EOSTRE

A Delhi School of Economics Publication

Volume III
2012
Message from the Director
It gives me great pleasure to know that Economics students are bringing out the next issue of Eostre. The
Masters programme in Economics at the Delhi School of Economics is one of the best programmes in the
country. It is good to see that students here not only learn theory but learn to analyze day to day issues as
an economist. Many articles in the last issue reflected this. Also, I found many contributors from other
places. This shows the popularity of the magazine and also the good efforts of the editorial team.

Congratulations for all your efforts. Keep it up and bring more laurels to Delhi School of Economics.

S.C.Panda

Message from the Head of the Department

I am greatly pleased to introduce the third issue of Eostre, a commendable effort by our students to
provide a platform for diverse perspectives on current economic and international issues. Students in the
Department of Economics, Delhi School of Economics are rigorously trained in the theoretical and
applied aspects of economics and are encouraged to apply the theoretical tools to the real world. Eostre is
a welcome initiative in this direction and is also a reflection of the fact that our students are amongst the
finest budding economists in the country. I congratulate the students of the 2010-12 batch for taking the
initiative of the 2009-11 batch forward and also congratulate them for providing a forum for intellectual
interaction.

Pami Dua
CONTENTS
Interviews and Discussions 21 Public Private Partnerships
Garima Wahi, M.A. Economics, Delhi School of
5 An Interview with Dr. Debraj Ray on
Economics
Development Policy Issues
19 An Interview with Dr. Isher Judge Ahluwalia on 24 Food Security in India: An Exploration of Major
Urban Development Policy Issues and Policies
Ayon Sarkar, M.A. Economics, Delhi School of
38 A Discussion with Montek Singh Ahluwalia on Economics
Foreign Direct Investment in India
30 Economic Regionalization and the World Trade
55 An Interview with Dr. Bharat Ramaswami on Organization
Policy and Technology Issues in Agriculture Mubashir Anis, Lahore University of Management
Sciences
Special Articles 35 European Debt Crisis and the Way Beyond
28 Can the Eurozone be Saved? Sukriti Jain, MBA―PGDM, Indian Institute of
Dr. Jayati Ghosh Management―Kozhikode

48 Lessons of a Tiger Ride and the Difficult Residues 40 Revisiting the 'Natural' Origins of Economics
of the Lokpal Movement for Civil Society Alex M. Thomas, PhD Candidate, School of
Aruna Roy & Nikhil Dey Economics, University of Sydney

Articles 42 I was born OK…Education Ruined Me!

Ashish Aggarwal, Shalini Taya & Pulkit Kapoor,
1 Could Being Poor Make Self-Control Even More M.A. Economics, Jawaharlal Nehru University
Difficult?
Dean Spears, PhD Candidate, Princeton University 51 When the Corrupt Support an Anti-Corruption
Movement
9 Social Norms and Poverty Traps: Theories, Smit Gade, M.Sc. Economics, Indira Gandhi
Empirics and Policies Institute of Development Research
Sourovi De, Research Assistant, Global
Development Network 53 Sin of Perfection
Sugandh Tibrewal, M.A. Economics, Delhi School
13 Access to Finance for All of Economics
Akshat Aggarwal, M.A. Economics, Delhi School of
Economics 58 Wrong Shade of Green: Bio-Fuels
Stuti Saksena, M.Phil Economics, University of
17 The Fungibility of Labour and Implications for Cambridge
Stimulus Spending
Navin Kumar, M.A. Economics, Delhi School of 60 Nuclear Energy: Still the Better Alternative
Yesh Vardhan Agarwal, M.A. Economics, Delhi
Economics
School of Economics
Could Being Poor Make Self-Control Even More Difficult?
Could Being Poor Make Self-Control Even More Difficult?
Dean Spears
PhD Candidate, Economics
Princeton University
Irving Fisher (1930), detailing his Theory of Interest,
suggested that “a small income, other things being equal,
tends to produce a high rate of impatience.” Fisher
explains that this would be both “rational”—immediate
survival is necessary to enjoy any future income or utility
at all, and “irrational”—“the effect of poverty is often to
relax foresight and self-control and to tempt us to ‘trust to
luck’ for the future.”
Subsequent economists, however, have often seen time
preferences as causally prior properties of persons, and
important determinants of who accumulates wealth and
who remains poor: the patient save and go to school, the
poor do not. However, recent literature in psychology
and behavioral economics—as well as scholarship, old
and new, on the experiences of the poor—all suggest that
Fisher’s suggestion could be worth a second look.
If poverty is, on average, associated with impatience or
diminished self-control, might causality partially run
from poverty to behavior? That is, instead of any
correlation being entirely due to time preference sorting
people into wealth and poverty, could being poor interact
with the psychological limits that rich and poor people
share to diminish behavioral control? If so, this process
would have implications for policies that implicate
decision-making by poor people. Moreover, it would
suggest rethinking common attitudes that separate the
well-behaved “deserving poor” from the “undeserving
poor.”
Theories of Poverty and Behavioral Control
This paper is far from the first to suggest that being poor
is psychologically difficult (Orwell, 1937; Karelis,
2007), or that bounded rationality of various types could
be made particularly pernicious by poverty (Bernheim,
Ray, & Yeltekin, 1999; Bertrand, Mullainathan, & Shafir,
2004; Duflo, 2006). This paper offers empirical tests of
hypotheses and theories culled from a long literature. Its
contribution is to identify well a direction of causality:
from poverty to behavior.
EOSTRE 2012
Figure 1 summarizes four causal mechanisms that might
tie poverty to diminished behavioral control. The first is
the familiar causal role of time preference: some people
make impatient decisions, heavily discounting the
future, so they become poor. The bottom three
mechanisms illustrate possibilities for another direction
of causality. Each case involves some mental resources
that would be similarly limited in poor people and rich
people—attention, willpower, or cognitive control—and
proposes a reason why poverty may especially consume
or deplete that limited resource.
The first of the bottom three mechanisms observes that
money is scarce for poor people, and that a poor person’s
finances could consume much of her limited attention.
Moreover, navigating this scarcity could produce anxiety
and stress, which could lead to mistakes, being
“overwhelmed”, and diminished performance (Adler, et
al, 1994; Ariely, et al, 2009; Mullainathan and Shafir,
2010).
The second mechanism begins with the claim that self-
control (or “willpower”) is a limited, temporarily
depletable resource. As psychologists Muraven, et al
(1998) argue, when we use our willpower to regulate our
behavior, there is temporarily less willpower left to resist
the next temptation. As Ozdenoren, et al (forthcoming)
model, because poor people cannot afford to indulge,
they must “spend” their willpower more often than richer
people, instead of spending money. As a result, poorer
people would often have more depleted self-control than
richer people.
Finally, the last mechanism notes that economic
decision-making is more difficult for poorer people
because the stakes are higher (Mullainathan and Shafir
2010; Spears, 2009). Deciding whether or not to spend a
given amount of money could require resolving a more
difficult trade-off for a poorer person than for a richer
person: the sacrifice and risk entailed in spending 10
rupees on, say, soap is greater when 10 rupees is a bigger
1
Could Being Poor Make Self-Control Even More Difficult?
part of your budget, and requires more deliberation.
Because making difficult decisions is also depleting of
cognitive resources (Wang, et al, 2010), these hard
choices leave the poor with relatively less capacity for
behavioral control.
The experiment reported below will not be able to
distinguish whether exactly one or another of these
theories is what ties poverty to its causal effect on
behavior. Several mechanisms could be simultaneously
important. A common theme among these three views,
however, is that poor and rich people share psychological
limits; poor people do not have a smaller stock of
attention, willpower, or cognitive control. Instead,
poverty is particularly depleting of limited psychological
resources.
A Partially-Randomized Field Experiment in
Banswara
If economic decision-making is more difficult for poorer
people than for richer people, then making a spending
decision could deplete behavioral control for poor
people, but not for rich people. Is this, in fact, what
happens?
To answer this question, I conducted an experiment
along with two research assistants during July and
August of 2010 in 16 rural villages of Banswara district
of Rajasthan. Each day both surveyors traveled to two
new villages, one richer and one poorer according to
census indicators.
The experiment’s participants made real spending
decisions. First, the surveyors offered participants a
product for sale either before or after asking them to
squeeze a handgrip, and then they recorded economic
and demographic information about the participants’
households. I was interested to see whether making the
decision about whether or not to buy the product would
have a different effect on handgrip squeezing time for
richer and poorer participants.
So, the experiment had two main parts: the economic
decision, and the handgrip. In the language of
econometrics, the making of the economic decision was
the “independent variable,” or the treatment, and the
duration of squeezing the handgrip was the “dependent
variable,” or the outcome. The randomization that made
it an experiment is that half of the participants in each
village made the economic decision first, and half of the
participants squeezed the handgrip first. In other words,
by the time they were squeezing the handgrip, a
2
EOSTRE 2012
randomly selected half of the participants had already
had to make a potentially difficult economic decision,
while the other half was “untreated” with any potentially
depleting effect of choice.
The economic decision was a simple, binary consumer
choice: whether or not to buy a package of two bars of
hand-washing soap for 10 rupees. This price was a
substantial discount, but could nevertheless represent a
difficult choice for some participants. About two-fifths
of the participants bought the soap – however, whether a
participant bought the soap was irrelevant to the
experiment; the “treatment” was having to make the
decision.
The handgrip task is commonly used in psychology
experiments as a measure of performance on a task
requiring self-control. The handgrip was bought at a
store that sells exercise equipment: it is meant to give a
workout, and is difficult to squeeze for a long time. In
this experiment, squeezing the handgrip for a long time
indicates having the resources to control behavior in the
face of an impulse to stop squeezing.
If the soap decision were difficult for the poor but not for
the rich, then it should be irrelevant to rich participants’
handgrip behavior, but should deplete handgrip
squeezing by those poorer participants who had already
been required to make the decision. Is this what
happened? The published paper goes into much
econometric detail about the results. However, figure 2
presents the heart of the finding: an interaction between
poverty and economic decision-making.
Indeed, the economic decision had little effect on richer
participants. However, poorer participants who had
been randomly assigned to make the decision first
squeezed the handgrip for about 40 seconds less (out of a
mean of 108 seconds) than poorer participants who had
not yet been asked to choose. Because the order of these
two tasks was randomly assigned, participants in the two
experimental groups are statistically comparable.
Moreover, figure 2 restricts the sample to participants
who still live in their natal villages (the results are very
similar for the full sample); because economic mobility
is probably limited in this group, it seems unlikely that
the result is due to differently depletable participants
having sorted over economic lifetimes into wealth and
poverty before our interview.
These data are consistent with Fisher’s hypothesis:
poverty can cause impatience, or diminished behavioral
Could Being Poor Make Self-Control Even More Difficult? EOSTRE 2012

control. Another study in the paper documents a similar
effect in a lab experiment among migrant workers in
Banswara, where “poverty” and “wealth,” in addition to
economic decision-making, are randomly assigned in the
lab. The third study uses the American Time Use Survey
to document that shopping (that is, making economic
decisions) is accompanied by secondary eating (here,
often an automatic behavior inconsistent with dietary
goals) for poorer people in the United States, but not for
richer people.
There is still much theoretical and empirical research to
be done in this field, separating the complex interactions
of poverty and behavioral control over the life course,
and the precise psychological and economic mechanisms
at work. Is poverty’s depletion of behavioral control
cumulative? How can it be reversed? How does it
interact with individual differences in behavioral control
resources, which in turn could be shaped by early life
economic conditions? Which decisions are most
depleting? What is clear is that a correlation between
poverty and apparent impatience is not necessarily
evidence for just deserts accruing to the behaviorally
undeserving poor. n

Figure 1: Theories of poverty and behavior

Figure 2: Experimental results for participants who live in their natal villages

3
Could Being Poor Make Self-Control Even More Difficult? EOSTRE 2012

References
Adler, Nancy E., et al. 1994. “Socioeconomic Status and Health: The Challenge of the Gradient.” American
Psychologist, 49(1): 15-24.
Ariely, Dan, Uri Gneezy, George Loewenestein, and Nina Mazar. 2009. “Large Stakes and Big Mistakes.” Review of
Economic Studies, 76: 451-469.
Bernheim, B. Douglas, Debraj Ray, and Şevin Yeltekin. 1999. “Self-Control, Saving, and the Low Asset Trap.” working
paper, Stanford University.
Bertrand, Marianne, Sendhil Mullainathan, and Eldar Shafir. 2004. “A Behavioral-Economics View of Poverty.”
American Economic Review: Papers and Proceedings, 94(2): 419-423.
Duflo, Esther. 2006. “Poor but Rational?” in Roland Bénabou, Abhijit Vinayak Banerjee, and Dilip Mookherjee eds.
Understanding Poverty: Oxford.
Fisher, Irving. 1930. The Theory of Interest: Macmillan.
Mullainathan, Sendhil and Eldar Shafir. 2010. “Decisions under Scarcity.” presentation, Russell Sage Foundation
Summer Institute for Behavioral Economics.
Muraven, Mark, Dianne M. Tice, and Roy F. Baumeister. 1998. “Self-Control as a Limited Resource: Regulatory
Depletion Patterns.” Journal of Personality and Social Psychology. Orwell, George. 1937. The Road to Wigan Pier:
Gollancz.
Ozdenoren, Emre, Stephen Salant, and Dan Silverman. forthcoming. “Willpower and the Optimal Control of Visceral
Urges.” Journal of the European Economic Association.
Spears, Dean. 2009. “Decision Costs and Price Sensitivity: Theory and Field Experimental Evidence from India.”
working paper, Princeton University.
“Economic Decision-Making in Poverty Depletes Behavioral Control.” B.E. Journal of Economic Analysis & Policy.
Contributions.
Wang, Jing, Nathan Novemsky, Ravi Dhar, and Roy F. Baumeister. 2010. “Trade-Offs and Depletion in Choice.”
Journal of Marketing Research, 47: 910-919, October.

