The “Kerala model of development” is often cited as a path for developing nations to secure strong human development indices (literacy, health, etc.) but without first adopting the “Washington Consensus” (essentially higher, per capita GDP via free markets). Today’s Economist Blog has a brief update on the model and the risk posed to it by the global economy and it reminded me of an old-ish article I never got around to blogging…

Back in September ’07, NYT described the Kerala model and its adherents this way –

TRIVANDRUM, India — This verdant swath of southern Indian coastline is a famously good place to be poor. People in the state of Kerala live nearly as long as Americans do, on a sliver of the income. They read at nearly the same rates.

With leftist governments here in the state capital spending heavily on health and schools, a generation of scholars has celebrated the “Kerala model” as a humane alternative to market-driven development, a vision of social equality in an unequal capitalist world.

…It also gained a reputation as a place hostile to business, with heavy regulation, militant unions and frequent strikes. There are fishing jobs but little industry and weak agriculture. Government is the largest employer; many people run tenuous businesses like tea shops or tiny stores.

However, if there’s one thing economists of all stripes agree on, there’s no such thing as a free lunch. They further note –

…far from escaping capitalism, they say, this celebrated corner of the developing world is painfully dependent on it.

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The Economist recently posted its newest “bright young economists to watch” list. In addition to the tremendous visibility given by a top tier pub like The Economist, past list alumni have gone one to great things –

Raj Chetty

TWENTY years ago The Economist wrote about eight young economists who were making a big splash in their discipline and beyond. One of them, Paul Krugman, recently won the Nobel prize for his models of international trade and economic geography. Ten years later we tried to repeat the trick, identifying another eight young stars, many of whom were taking their discipline far off-piste. One has since achieved even greater fame than anticipated. Steven Levitt of the University of Chicago became a household name as co-author of “Freakonomics”, a bestselling book published in 2005.

This year, 2 economists of mutinous importance made the cut.

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The NYT has an interesting story on how the US’s recession will affect the folks in the Desh most directly linked to our economy –

The DJ ain’t gettin’ as much play

BANGALORE, India — After years of being blamed for job losses in America and elsewhere, India’s high-tech companies and outsourcing firms are going through a downturn of their own. The global slowdown is forcing them to reduce hiring, freeze salaries, postpone new investments and lay off thousands of software programmers and call center operators.

Of course, as with many things in life, an economic “crisis” is often a relative thing. In the 70s & 80s, for example, the Natural and NAIRU rates (essentially the lowest possible unemployment rate w/o screwing other things up) were widely thought to be around 6%. Our recent 6.5% uptick in unemployment, by those standards, would have been seen as a blessing. And in a global context, the most recent US unemployment rate would literally be a godsend. For ex., France’s official unemployment rate – even in boom times – is way above this and the unofficial rate is probably closer to 10%.

So with that economic relativism in mind, what does a crisis look like through the eyes of Infosys? A mere 13-15% growth –

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As the world hopes / prays / waits for an impending Obama Presidency, OpEds like this one are surfacing asking “what would it mean for us over here?” Writing for the Times of India, the wonderfully multi-syllabically-named Swaminathan S Anklesaria Aiyar takes a look at how Obamanomics might affect the Desh –

What They Are Wishing For….

Barack Obama looks certain to beat John McCain and become the next US president. Most Indians will be delighted. An Obama victory will symbolise the vanquishing of racism and the dismal Bush legacy.

…Yet, a look at the voting record and campaign content of the two candidates suggests that McCain might in many ways be better for India than Obama, especially on economic issues.

One of Aiyar’s biggest fears is resurgent protectionism within the anchor tenant for world trade –

…pressures will mount for protectionist measures and beggar-thy-neighbour policies in the US, hurting countries like India. Apart from erecting import barriers and subsidising dumped exports, US politicians will seek to curb the outsourcing of services to India. Visa curbs will slow the movement of skilled workers and their dollar remittances back to India. McCain is one of the few American politicians in either party with the courage and conviction to stand up to protectionist populism. By contrast, Obama embodies protectionism.

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This post is intended as a discussion post, inspired by a recent Tehelka article posted on our news tab, entitled, A Lifeline of Red Tape?. The thesis of the article is this: while India’s stock market may be in free fall (it’s already lost 50% of its value from a year ago), the economic fundamentals of the country remain somewhat solid. The crisis in the global economy may not be devastating across the board, because India’s domestic economy is sheltered from world markets:

For economies such as India, the domestic growth is real and reasonably steady. But the impact of the recession in the US and the global credit freeze has meant that stockmarkets are in turmoil as foreign institutional investors (FIIs) sell equity in domestic stocks to meet liquidity needs back home; companies which had raised funds abroad now see the money supply dry up; and lack of liquidity impinges on Indian banks’ ability to lend. Wharton business professor Mike Useem says this is the world’s worst financial crisis. “Unlike the US, the world will not see an immediate impact on the surface, but the pain will be felt slowly,” Useem told TEHELKA (link)

Unfortunately, after that, the Tehelka article doesn’t really add much more meat to the thesis (though it’s still worth reading). But I think it’s an interesting point to discuss, and it’s one that my friend Rajeev, a software guy who lives in Bangalore, also suggested to me recently when he was visiting: India’s slow path to liberalization/privatization and relatively conservative rules for foreign investors will protect it from the worst of the current global financial crisis.

