#44 Hindi Chini Bye Bye?

Four Myths about the PRC's prowess, Skill Development PolicyWTF, Responding to the Standoff on the LAC, and more

This newsletter is really a weekly public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

PolicyWTFs: The Fault in Central Planning for Skill Development

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Raghu Sanjaylal Jaitley & Pranay Kotasthane

How about some heart-warming news to begin with?

The National Skill Development Council (NSDC) has identified 116 ‘atmanirbhar districts’ in six states to focus on reskilling of migrant labourers who have come back home. The government plans to map their current skills, reskill them and identify areas where they could be employed. NSDC estimates 6.7 million returning migrants who will need help. The district administration machinery will take this on a war footing. This is nice. The government should always be seen to be doing something.

The news report also has this great line about the real villains in Indian society.

The NSDC estimates that of 420 million Indians in the labour force, almost 360-370 million are already skilled but many face issues of getting hired due to the overwhelming presence of middlemen and fixers

Sometimes I think the standard Indian greeting should be - aap party hain, ya broker? Once you have got that out of the way, you can have civil discourse with any stranger.

How Omniscient is NSDC really?

Let’s get the obvious question out of the way – If there were jobs available in these 116 districts, why did these labourers travel to distant cities for jobs in the first place?

We have other questions too.

  1. What skills will the government train these migrants on? They seem to have mapped their existing skills. How? What’s the skill of a security guard or someone who tosses bricks on a construction site? What will you do with them further?

  2. The best way to destroy the market for a skill is to unthinkingly train lots of people in that same skill. Does the government have numbers about the market requirements of each skill in these districts?

  3. How does the government know which of these skills have a demand in the market? Now or in future? Did it always know this? If yes, why did it wait for a pandemic to run such programs in these ‘aatmnirbhar districts’? It should have been doing it all along

  4. Who will pay for it? The government? If yes, why only for skill development of people in these districts? Why not for everyone?

I guess some of you will find this line of questioning absurd. Please judge the government by its intentions, you will argue. Well, here’s a quick reminder. The first principle of policy analysis – don’t judge a programme by its intentions. Because intentions are always pure as the driven snow. Judge the policies by their rationale and their likelihood of success.

You aren’t convinced? Let me take this further with an analogy.

Say, you have a daughter who is 12. You want her to pursue a career that will be relevant and coveted a decade from now. This shouldn’t be the only criteria but for a moment, let’s assume, this is your only criteria. You know her interests, her temperament and her current capabilities. After all, she’s your daughter. Would you know for sure what stream should she opt for her graduation five years from now? The short answer, as any parent will attest, is no. Because you have no idea of the hottest jobs ten years from today. So, if you can’t predict what skills your own daughter should train herself on, how do you imagine the government to know what skills are best for millions of migrant labourers in future? The state couldn’t have known it even if it were literally their mai-baap.

That Brings us to Spontaneous Order         

The simpler a concept, the harder it is to comprehend. The idea that social order and common good can emerge from free and decentralised individuals acting in their self-interest is simple but goes against our intuition. Why? Because it has been drilled into our heads that we need to sacrifice our self-interest to pursue the greater common good. So, how can any larger good come about if all of us pursue our own agenda?

Hayek wrote about this in Studies in Philosophy, Politics and Society (p. 167):

“Much of the opposition to a system of freedom under general laws arises from the inability to conceive of an effective co-ordination of human activities without deliberate organization by a commanding intelligence. One of the achievements of economic theory has been to explain how such a mutual adjustment of the spontaneous activities of individuals is brought about by the market, provided that there is a known delimitation of the sphere of control of each individual.”

We are always looking for a commanding intelligence that will co-ordinate human activities towards a common goal. Even when there’s evidence around us that spontaneous order works better.

A Short History of Skill Development in India

Skill development in India is a great example of how spontaneous order has worked. There have been three big skilling and employment waves over the last three decades in India. IT services, BPO and logistics (home delivery of things).