4
An Interview with Dr. Debraj Ray
An Interview with Dr. Debraj Ray
Dr. Debraj Ray is the Julius Silver Professor, Faculty of Arts & Sciences, and Professor of
Economics in the Department of Economics at New York University. He is the Co-Editor
of the American Economic Review and has authored various textbooks, including the
well-known 'Development Economics'.
The recent recommendations of the Planning
Commission on the poverty line and the heated debate it
triggered highlights the persisting economic disparity
in India, as also does the broad range of public and
academic opinions on the issue. What according to you
can Development Economics offer to the discussion?
What's a poverty line for? There are two answers. The
first one is more innocuous than the second.
(a) To "accurately" measure poverty and report on trends.
I am not sure what purpose this serves exactly, because
poverty lines are notoriously susceptible to manipulation
for political ends. You can wipe out (or add) enormous
amounts of poverty by moving the line around by a tiny
bit, especially because there is a lot of clustering in the
subsistence or near-subsistence region. In work with
Partha Dasgupta in the 1980s, we've argued quite
strongly that there is really no such thing as some fixed
poverty line on which we should be hanging our
collective reputations as politicians, policy makers or
even as academics. There is—more accurately—a zone
of consumptions over which your standard of living
(nutrition, health, and education) dramatically affects
your options in the future. Our goal should be to take
people over that hump, and just saying that 40% of the
population is "in poverty" is to some extent a waste of
energy and time.
(How significant or pronounced that zone or hump is
would depend on how "nonconvex" is the reaction of
well-being to income around a certain critical level of
income. If you think of nutrition, shelter, and basic
health, it is probably true that such a critical zone exists.
But all the same, we should care about the distribution
not only around the poverty line, but also the distribution
below it, and Development Economics does have
something to say about this, with Foster-Greer-
Thorbecke-type measures of poverty.)
EOSTRE 2012
By the way, this isn't a new debate. Dasgupta and I
document another raging battle of this kind from some
decades ago, this time based on the ability of people to
"adapt" to their conditions of low nutrition. See our
article in Dreze and Sen (edited), The Political Economy
of Hunger, Volume 1 (1990).
On measuring trends, things are more interesting and
hopeful. While the absolute levels of poverty are a bit of a
chimera, it is important to see whether the percentage of
people below a certain threshold is going up or down
over time. Hopefully the trend is less sensitive to the
exact threshold we pick. And I have no problems with
choosing a double or triple threshold and seeing what is
happening to trends at each of these thresholds. Indeed, if
people in government and policy were more educated, or
interested in the issues, we could do this with entire
income distributions; and debate matters at that broader
level.
(There is also the possibility that changing the threshold
mid-stream gives a potentially distorted picture of the
trend, because people don't pay attention to the fact that
the threshold has changed, but I am ignoring this crazy
line of reasoning. Anything is possible though in public
discourse!)
(b) To define eligibility for Below Poverty Line (BPL)
transfers.
This is really what gets everybody's emotions running.
The recent Planning Commission recommendation is
around Rs. 30 per day. This is a pittance for determining
social transfers. It's also silly, because what the Report
essentially does is update the 2004-2005 levels for
inflation (much of the effort goes into figuring out the
price indices rather than the conceptual question of
whom we should be trying to help with transfers, and
why). In a real sense we should be doing this backwards:
5
An Interview with Dr. Debraj Ray
trying to reach as many people "in the zone" as possible,
the region in which their increased access to resources
matters substantially for the development of capabilities.
That zone probably lies anywhere between 0 and perhaps
up to Rs.150 at current prices. Do we have the political
will—or the potential willingness to make transfers
based on need—to calculate the magnitude of resources
that will be needed to reach all such people, perhaps in
some graded way depending on finer estimates of their
income? To do that we need to first work on the social
budget, and then see how far short we fall. For that we
need some serious upper bounds and lower bounds, not a
hackneyed poverty line. Rs.30 is at best a lower bound. I
would use something in the neighborhood of Rs.150 as
an upper bound, and then do some sensitivity
calculations: see how the figures move with the various
thresholds. India is not going to become a developed
country by sending probes to the moon, but by shifting
some of that budget to people "in the zone".
Under the present scenario, inequality and poverty are
the major issues that are constraining the potential
growth of India. In this connection, do you think that
an "entitlements driven" government policy, for
instance one that promises 100 days of work under the
National Rural Employment Guarantee Act (NREGA),
is likely to provide a sustainable solution to poverty or
does it only push individuals above the poverty line
temporarily so that an adverse shock will bring them
crashing back to extreme poverty levels?
NREGA—which provides an entitlement—is one
component of a serious social transfer program that the
Government of India needs to explicitly and seriously
embark on if India is to go anywhere: not the 5% of India
that hangs out near the top, but much or most of it.
The basic point of NREGA and other such schemes is
that benefits of participation are set so low, that it is only
people who are desperately poor who will choose to
participate in them (a bit like the old British famine-relief
programs). This self-targeting mechanism also means
that employment guarantee schemes act as a safety-net
designed to provide some minimal income in order that
people might avoid the worst consequences of poverty —
malnutrition, destitution, school attrition, etc. They are
not meant to be a ticket to middle-class prosperity. Such
schemes thus play an important function in poverty
alleviation, even if they prove not to be a major growth
engine.
6
EOSTRE 2012
Your work has often highlighted the crucial role played
by imperfect market institutions and interlinkages in
rural economies. In this light, what would be your
recommendations to policy developers for the
development of imperfect credit and land markets?
More than imperfect land markets, imperfect credit
markets are crucially important in perpetuating
inequalities. Indeed, I'm not so sure that perfectly
functioning land (sales) markets would be equalizing.
Agriculture is plagued by correlated shocks. So poor
landowners end up selling precisely when prices are low.
The problem is obviously less acute when shocks are not
correlated — there is no reason then why prices would be
low precisely when you want to sell. In contrast, the
wealthy can tide themselves over such shocks, correlated
or not. So a free market for land would probably quickly
amplify land inequalities.
Imperfect credit markets are another matter. Credit is one
of the best ways of getting inequality not to matter,
because your initial conditions become a smaller
determinant of how well you can invest or educate
yourself. What we're now seeing in India is a veritable
explosion of technical institutions, universities and
business schools which are living off the abilities of high-
income groups to invest in education and signal their
worth to a high-end job market. There is no way a poor
person can get into that market. To break this impasse, I
believe that government must get more deeply involved
in the business of educational subsidies. Moreover, they
should sharecrop in the outcomes and not charge a fixed
interest rate. Imagine a 5% surcharge placed by the
Government of India on every Indian who has graduated
from an IIM or an IIT, from any subsidized institution of
higher learning (you're probably not enjoying reading
this). The surcharge could be placed even on foreign-
earned incomes, and it could be enforced by not allowing
NRIs entry to the country unless they are up to date with
their payments! (Luckily, NRIs love to visit India so this
would be easy to implement)
In general, equity sharing in loans is a very good idea.
Why not retain the rights to a fraction of large incomes,
while letting unsuccessful people go? One might argue
that this would dampen the incentives of people to
acquire education, but I don't think that would happen:
would you let your education slide because of an extra
5% surcharge?
An Interview with Dr. Debraj Ray
In the context of the caste system in India, why do you
think historical inequalities across different castes are
perpetuated in time in spite of equal opportunity
policies such as reservations?
It depends on what you mean by "historical inequalities".
If you are referring to social inequalities that stem from
attitudes, these can last for a very long time, and in fact
they can (and often are) exacerbated by things such as
reservations, not lowered. First, there is indignation and
anger that x% of the seats should be reserved for a
particular group, and then there is the ever-present
danger of the Bayes' Rule. If you see a Scheduled Caste
individual in a top government job, how would you
update your prior belief about his or her intrinsic
abilities? Reservations surely worsen the attitudes of
those who don't stand to benefit.
If you are referring to economic inequalities, then I'm not
sure that "historical inequalities" have been
"perpetuated". It is still true that the per-capita income or
wealth of a low-caste individual will be smaller than that
of her high-caste counterpart, but that doesn't establish
perpetuation: in a counterfactual world of no
reservations, things may well have been far worse.
There are two more complications. One is the real
possibility that caste-based reservations may do precious
little to assist those at the very bottom of the income
scale, and can greatly widen economic inequalities
within a reserved caste. For this reason, and for reasons
that I don't pretend to fully understand, there are income
restrictions on reservations for Other Backward Classes
laid down by the Supreme Court, so as to exclude the
"creamy layer" of these groups from reservations. But
the creamy layer restriction does not appear to apply to
Scheduled Castes (SCs) and Scheduled Tribes (STs).
That brings me to my second complication, which is my
view that ideally all reservations should be based on
economic characteristics. It should not matter whether
you're SC, ST, Muslim, forward or backward. But this is
something that is very hard to implement in today's India,
and probably in tomorrow's India as well. It will become
easier—and we should move in that direction—as our
databases improve.
Of course, there is the problem of history-dependence.
With the emphasis on caste as a salient marker, it may
become extremely difficult to move away from it even as
our databases improve. It is possible to predict that one of
the huge problems with redistributive politics in India
EOSTRE 2012
will be the interaction of existing (imperfect) divisions,
such as caste, with the correct economic divisions that
will become slowly addressable because of the
availability of data.
In the paper 'Implications of an Economic Theory of
Conflict: Hindu-Muslim Violence in India', you have
argued that for a low income group, increasing group
income raises violence against that group and lowers
violence generated by it. Can this assertion be applied to
the recent breakout of violence in the United Kingdom?
To some extent, yes. As in the United States, inequality in
the United Kingdom has been steadily climbing over the
last decades. Things have been made even worse by the
recent crisis in which unemployment levels have shot up.
One important implication of high unemployment,
especially among young men, is that the opportunity cost
of engaging in protest, looting or crime is lowered. The
fact that the wealthy do not seem to suffer in the same
way in times of crisis adds to the incentive to engage in
violence. This is certainly one consistent reading. It ties
in with the same sort of theory that I have used elsewhere
to study Hindu-Muslim violence, though the contexts are
very different.
A few words about that paper, written with Anirban
Mitra. We study inter-group conflict driven by economic
changes within groups. We show that increasing group
incomes raises violence against that group (they are more
attractive targets), and lowers violence generated by it
(the opportunity cost of engaging in violence is higher).
These correlations are tests for group aggression or
victimization, which we apply to Hindu-Muslim
violence in India. In principle, this sort of argument can
be applied to the UK (or other countries) as well.
Yet I did write "to some extent", because this cannot be
the whole explanation. We need to understand the
flashpoints better. In the UK, a man named Mark Duggan
was shot by the police. The initial reaction to this was a
peaceful protest, but very quickly a riot started in North
London and spread all over London and elsewhere. You
can think of these isolated incidents as "sunspots" or
"flashpoints" that signal a mass movement to a different
social equilibrium, though the word "equilibrium" may
sound weird in this case, one in which violence is the
norm and there are way too many people engaging in it
for the police to be effective. We've seen similar
flashpoints in most riot situations, as also in the so-called
"Arab Spring" protests. We don't understand these very
7
An Interview with Dr. Debraj Ray
well, and in this sense the narrower economic issue you
asked me about can only serve as an incomplete
explanation. But I have no doubt that it is relevant.
What in your view is the major reason behind the
current Euro Crisis? Which policy instruments should
be focused on to mend the situation?
First I should say that international finance is not my field
of expertise, and what I have to say on this matter could
equally be said by most educated people.
Maastricht gave birth to the European Union and the
Euro, and signatories to this treaty effectively gave up
autonomy over their monetary policy in order to win
stability in relative prices across the member nations, and
a freer flow of capital and labor without an attendant fear
of self-fulfilling runs on any one of the countries. In
short, it was felt that the elimination of exchange rate
fluctuations and the attendant increase in price
transparency would reduce transactions costs, leading to
higher intra-European trade, gains in employment,
greater credibility in the control of inflation, and a lower
interest rate premium all around (with the removal of
uncertainty in exchange rates). These are the big
advantages of a common currency.
This interview has been reported by Arushi Dhingra, Sakshi Dargan and Sanghamitra Mukherjee. Special thanks to Radhika Kapoor and
Sneha Lamba.
8
EOSTRE 2012
But there were costs. Apart from the sacrifice of
autonomy in monetary policy, fiscal instruments would
also have to be kept within parameters. There are strict
guidelines, for instance, on the ratio of the government
deficit to GDP, as well as on overall outstanding debt.
Some of this fiscal discipline was made easier by
financial inflows into the Eurozone in the wake of
Maastricht.
But there was also a lot of leveraging of debt in Italy and
Greece, largely accomplished by the use of complex
derivatives. Even in the early 2000s, the Greek economy
was strong, but in the last few years there has been a drop:
industries such as tourism and shipping are particularly
sensitive to the business cycle. But public debt remained
high. It soon became apparent that one country's bond
wasn't just a European bond; it depends on which
government is issuing that bond. At any rate, that was
how international perception began to be shaped. Alas,
there are multiple equilibria in riots, and there are the
same multiple equilibria in international currency
markets: a relatively small change in fundamentals can
lead to an enormous change in overall outcomes as self-
fulfilling pressures build up. Now the eye isn't just on
Greece any more, it is on Italy, and who knows, Spain,
Portugal and Ireland may all be next in line. n
Social Norms and Poverty Traps: Theories, Empirics and Policies
Social Norms and Poverty Traps: Theories, Empirics and Policies
Sourovi De
M.Sc. Economics for Development, University of Oxford
Research Assistant, Global Development Network
Poverty traps have many definitions. Broadly speaking,
they may be defined as self-sustaining mechanisms
which cause persistent poverty and reinforce socio-
economic immobility. Causes of poverty traps abound,
and a common example is the lack of rural credit and
insurance markets for poor farmers in a developing
country. An institutional failure of this complexion
inhibits capital accumulation and production. The
existing poverty of poor farmers and the resultant lack of
collateral—due to minimal capital
accumulation—further render them ineligible to borrow
from institutional lenders like commercial banks. In the
absence of uniquely tailored financial services for the
poor, poverty persists through the channels of low capital
accumulation, and inability to borrow from commercial
lenders.
In a similar vein, if we posit that group-level influences,
socio-cultural norms and social networks prevent an
individual's ability to exit poverty, then we are
effectively arguing that social norms cause poverty traps.
For instance—in many developing countries, an
individual's occupation is not determined by personal
choice or merit, but rather through social norms and
familial occupation. Thus, a low paying occupation may
be thrust on an individual and incapacitate his exit from
poverty.
I will now briefly discuss two different theories of social
norms-based poverty traps [Ray's theory of shared, low
aspirations among low-income groups; and Durlauf's
“membership theory” of poor socio-economic outcomes
emerging out of group affiliations]. While the two
theories deal with social norms-driven poverty
differently, they both ultimately point at how group-level
influences affect individual poverty. While discussing
each theory, the relevant policy implications for poverty
alleviation are also discussed. Finally, I argue that
shifting from a demand- to a supply-driven approach to
EOSTRE 2012
upward social mobility should be preferred over
historically practised “associational redistribution”
policies.
In Aspirations, Poverty and Economic Change, Ray puts
forth an aspirations-based approach to understand how
individual behaviour is influenced by group-level
associations, and how these causally lead to persistence
of poverty. This approach argues that “individual
aspirations are born in a social context; they do not exist
in a vacuum”, meaning that an individual's aspirations
are shaped by the educational attainments, socio-
political status, and economic well-being of those in his
surroundings. Ray posits that it is only one's local society
— composed of individuals who are broadly similar to
us, or relevant to our experiences — that influences our
“aspirations window”. To fully understand the
implications of these group-level influences on
individual aspirations and resultant persistence of
poverty, I now borrow a more formal model for the above
explanation from Ray (2003).
If s denotes an individual's current living standard, and a
is the standard that he aspires to achieve, the aspirations
gap is then just:
Hence, a person with very high aspirations in comparison
to his current standard of living will be and will have an
aspirations gap of 1 [“fully gapped” (Ray (2003)].
Someone who does not aspire beyond his present socio-
economic standing will have a ~ s, and the aspirations
gap will be approximately 0. If we now assume that
investment i potentially increases the future standard of
living as per some function s (i,s) thus narrowing the
aspirations gap. Say, this investment is comes at a cost to
the individual—denoted by a cost function c(i,s). Hence,
an individual may be viewed as choosing i to minimise
the sum of the aspirations gap and the cost function,
subject to the constraint
9
Social Norms and Poverty Traps: Theories, Empirics and Policies
Thus, given that one's aspirations are conditioned by
one's immediate environment, the main observation
discussed by Ray is both a large aspirations gap and a
small aspirations gap might be detrimental to investment
effort to better one's own conditions. The latter occurs, he
posits, because there is very little to aspire towards; and
the former because the gap is too large to cover with any
conceivably affordable investment. This aspirations-
based theory of poverty persistence can be applied to
explain a number of socio-economic issues: why do
middle-income countries grow faster than poor or rich
countries or why do historically polarised communities
exhibit low levels of socio-economic mobility.
However, the above theory has further scope for
improvement. While it is plausible to assume that large
investments for personal accumulation of social capital
is prohibitive for members in low-income communities,
it is difficult to explain why a person who has an
aspirations gap of almost zero would stop investing for
improving his standard of living—i.e., why would such a
“fully covered” person not upgrade his a and stop
aspiring further. Ray explains this on the basis of the
argument that one's aspirational window is limited to and
shaped by one's “local society”, but there is nothing in the
theory to explain what would happen overtime when
social exclusivity and group-level influences may
gradually weaken, say due to influences of schooling or
media. This model is well-suited for a community which
is absolutely socially exclusive (say, the aborigines in
Australia; or the Santhal tribes in India). However, given
the influx of media and increasing migration to urban
sites, such stringent levels of social exclusivity are hard
to reconcile with reality. In addition, the theory is also
mute on effects of inter-temporal revisions in
aspirations—how levels of aspirations are revised from
time to time, on the basis of successes/failures of one's
peer group. Additionally, the theory does not throw much
light on how anti-poverty policy should be designed to
tackle this 'poverty' of aspirations. My personal
understanding is that one has to increase social
interactions (and thus, reduce social isolation) of the
“aspirationally poor” with a critical mass of role models
who are placed favourably in terms of socio-economic
standing, but not so much better off that achievements of
these role models seem unattainable for aspirants in low-
income communities. A number of policies based on
associational redistribution and affirmative action (these
are discussed in detail below) may be suggested as
suitable policies for our malady, but it is hard to
formulate a policy for a mass of people which
10
EOSTRE 2012
simultaneously caters to each individual's “aspirational
window”.
The second theory of social norms-based poverty
persistence I would like to discuss is Durlauf's
membership-based theory, which argues that an
individual's socio-economic prospects are strongly
influenced by the groups to which he is affiliated over the
course of his life. Examples of these groups may be
endogenous (residential neighbourhoods, schools) or
exogenous (ethnicity or gender). The basic nuts-and-
bolts of this theory are elegantly straightforward:
Durlauf posits that group-level influences causally
influence an individual's socio-economic prospects
through the channels of a) peer-group effects (when some
members in a group choose to undertake an activity—say
juvenile crime or smoking—the preference ranking over
those choices for the other members in that group may be
altered. Thus, a person might be initially averse to
smoking, but may start smoking because his friends do
so); b) role model effects (when behaviour and choices of
the older members in a community affects the
preferences of the younger members. For instance, a
student may rate a university degree highly in this
preference ranking if the percentage of successful adults
who secured such a degree in his community is high); c)
social learning (this refers to the influences which the
choices and outcomes experienced by some members of
a group have on the subsequent choices of others, via the
information that those choices and consequences impart.
If a community has a high percentage of adults who have
attended college but have not succeeded economically,
this information can influence how high school students
assess the benefits of college); and finally, d) social
complementarities (this refers to the idea that the choices
of some members of a group make the choices of other
members more or less productive. For instance, a study
group in which the effort put in by other members makes
the efforts of each member more productive is an
example of social complementarities).
The empirical evidence on group-level effects is, at best,
mixed and ambiguous. Standard regression analysis
dealing with group-level effects have been carried out by
treating individual socio-economic outcomes (wages
and earnings, years of schooling, or non-marital
childbearing in teenage) as the dependent variable, and
individual and neighbourhood characteristics as
independent variables. Thus, absence of membership
effect would mean an insignificant coefficient on the
variables in the vector containing neighbourhood
characteristics.
Social Norms and Poverty Traps: Theories, Empirics and Policies
While some studies have found that once various
individual characteristics are controlled for, percentage
of professional workers or university degree holders
among parents in a community reduces the probability of
teenage pregnancy and high school dropouts (e.g. Crane
1991); other studies have shown that evidence on group-
level effects is highly dependent on the model
specification and strength of individual controls. For
example: in Ginther, Haveman and Wolfe (2000), a wide
range of alternative specifications of individual and
neighbourhood controls are considered for three youth
outcomes: high school graduation, years of completed
schooling, and teenage pregnancy outside wedlock.
They found “richer individual controls” systematically
reduce the magnitude of estimated neighbourhood
influences. Needless to say, the empirical literature on
neighbourhood effects is plagued by self-selection
problem. Unlike a randomised controlled experiment,
individuals are not randomly assigned to
neighbourhoods; they choose neighbourhoods subject to
prices, rentals and incomes. Thus, when one observes a
group of individuals in a “bad” neighbourhood, it seems
quite likely that they have some unobserved
characteristic(s) in common, leading to biased estimates
on group effects. Quasi-experiments have been carried
out on recipients of housing vouchers with and without
location restrictions, yielding mixed results; while
randomised controlled trials are rare.
Policy designs to tackle social norms-based poverty have
historically been in the form of associational
reintegration policies—namely, policies which
redistribute and realign group affiliations. Traditionally,
these have been in the form of affirmative action policies
(reserving a certain percentage of seats in public/private
educational institutions for minorities, or hiring policies
in firms that have lower minimum qualification
requirements for candidates from minority
communities), desegregation 'busing' or magnet schools
(providing transport facilities to children from areas
inhabited by minority communities to enrol and study in
schools in high-income areas which traditionally cater to
children from well-off communities), and even
incorporating anti-discrimination policies in deciding
the location of public housing projects. These different
policies have the same agenda—to alter traditional social
interactions and experiences of individuals by altering
the composition of one's socio-economic peer group.
These policies are clearly hard to defend and implement.
First, though there is (scarce) empirical evidence
EOSTRE 2012
supporting the presence of group-level effects, the exact
causal channels are not clear. With inexact understanding
of the channels through which group associations
reinforce poverty persistence, implementing an
associational reintegration policy is akin to operating by
guess-and-check. Second, there is likely to be lack of
political willingness to undertake these reintegration
policies as they are often blamed for being excessively
intrusive, and thwart one's right to free and private social
associations. For instance, parents may be unwilling to
send their children to a school in an unfamiliar locality
when there are schools available in the vicinity of their
homes.
But there is a deeper debate implicit here—what is more
important: one's right to private and free group
association, or pathways out of persistent poverty? As
mentioned above, parents can (legitimately) override
policies like desegregation 'busing' or magnet schools to
protect their community's right to exclusive social
affiliation, even though their objections may not serve
the best interest of their children. A paternalistic
policymaker may reject the parents' preferences and
continue to impose reintegration policies. A liberal
policymaker may think otherwise, and uphold the right
of private association over and above any desegregation
policy. Ultimately, the political and social context of a
given state or country, as also the nature of the social
welfare function being considered by the policymaker
will determine whether, and in what form, social
reintegration policies will be implemented.
In my opinion, traditionally, associational reintegration
policies are demand-driven in their approach. This is
because they try and create a demand for schooling in
schools formerly untapped by inhabitants in minority
communities—by providing transport facilities or school
vouchers; or demand for state housing in areas where
ethnic minorities did not previously reside, through
redistributive policies of state housing boards. These
measures try to create a demand which did not erstwhile
exist before the implementation of the policy. These
policies are also sensitive to political opposition of two
kinds: a) from the beneficiaries of these polices who feel
their right to social exclusivity is being invaded, and b)
from socially and economically well-off groups who
might resist mingling with members from lower income
communities, whether in schools or in residential
neighbourhoods.
A less politically sensitive approach to tackle social
norms-based poverty persistence is to upgrade pre-
11
Social Norms and Poverty Traps: Theories, Empirics and Policies EOSTRE 2012

