Archive for July 24th, 2013

The exit of India’s middle class..

July 24, 2013

A food for thought article by Sandipan Deb. It printed about a fortnight ago but I missed it somehow.

It sums up much of what this blog has been trying to say through several posts based on experiences in Bangalore. Middle class is exiting from public life and does not care on what is going on in the country. Fed up of the government’s failure to deliver basic goods, it has created its own systems. The government policies for years has had nothing for middle class. High inflation, poor infra, sick governance are the things which has led to this  exit

The article picks from the works of  late Prof Albert Hirschman who is deemed as one of the most deserved not to get The Prize.  The current hot economic debate in India is whether India should follow Sen’s econ model vs Bhagwati’s econ model.  This debate has become more hype than substance now. Hirschman’s exit theory is  a much bigger and ignored problem. Moreover, it can just be noticed around you as there is no research which shows this development:

It has now become the rule. Any conversation with friends, when it turns to the state of Indian polity and governance, quickly degenerates into either despair or derision.

Of course, middle-class disenchantment is hardly new. But in recent times, I do believe it has grown to fierce proportions. Government corruption, subversion of democratic institutions, a slew of supposedly populist but financially ruinous measures, shameless pandering to vote banks, mismanagement of the economy…in the last few years, if my friends are a representative sample, the Indian middle class seems to have just had enough. In fact, it is exhibiting classic signs of what economist Albert Hirschman observed in his seminal 1970 book Exit, Voice and Loyalty. Circa 2013, large sections of the Indian middle class are Exiting.
In the 1960s, free market champion Milton Friedman came up with a novel idea to rejuvenate the ailing American public school system. If the private sector is kept on its toes by the possibility of Exit—of shareholders, employees, customers—the same principle should work in the public sector too, he argued. Friedman suggested that parents be given vouchers that allowed them to take their tax money away from bad schools to good schools. But, Hirschman found that this Exit option (he extended it from schools to any sort of human grouping—firm, organization, nation-state) had several important drawbacks. In the words of political scientist Francis Fukuyama: “The freedom to Exit was often used by the most ambitious, educated, or well-to-do users of a particular service, and once they exited, those remaining were even poorer, less educated, and less demanding. Moreover…the possibility of Exit weakened the effectiveness of Voice, that is, the ability to directly change the management’s behaviour through feedback, discussion, and criticism.”
I have just started to read Hirschman having read so much about him.
He says earlier middle class was exiting physically. Now mentally:
In the 1970s and 1980s, India lost large numbers of its best and brightest young men and women, who went to the US for higher studies with the express intention of never coming back. This, with the active support of their parents, who saw only a bleak depressing future for the middle class in India. In the 1990s and the 2000s, this migration—the most unambiguous form of Exit—has been tempered to a large extent, but Exits need not only be physical. The collapse of Communism was brought about by the Mental and Emotional Exit of people (Physical Exit was almost impossible, unless you were willing to risk your life).
In India currently, we are seeing a Mental Exit of the middle class, and a Physical Exit of the cream of the next generation, like in the past, may be imminent. Look around: the number of middle class parents taking on huge financial burdens to send their children abroad right after they finish school is rising by the year. The brain drain of yesteryears comprised graduates. Today, the process starts at a younger age. Exit has to be made at the earliest.
The Mental Exit—a rejection of the state while residing within its geographical boundaries—is typified by Indian resourcefulness. So the middle class uses every means it can think of to avoid or evade taxes. It is also increasingly insulating itself. Consider Gurgaon, aka Millenium City, or the townships burgeoning around our metropolises. Gurgaon gets only a fraction of the services that are its due from the Haryana government: power, security, transport infrastructure. So the city is a collection of countless gated communities—self-sufficient units with their own security, power and water backups, and recreational areas. The condominium dwellers can do little about the pot-holed roads or the law and order situation, so they shrug and once they are back home, they switch off from India. They are now well-ensconced in the Republic of Gurgaon. This is being replicated all over the country.
Bang on..This exit leads to decay:
According to Hirschman, Exit extinguishes Voice, and this causes organizational stasis and finally decay. Evidence that a large part of the Indian middle class is exiting reluctantly and still cares enough to have its Voice heard lies in the popular participation in Anna Hazare-led anti-corruption movement, and in the spontaneous public outrage over the gangrape and death of a young women in Delhi in December (But the less-than-sensitive handling of that Voice by the administration perhaps strengthened the Exit impulse). We should also not find it surprising that Narendra Modi, with his talk about a New India, a new energy, is so popular on social media, which is packed with middle class people who have mentally exited India but yearn to return. They retain Loyalty—Hirschman’s third concept—to some idea of India. That idea—at best hazy and amorphous—is powered by a bitter sense of betrayal.
What should worry the people who govern India is that it is always the more intelligent, the more valuable people who exit. Alienation is not a mental condition fools are familiar with. Also, when you Exit a place, you enter another. Circa 2013, the Indian middle class may be believing that wherever it enters, it can’t be worse than the place it exited.
Who cares…

Controlled dismantlement of the Eurozone : A proposal

July 24, 2013

Quiet a few people have written on undoing Eurozone and how to go about it. Likes of Barry Eichengreen warn against any such approach as it will lead to mother of all financial crisis.

This paper by National Bank of Poland econs — Stefan Kawalec and Ernest Pytlarczyk is an addition to the first camp. It was surprising to see a apper from NBP econs not just critcising the Euro project but also suggesting to dismantle it. Their suggestion is to allow the strong countries to move out of the currency block and the weaker economies to remain till the crisis eases:

In Kawalec and Pytlarczyk (2013), we argue that the single European currency constitutes a serious threat to the European Union and the Single European Market, and we propose a controlled dismantlement of the Eurozone. In this paper, we undertake a deeper analysis ofthe measures which would minimize the risks throughout the process of the Eurozone dismantlement and contribute to rebuilding confidence in the future of Europe.

The dismantlement should be the result of a consensual decision to replace the euro with an alternative system of currency coordination.  The dismantlement should start with the exit of the most competitive countries. In the meantime, the euro should remain the common currency of less competitive countries.

The European Central Bank (ECB) should be preserved as the central bank for all 17 Eurozone member countries, even after some of those countries have replaced the euro with new currencies. In this capacity, the ECB should be in charge of designing, preparing, and implementing the segmentation of the Eurozone as well as managing the new currency coordination system– European Monetary System 2.

 The forthcoming EU – USA free trade agreement would build new momentum for economic growth and contribute to restoring confidence in the future of Europe. As of today, neither the member states of the Eurozone nor European institutions such as the European Commission or the ECB have been able to come up with a game-changing proposal such as the Eurozone dismantlement. However, this may change as a result of adverse economic and political developments.One of the potential triggers could be the situation in France.

Nice bit..

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