(Note: that is NOT the same as saying we need a return to 1970s socialism. Rather, the thesis is simply that caution in reforming and “modernizing” the Indian economy seems much more attractive at times like these.)

Obviously, the foreign institutional investors who had been propping up the Indian stock market in particular will be pulling back (they already have, as I understand it). And the IT industry, which is so heavily oriented to the global economy, is going to be feeling pain.

But while those are parts of the Indian economic boom we have been hearing the most about here in the U.S., they actually remain relatively small parts of the broader Indian economy, which is still based, first and foremost, in agriculture. The fact that most Indians owe relatively little (many Indians still prefer to pay for their homes in cash, and do not heavily rely on credit cards) also helps them weather the storm. But is that enough to keep the Indian economy moving forward?

I am less clear on what is happening with the Indian real estate bubble; I have read some things that suggest the market is on the verge of collapse, but anecdotally, friends and family in Delhi and Bombay tell me prices are still quite high. Do readers have any data on this? Also, what impact is the devaluation of the Rupee likely to have? Continue reading →

This Wired piece manages to combine 4 of my favorite topics into a single article –

• Who You Gonna Call? The Medicine Man – Lokesh “Mulama”

  Law and Economics
• Indian Governance & Modernization
• The Tech Boom
• Goondas

The story? The crazy things Bangaloreans have to do to establish title to a piece of property.

Let’s say that you or your company wants to build a tech office building on a piece of land currently occupied by a house in Bangalore. Normally, you’d just pay the homeowner for the property and tear down the house to start constructing your office building.

The problem is that actual legal title to land is a pretty murky problem in India (as well as many other parts of the 3rd world). In other words, the guy you bought the land from might not have owned it in a legally clear manner to begin with. His father may have simply squatted on it, and later his eldest son decided to build a nicer house on his boyhood plot of land. Or perhaps his backyard garden – the one you planned on turning into a Nano parking lot for employees – actually belongs to his neighbor?

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What impact will the banking crisis and subsequent stock market collapse have on the developing countries of South Asia? According to one economist, not much. According to Michael Clemens at the Center for Global Development, no economic crisis has been very consequential in the medium to long term:

In historical perspective, many of the most worrisome recent crises are small bumps on a very long road. The entire effect of the 1994 so-called “Tequila” Crisis on per-capita real income of the average Mexican… was erased in exactly three years. In Thailand, epicenter of the 1997 Asian Financial Crisis, it took all of six years. In Indonesia, the poverty rate in the population was back to its pre-crisis level within just three years. Even the big, bad 1982 Latin American debt crisis … [had no long term effect]

Bad years are typically followed by offsetting good years, and good years by bad. The good years get smaller headlines, or none at all. The point is that in the long march of development, some financial crises amount to rounding error relative to the real economy, and the real economy affects welfare. [Link]

Clemens claims this is even true about the mother of all financial crisies, the Great Depression. Even this seemingly cataclysmic event, he argues, had no real impact on long term American growth.

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Since we’ve been talking Indian banking lately, a friend forwarded me this old-ish blogpost at MIT’s Technology Review magazine outlining one way that tech is helping roll out rural banking in India –

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An ATM for the next Billion?

Kasaghatta, India: It’s a 90-minute walk from this southern Indian village–one of 730,000 in India–to Doddabenavengala, the nearest town with a bank branch. Until a few months ago, Karehanumaiah, a 55-year-old agricultural laborer, had no bank account, which also meant he had no access to formal credit. (He would have to pay 10 percent monthly interest to informal lenders to, say, borrow $45 to buy a goat.) But that all changed in recent months.

Karehanumaiah uses a desktop terminal to deposit 150 rupees (about $3.50) into his new account at Corporation Bank, with help from Muniyamma Ramanjanappa, a village resident who conducts these transactions in her concrete house as a bank representative. First, a smart card and a thumbprint scan prove his identity. Next, Ramanjanappa updates the bank balance information on his smart card by connecting the terminal to the bank database with a cell phone. Finally, Karehanumaiah hands Ramanjanappa the cash and gets a receipt for his deposit (which brings his balance up to 160 rupees)….now that Karehanumaiah has a bank account, he can borrow money from the bank at rates of between 8.5 and 13 percent annually–far less than in the informal system–and gain a toehold into the formal economy.

Ninety percent of India’s rural residents lack bank accounts, and a variety of technologies are being applied to the problem. Other efforts include using cell phones to make payments and execute bank transactions in a nation that is enrolling a staggering eight million new cell-phone accounts monthly, many of them in rural areas.

For me, the article really highlights what real, “bottoms up” econ & tech development is supposed to look like… Continue reading →