existing services available to minority communities, and
aid the accumulation of social capital among its members
to bring them at par with the population at large. Doing
so, it is hoped, will eliminate the need to implement
affirmative action in later stages of one's life (such as
preferential recruitment criteria in adulthood). Some
examples include programs like Teach First (UK), Head
Start (USA) or Teach for India; all of these, instead of
uprooting community members from their original
surroundings, invest resources in upgrading existing
public service delivery. Teach First and Teach for India,
for instance, employ promising graduates from the best
universities in their respective countries and recruit them
in under-resourced schools in low income districts of
these countries. Head Start, which has a more holistic
approach, provides nutritional and educational
intervention to children in low income families.
To conclude, through two very different theories of social
norms-based poverty traps, we have seen how group-
level influences can impact an individual's behaviour and
decisions to invest in his standard of living, ultimately
affecting one's socio-economic prospects. Neither theory
has strong empirical evidence to back it, though there is
ample literature in ethnographic studies to support such
theories. On the front of policy design, both Ray and
Durlauf suggest that associational redistribution and
affirmative action are appropriate responses to break this
form of poverty persistence. However, we have
discussed the difficulties implicit in undertaking these
politically sensitive and intrusive policies. Having said
so, both theories discussed in this essay certainly deserve
merit for articulating an almost amorphous channel of
poverty persistence. The lack of existing research on
these theories, I reckon, is not due to logical weaknesses
or inconsistencies of these theories, but rather due to the
difficulties in modelling something as individualistic as
“aspirations window” in relation to something as generic
and group-based as “standard of living in the local
society”, or “social complementarities”. n

References
Crane, J. (1991). The Epidemic Theory of Ghettos and Neighborhood Effects on Dropping Out and Teenage
Childbearing. American Journal of Sociology, 96, 1226-1259.
Durlauf, S. N. (2002). Groups, Social Influences and Inequality: A Memberships Theory Perspective on Poverty Traps.
Retrieved March 26, 2011, from http://www.santafe.edu/media/workingpapers/03-03-020.pdf
Ginther, D., Haveman, R., & Wolfe, B. (2000). Neighborhood Attributes as Determinants of Children’s Outcomes: How
Robust are the Relationships? Journal of Human Resources, 35, 4, 603-642.
Ray, D. (2003, March). Aspirations, Poverty and Economic Change. Retrieved March 26, 2011 from
http://www.econ.nyu.edu/user/debraj/Papers/povasp01.pdf

12
Access to Finance for All
Access to Finance for All
Akshat Aggarwal
M.A. Economics
Delhi School of Economics
Introduction
The most significant issue that India faces today is the
extreme poverty that has lead to the deprivation of almost
a quarter of the population. India is the second fastest
growing economy in the world and this high growth rate
should help reduce this number. But the causality may
work also in the reverse direction. The existence of such
high levels of poverty may begin to retard the growth
rates and prevent the economy from realizing its full
potential. While this problem is relatively easy to state,
solutions are hard to find. The poor have a keen sense of
the manner in which many of the challenges that they
face can be addressed. Hence, instead of trying to force
poorly designed free or subsidized services on the poor,
proper and efficient means of breaking the vicious cycle
of poverty should be explored. Improved access to
financial services can prove to be an effective tool in this
regard.
Access to finance in this context can be defined as the
ability of economic participants to avail a broad range of
financial services suited to their specific requirements
and to manage price and other risks that affect the income
and expenditure of the household. Since poverty is one of
the most significant issues that many South Asian
nations, including India, face today, my attempt in this
essay is to focus on the reasons of low financial
accessibility in India and how delivery of financial
services can be improved to help people overcome
poverty.
Economics of Low Financial Access
The key issues that limit the expansion of financial
services are related to the twin structural problems of
market failure and absence of markets. According to
basic economic theory, credit can be traded through
competitive markets, where supply and demand forces
interact. These markets, when operating freely and in the
absence of externalities, tend to reach a state of
equilibrium. But, because it requires repayment, credit is
EOSTRE 2012
a special good. Absence of repayment potential and
presence of asymmetric information between lenders
and borrowers of credit create the familiar problems of
adverse selection and moral hazard. This problem of
asymmetric information can be effectively mitigated
through the use of collateral and judicial enforcements.
But, in many developing countries, these instruments
either perform poorly or do not exist at all. Further, in
rural areas of developing countries, the market failure
paradigm simply cannot be applied because of complete
absence of formal markets—supply is weak or missing
because of poor availability of financial service
providers. Demand for the same is also low because of
reasons such as accessibility constraints and cultural
specificities.
What Constrains Access to Finance?
The lack of access to finance on reasonable terms for
India’s rural poor can be attributed to a combination of
factors that affect both banks and their clients. Banks
consider it risky to lend to the rural poor because of
uncertainty of repayment due to their volatile income-
expenditure patterns or exposure to systemic risks (such
as crop failures or a fall in commodity prices).
Collateralization of loans is a measure that banks can use
to avoid uncertainty in repayment, but rural poor are at a
loss here due to unavailability of fixed collateral. Even if
they have some land holdings which can be used as
collateral, they lack proper titles to their holdings. The
legal system in India also makes collateral registration
and its repossession a long and difficult process. These
factors create a situation where the only measure left for
the banks to mitigate the risk inherent in lending to the
rural poor is rationing of loans. Rural lending is also
associated with high transaction costs (because of small
loan amounts and large geographical areas covered),
adding to the difficulties in providing banking facilities
to the poor.
13
Access to Finance for All
Ways to Provide Improved Banking Facilities
to the Poor
To make the formal financial sector cater efficiently to the
rural poor, there is a need to find low cost alternatives to
reach the underprivileged groups. Formal rural financiers
need to introduce flexible financial products catering to
the needs of the rural poor. The government is required to
play the role of a facilitator here. There is also a need to
simplify the bank procedures for the rural poor. The
government needs to review its policy of interest rate
determination through caps on lending rates and floors on
deposit rates1. The government also needs to revisit its
policy of priority sector lending imposed on banks. Here,
an option could be to make the priority sector2 lending
obligation tradable. This would create a system where the
bank that carries out its operations most effectively, is
paid by less effective banks to carry out the priority
lending on their behalf. This would enhance competition
in rural lending, thereby increasing the efficiency and
helping the rural poor to access finance at competitive
rates. Competition can further be enhanced by
encouraging the entry of private sector banks in the rural
areas through the creation of a facilitating regulatory
environment, accompanied by liberalization of interest
rates and measures to support innovations from private
sector banks.
Recent Efforts to Improve Financial Access in
India
Because of the inefficiencies inherent in India’s rural
financial markets and the lack of success of banks in
providing finance to the poor, Non-Governmental
Organisations (NGOs), financial institutions and the
government have made a collaborative effort to develop
new financial delivery approaches. These approaches,
known as Microfinance Programmes, have been
designed to overcome the need for collateral and some of
the risks and costs associated with formal financing. They
provide financial services to the poor, with the aim of
raising income levels and improving living standards,
attempting to combine safety and reliability of formal
finance with the convenience and flexibility associated
with informal finance. While efforts are being made to
improve the formal financial sector’s ability to serve the
poor, microfinance can play an important role in the
interim. Following are the two microfinance approaches
in India:
1
Despite the financial sector liberalization and deregulation of interest rates by the Reserve Bank of India (RBI) during the 1990 ’s various
state governments continue to regulate interest rates.
2
Banks are mandated to direct 40% of net bank credit to designated priority sectors which include agriculture, small scale industries, small
businesses, self-employed persons, small-scale retail trade, small road and water transport operators.
14
EOSTRE 2012
(a) Self Help Groups-Bank Linkage Approach
Contrary to the models developed on the lines of the
Grameen Bank of Bangladesh and replicated in other
countries, in India, the public banking network has been
involved in the provision of micro-credit to the poor
through its linkages with Self Help Groups (SHGs). Over
the years, this programme has become one of the
dominant modes of microfinance in India. But an analysis
of this programme has indicated that the present system is
unsustainable. A key constraint is the limited capacity of
this programme to promote and maintain the groups and
ensure their quality. NGOs involved in servicing the
SHGs receive no or below cost consideration for the
formation and promotion of SHGs. NGOs depend on
grants and donations, which are neither reliable nor
sufficient. Therefore, at least in theory, the incentive of
the NGOs to consistently promote high quality SHGs,
and supervise existing portfolios, is weak. This may lead
to an increase in the default rate. Also, this model is not
financially sustainable as banks allocate the entire capital
and hence bear the entire credit risk. Further, the moral
suasion tactics used by the government on banks to lend
to SHGs at subsidized rates make banks refrain from
lending and hence constrain the future growth of bank-
SHG linkage. Nevertheless, this model continues to play
a significant role.
(b) Specialized Microfinance Institution Approach
Another variant of microfinance, developed in India, has
the potential to overcome the constraints in the SHG-
Bank Linkage model. This involves the creation of
specialized microfinance institutions (MFIs), which
perform both the facilitating and intermediating
functions. The role of banks is confined to providing
credit to these MFIs which in turn provide credit to the
groups. There are also some financial institutions, mainly
NGOs in India, which work on both, the MFI model, as
well as SHG-Bank Linkage model. The model based on
which credit is provided to the rural poor depends on the
client’s financial requirements and the type of business
activity they are pursuing. These microfinance
institutions combine some of the features of the informal
sector, such as flexible products and customer friendly
services, and that of the formal sector, such as
documented loan contracts, detailed book accounts and
some degree of supervision. These MFIs are successful to
a great extent to provide financial services to the poor.
Access to Finance for All
Impediments to the growth of Microfinance
Institutions (MFIs) in India
Despite their evident potential, MFIs in India are limited
in their scope as compared to those in Bangladesh. The
major constraints faced by MFIs can be broadly
characterized as capital, regulatory, and infrastructural
constraints. As a part of my research for this essay, I
3
conducted a study in a village where an NGO named
4
'PAHAL' is working based on the above discussed dual
model to provide microfinance services to the poor.
Based on the study, I realized that along with the
traditional constraints as described above, which most
MFIs face in expanding their operations, there are many
other micro level aspects that are ignored while accessing
the benefits of microfinance programme. They are listed
as follows:
(a) Capital Constraints
Within the traditional constraints, capital is a major issue
impeding the growth of MFIs in India. This is so because
capital allocation in this model happens at two stages for
the same financial portfolio. In the first stage, a bank
lends to the MFI which then lends to millions of its
clients. The final price will therefore include capital
charges at both these levels, which are ultimately borne
by the poor borrowers. In this case, the MFI has
considerable incentive to maintain supervision, but it
bears 100% credit risk on the portfolio, limiting the
funding of loans from banks. Further, a MFI is not
allowed to mobilize deposits unless it registers itself as a
Non-Bank Finance Company (NBFC), which requires
approximately Rs.20 million of startup capital which is
beyond the reach of most of the MFIs. MFIs also face
problems in raising equity as NGOs are not allowed to
invest in MFI equity because of their charitable status.
Also, foreign direct investment (FDI) is negligible
because of relatively high minimum levels. This has led
to difficulty in achieving growth and profitability for
Indian MFIs.
(b) Regulatory Constraints
Another issue impeding the growth of MFIs is the
absence of an enabling policy, and a legal and regulatory
framework. There are several regulatory distortions in
3
This Study is based on ethnographic fieldwork that I did as a part of my educational excursion to Nainital, Uttrakhand (INDIA)
4
PAHAL - An Institute of Community Empowerment & Micro Finance, managed by PAHAL Institution, Kathgodam, Nainital, Uttrakhand (INDIA).
5
For example, a commercial bank's first loan to a startup MFI is often quite small, sometimes as low as Rs. 10 - 15 lakhs. If the MFI repays
the loan on time, the bank extends a larger loan, and so on.
EOSTRE 2012
the Indian microfinance sector but no distortion has such
adverse effects as the glaring lack of transparency in the
operations of MFIs and the data reported by them.
Because the market lacks credible information,
regulators as well as lenders often suspect the worst,
which in turn spills over into suboptimal policy designs.
Due to the lack of credible information, when
commercial banks lend to small MFIs, they tend to
5
employ a “step-lending strategy” , which slows down the
flow of funds. Another regulatory distortion in the sector
exists because of the formal interest rate caps. Interest
rate caps, where they are enforced, almost always hurt
the poor by limiting services far more than they help the
poor by lowering rates.
(c) Micro Level Policy Constraints
There are various micro level aspects which are usually
ignored while gauging the benefits of microfinance.
While interviewing SHG members, I discovered that
those who are in desperate need of finance are the ones
who get excluded from microfinance benefits. There are
various reasons for this. Formation of SHG requires
group members to collectively pool their savings, based
on which the loan is disbursed. However, if an individual
does not have the required savings, and if nobody is ready
to contribute on his behalf, then he is not eligible to be a
part of SHG and hence remains financially excluded. At
times, even after the formation of SHG, group members
face much difficulty to get loans. On an average it takes
approximately 2-3 years for the formation, monitoring
and nurturing of a SHG, after which the loan gets
sanctioned from a bank. Throughout this period, the
savings of the SHG members remain locked up in a bank
account, and they then have to resort to the local money
lender. Additionally, after a loan is sanctioned, borrowers
are required to make frequent, usually weekly,
repayments. Given the fact that most of the population
depends on agriculture and hence gets returns on its
investment during only a particular time of the year, they
find it difficult to make such frequent periodic
repayments, leading to defaults. Hence, inefficiencies
exist at each layer of the operation leading to financial
exclusion. I also found lack of knowledge among the
people as another important factor hindering their
financial inclusion. Aside from the fact that the rural
15
Access to Finance for All EOSTRE 2012

