in physics. A physicist would view the brain and its functioning as an extremely complex natural process. Physicists have a simple approach when they try to understand complex natural phenomena. Just as any change in the picture on your computer screen is brought about by a change in the colour and intensity of each of the pixels, any process that we observe in nature is the result of a change of the arrangement of smaller particles like atoms that constitute everything. As there are billions and billions of them in even a small object, simply by moving from one place to another, these particles can accomplish wonderful things- the rusting of iron, the burning of paper, the discolouration of leaves in autumn, lightning, tornadoes, in short everything you see around you! All the complexity in natural phenomena is because of the large numbers of these particles involved in these processes (a screen can generate a far more complex picture if there are thousands of pixels instead of say twelve). The movement of these particles is governed by precise, empirically tested laws. Based on the present state of a system of particles these laws tell us how the system will evolve in time.

The functioning of our brain is undoubtedly more complex than the phenomena mentioned above but our bodies and brains are made of exactly the same atoms that physicists and chemists study in the lab everyday. How these atoms evolve with time is governed by the same laws. Therefore it follows that what we will do in the next moment depends on the physical behavior of the atoms in our brains at the present moment (which might correspond for example to a high level of activity or increased blood flow in a certain region of our brain or may be an unusually large number of neurons firing in another region). But we also know that what we will do in the next moment depends on what we are thinking and how we are feeling at the present moment- if you are angry you might yell at someone, if you are depressed you might call a friend etc. Consider the two italicized statements in this paragraph. As an effect cannot have two different causes these statements suggest that what we subjectively feel as an emotion like anger or sadness corresponds to a definite behavior of atoms, i.e. a definite physical process in the brain that can be, in principle, objectively observed.

So at the end of this part the partial answer to the question posed in the title seems to be that any mental activity must correspond to definite physical processes in our brain and these physical processes can be analyzed using the usual methods of science. I will argue in the next part of this post that a scientific description of the objective process that a thought, emotion or sensation is related to is, however, inadequate in capturing all aspects of our consciousness.

The concept of consciousness not tethered to a body is obviously meaningless from this point of view. Thus from this perspective the idea of ghosts or spirits or a soul that leaves the body after death is absurd! The same thing can be said about a nirakar (formless) God having conscious attributes like mercy and forgiveness. But then rules need not apply to God!

Saturday, April 11, 2009

Prisoner's Dilemma



And that's why you should never trust women!

What the woman did, however, makes complete sense. If the man had decided to steal, it would make no difference to the amount of money she would take back (which would be zero) whether she splits or steals. If on the other hand the man had decided to split, it would obviously be favorable for her to steal. Thus whatever the man might have chosen to do, split or steal, the outcome is more favorable to the woman if she chooses to steal.

But what if the man had also done this simple calculation before taking his decision? The outcome would be the worst possible for either of the participants! Thus if both players are rational and try to maximize their own payoffs they lose everything. Thus sometimes altruism can be more beneficial than selfishness. This is a version of the prisoner's dilemma (PD) (although there are subtle differences). The wikipedia article mentions that in experiments 40 % of people choose to trust each other and cooperate. Thus people do not always make the selfish, rational choice.

I read about a similar paradox called the traveler's dilemma (TD) in an article written in Scientific American by Kaushik Basu who used this paradox to argue that

The game and our intuitive prediction of its outcome also contradict economists' ideas. Early economics was firmly tethered to the libertarian presumption that individuals should be left to their own devices because their selfish choices will result in the economy running efficiently. The rise of game-theoretic methods has already done much to cut economics free from this assumption. Yet those methods have long been based on the axiom that people will make selfish rational choices that game theory can predict. TD undermines both the libertarian idea that unrestrained selfishness is good for the economy and the game-theoretic tenet that people will be selfish and rational.

You might wonder (as I did when I first read the above article) when in real life do people have to make such decisions (other than contrived situations in game shows)? Let me give you two examples,

1)A recession like the current one is worsened due to a lack of confidence. Consumers because of lower income and out of fear of unemployment choose to spend less which leads to companies doing badly which leads to further unemployment and lowering of incomes. Thus although it may be rational for each individual to save money in a recession, this leads to a situation which is bad for the population as a whole. This is called the paradox of thrift.

2) In an arms race between two countries both the countries have the choice to invest more in weapons or reduce arms. For either country military expansion is the 'rational' choice irrespective of what the other country does. This leads to a situation which makes both countries less safe than if both had chosen to reduce arms.

As the second example suggests PD is not limited to just economics. In fact the iterated PD (a version where two players play PD many times) has been used to explain among other things morality and the evolution of altruism (subscription required)!