Archive for June 8th, 2007

Hip Heterodoxy

June 8, 2007

There has been a lot of debate and blogging on this article titled Hip Heterodoxy by Christopher Hayes. You can get a summary of all the commentary here.

What is all this about? Well Heterodox economists are all those economists which think beyond neoclassical economics. Neoclassical economics is standard economics stuff which is based on 3 assumptions:

  1. People have rational preferences among outcomes that can be identified and associated with a value.
  2. Individuals maximize utility and firms maximize profits.
  3. People act independently on the basis of full and relevant information.

All said and done neoclassical economics may be the right thing to do but somehow it has not worked. Huge development programs have been made based on the principles but most have failed. In finance, we have efficient market hypothesis (which is nothing but neoclassical) but we know markets have been inefficient for a long period of time.

It is good to be heterodox otherwise how else would someone come out with new ideas? Neoclassical is too strong a theory but then you need to develop the subject and this is where heterodoxy matters.

Earlier, we didn’t even have much empirical work by heterodox but now there is plenty. For instance, we have evolution of behavior economics which has found mainstream acceptance in finance and has shown markets need not be efficient and the anomalies would always be there as humans are anything but rational.

What do you think?


How to reform India’s Agriculture?

June 8, 2007

This could have gone to assorted links section. But as I have been writing on State of Indian Agriculture seperately, I thought it bettter to bring this one seperately.

In ET today, Ashok Gulati has written an excellent article on how can we bring growth in India’s agriculture.

If you recall, Prime Minister in the recent National Development Council had said govt. would invest Rs 25,000 cr on the ailing agriculture sector. I had written about it here. (By the way the speeches etc related to the meet are out now and you can find them here, in particular the strategy paper on agriculture looks quite good)

Now on the article. The question Gulati asks is where should govt spend the Rs 25k? Should it go towards irrigation systems, or better fertilizers or power? That is a question which would interest policymakers the most. Where to spend?

He says the research done at IFIPR by him and his colleagues show:

  • If the objective is raising growth rates in agriculture, marginal returns are highest when resources are spent on agriculture R&D, followed by rural roads.
  • If the objective is reducing rural poverty, one can get biggest bang by investing in rural roads

So rural roads are very important either way you look at it. He continues to surprise with this:

Returns through public expenditure on irrigation, especially through major and medium irrigation schemes, are very low. Irrigation is important but just pouring money in canal irrigation without any commensurate reforms on the demand side management of water in terms of pricing and institutions for better water delivery such as participatory irrigation management, may not give high returns.

This takes the cake:

Increased supplies of irrigation water, in the absence of such reforms are often absorbed by those at the head ends of the canal system. They grow water guzzler crops like sugarcane and rice while those at the tail end of the canal system remain deprived of sufficient water supplies even to grow sorghum. That is one of the reasons that during the last five-ten years while lots of money has been poured in canal irrigation, but without much increase in irrigated area. As a result, widespread prosperity that should have resulted from enhanced irrigation remains concentrated in few hands.

So, it is critical to note that enhanced money allocation in isolation will not deliver. It must be accompanied by price and institutional reforms, especially in water.

So, institutions matter. What also matters is things ignored- R&D and rural roads. It is a tough decision to make for any policymaker at such tough times. How does he divert funds at R&D and rural roads when the growth is not happening at all? That is why hard reforms are to be taken when times are good.

But, on a hindsight agriculture’s share in GDP would further shrink as India develops further(just as we see in developed countries). So why should one spend on agriculture? Well, agriculture may be shrinking but people employed in agriculture are not. So India needs people to move from agriculture to industry and services. For that there is a need to focus on education, education and education.

Assorted Links

June 8, 2007

1. Marginal Revolution on Hedge Funds. He says:

Overall I was struck by how much hedge fund activity is an artifact of regulations, and not necessarily beneficial regulations.  Deregulating some aspects of mutual funds may be an alternative to regulation of hedge funds.

2. Here is a fantastic write-up on Jeff Sachs and his work on Millenium Villages. I had posted about them earlier as well.

3. Dani Rodrik as usual says something most economists would not like. He says the growth of auto parts industry in China is a mix of both – a good dose of market discipline combined with a government bent on enhancing industrial capabilities. He says most market fundamentalists would argue that Chinese auto parts industry would have grown faster if there was no government but the government policy has been really successful and has been a breeding ground for private players.

4. Rupee finds favour from investors abroad. IADB has issued rupee denominated debt in Japan as Japanese investors have insisted on rupee denominated debt.

5. RBI to issue guidelines on foreign ownership of commodity exchanges. This is really funny. RBI should be focussing on putting its act together and solve the monetary mess (money market rates are putting a yo-yo to shame). I wonder then what is Forward Market Commission for? Shouldn’t it issue guidelines in consultation with the RBI?

6. Read on Debt Shy Asian Companies. Sample this:

Sesa Goa’s real appeal isn’t in the company’s mining projects, but in its financial statements. It’s virtually an automated teller machine. Take a crude measure of the company’s surplus cash flow: the money it made from mining last year minus what it invested. Divide that by long-term borrowings. You get a figure of, hold your breath, 885. Only one company in the Standard & Poor’s 500 Index — McGraw-Hill Cos — is more tempting, if you exclude those that have no debt and need to be judged by other investing yardsticks.

Thanks to Marginal Revolution for 2.

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