usually do not satisfy the legal formalities required by Conclusion

banks, most of the people I interviewed did not even have
knowledge of the legal formalities which they would
have to fulfill to get a loan from a bank. They had no idea
of the difference between the interest rates on a loan from
a bank and a loan from a MFI and the fact that banks
charge a lower rate than a MFI.
Based on my observations, I concluded that the lack of
competition among MFIs is a major issue which impedes
the universal financial inclusion in India. Competition is
required to provide proper incentives to minimize
financial exclusion and to create financial products that
are appropriate for the rural poor. Competition will also
force MFIs to publicize the benefits of microfinance,
increasing their outreach as well as the knowledge of
people.
Improving access to finance for India’s rural poor and
meeting their diverse financial needs presents a
formidable challenge. In the near future, microfinance
can serve as a quick way to deliver finance. But the
medium term strategy to scale up access to finance for the
poor should be to graduate microfinance clients to formal
finance institutions where they can access standard
individual loans on a fully commercial basis. An
immediate problem that arises here is that there are no
obvious lenders for microfinance customers in the
banking sector. None of the formal financial institutions
is close to offering the financial products that best cater to
the rural poor. Efforts to promote microfinance should go
hand in hand with efforts to improve the formal sector
banking facilities for the poor. Both the public and the
private sector need to play a critical role in this context. n

References
Basu, Priya (2006); “Improving Access to Finance for India’s Rural Poor”, Washington D.C.: World Bank.
Ananth Bindu, Bastavee Barooah, Rupalee Ruchismita and Aparna Bhatnagar (2004); “A Blueprint for the Delivery of
Comprehensive Financial Services to the Poor in India”, Centre for Microfinance Working Paper Series, December
2004.
Mor, Nachiket (2005); “Expanding Access to Financial Services–Where do we go from here?”, Centre for
Microfinance Working Paper Series, March 2005.
Claessens, Stijn (2005); “Access to Financial Services: A Review of the Issues and Public Policy Objectives”, World
Bank Policy Research Working Paper, May 2005.
“Regulatory Aspects of Universalizing Financial Services Access”, Centre for Microfinance Working Paper Series.
Rozycki, Valerie (2006); “Credit Information Systems for Microfinance in India–Developing solutions to manage
anticipated boom in sector growth”, Centre for Microfinance Working Paper Series, May 2006.
Radcliffe Daniel and Ratti Tripathi (2006); “Sharpening the Debate – Accessing the Key Constraints in Indian Micro
Credit Regulation”, Centre for Microfinance Working Paper Series, November 2006.
Ananth Bindu (2005); “Financing microfinance – the ICICI Bank partnership model”.
Gobezie Getaneh (2008); “Sustainable Rural Finance: Prospects, Challenges and Implications”, Paper Presented at the
Annual Conference organized by the Association of Ethiopian Microfinance Institutions (AEMFI), March 2008.

16
The Fungibility of Labour and Implications for Stimulus Spending
The Fungibility of Labour and Implications for Stimulus Spending
Navin Kumar
M.A. Economics
Delhi School of Economics
A commodity is said to be fungible when units of the
commodity can be mutually substituted. For example, a
rupee that you have earmarked for a holiday can be easily
spent on rent. Any one hundred rupee note is the same as
another. A barrel of crude oil is the same as another of the
same grade. A kilogram of fresh chillies is the same as
another; at least at a wholesale market. In contrast,
diamonds differ in size, cut, clarity and grade; which
means that a diamond cannot be considered to be a
perfect substitute for another. When we speculate
whether labour is fungible, we are essentially asking if
one labourer can be easily substituted for another. Put
differently: If a job is created, can we hire just about any
worker?
Obviously, the answer to this extreme question is “No”.
An English professor cannot fill an engineering vacancy.
A cricketer will have immense difficulty teaching
Othello. A farmer will lack the talent and training to score
a century at a One Day International cricket match. Yet,
we must not reject the notion simply because we can find
exceptions to the most extreme form of the statement.
Young boys who are appointed by tea stall owners serve
tea and snacks and collect cups; these are not skills that
take time to learn and also monitoring is not immensely
difficult. If such an employee quits, he can be easily
replaced by any 10-14 year old (if one is willing to ignore
the law) or any unemployed person (if one is not willing
to ignore the law but is willing to pay higher wages). In
general, high-skill workers are not substitutable while
low-skill workers are. This article studies the possibility
of job creation promises by the Government not resulting
in the same due to the possibility of job switching.
To delve deeper into the subject of fungibility of labour,
we must first discuss the different aggregate supply
curves. There are two “extreme” aggregate supply (AS)
curves: the Classical (a vertical supply curve; reflecting
the full use of all productive factors) and the Keynesian (a
horizontal supply curve; reflecting unemployment). In
EOSTRE 2012
the first case, an increase in aggregate demand results
only in an increase in prices. In the second, it results in
only an increase in output (and therefore a decrease in
unemployment). The aim of this pedagogical exercise is
clear: to demonstrate that a boost in Aggregate Demand
(AD) will manifest itself either as an increase in prices or
an increase in output or a combination of the two in the
case of the upward sloping AS curve.
An increase in AD can also lead to “crowding out”. This
occurs when Fiscal Policy changes of an increase in
government spending (or a cut in taxes) lead to changes
in private sector investment, as a result of which output
does not increase as much as it possibly could. However,
‘crowding out in the labour market’ can be thought of as
when an increase in government spending causes
workers to shift from producing goods for the private
sector consumption and investment (the C and I
components of AD) to producing goods for the public
sector (the G component of AD). In the extreme classical
case, since workers cannot produce more goods than they
are currently producing, (the possibility of expanding AS
is assumed away for pedagogical purposes), output is
fixed. An increase in government spending will thus lead
to workers being hired from the pool of already
employed workers. A civil engineer hired to build new
houses for the poor is no longer available to work on
luxurious South Mumbai flats. At the margin, some
private developer somewhere would have to do with one
civil engineer less. In the extreme Keynesian
case—where unemployment exists—workers are drawn
from the pool of unemployed persons and therefore there
is no diversion of labourers from private production
towards public production. Note that this assumes that
labour is highly fungible: the workers in the
unemployment pool have the ability to perform whatever
work is generated by government spending. Due to the
fungibility of labour, workers are interchangeable (or at
least, costlessly trained) and so vacancies can and will be
filled by anyone who is willing to work.
17
The Fungibility of Labour and Implications for Stimulus Spending
However, if labour is not fungible, the same logic no
longer applies. If, while spending, one chooses to spend
on projects that entirely draw employees from the pool of
the unemployed, one does not draw resources away from
the private sector. Hence this leads to job creation.
However, if while spending, the public spending draws
from the pool of the already employed, we have
“crowding out” in the labour market which implies job
switching and hence no real job creation.
So, what does empirical evidence say about job creation
through stimulus spending in the light of fungibility of
labour? Garett Jones and Daniel Rothschild of George
Mason University set out to investigate the American
Recovery and Reinvestment Act (ARRA). Also known
as the Recovery Act, ARRA was a 2009 Economic
stimulus package meant to save and create jobs during
what turned out to be the second year of the recent
financial crisis. Its cost was estimated at $800 billion at
the time. They surveyed firms, non-profits and local
1
governments that received ARRA funding .
They found:
Hiring isn’t the same as net job creation. In our survey,
just 42.1 percent of the workers hired at ARRA-receiving
organizations after January 31, 2009, were unemployed
at the time they were hired. More were hired directly from
other organizations (47.3 percent of post-ARRA
workers), while a handful came from school (6.5%) or
from outside the labour force (4.1%). Thus, there was an
almost even split between “job creating” and “job
switching.” This suggests just how hard it is for
Keynesian job creation to work in a modern, expertise-
based economy: even in a weak economy, organizations
hired the employed about as often as the unemployed.
1
Jones, G., and Rothschild, D., Did Stimulus Hire the Unemployed? Answers to Questions about the American Recovery and Reinvestment
Act Mercatus Center Working Paper, September 2011
2
Lamo, A., Perez, J., and Sanchez, A.J., Crowding out or crowding in? Employment in the public and private sector in the
November, 2009
3
Tiwari, R., Farms hit, freeze NREG for 3 months/yr: Pawar to PM Financial Express, 09 December, 2011
18
EOSTRE 2012
The interpretation of these results does not lend itself to
either of the extreme cases: stimulus funds do not go
entirely to hiring the unemployed (extreme Keynesian
case) but it does not avoid them altogether either
(extreme Classical case). Some commentators seem to
believe that since only a “minority” of workers were
drawn from the unemployed, the stimulus was not worth
the cost (the authors, Jones & Rothschild seem to hold
this view). Yet, there is no reason to believe that there is
something magical about a greater than 50% proportion.
It should also be noted that we can, in theory, target
government spending so that the resulting production
generates job profiles that can be filled in by the
unemployed only. Thus it is possible to argue that ARRA
should have been better designed and not scrapped
(praxis may be harder). Other empirical studies find that
over the business cycle, government hiring may crowd
out or crowd in (cause firms to increase labour demand as
a result of increased government spending) labour
demand depending on the rigidity of labour and product
2
markets .
We do not have a comparable study for India.
Incidentally, Sharad Pawar’s claim, that agricultural
produce is suffering because NREGA is drawing away
labourers from the same pool that does the harvest season
work, seems to suggest that even targeted government
schemes are causing labour market crowding out in
India.3 Thus, even in an economy with a considerable
amount of slack, stimulus spending will not help if it is
not targeted at sectors with a lot of slack (standard
Keynesian advice) that will hire from the pool of the
unemployed. n
OECD,
An Interview with Dr. Isher Judge Ahluwalia EOSTRE 2012