Let’s take IT services. In 1990, India had 337 engineering colleges with about 10,000 new students enrolling every year. Of these, the government engineering colleges numbered about 180 accounting for 50 per cent of the enrollment. The IT industry employed fewer than 10,000 people then. In 2018, the total engineering colleges had grown to about 3400 of which the government colleges were 466. The annual enrollments were about 8 lakhs and private engineering colleges accounted for almost 90 per cent of it. The IT industry employed about 41 lakh people in 2018. Besides the engineering colleges, others like NIIT, Aptech and scores of smaller entities trained millions of graduates in coding and testing skills to make them employable.

The government didn’t go about building engineering colleges or training institutes to address the need for IT companies. It didn’t have to. As IT companies grew, the demand for engineering talent grew. This signalled to players in the education sector to increase capacity or to build new engineering colleges. Quite remarkably, the supply of trained professionals kept up with the demand as the Indian IT industry boomed.

Similarly, the BPO industry saw rapid growth between 2005-15. The industry required a legion of English-speaking graduates in a country where this skill was considered elite. The government didn’t set up institutes to train young graduates to speak in English. Millions of them sprang up all over the country in response to the demand for such training. Over time there was an oversupply of these institutes. Many of them shut down and shifted to other businesses. The market found a more efficient avenue for allocation of capital.

In the last five years, the demand for skilled drivers (2 or 4 wheelers) went up as cab aggregators, e-commerce players, e-pharmacies, e-grocers and food delivery companies scaled up their business across India. Neither these companies nor the government had to set up driving schools to prepare people for these jobs. As the demand for driving skills increased, hundreds of driving schools cropped up in villages of Telengana, Odisha and Bihar. In less than 3 years, over 30 lakh ‘driving’ jobs were created and filled up by people who didn’t know driving before.

The Folly of Central Planning

What does this mean? The government has no special powers to predict which skills will be needed in the future job market. In fact, it will get it wrong if it tried predicting. Because it will club together migrants based on some sketchy details of their skills, create a database and deliver skill programmes that have no bearing to what the market needs. As Hayek wrote in Use of Knowledge:

“This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the “man on the spot.”

The Indian state, as we never tire reminding, has low capacity and finite resources. It should use them in areas where it can have the maximum impact. Skill development, as our recent history has shown, doesn’t need its attention or its benevolence. The best way to help migrant labourers is for the government to create an environment for businesses to flourish. Simplify labour laws, reduce regulations, make capital easy to access and stay out of the way most of the times – these will help entrepreneurs. They will create jobs and the market will find ways to skill people and fill up those roles.

That’s spontaneous order in action. No one has to control it. It comes together on its own. It is simple.

PS: Our friend Ameya Naik (@KianAyema) will remind you of Bill Gates’ well-intentioned idea about how chickens can solve world poverty. Chickens are easy and inexpensive to take care of, are a good investment, and keep children healthy, and empower women. So wouldn’t it be great if the Gates Foundation gave chickens to a third of rural Sub-Saharan Africans? Won’t that solve their poverty problem?

The answer to that is obviously no. The price that each egg or chicken earns for a family will drastically reduce if everyone around you is doing exactly the same thing. So is the case with skilling. Too many centrally-planned barbers or plumbers is the best way to destroy the market for barbers and plumbers.


Matsyanyaaya: Busting 4 Myths about the PRC

Big fish eating small fish = Foreign Policy in action

— Pranay Kotasthane

Having read the news reports about the all-party meeting, I couldn’t help but think how different the rhetoric in Indian politics and society would’ve been if Pakistan, and not China, were to have committed the exact same actions.

One reason for this difference in response is probably the myth-building the PRC has done. Many in India have also unsuspectingly believed all the stories that they sold to us, thereby creating the image of an adversary that’s just too strong to be challenged.

So this edition of Matsyanyaaya is a compilation of four myth-busting articles on the PRC that I came across.

Myth #1: PRC is Efficient

The paeans of PRC’s efficiency are all around us. Lots of us believe that the PRC can do long-term planning and act coherently precisely because it is an efficient, ruthless machine.

A recent paper by Hui Zhou busts this myth by meticulously documenting all that is inefficient about the PRC. Here’s a summary:

..such rosy assessments overlook key costs – not least to the rights and protection of citizens… this overlooks the immense costs and two key questions: How does the system derive its huge resources? Why does the government enjoy such powers of enforcement?