An Interview with Dr. Isher Judge Ahluwalia

Dr. Isher Judge Ahluwalia is Chairperson of the Board of Governors of the Indian Council for
Research on International Economic Relations and is also Chairperson of the High-Powered
Expert Committee on Urban Infrastructure and Services, Government of India, that
submitted its Report in March, 2011. Dr. Ahluwalia is an eminent alumnus of the
Delhi School of Economics, having completed her Masters degree in Economics in 1967.
It has been over forty years since you graduated from the percentage of India's population below poverty line
Delhi School of Economics. What have been the major fluctuated at around 50%, and this was associated with
alterations in economic issues and perspectives over growth of GDP of about 3.5% per annum. The decline in
these years? Do you feel that the sectors that were of income poverty was clearly associated with the
concern in those days have been dealt with efficiently acceleration in economic growth rate to 5.5% per annum
and this has allowed the country to focus on other issues during the decades of the 1980s and 1990s. Since
or are the same sectors still under treatment? If so, have economic growth has accelerated to 8 plus per cent per
the concerns allayed or have they increased? annum in the last decade, we should expect a much faster
When I was at DSE from 1965 to 1967, we were taught decline in income poverty.
planning models, and we also studied at great length how At long last, the Government of India has started putting
to generate exports from a highly protectionist industrial its money where its mouth has been, i.e., in addressing the
and trade policy regime. We learnt about how the anti- multiple aspects of poverty which can be measured in
export bias of the import substitution regime could be terms of social indicators such as life expectancy, infant
offset by providing subsidies to exports. We never mortality rate, literacy rate, state of gender equality, etc.
questioned the heavily protectionist Import Substitution But the improvement in outcomes on the multiple aspects
Regime. The Macroeconomics that we learnt was for a of social development is crucially dependent on
closed economy. improving the systems of public service delivery and
We have come a long way in the 30 years from 1980-81. reducing corruption. We can't spend our way out of
Indian economy is much more open to world trade and poverty.
capital flows. The balancing act in controlling inflation,
growth rate of GDP and the exchange rate now pose a According to the report on Indian Urban Infrastructure
major challenge for the Reserve Bank of India. and Services, urbanization will be the leading driver of
growth in the economy. However, growth may not
Private investment accounted for over 70% of the total
necessarily lead to sustainable development. Do you
fixed investment in 2009-10. In 1980-81, its share was
think our degrading environmental resources will be
about 50%. In fact the growth acceleration of the decade
able to withstand the pressure of rapid urbanization?
2001-2011 has been dominantly led by the private sector.
This means that in the new dispensation, government Our degrading environmental resources will also not be
policies which influence the investment climate are very able to withstand the pressure of agricultural growth based
important. on ground water extraction through pumps which run on
“free” electricity. We need to be sensitive to
Another important difference is that the Government of environmental protection whether it is rural or urban
India is now focussing on education, health and direct growth.
poverty alleviation. In the mid-60s and for a long time
thereafter, the focus was mainly on income poverty. The choice is not between rural and urban growth. It is
between slow growth and rapid growth. Agricultural
I remember that between the time that I got my masters value added can grow at best at about 4% per annum over a
degree from the Delhi School of Economics in 1967 and 10 year period. If our target growth rate in the Medium
when I returned to India in 1980 as a professional run is 8-9% per annum of GDP, then the faster growing
economist to start a career of policy-oriented research, the sectors, i.e., industry and services will have to be the
19
An Interview with Dr. Isher Judge Ahluwalia
engines of growth. So, the choice is to either reduce
poverty through rapid, broad-based and inclusive growth
or to live with poverty for much longer by shunning
industry and services. Essentially, I believe that
urbanisation is a necessary consequence of development.
As our report puts it, “India cannot afford to get its urban
strategy wrong, but it cannot get it right without bringing
about a fundamental shift in the mindsets which separate
rural from the urban”.
According to the report on Indian Urban Infrastructure
and Services, the investment for urban infrastructure
over the 20 year period is estimated at Rs. 39.2 lakh crore
at 2009-10 prices. The report suggests various funding
mechanisms for meeting the same. What according to
you could be the major bottlenecks in financing these
requirements?
Financing of the cumulative investment total of Rs. 39.2
lakh crore over a 20 year period from 2011-12 to 2030-31
requires strengthening the financial position of our urban
local governments. The 74th Amendment of the
Constitution of India in 1992 devolved the responsibility
for delivering the basic urban services such as drinking
water, solid waste management, storm water drains, urban
transport, etc. to the Municipal Corporations and/or
Municipalities. But these mandates have remained
unfunded because State Finance Commissions have failed
to carry out the devolution to the third tier of government
which was expected of them.
Over time our Municipalities and Municipal Corporations
have relied more and more on transfers from the state
governments and the Government of India, and have not
used the space available to them for raising revenue, i.e.,
property tax, other taxes (for example, entertainment tax,
profession tax), and user charges. The urban local bodies
must be helped to mobilise their own resources, and these
resources must be supplemented by predictable
guaranteed transfers from the state governments. The
Government of India must also increase its urban
spending, for example through the Jawaharlal Nehru
National Urban Renewal Mission (JNNURM) from 0.1%
of GDP to 0.25% of GDP, and these transfers must be
linked to reforms in governance and to building capacity
for urban planning and urban management.
The report also suggests the need for urban local bodies
to secure a revenue base in order to enable them to meet
This interview has been reported by Aditi Gupta, Mira Sethi, Nainy Rao, Sakshi Dargan and Sanghamitra Mukherjee.
20
EOSTRE 2012
the enormous burden of responsibilities assigned to
them. Certain solutions suggested by the committee
include allowing some 'exclusive' taxes to be collected by
urban bodies and also encouraging smaller cities to
raise finances in a pooled manner. What would be the
ground-level action plans for transforming these
suggestions into reality?
A sub-group of our Committee was set up by the Ministry
of Urban Development to draw a road map. We have done
that. We have suggested concrete ways of bringing about
these reforms. At the level of the urban local bodies, we
have recommended that they should target a 15-20%
annual increase in collection of taxes and user charges.
They should update their property registers to match the
information gathered through the Geographical
Information System. Also, levies such as parking fees,
advertisement fees and trade license fees should help
strengthen the resource base of the urban local bodies.
Are Public Private Partnerships (PPPs) important in the
delivery of services and facilities in the Urban Sector? At
the level of the urban local bodies, how can some of the
successful cases of PPPs be profitably replicated?
The Committee views PPP (public private partnership) as
an important instrument for enhancing efficiency in the
delivery of urban services and ensuring that controllable
risks such as operations risks are transferred to the service
provider. PPPs, which are structured around a robust
revenue model (including user charges, targeted
subsidies, and viability gap funding), can contribute to
systemic gains and better management of urban services.
Of course, it is very important to build capacity at the
urban local body level in order for them to be an effective
partner in any PPP arrangement.
In the light of the recent financial crisis and the
subsequent economic slowdown, what policy initiatives
should India undertake to sustain a growth rate of 8% or
above?
The growth credentials of our economy are well
established. But we cannot take for granted that our GDP
will grow at 8% per annum in the foreseeable future. There
is a significant deterioration in the external economic
environment after the global slowdown. But more
importantly, sustaining the growth momentum requires
government policies to be investor-friendly, efficiency-
encouraging, and leading to a stable macro-economic
environment. n
Public Private Partnerships
Public Private Partnerships
Garima Wahi
M.A. Economics
Delhi School of Economics
Introduction
According to the United Kingdom Commission on
Public Private Partnerships, ‘A Public Private
Partnership (PPP) is a risk-sharing relationship between
the public and private sectors based upon a shared
aspiration to bring about a desired public policy
outcome’. In the case of infrastructure, PPP generally
refers to the Concession or Build-Operate-Transfer
(BOT) contracts, or any variant of them, i.e., contracts
where risks and responsibilities transferred to the private
sector are much wider than in traditional public sector
projects. Concession is an exclusive right granted by the
government to a corporation, under which it can operate
locally. BOT, on the other hand, is an arrangement in
which private sector builds an infrastructure project,
operates it and eventually may or may not transfer
ownership of the project to the government. If the
company continues to run the facility, then the
government acts as both the consumer and the regulator.
As the name suggests, Public Private Partnership does
not result in complete privatization. It aims to implement
advanced risk sharing structures between the public and
private partners. A well designed PPP redistributes the
risk to the party that is the best suited to manage it and
does so at the least cost. It is a means to achieve
efficiency and quality in the provision of public goods
such as infrastructure and health services. The private
sector provides the required services and bears the
associated risks, while the government provides the
grants, subsidies and tax breaks necessary for the
successful implementation of the project.
The cause of the birth of Public Private Partnerships can
be attributed to the mounting public debt in India during
1970s and 1980s due to the first round of oil price rise.
Lack of public finance meant reduced expenditure on
infrastructure as well as delays in the completion of
indispensable projects. In such a scenario, the
EOSTRE 2012
introduction of PPP was seen as a golden key that would
allow a rise in capital expenditure in these projects along
with the additional benefits derived from the private
sector such as efficiency, cost reduction and timely
completion of projects. Other benefits of PPP include
accelerated and enhanced delivery of projects and wider
social impact through efficient provision of public and
quasi-public goods.
Rationale behind Public Private Partnerships
The rationale behind PPP is threefold:
(I) Volume: Given the public finance constraints, PPPs
increase the volume of investments that can be delivered
during a given time period. This increase is achieved
through reduction in cost and improved service delivery.
Much of this improvement can be attributed to the private
sector’s enhanced innovation, experience and flexibility.
Thus, PPPs reduce the government’s capital cost which
in turn helps to bridge the gap between the need for
infrastructure and the government’s financial capability.
Service delivery is improved by allowing both sectors to
do what they do best. Government decides the policies
while the private sector takes the responsibility for non-
core functions such as maintenance and operations.
(ii) Efficiency/Quality: Experience shows that
efficiency/quality gains can be obtained through
inclusion of the private sector in the provision of public
goods. Private sector is expected to bring its “rigour”
and “expertise” in the design, implementation and
operation of a project driven by the desire for profits.
Public sector alone, however, suffers from bureaucratic
inefficiencies.
(iii) Competition: This is a consequence of
liberalization and deregulation policies. An opportunity
for private players to enter in long term investments in
the Public Domain builds a sense of competitiveness
among them as each player tries to capture a greater share
of the pie.
21
Public Private Partnerships
Among the above three arguments, the
“efficiency/quality” argument is the decisive one for
PPPs.
Public enterprises provide for all kinds of public and
quasi-public goods and ensure a high degree of public
accountability. However, it is common knowledge that
the public sector suffers from bureaucratic delays, red
tapism and political interference. Private enterprises, on
the other hand, are only interested in profits and thus
hardly invest in social goods such as hospitals, schools,
and highways. Public Private Partnerships ensure that a
majority of the limitations of the public and private
sectors are done away with. This is due to the ‘Risk
transfer’ from the public to the private sector which is the
most critical element of all PPP projects. The goal is to
combine the best capabilities of the public and private
sectors for mutual benefit. For example, if a private
company finances and builds a highway, it also assumes
responsibility for the related risks. A relatively stable
long-term investment opportunity incentivizes the
private sector to bear this risk. Besides this, the private
sector brings about greater efficiency and innovation
which could potentially increase revenues and reduce
costs.
A clear distinction should be made between PPPs and
privatization. These are two completely different terms
with distinct implications. While a PPP is funded and
operated by virtue of a partnership between the
government and one or more private sectors companies,
privatization means a radical and irreversible change in
the way a service is provided and in the ownership
pattern. Under privatization, the government loses its
control over the privatized enterprise and the private
player then aims for profit maximization and is not
accountable to the public at all.
The successful cases of PPPs also provide a rationale for
PPP expansion based on the evidence. For example, in
the PPP ‘Timarpur Integrated Solid Waste Management’
project, steps such as detailed technical studies, financial
and risk evaluation and obtaining regulatory and
statutory approvals were undertaken at the project
preparation stage itself, owing to the participation of the
private sector. The project implementing Special
Purpose Vehicle (SPV) was also incorporated prior to the
launch of the bid. Typically, a private sector consortium
forms a special company called “Special Purpose
Vehicle” to develop, build, maintain and operate the asset
22
EOSTRE 2012
for the contracted period. This ensured that the actual
project development phase experienced as few hurdles as
possible.
Current Scenario
In India, pressure to change the standard model of public
procurement arose initially from concerns about the level
of public debt, which grew rapidly during 1970s
and1980s. The government sought to encourage private
investment in infrastructure. It was argued that public
sector projects with a single private sector organization
taking responsibility for most aspects of service
provision could yield an improved allocation of risk,
while maintaining public accountability.
India has had more success in attracting private
investment in the public domain of infrastructure in 2006
than any other developing country. However long-
standing policies in most other South Asian countries are
beginning to bear fruit as well. South Asia has seen a
recent surge in investment commitments to
infrastructure projects with private participation. While
infrastructure in South Asia attracted only 5% of the total
in 1995-2005, its share grew to 13% in 2001-06. In 2006,
the share rose to 19%. Since the onset of the global
financial crisis in 2008, the long term financing to sustain
the development of infrastructure has become difficult to
obtain in many developing countries. However, India
has remained impassive to a great extent to such issues.
India has seen a rapid increase in private investment in
infrastructure since 2003. Its PPP program has grown
rapidly over the past five to six years. Although PPPs are
more exposed to interest rate volatility, Indian PPPs did
not suffer much during the financial crisis due to the
presence of growth prospects.
In India, typical concessions encourage the use of debt
over equity. For example, in the case of termination of
any project, lenders are repaid in full or a large part, while
shareholders get close to nothing. Thus, raising adequate
equity finance tends to be the most challenging aspect.
PPPs have relied heavily on commercial banks for their
debt-financing. However, long-term financing also
exposes the banks to the risk of asset-liability mismatch.
An active bond market can increase the flow of long-term
funds and can reduce reliance on banks, hence it is a
frequently used option.
Public Private Partnerships
Difficulties with regard to PPP
When public finance constraints are real and severe, the
alternative is to postpone investment or cancel it
altogether. In such a case, the PPP option should be
exercised provided that it yields a satisfactory economic
rate of return. However, there are multiple reservations
about the PPP option:
First, PPPs are sometimes handicapped by the
requirement of greater and more transparent
accountability as compared to public projects. PPPs and
public projects are not equally treated as regards
performance. For instance, if construction costs and
delays are well over expectations, PPPs are immediately
liable whereas consequences for public projects are often
much less dramatic and hardly visible.
Second, PPPs are often affected by the PPPs lobbyists
and the politicians who often use biased arguments to
manipulate decisions regarding PPPs according to their
requirements.
There have been a few PPPs that have encountered
problems. For example, in the Delhi-Gurgaon
expressway project, the government committed to
provide a substantial area of land prior to actually
acquiring the land. However, it turned out that there were
certain areas of land that were difficult to acquire as they
were densely populated. This exposed the government to
EOSTRE 2012
the risk of not being able to provide the land in time, thus
adversely affecting the overall schedule of the project.
To gauge the effectiveness of PPPs, a cost-benefit
analysis can be conducted to compare a PPP option with a
purely public alternative. Also, few points should be
emphasized while opting for a PPP project. First,
procurement procedures should be efficient.
Negotiations should not be long and expensive. Second,
private players should be given enough incentives to
operate efficiently without abusing their monopolistic
position. Third, PPPs should not impinge on other
important issues in terms of efficiency for society at
large.
Concluding Remarks
According to the Planning Commission, approximately
8% of the GDP is to be invested in sectors concerning
telecommunications, electricity, transportation, water
supply and irrigation to ensure their development. Such
investments should be made strategically to ensure
efficiency. PPPs are relatively beneficial in terms of
volume, efficiency and competitiveness and are a
success in times of financial constraints, though
accompanied by their own set of difficulties and
drawbacks. Thus, PPP projects can only be successful if
they are drafted carefully, taking into account all possible
contingencies. n
23
Food Security in India: An Exploration of Major Issues and Policies
Food Security in India: An Exploration of Major Issues and Policies
Ayon Sarkar
M.A. Economics
Delhi School of Economics
The architecture of a development policy forms an
integral and a fundamental part of the policy making
process as it connects the hopes and aspirations of
masses. The role of the state as a central planning
authority is essentially crucial when it comes to
addressing issues such as poverty, unemployment etc.,
unlike free market policies that fail on such fronts.
Therefore it is very important that the development
strategy is structured on such lines that it meets the basic
requirements of the commons thereby promoting
adequate social and economic security. Poverty,
unemployment and rural distress continue to be some
major hindrances on the path of progress in our country
despite the fact that our nation is doing well in terms of
economic growth on the international front. This gap
between growth and development is constantly widening
which calls for a lot of attention. The rich are becoming
richer while the plight of the poor continues to increase;
this shows the fragility or the inherent hollowness of our
development strategy that has failed to create an
egalitarian welfare state.
Food security is a major challenge confronting India
today. India achieved self sufficiency in food grain in the
1970’s and has sustained it since then. It has also
enhanced its capacity to cope up with year to year
fluctuations in food production. But this achievement of
macro food security at national level has not percolated
down to the households and therefore the level of chronic
24
EOSTRE 2012
food insecurity as well as nutritional inadequacy in India
is still very high. The National Nutrition Monitoring
Bureau [NNMB] estimated that in 2000-01 about half of
the rural children below 5 years of age suffered from
malnutrition and 40% of adults from chronic energy
deficiency. The nutritional status among the tribal is even
worse. In 1998-99 over 60% of the tribal children below
5 years of age suffered from malnutrition and more than
half of the adult tribal suffered from chronic energy
deficiency.
Surprisingly, India is one of the few countries which have
experimented with a broad spectrum of programmes for
improving food security. The food security and
nutritional status among the people continue to be
deplorable despite the fact that several centrally
sponsored food security programmes are run in the
country and also the fact that there is an excess supply
available which is going waste. State governments also
simultaneously run several food and nutritional schemes
in different regions independent of centrally run food
security programmes. But still a significant proportion of
our population remains hungry.
Central government sponsored food security
programmes are directed towards all sections of the
society but there are some specific programmes that are
planned towards the underprivileged sections in
particular. These existing food security programmes are
as follows:
Food Security in India: An Exploration of Major Issues and Policies
Programmes and steps taken for
food security
Public Distribution System [PDS] The
PDS in its present form—a producer
price-support-cum-consumer subsidy
programme—has evolved in the wake of
food grain shortages of the sixties.
Mid-day Meal Scheme.National
programme on nutritional support to
primary education launched in 1995
aimed at improving enrolment rates and
reduce drop outs.
Village Grain Bank Scheme
National Food For Work Programme
[NFFWP]
Antodaya Anna Yojna
Unlike the normal PDS this system
aimed mainly at providing food to those
selected people who are far below
poverty line.
Integrated Child Development
Programme
Centrally sponsored scheme, state
administered, nation-wide direct
nutrition intervention programme,
which integrates supplementary
nutrition with primary health care and
informal education.
Essential Commodities Act, 1955
Rashtriya Krishi Vikas Yojna
Targeted public Distribution
System[TPDS]
National Rural employment
Guarantee Act [NREGA]
Sampoorna Gram Rozgar Yojna
Source: ICRIER Report, working paper 240
Target Population
All sections of the people.
Students of government primary school
aided and run by the local bodies.
The revised scheme envisages inclusion
of Below poverty line [BPL] and
Anthodaya anna Yojna [AAY] families
in villages which are to be identified by
the state governments in the food deficit
areas.
All poor people in rural areas who are in
need for wage employment and are
interested in doing manual and unskilled
work.
5% of the total population in the country
who sleep without two square meals a
day.
Children and pregnant women
General public against price fluctuations
in essential food items.
The farmers or the cultivators
This scheme focuses mainly the Below
Poverty Line [BPL] people
Rural households, primarily semi-
skilled or unskilled workers, living
below the poverty line in India.
Women scheduled castes and scheduled
tribes and parents of children withdrawn
from hazardous occupations
EOSTRE 2012
Coverage and Implementation
It was basically intended to benefit the
consumers against fluctuations in food
prices, focusing mainly on the lower and
middle class people.
The scheme covers students of class I to
V.
Launched in 1996-97 by the Ministry of
Tribal Affairs in 11 States. Since 2004,
the scheme is being implemented by the
Department of Food and Public
Distribution.
150 Backward districts of the country,
launched in the year 2000.
One crore of the poorest families,
launched in the year 2000.
This scheme was launched in 1975 in 33
community development blocks. It
covers 6118 blocks in the country
including 4790 in the rural areas, 805 in
the tribal areas and 523 urban slums.
Extends all over India; launched in
1955.
Covers all states and launched in the
year 2007.
This scheme was intended to benefit
about 6 crore poor families, launched in
1997.
Launched in 2005
Launched in 2001 in all States and
Union territories
25
Food Security in India: An Exploration of Major Issues and Policies
Food subsidy forms an important form of government
intervention to meet the basic food requirements of the
people. The public distribution system in India as we all
know forms the major food subsidy programme which
the government of India runs throughout the country and
through which the government establishes regulation in
the food market. However, two conditions govern the
sale of subsidized grain. First the buyer coming to the
ration shop must posses a ration card and secondly, grain
purchases are subjected to a quota. The Food
Corporation of India {FCI}procures grains at the
procurement price and then stores and transports it to the
various consuming location. The wide spread nature of
this programme therefore makes the food grain market
highly regulated which fulfils several important
objectives of the government’s development policy. This
kind of a centralised system helps to enhance efficiency
of food markets as well as improve equity in food market
outcomes that enhances food consumption among the
people. Price stabilization is another central focus of the
programme which prevents frequent surge in prices of
food. Last but not the least the PDS also happens to be a
protective shield for the farmers as this scheme helps
them to get remunerative prices for their produce. The
price at which the FCI procures food from the farmers is
like a price floor for their produce below which farmers
aren’t going to transact with anyone. As a result of this,
poor farmers get protected from the exploitative
activities of the middlemen. Similar programmes with
targeted goals, especially extending to below poverty
line households, have also been introduced, for example:
Anthodaya Anna Yojna.
Cereal consumption has fallen without corresponding
adequate consumption of other non cereal nutritious food
items despite the presence of such a subsidy programme
for a long time. A significant proportion of the poor do
not even have an adequate purchasing power to avail
these public welfare schemes. Apart from all these
problems targeting errors are also some of the major
drawbacks of the targeted subsidy schemes that provide a
larger subsidy than the ordinary PDS to the BPL families.
Finally corruption and lack of adequate vigilance on the
implementation of these programmes has led to
tremendous inefficiency, the cost of which is borne by the
poor.
However, the finance minister in his budget speech this
year has made an explicit announcement of replacing
subsidies on goods with cash transfers and this
amendment is already in place for some goods like fuel,
fertilizer. This proposal which is a sheer move towards
deregulation shall completely dilute the role of the state
26
EOSTRE 2012
in the long run and hence has been an important topic for
discussion among analysts. Any modification in the
development programmes run by the government should
be acceptable provided it meets the basic objectives of
social welfare within the country like the ones mentioned
above in the PDS regulated mechanism. But the proposal
of direct Cash transfers turns a blind eye to a lot of such
objectives which a development policy ought to focus
on. The MSP which creates a price floor for the
cultivators guaranteeing remunerative prices for their
produce shall disappear completely by such a
decontrolable setup and farmers will be at the mercy of
such traders and middlemen to sell their produce. By
replacing the government procurement and distribution
of foodgrains system by a pure cash transfer would mean
farmers would not have assured sales of their produce at a
certain price. They would have to depend upon the
markets to sell their output. Since traders and middlemen
have a better knowledge about the markets, and possess
resources to carry output from one place to the other on a
large scale compared to the poor farmers, it is quite likely
that they would try to exploit the farmers by offering a
low price for their output. Farmers won’t get an adequate
price for their produce and huge margins will be
siphoned off by the middlemen. Similarly, putting money
in the hands of people and allowing market forces to play
a free role in the food market would cause an increase in
the demand for a variety of food items available in the
market. As the centralized distribution system would be
absent, markets would see an increased demand for
primary goods like rice, wheat etc.; traders and
merchants would try to take an advantage of this situation
by resorting to unfair practices like hoarding, hence there
will be a shortage in the supply of these food items which
would then cause an increase in their prices leading to
food inflation. This would have severe implications on
the marginalized sections living on daily wages. In the
last two years, the economy has seen tremendous food
inflation, and now if we do away with this regulated
framework even in the food grains market, it is going to
further aggravate the problems which the country is
facing in terms of rising prices. Finally, another
drawback of such a proposal could be regarding the
utilization of the funds for purchasing adequate food
items that shall provide proper nourishment instead of
unnecessary non-food items. It could also be the case that
money is spent not on food but on unnecessary non-food
items.
Thus its time to re imagine and restructure the
architecture of our development policy on appropriate
lines so that the benefits of economic growth have a
Food Security in India: An Exploration of Major Issues and Policies
trickle down effect for the society. The process of
development cannot be defined only in quantitative
terms as it includes several qualitative aspects of human
life like rights, freedom etc. Since food insecurity is one
of the major challenges before the nation, it has to be
dealt seriously with appropriate policy making. In this
context, it becomes extremely important to understand
the importance of the PDS which is a major food security
programme run by the Indian Government that fulfills a
myriad of objectives of social welfare and development.
Therefore replacing such a centralized regulated system
with direct cash transfers would be inappropriate and
also incompatible with the problems prevailing in the
country. So the proposal made by finance minister of
cash for subsidy programme stands completely
unjustified.
But it is also important to highlight the problems with the
existing regulated mechanism. The PDS suffers several
drawbacks which need to be addressed with adequate
precision. For instance, the high level of corruption
involved in the distribution of food through ration shops
is responsible for its inefficiency in some states. So it is
crucial that independent government agencies get
established that shall monitor the implementation level
of the subsidy programme in the states. In this way
regional variation in the appropriate implementation of
the scheme would get checked. It’s really surprising that
the government which spends money on various
development programmes fails to spend a little more to
see their implementation and also the utilization of its
funds.
Large inclusion and exclusion errors associated with the
implementation of the poverty alleviation schemes lead
to a wastage of government resources which needs to be
minimized. One way to deal with this is to focus
principally on universal subsidy programmes instead of
targeted schemes towards the poor. In 1999-2000, 36%
of poor households report purchases of wheat and rice
from PDS and the corresponding figure for non poor is
31%. Across states the correlation between participation
References
Ghosh, J (2006), “Food Insecurity in South Asia”, www.macroscan.com, January.
Utsav Patnaik, (2004) , “Republic of hunger”, Public Lecture on the occasion of the 50th Birthday of Safdar Hashmi,
organized by SAHMAT (Safdar Hashmi Memorial Trust), New Delhi, April.
Mittal.S and Sethi D, (2009) “Food Security in South Asia: Issues and Challenges” Working paper no. 240, ICRIER
[Indian Council for Research on International Economic Relations] September.
“The Concise Oxford Companion to Economics in India” edited by: Kaushik Basu and Annemie Maertens
EOSTRE 2012
rates of poor and non poor is 0.98 (Source: Public
distribution system, Bharat Ramaswami, The Concise
Oxford Companion to Economics in India). This has led
analysts to conclude that the interests of the poor lie in
universal subsidy schemes rather than targeted schemes.
Finally coming to the proposal of direct cash transfers,
such a policy should not replace the existing regulated
mechanism but it should definitely supplement it. Cash
transfers programme initiated through various
employment generating schemes should be run,
[something like the National Rural Employment
Guarantee Act] that shall coexist with the subsidy
schemes. On the other hand, conditional cash transfer
programmes along with the PDS shall be a consistent
modification in the development strategy that shall
essentially play a crucial role in diverting funds towards
essential non-food and non cereal consumption. This will
enhance the consumption standards of the people which
in turn shall get reflected positively in the food security
indicators. Exclusive focus needs to be given to right
based programmes which give the citizens a right to live
with dignity. NREGA is an example of such a policy
which has created history in the field of social and
economic security. Therefore, the right to food act that is
awaited should be made universal instead of just
targeting it towards BPL families.
These changes and modifications shall facilitate the
process of upliftment and so our development policy has
to be re imagined on these lines. Economic growth leads
to economic development only when the welfare of the
society as a whole gets maximized. Therefore, it is very
important that the structure of the development policy is
properly designed so that the nation moves towards an
egalitarian framework. Different regions and different
sections should benefit equally from various plans of
action. Food security being one of the basic human
requirements has to be given a special focus in our plan
policy so that people can get adequate food. This shall
help us to have a healthy labor force which can then be
nurtured for human resource development. So its time to
identify this link between food security and development
and re imagine development policy in India. n
27
Can the Eurozone be Saved? EOSTRE 2012

Can the Eurozone be Saved?

Dr. Jayati Ghosh
Dr. Jayati Ghosh is a Professor of Economics at the Centre for Economic Studies and Planning,
Jawaharlal Nehru University. She is the recipient of the 2010 ILO Decent Work Research Prize. A prolific
writer and debater; her areas of interest in Economics include International Economics,
Macroeconomics of development and employment trends in developing countries.

The euro has always been an unlikely major currency,
based as it is on monetary union between countries who
do not share political union. Its creation was remarkable,
a tribute to idealism and a reflection of the triumph of
political will over economic barriers. To outsiders, it is a
fascinating experiment, since its apparent stability called
into question the economic axiom that monetary union is
difficult if not impossible without fiscal federalism
underpinned by more comprehensive political union.
Of course the eurozone is not the first attempt at
monetary union in history, nor is it likely to be the last.
But thus far it was the most successful by far, the
culmination of the century-long drive in Europe towards
greater integration, proceeding despite various hurdles of
conflicts and instabilities. The driving force of such a
union may well have been political, but there are also
clear economic benefits. These stem mostly from the
reduced transaction costs of all cross-border economic
activities, including trade in goods and services. In
addition, the stability provided by a single currency
serves to reduce risk in a world of very volatile currency
movements driven by mobile capital flows, and this is
seen to be an additional inducement to invest in
productive activities.
But there are also significant costs of such union, which
have become especially evident in the recent past. The
most obvious is the loss of two major macroeconomic
policy instruments: the exchange rate and monetary
policy, which can otherwise be used to prevent an
economy from falling into a slump. For example, Greece
could have tried to use a combination of exchange rate
devaluation and lower interest rates to stimulate demand,
increase income and reduce unemployment, as well as
prevent the external deficit from deteriorating. Of course
this is not foolproof, as many countries know, but trying
to adjust without such instruments is that much harder.
With that option closed, adjustment based entirely on
domestic economy measures requires such severe
“internal devaluation”, including cutbacks on public
spending and private consumption, that they are unlikely
to be accepted in a democratic set up.
The other way to resolve this would be for workers in
Greece to move to other parts of the eurozone, and so
reduce the pressure on the domestic economy. This
obviously requires free flow of factors across borders,
which has been seen since Robert Mundell’s
contributions as a basic economic condition for currency
union. This was sought to be created by the “Single
Market” in 1994, but even till date labour (and much
merchandise) does not really move freely across
European borders despite the removal of official
restrictions.
Finally then, the option would be to have fiscal transfers
(implicit bailouts) to Greece from stronger segments of
the eurozone economy. This fiscal federalism is quite
important in the US, which is another large area that is a
currency union (in this case backed by political union).
But the European Charter did not provide any bailout
clause that enables such transfers. So this depends
crucially on the ability and willingness of the European
Union (and basically, the core countries of Germany and
France) to set such a precedent - there is already a
political backlash in these countries against this.
The problem is aggravated by bond markets that simply
do not believe that the governments will repay their
existing debts in full, and have therefore participated in a
crazy downward spiral. The problem is this: the more the
financial markets hammer the government bond markets,
the more governments in Greece and Spain and
elsewhere are forced to announce and try to implement
severe austerity packages that entail large cuts in public