High taxation, low benefits. If non-tax revenues collected by the government are considered in addition to formal categories of tax, China’s tax burden is likely 35 percent to 40 percent of GDP, surpassing many high-welfare European countries. Yet, the quality of public service and social security lag far behind standards in Europe.

Low human rights standards. Unfairness in China’s welfare system, lack of access to healthcare (particularly for those without urban registration), forced land acquisition and violent property demolition and other common problems lower the cost of development for China’s government.

Debt for development. Since the 1990s, local Chinese governments have rapidly built a "GDP machine" that leverages borrowing for development. This has led to huge level of so-called implicit debt. Of the 29 provincial-level administrative divisions in China for which statistics were available, 21 had debt levels exceeding 150 percent.

Myth #2: CCP is Merit-oriented

Haven’t you heard this regurgitated on many occasions — Chinese governance rocks because it rewards merit? But a recent analysis by Neil Thomas of MacroPolo shows how personal networks of the supreme leader determine career prospects at high levels, not their merit. Here’s a summary from the paper:

Recent scholarship on career advancement in the Chinese Communist Party (CCP) shows that factional ties to the top leader, as measured by overlapping study and work experiences, strongly bolster chances of promotion to the Central Committee. Competence, if judged on economic growth and fiscal revenue, appears to matter more for the promotion of lower-level cadres.

The foremost finding is that, since becoming CCP General Secretary in November 2012, Xi has been remarkably successful in elevating politicians with whom he has professional, educational, or personal ties. Formally, the Central Committee elects the Politburo, but in reality it is selected by backroom negotiations. So, while the composition of the 18th Politburo (2012-2017) reflected the clout of his predecessors, Xi capitalized on the outsized power he acquired during his first five-year term to install close comrades in the 19th Politburo.

Myth #3: PRC is an Indiscriminate Bully

PRC’s continued arrogance against many of its neighbours has led to a belief that its usage of force can be explained by its growing military strength or the assertiveness of its leaders. However, a recent paper by Ketian Zhang shows that China is a cautious bully, not an indiscriminate one. Here’s a summary:

China is curiously selective in its timing, targets, and tools of coercion: China rarely employs military coercion, and it does not coerce all countries that pose similar threats. An examination of newly available primary documents and hundreds of hours of interviews with Chinese officials to trace the decision making processes behind China's use and nonuse of coercion reveals a new theory of when, why, and how China employs coercion against other states, especially in the South China Sea. Contrary to conventional wisdom, the findings show that China is a cautious bully that does not use coercion frequently. In addition, when China becomes stronger, it tends to use military coercion less often, choosing instead nonmilitary tools. Moreover, concerns with its reputation for resolve and with economic cost are critical elements of Chinese decisionmaking regarding the costs and benefits of coercing its neighbors. China often coerces one target to deter others—“killing the chicken to scare the monkey.” These findings have important implications for how scholars understand states' coercive strategies and the future of Chinese behavior in the region and beyond.

Myth #4: PRC Thinks Strategically, Not Tactically

Another myth that is heard often is how PRC leaders always think long-term. Such notions are betrayed by China’s own actions in the South China Sea and Ladakh during the times of COVID-19. At a time when the US is trying to take China head-on, its leaders have antagonised India, Australia, Vietnam, Taiwan, and Hong Kong — all at the same time, putting in motion Luttwak’s Logic of Strategy. How can this be considered ‘strategic’?

My colleague Nitin Pai had made precisely this point in SCMP two years back:

Half of India’s population is under 26. Whatever the stakes on the remote Himalayan slopes, they are likely to carry an imprint of China as an adversary and an enemy well into the rest of their lives. Is it really in China’s interests to alienate half a billion people across its borders for the next several decades? Will it be easier or more difficult to achieve President Xi Jinping’s “China Dream” under these conditions? How does it help China if India is pushed into a tighter embrace of the United States?

India Policy Watch: Thinking About Collective Risks

Insights on burning policy issues in India

— Raghu Sanjaylal Jaitley

The COVID-19 pandemic is not a ‘black swan’ event. Taleb himself has termed it a ‘white swan’. How improbable an event was this pandemic? There was a mainstream film made nine years back which had laid out the sequence of events. And a famous man had delivered a TED talk on the next outbreak five years ago.