28
Can the Eurozone be Saved?
expenditure with adverse effects on employment and
output. So they keep announcing budget cuts that involve
declining spending on crucial things such as schools and
hospitals and significant effective wage cuts for public
sector employment.
The so-called “bailouts” that are being provided by the
European Central Bank and the IMF to the countries in
trouble are in reality bailouts for the banks (mostly from
Germany, France, the Netherlands and UK) that have lent
to these countries, not financing that will enable public
expenditure to lift these economies into growth. Instead,
external markets are supposed to provide the dynamism –
but obviously, all countries or regions of the world cannot
rely on net exports to make their own economies grow,
especially if they are intent on suppressing domestic
wages and demand to make their own economy more
“competitive”.
Quite apart from the public discontent that this involves,
this strategy is macro-economically stupid. The
multiplier effects of these moves are obviously negative,
and so the economy tanks. This makes it much harder for
all the private borrowers—large and small firms,
household enterprises, individuals who have taken credit
to buy homes or purcahse consumer durables, credit card
holders, and so on—to repay their debt, because their
incomes also collapse. So fiscal space, which is not a
static variable, actually worsens and all the indicators
look worse than before!
EOSTRE 2012
Part of the problem, is that the bulk of the mainstream
economics profession has been deskilled: it has simply
forgotten basic Keynesian macroeconomics, and so is
unable to offer even the most obvious essential advice.
Expansionary fiscal policies increase demand and
private sector revenues and therefore generate more tax
revenues. It makes much more sense to grow out of debt
than to plunge into a downward spiral that is worsened by
public austerity.
But the other aspect of the problem is deeper, reflecting
the political and class configurations that create and
intensify the mess. The choice between increasingly
futile and often counterproductive monetary easing and
dithering about fiscal policies that are oriented to more
austerity in order to satisfy bond markets is ultimately a
political choice, reflecting the continued power of
finance. Governments today are spooked and even
paralysed by the very financial markets that they have
just saved, and the regulation that would control these
irrational trends has so far been absent.
No wonder that the new Wolfson Economics Prize that
has just been announced offers £250,000 to the person
who comes up with the best plan for winding up the euro
in an orderly way! n
29
Economic Regionalization and the World Trade Organization
Economic Regionalization and the World Trade Organization
Mubashir Anis
Lahore University of Management Sciences
Introduction
The World Trade Organization (WTO) is an
Organization committed to the liberalization of World
trade. As the successor of GATT, WTO aims to bridge
gaps between trading countries and set out rules that
enhance and speed up the process towards complete trade
liberalization, but this is not without hurdles and counter
measures. The phenomenon of regionalization whose
“second wave” in the East Asian region is an incidence
that proponents of trade liberalization argue would
render the global trade to mere trade between economic
regions and not individual countries.
Regionalization is different from regionalism.
Regionalism is a “backlash” against globalization with
states in the proximity of one another forming deeper
economic unions and mutual tariff cuts, promoted more
so as a “political ideal” rather than due to market
considerations. Whereas, Regionalization is the product
of market forces; within the context of East Asia it comes
naturally because it is the “fastest growing and most open
economy in the world” as Kharas and Gillis have argued
in their paper.
One of the functions of the establishment of trading blocs
is to allow easier trade within the regions, and to increase
the economic efficiency and the competitiveness of their
products. The free trade among the member states will
increase dependence between both the states, which will
promote regionalization. For example, since NAFTA has
been established, the trade among the U.S., Canada and
Mexico has more than doubled. While the WTO is
working towards the elimination of trade barriers
globally, trading blocs are keenly maintaining and even
increasing them by using the title of regional
cooperation. As trading blocs give their member states
more interest, they ensure the building of trade barriers to
the outside world and prevent other countries’ and
regions’ goods from being imported. Though trading
blocs satisfy their member states, they dent the
30
EOSTRE 2012
foundation of global cooperation and further increase the
difficulties of negotiations between countries, thus
blocking the real “globalization.”
Case for Regionalization as a Barrier to
Economic Globalization
Proponents of regionalism appropriately point out that
regionalism is a step in the process of evolution towards
Globalization, preparing individual states for
competition and “cooperation” on a global level, but
critics of regionalization argue that the “spaghetti bowl”
effect of different rules and procedures that tend to
develop in different economic regions causes a serious
barrier to any future global economic assimilation.
An evidence for this line of thought is the growing
proportion of inter East Asian trade; the source of China’s
majority imports is the East region. The same holds true
for the European Union and to a limited scale for North
America.
East Asia’s regionalization has followed a flying geese
pattern with production of simpler goods shifting to low
cost producers. However, factors such as location
involve history and mere luck too. The process of
economic renaissance started with Japan. Its transfers of
technology and simpler tasks such as components led to
the rise and prominence of the four tigers (Hong Kong,
Singapore, South Korea and Taiwan) and now the
process is culminating in the rise of China as a global
giant. The cohesion that East Asia has witnessed has
caused the economies to adapt to each other’s needs with
regard to finance, research and production which have
been organized according to the needs and
considerations of the region to complement one another,
leading to economic convergence in the region. This
scale and nature of cooperation also puts proponents of
trade liberalization at unease as the region’s system and
structure develops exclusively from the other regions,
this very fact is going to make it increasingly difficult to
Economic Regionalization and the World Trade Organization
incorporate the region in the WTO’s vision of less
exclusive country wise trade liberalization. Thus the
argument that regionalization is more of a hurdle than a
facilitator of trade liberalization on a global scale.
In the discourse of regionalization with regard to
globalization of world trade, trade creation and trade
diversion affects of trading blocs are good indicators to
gauge their static affect on overall trade liberalization,
but there have been mixed results so far especially to the
trade creation and divergence affect of trading blocs. The
method of gauging the affect of Regional Trade
Agreements is the increased inter-region trade from
“normal” and decrease in intra-region trade from
“normal” levels. The results have been mixed with
Bikker (1987) finding an “extra region” bias for the
European region and Bergstrand (1985) finding an
increase in proportion of inter-member states.
The Regionalization process has another dimension to it
which is more dynamic in nature than the current trading
mixture; it is basically going to affect the future trading
relationships of regions. It is that of intra-region FDI.
European Union for one has increased intra-region
investment significantly since the inception of the region
as an economic entity, with the proportion of investment
by member states increasing from 40% in 1984 to 60% in
1993. This phenomenon is likely to promote regionalism
in the region in the form of companies. On the firm level,
this points out towards investment decisions favourable
to European region market that is likely to affect future
trading relations. It is most likely to increase intra-bloc
trade in the region.
East Asian region has also seen such a pattern taking
place, starting in the 1960’s with Japanese investments in
the four tigers for components and material, down the
value chain—a position which was later assumed by
China as the “warehouse” of the region.
Also, it can be argued that as the financial interests of a
country increase in an intra-region set up through FDIs,
the region is going to perceive itself as an exclusive entity
against other countries, dealing with them as one region,
similar to what is practiced by the European Union,
having harmonized standards and procedures in the
region and “common non-tariff” barriers such as anti-
dumping duties or standards relating to import of fruits
and seafood.
EOSTRE 2012
Case for Regionalization as a compliment to
Globalization
East Asian regionalization through Free Trade
Agreements (FTAs) is popular for a number of general
reasons, as well as some country specific reasons. The
general reasons include a global trend of membership in
regional groupings, increase in market accessibility and
the expected positive impact on economic growth.
The 1997 currency crisis showed that area economies
could not depend upon countries outside the region for
help. This realization led to a number of proposals aside
from regional FTAs. For example, the Chiang Mai
Initiative was a proposal to allow the swap of currencies
when liquidity was required. If these were incorporated,
the FTAs would quickly move past the slow and
contentious pace of WTO negotiations with like-minded
partners and could pioneer liberalization in new areas
such as labor mobility.
Finally, for countries such as Japan and South Korea,
FTAs can be used to promote domestic policy reform and
to improve business opportunities through the
harmonization of systems such as technical standards for
electronic products. FTAs provide its advocates a tool for
robust economic recovery through closer integration
with countries that have higher growth potential than
post-industrial Japan.
The path of reaping benefits from FTAs is not one
without obstacles. Countries with differing goals and
aims must define a common consensus of objectives,
which can be thorny to find amidst a tangle of historical
issues, political and security alliances, lack of political
leadership and domestic protectionist impulses. In short,
regional and even bilateral FTAs are not immune to the
problems that resist consensus at the WTO level.
The most important concern is whether these Regional
Trade Agreements (RTAs) can lead the world economy
toward the optimum policy objective of global free trade.
Grimwade (1996) argues that ‘first regionalism’ in the
1960s collapsed because it failed to produce sufficient
positive gains from forming RTAs. However, Bhagwati
(1993) recognizes that ‘second regionalism’ has been
proliferating since the 1980s and has the potential to be
long lasting, compared with the failed first regionalism,
if the following two key issues are addressed. First, it is
31
Economic Regionalization and the World Trade Organization
important to find out if the immediate static effect of
RTAs on world welfare can be positive. Secondly, over
time, the ‘domino effect of regionalism’ caused by the
welfare effect of RTAs leading to non-discriminatory
global free trade, needs to be measured.
The first issue has been widely analyzed since it’s
introduction in the concepts of trade creation and
diversion effects for the customs union by Viner in 1950
and was later clarified by Kemp and Wan in the year
1976. The second issue concerns how the proliferating
RTAs will lead to their evolution over time. Countries
excluded from a particular RTA may join existing RTAs
in order to share benefits arising from free trade and to
avoid isolation. The membership of existing RTAs will
increase by attracting new members and the gains from
free trade will rise. Alternatively, excluded non-member
countries may create separate RTAs by negotiating new
RTAs between them and by competing with existing
RTAs, thereby causing the proliferation of RTAs. Both,
the process of inducting new non-members to existing
RTAs and the process of non-members forming new
RTAs may trigger the domino effect of regionalism and
could lead the world economy towards global free trade.
An objective assessment of trade regionalization in East
Asia can be assessed by the quantitative impacts on
world and regional welfare and output. A recent work by
Park attempts to quantify these effects and finds positive
results. The positive impact of trade regionalization is
expected to arise out of gains resulting from free trade.
These include gains resulting from bigger markets and
greater competition which would lead to gains from
economies of scale, thus leading to greater efficiency and
a significant decrease in welfare loss leading to overall
gains in welfare. However the only drawback is its
impact on non-member countries. A non-member might
lose its comparative advantage with respect to some
member countries as member countries may find cheaper
goods within the region. Therefore an objective study
must represent a global effect—including members and
non-members—to find whether there are any global
gains from the trade regionalization, as in the case of East
32
EOSTRE 2012
Asia. Park’s study concludes that gains from
regionalization outstrip the losses. Table 1 shows that the
losses of the non-members in terms of output and welfare
are lower relative to the gains realized by members,
leading to significant increases in world output and
welfare. For example, in the ASEAN Hub RTA, welfare
and output losses to non-members were 0.06% and
0.07% respectively while the gains to members were
2.54% in welfare and 1.77% in output, leading to world
increases in welfare and output of 0.98% and 0.67%
respectively. Liberalizing trade entails easier and
cheaper movement of goods, services and other factors
that will boost trade. For example, Singapore can
outsource the production and transport of low-tech goods
to a country such as Malaysia. Singapore would then add
value to these goods and then perhaps sell them to Japan.
Also when countries integrate, it is important that they
remain competitive; otherwise some other member
country can easily invade the market, leading to Balance
of Payment deficiencies. This would mean that member
economies will have to be efficient and dynamic; another
virtue realized due to integration. East Asian member
countries are generally small, apart from a few such as
Indonesia. They could only have realized true economies
of scale through expansion of their markets. Integration
also leads to tight linkages. With the liberalization of
trade, backward and forward linkages become tighter
because importing raw materials and outsourcing certain
aspects of production become easier and less costly. This
enhances the growth of member countries and makes
them interdependent. Such a situation leads to a decrease
in trade with non-member countries.
Non-members lose out in the process. Indonesia is
probably going to prefer South Korean manufactured
goods as opposed to some non-member producers’
because the price is going to be lower from the regional
producer. The reason why the loss to non-members is not
equal to the gains to the members is because not all of the
gains realized by the members are attributable to the loss
suffered by the non-members. Non-member countries
may also be pushed to pursue policies of efficiency and
competitiveness in line with their integrated competitors.
This may also decrease the distortions in their trade.
Economic Regionalization and the World Trade Organization EOSTRE 2012

33
Economic Regionalization and the World Trade Organization EOSTRE 2012

Conclusion and the ASEAN and the overall increase in world trade
evident over the last twenty years. Those who see
The debate on the impact of regionalization and on the
regionalization as an opposing force to free trade are
prospect of free trade has proponents on both sides of the
quick to point out that much of this trade is intra-region
issue, each having valid points and empirical evidence to
trade, thus referring to their reservation that this would
support it. Those arguing the case for regionalization put
lead to a trade between large and small neighbouring
forth the claim that the advent of regionalization and
regions and not between individual countries. This is
FTA’s allow countries to open up and prepare for
going to cause economic systems to evolve differently
competition and face the dynamism they may confront in
thus jeopardizing any future for free World Trade,
free trade, as they are unlikely to embark upon “unilateral
resulting in future trading ties to be characterized by
liberalization” otherwise. Proponents of regionalization
inter-regional relations rather than a system of truly
point towards the correlation between the consolidation
free trade. n
of regional blocs such as the EU, NAFTA

References
Baldwin, Richard. “A Domino Theory of Regionalism.” IDEAS: Economics and Finance Research
Baldwin, Richard, and Anthony J. Venables. “Regional Economic Integration” IDEAS: Economics and Finance
Research. 1995.
Shujiro, Urata. “Economic Regionalization in East Asia.” 2003.
Park, Iwwon. “East Asian Regional Trade Agreements: Do They Promote Global Free Trade?” June 2006.
Grimwade, Nigel. “International Trade Policy: A Contemporary Analysis.” Routledge (London & New York), 1996.
Bhagwati, Jagdish N. “India in Transition: Freeing the Economy.” Clarendon Press (Oxford England and New York),
1993.
Gill, I., Kharas, H. “An East Asian Renaissance: Ideas for economic growth” (The World Bank , Washington D.C),
2006.
Jean Louis Mucchielli, Peter J. Buckley, Victor V. Cordell. “Globalization and Regionalization” (International Business
Press), 1998.
Creamer, R. Huffington post (http://charlog.wordpress.com/2010/01/04/economic-polarization-and-political-
polarization/)

34
European Debt Crisis and the Way Beyond
European Debt Crisis and the Way Beyond
Sukriti Jain
MBA―PGDM
Indian Institute of Management―Kozhikode
“Technology has changed, the height of humans has
changed, and fashions have changed. Yet the ability of
governments and investors to delude themselves, giving
rise to periodic bouts of euphoria that usually end in
tears, seems to have remained a constant,” Carmen
Reinhart and Kenneth Rogoff.
The first ever recorded incidence of sovereign default in
377 B.C. was of Greece and ever since it has failed to
repay its debts on numerous occasions in the past 2,388
years. Even supposed bastions of financial reliability
such as Germany, Britain, France and the United States
have in the past fallen into some kind of sovereign
default. Almost every nation on Earth (exception of a few
Asian and Nordic countries) has at one time or the other
failed to honour their obligations. Over the years the
frequency of defaults has increased and along with it
collateral damage has assumed broader and systemic
proportions.
Today PIIGS juggernaut has transformed into Euro
zone's Frankenstein monster. Under the aegis of the
Stability Growth Pact and Maastricht Treaty, provided its
adopters access to common currency, unified capital
markets, free trade and cheap credit allowing it to
accumulate high levels of debt and engage in tax evasion
which led to shrinkage of government income along with
near absence of lender of last resort. The inherent
weakness in structure of Euro was that of being adopted
by a group of widely divergent economies pursuing their
own fiscal policies with same monetary and interest rate
policies across Euro zone.
Parallels have already been drawn to the 2008 financial
crisis and the present one is being deemed to be a lot
bigger. During the Global Financial Crisis of 2008, the
total toxic assets that the Fed wound up having to buy
cost $1.5 trillion – about 11.5% of US 2008 GDP, the total
sovereign debt of PIIGS is about €3.1 trillion which is
20% of Euro zone's GDP. Thus the message from Greece
EOSTRE 2012
in the words of Floyd stands stark and clear “I'm small.
I've suffered. You can afford to rescue me. If you
don't, I can create chaos for all of you.”
The euro was designed to be the Roach Motel of
currencies. Once you enter, you can never leave since
there is no legal provision for departure.
Although the costs of efforts to save the euro are justified
by the claim that the alternative would be too dreadful to
contemplate, the economic history is replete with
examples of fixed exchange rates that came unfixed. In
2002, Argentina gave up Currency Board which led to its
eventual cut off from international credit, massive
devaluation of the Peso (by a factor of 2/3), a brief
recession, plunging of imports, limits on bank
withdrawals—the corralito—and big losses for
depositors and banks as their assets and liabilities were
redenominated, each at a different exchange rate, but it
proved to be a turning-point, as devaluation did work its
way back to economy’s rebound wherein the economy
grew at 9%, illustrating that the costs entailed are not
always greater than the costs of servicing even the
disuniting of currency unions, though rarer, happens
from time to time.
The three major ways to fall apart are: a wholesale
dissolution into the original currencies; a fissioning into
northern hard-currency and southern soft-currency
blocks; or the exit of a trickle of countries, or just one.
These translate to, as suggested by Hans-Olaf Henkel,
that Germany could leave, either on its own or with a
select group of small economies—Austria, Finland and
Netherlands or the third and more likely, Greece might
secede or be forced out, each having economically
devastating consequences. If Germany were to leave, its
Neue Deutschmark would soar and while transition itself
would not pose a challenge, the ensuing recapitalisation
would lead to lower value of its foreign assets.
35
European Debt Crisis and the Way Beyond EOSTRE 2012

36
European Debt Crisis and the Way Beyond
On the other hand if Greece was to leave, its drachma
would plummet which might be good for its exporters but
it would trigger what Barry Eichengreen calls “the
mother of all financial crises”. The devaluation of the
drachma against the euro would turn any debts that
remained in euros into a crippling burden (a fallout of
Original Sin). At the same time depositors, who are
already edging towards the exit, would break into a
headlong bandwagon effect, triggering in its wake a
dominoes effect culminating into bank runs not just in
Greece but the entire coupled international financial
system.
The costs of both these eventualities, as estimated by
UBS, are forbiddingly high at around 20-25% of GDP in
the first year and then roughly half that amount in each
subsequent year if Germany departs and this figure rises
to 40-50% of GDP in the first year with subsequent
annual costs at around 15% for Greece stepping out.
In contrast, a successful rescue would seem a bargain as
adding together the money already spent on rescues, to
what is needed to recapitalise European banks and any
potential losses to the ECB, the total will still be in
hundreds of billions of Euros. If the ECB’s intervention
is bold and credible it might not even have to buy that
much debt, because investors would step in. But this at its
onset also evokes the classic moral hazard problem that
ECB will always be ready to bail them and hence they
may shy away from reform and rectitude. (countries
become too big to default)
In an ordinary financial crisis, with the passage of time,
the panic subsides and confidence returns. But in this
case, time has been working against the authorities as in
the absence of political will, Europe is condemned to a
seemingly unending series of crises. Measures that
would have worked had they been adopted early enough,
turn out to be inadequate by the time they become
politically possible.
The outlines of the missing ingredient in the perfect
European union, namely a common treasury, are
beginning to emerge in the form of the European
Financial Stability Facility (EFSF)—agreed on by
twenty-seven member states of the EU in May
2010—and its successor, after 2013, the European
Stability Mechanism (ESM). It is supposed to provide a
safety net for the euro zone as a whole, but in practice it
EOSTRE 2012
has been tailored to finance the rescue packages for three
small countries: Greece, Portugal, and Ireland and is not
large enough to support bigger countries like Spain or
Italy. Nor was it meant to deal with the problems of the
banking system, although its scope has subsequently
been extended to include banks as well as sovereign
states. Its biggest shortcoming is that it is purely a fund-
raising mechanism and the authority to spend the money
is left with the governments of the member countries.
As per George Soros, to prevent a financial meltdown,
four sets of measures would have to be taken. First, bank
deposits have to be protected. As, if a euro deposited in a
Greek bank would be lost to the depositor (in the
eventuality of Greece defaulting), a euro deposited in an
Italian bank would then be worth less than one in a
German or Dutch bank and there would be a run on the
banks of other deficit countries. Second, some banks in
the defaulting countries have to be kept functioning in
order to keep the economy from breaking down. Third,
the European banking system would have to be
recapitalized and put under European, as distinct from
national, supervision. Fourth, the government bonds of
the other deficit countries would have to be protected
from contagion. The last two requirements would apply
even if no country defaults.
All this would cost money. Under existing arrangements
no more money is to be found and no new arrangements
are allowed by the German Constitutional Court decision
without the authorization of the Bundestag. There is no
alternative but to give birth to the missing ingredient: a
European treasury with the power to tax and therefore
to borrow. This would require a new treaty,
transforming the EFSF into a full-fledged treasury.
If at all Union survives the possible way forward as
propounded by pro-political integration to enforce
discipline is creation of a United States of Europe /fiscal
union that would supervise the issuance of common
Eurobonds. With the ins (good governments) emerging
as more powerful (with power to veto countries’ fiscal
excesses and giving the European Court of Justice the
right to impose good behaviour) than outs (bad
governments) building in its wake a huge new federal
super state offering the ten countries, including Sweden,
Poland and Britain, that kept their own currencies a
choice: to join the euro or be excluded from a new “core
Europe”. n
37
A Discussion with Montek Singh Ahluwalia EOSTRE 2012

This discussion has been reported by Mira Sethi, Nainy Rao, Sakshi Dargan and Sanghamitra Mukherjee. Special thanks to Ayon Sarkar.