The problem with a COVID-19 kind of event isn’t that it couldn’t be foreseen. It is about the policy planning framework to prepare for such events.

Why is this a problem?

Three reasons:

  1. Nature of the problem: The pandemic is a good example of an event that is logically possible, has huge costs for humanity but can’t be predicted. It could happen tomorrow or 25 years from now. There’s no build-up to the event. This makes it difficult to assess the optimal level of readiness.

  2. Policymaking limitations: Most policy-making frameworks focus on solving an existing problem. The challenge is on finding the most optimal solution given the constraints of the policy environment. Then there is a small subset of problems where the problem is an event in future. Disaster planning or defence readiness are examples of these. In these problems, there’s either data available to arrive at defined time horizon of probabilities (earthquake, infrastructure planning) or there’s a build-up that gives a narrow window to mobilise efforts (cyclones, floods or wars). Events like a pandemic are a completely different category. The policymakers lack experience and frameworks to plan for them.

  3. Cost-benefit analysis: Does it make sense to be in a total state of readiness for 50 years for an event whose costs would be high but can’t be assessed now? You could spend a lot of time and money to be prepared and be accused of being both paranoid and wasteful. What should be the optimal split between building generic capabilities and investing in specific solutions for events like these?

Way Forward

We come back to the arguments we have made in past editions of this newsletters. The state has to prioritise its focus on areas that market can’t sort and get out of others. Events with huge negative externalities are one among them. State capacity should be built for solving them. There should be a long-term commitment to stick to a course and every evidence and argument woven to frame a strong narrative to support such commitment. For example, the experience of the current pandemic should be used to strengthen the case to commit more resources to solve for the possibility of a discontinuous climate change event. Supporting this strategic direction should be the operational readiness to manage the fallout of the event. This should include training, improving public awareness, conducting simulation drills, framing a communication network to coordinate response and building operational competence to manage collective risks. The best responses to COVID-19 has been from states that had the experience of previous outbreaks like SARS, H1N1 or Nipah and sustained the operational infrastructure they built to contain them.

The narrative of investing for the long-term to manage collective risks has to be built and sustained by policymakers and opinion leaders. There will be a competing narrative that finds this wasteful or paranoid as we have seen with climate change and during this pandemic. It is critical to establish this narrative dominance in society. Once the political incentive is sorted, institutional capacity and resources will follow.  

A Framework a Week: Responding to the Standoff on the LAC in Ladakh

Tools for thinking public policy

— Pranay Kotasthane

The Takshashila Institution’s geostrategy team has a framework for India’s options with China on the Line of Actual Control (LAC). We find that under the current circumstances, replicating China’s actions elsewhere long the LAC and *then* pursuing mutual de-escalation might be a better tactical option for India.

Here’s the framework:

The conclusion:

Since China has seized territory, it only needs to hold on to what it has gained to maintain the new status quo. On the other hand, India’s task is more difficult since it seeks to return to status quo ante. To secure this, India can:

1.Seek a mutual de-escalation through diplomacy (unlikely). [1 green in the row]

2.Continue the standoff (hold). [1 green in the row]

3.Escalate by replicating China’s land grab elsewhere long the LAC and pursue mutual de-escalation. [2 greens in the row]

Under the circumstances, option 3 seems to be the better one.


Reading and listening recommendations on public policy matters

  1. [Article] Rohan V in the Scroll.in asks five questions of the government whose different arms seem to contradict one another on what happened at the LAC

  2. [White Paper] A white paper released in July 2019 by the State Council Information Office of the People's Republic of China titled "China's National Defense in the New Era" is a good starting point to understand China’s defence interests

  3. [Article] Barry Ritholtz on What Drives Markets - a pet topic of ours of late.

  4. [Article] Another one of our favoured topics. David Gordon on Does The Free Market Corrupt People where he goes on a frontal attack on rockstar philosopher and Harvard teacher, Prof. Michael Sandel

That’s all for this weekend. Read and share.

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