39
Revisiting the ‘Natural’ Origins of Economics
Alex M. Thomas
Ph.D Candidate, School of Economics
University of Sydney
Revisiting the ‘Natural’ Origins of Economics EOSTRE 2012

References
Aspromourgos, Tony (2009), The Science of Wealth: Adam Smith and the Framing of Political Economy, Oxon and
New York: Routledge.
Bharadwaj, Krishna (1986), Classical Political Economy and Rise to Dominance of Supply and Demand Theories,
Calcutta: Universities Press.
Groenewegen, Peter (ed.) (2001), Physicians and Political Economy: Six Studies of the Work of Doctor-Economists,
London and New York.
Lang, Dany (2008), “Why Economists should Choose their Inheritance: Physics and Path-independence in Economic
Systems”, Review of Political Economy, Volume 20, Number 3, pp 405-420.
Maas, Harro (2001), “An Instrument Can Make a Science: Jevons’s Balancing Acts in Economics”, History of Political
Economy, Volume 33, Number Supplement 1, pp 277-302.
Mirowski, Philip (1984), “Physics and the ‘Marginalist Revolution’”, Cambridge Journal of Economics, Volume 8, pp
361-379.
Mosselmans, Bert (2007), William Stanley Jevons and the Cutting Edge of Economics, Oxon and New York: Routledge.
Schabas, Margaret (2005), The Natural Origins of Economics, Chicago: The University of Chicago Press.

41
I was born OK…Education Ruined Me!
I was born OK…Education Ruined Me!
Ashish Aggarwal, Shalini Taya & Pulkit Kapoor
M.A. Economics
Jawaharlal Nehru University
Introduction
The experimental study this paper discusses was aimed at
testing a possible difference in behavior reflected in the
decision making process of economists and non-
economists. The observation was based on the premise
that exposure to the “Self-Interested Rational Homo
Economicus” model that is prevalent in economics
coursework throughout the world, tweak the way
students tend to make their day to day decisions and
moreover has an impact on their ideas about the behavior
of others. The study is important to bring out that a
simplified model of rationality and utility maximization
does not reflect the ways of the world as decisions
contingent on contexts cut deeper into the ideas of
fairness, attitudes and cultural exposure rather than just
being an optimization exercise. Interestingly the study to
some extent also hints at what exposure to a particular
idea in any field of study can result into as students
largely make decisions based on their conceptualization.
When students, despite knowing that higher contribution
to a public goods game would yield higher payoffs,
continue to “defect” simply because it is the “Dominant
Strategy” as specified in their textbooks, the irony of this
‘Rationality’ questions the purpose of studying these
models.
Theoretical Background and the Existing
Literature
Ultimatum bargaining game
Carter and Irons found that in the model of self interest, in
both roles (allocator and receiver), economics students
performed significantly more in accord with the
predictions of the self interest model than did non
economics students. Other researchers have shown that
the strategy predicted by the self interest model is almost
never followed in practice: 50-50 splits are the most
common proposal, and most highly one-sided are
rejected in the name of fairness (Guth,et al., 1982;
Kahneman, et al., 1986).
42
EOSTRE 2012
Dictator game
Empirical results of the dictator game suggest that people
not only care about their own material payoffs but also
about such things as fairness, equity, and reciprocity.
(Henrich et al.)
An experiment by Kahneman, Knetsch, and Thaler
(1986) resulted in three-quarters of the students opting
for the equal split.
Voluntary Contributions Mechanism Experiment
A study by Gerald Marwell and Ruth Ames (1981) found
that first year graduate students in economics are much
more likely than others to free ride in experiments that
called for private contributions to public goods using the
standard voluntary contribution mechanism design.
They found that economic students contributed an
average of only 20 percent of their endowments to the
public account significantly less than the 49 percent
average for all other subjects.
Experimental Design
The experiment was conducted with 18 graduate level
students of Jawaharlal Nehru University, all belonging to
the same age group. Nine of these students had a formal
exposure to Game Theory as part of their curriculum in
economics coursework. The remaining of nine students
were a mix of students belonging to courses such as
Sociology, Political Science, Languages etc. with no hint
of any formal study of game theory. The groups were also
a proportionate mix of male and female participants in
order to nullify any gender effects in the decision making
process.
In two sessions, three games were conducted with the
two groups in a similar setup. The choices of these games
were made in accordance with the hypotheses that were
being put to test. The participants were first asked to fill
in their personal details which could be collated later for
I was born OK…Education Ruined Me!
a neat representation and all of them were assured of their
privacy throughout and beyond the experimental study.
The participants were made to play the dictator game in
the first round because of various reasons. Firstly, the
dictator game is the simplest of all the three games and
since many of the participants had no exposure to
experimental study, the idea was to first stimulate the
responsiveness of the participants to the instructions that
would be given over the course of the session. Moreover,
the dictator game would also serve as a base round to
compare the behavior of the individuals in the
subsequent rounds as this is the only game which is
salient with one’s own actions and hence captures the
intrinsic characteristics of the participants in the best
possible manner. As purported, the game saw
significantly higher contributions by the non economics
group with people from the economics background
handing out a few zeros as well.
The next was the voluntary contributions mechanism and
was placed between the dictator game and the ultimatum
bargaining game in order to do away with any carry over
effects because of the similarity between the two. The
students were first asked to solve simple jumbled words
in a stipulated time in order to “earn” money. After this
their payoffs (in terms of experimental units) from this
were calculated and they were asked to make a
contribution to the “Library Books Section” from their
earnings. The idea behind making them “earn” their
endowment was to do away with the confounding that
could be involved with ownership of the money out of
which the contributions had to be made. The difference in
their contribution behavior was studied in terms of the
percentage contributions that were made.
The final round was ultimatum bargaining game in which
they were asked to make “offers” in the employer-
employee framework, where the participants were all in
the role of the employees making offers to the employees
(who didn’t exist!). Following their offers, they were
asked to state the minimum amount that they would be
willing to accept in the role of the employee and their
reasons for that (they were assured that their earnings
would not be impacted in any manner). This would be
used in the qualitative analysis of their choices.
Hypothesis
Dictator Game: In this game, there is a decision maker
(dictator) and a passive player (receiver) with the dictator
having to make a choice of splitting an endowment (100
EOSTRE 2012
units in our case) between himself and the receiver. We
conjecture that the students of economics would make
lower offers in the role of dictators than those in the non
economics group.
H1: The mean of amount given for the Economics
students would be different from that of the Non
Economics students. In general, it would be lower.
Voluntary Contributions Mechanism Game: The game
is played in a way where everyone is asked to make a
contribution out of their endowment and the total
contribution is multiplied by a factor (3 in our case) and
the resultant amount is divided equally among all the
players. Economics group who are exposed to the idea of
“free-ridership” are expected to make lower
contributions in general. To do away with the endowment
effect, we made the players solve 10 jumbled words (in
two minutes) at the beginning of the round such that each
correct answer would “earn” them 10 units. They were
then asked to make contributions out of their earnings
and the results were captured in terms of the ‘percentage’
of contributions made.
H2: The mean percentage contribution for the
Economics students would be different from that of Non
Economics students. In general, it would be lower.
Ultimatum Bargaining Game: The game is an extension
of the Dictator game only with the difference that the
decision maker proposes the amount and the receiver is
no longer passive as he makes a decision whether to
accept the split or reject it. If the receiver accepts the split,
it is executed and the payoffs are thus decided but if he
rejects the offer, it results in both the parties getting
ZERO payoffs. The game was framed in the context of a
job market where the decision maker was the manager of
a firm looking to hire a candidate (receiver) for a project
by making him an offer out of an endowment of 100
units. We suspect that students, who have studied
economics, make lower offers to the candidates based on
their ideas of equilibrium. The game was followed by
asking the students their minimum acceptable offer in the
role of candidates and their reasons for that. This exercise
would help differentiate in the ideas behind their choices
in both the roles and would offer a good qualitative
comparison.
H3: The offers made by the students of Economics would
be different from the offers made by Non Economics
students. In general they would be lower. Economics
Students would also accept lower offers.
43
I was born OK…Education Ruined Me! EOSTRE 2012

Experimental Results
Testing for H1, the following results were obtained

S.No. Economics Non Economics

1 20 50
2 0 1
3 20 40
4 0 50
5 0 40
6 0 50
7 50 40
8 50 50
9 0 40
Total 140 361
Mean 15.56 40.11
Standard Deviation 21.28 15.49

Pooled standard deviation= 18.62 units

t-value= 2.80 (Ho: µ1 = µ2 ; H1: µ1 < µ2 )

t0.01, 16 = 2.58

The difference is significant at 1% level of significance which clearly bearing out the
hypothesis purported. Interestingly, more than half the students (five) belonging to the
economics group gave nothing to the receiver in this game.

44
I was born OK…Education Ruined Me! EOSTRE 2012

Testing for H2, the following results were obtained:

Economics Non Economics

S.No Earnings Contribution % Contributed Earnings Contribution % Contributed

1 90 15 16.7 50 50 100
2 40 10 25 40 10 25
3 70 10 14.28 40 20 50
4 100 20 20 70 30 42.86
5 100 40 40 90 30 33.33
6 90 50 55.56 60 30 50
7 80 30 37.5 80 40 50
8 100 20 20 80 20 25
9 100 10 10 100 80 80
Mean 26.56 50.69
Standard Deviation 14.79 24.94

Pooled standard deviation= 20.48 units t-value = 2.50 (Ho: µ1 = µ2 ; H1: µ1 < µ2 )
t0.01, 16 = 2.583
t0.05, 16 = 1.746
Results are significant at 5% level of significance. Testing for H3, we obtained the following results:

Economics Non Economics

S.No Offer Minimum Desired Offer Minimum Desired
1 40 35 50 50
2 30 40 45 50
3 50 40 35 35
4 10 1 50 30
5 30 1 45 40
6 25 60 40 40
7 50 50 42 40
8 15 85 40 55
9 20 10 30 40
Total 270 206 377 380
Mean 30 22.88 41.89 42.22
Standard Deviation 14.36 28.13 6.58 7.95
Pooled standard deviation for offers made= 11.85 units
t-value= 2.13 (Ho: µ1 = µ2 ; H1: µ1 < µ2 )
t0.01, 16 = 2.583
t0.05, 16 = 1.746
The result is significant at 5% level.
45
I was born OK…Education Ruined Me!
Moreover, when the difference between minimum
desired for the two cohorts was tested, the difference was
significant at 5% level (t0.05, 16 = 1.746)
Pooled standard deviation= 20.67 units
t-value= 1.98
In addition, when difference between the offers made and
the minimum desired by the subjects was tested, the
difference was insignificant for both the types of
subjects. (t-values were 0.68 and 0.096 for economics
and non-economics students respectively). These results
indicate that economics students play their “dominant
strategy” of accepting lower offers whereas the non
economics group displayed their “fairness” in accepting
offers similar to what they had proposed in the role of the
employer (the major reason that was forwarded was that
difference in the social relation that was stimulated by the
framing of the game). This again brings out the point that
textbook economics and more specifically the self
interest model leads students to behave in a “rational”
way with complete disregard for the context which on the
other hand plays a major role in the ideas that govern the
choices of students who do not make “rational” decisions
in the textbook sense of the word but nevertheless form a
large majority of the day to day business. The results
were in conformity with the study done by Marwell and
Ames (1991) in which they asked their subjects questions
about ‘fairness’ motivating their contributions to public
goods in which more than 75 percent non-economists
replied in the affirmative while majority of the
economists gave responses which were difficult to
summarize (one-third even refused to respond to the
question).
Conclusion and Discussion
The results from the dictator game conducted in the first
round of the experimental session says much in its own
right about the difference in the behavior of students
exposed to a more or less common culture but different
academic ideas. It was observed that the mean offers of
46
EOSTRE 2012
economics students were less than half of what was
offered by the non economics students. The results of the
subsequent games, namely the public goods game and
the ultimatum bargaining game further strengthen our
belief in the notion. The voluntary mechanism design
saw a larger number of economics students contributing
a lower amount of their earnings, much closer to their
idea of ‘free-ridership’. The non economists on the
contrary contributed larger percentages of their earnings
individually. In the ultimatum bargaining game, the
threat of refusal from the recipient and a consequent zero
payoff made economists offer a higher amount,
specifically the mean amount offered was twice as large
as the amount offered in the dictator game, whereas the
mean amounts offered by non economists was similar to
the dictator game. Nevertheless, the amount offered by
the economists was still significantly lower than the
corresponding value for non economists. This clearly
indicates that there are different reasons that govern the
choice behavior of the two groups to say the least. This
difference, in our view, stems from the fact that
economists are constantly and unfortunately solely
exposed to a framework which is limited in scope and
applicability.
A variety of evidence in literature suggests marked
difference in the behavior of economists and non
economists. Our study, limited in its capacity, brings out
this difference in a rather sharp form. The results from
each of the games clearly justify our conjecture that
studying economics or specifically an exposure to the
self-interest model of economics has a bearing on the
behavior of people. Precisely speaking, the self interest
model that textbooks around the world preach as an
explanation of human behavior, the rational choice of the
“Homo-Economicus” and the monotonicity of the utility
preferences can at best tweak the way people make
choices rather than providing an adequate explanation
for actual choices and utility maximization in the
interactions that take place in society. n
I was born OK…Education Ruined Me! EOSTRE 2012

References
Frank, Robert H., Thomas Gilovich, and Dennis T. Regan, “Does Studying Economics inhibit Cooperation?”, Journal
of Economic Perspectives, 7:2, 1993, Pgs 159-71
Guth, Werner, Rolf Schmittberger, and Bernd Schwarze, “An Experimental Analysis of Ultimatum Bargaining Game”,
Journal of Economic Behaviour and Organization, December 1982, 3:4, 367-88.
Henrich, Joseph, Robert Boyd, Samuel Bowles, Colin F. Camerer, Ernst Fehr, and Herbert Gintis, eds. 2004.
“Foundations of Human Sociality: Economic Experiments and Ethnographic Evidence from Fifteen Small-Scale
Societies”. Oxford: Oxford Univ. Press. Oxford Scholarship Online. http://www.oxfordscholarship.com.
Hoffman E., and Spitzer M.L., “Entitlements, Rights and Fairness: An experimental examination of sujbects’ concepts
of distributive justice”, Journal of Legal Studies 14, no 2, 1985, 259-97.
Kahneman, Daniel, Jack Knetsch and Richard Thaler, “Fairness and the assumptions of Economics” Journal of
Business, Part 2, October 1986, 59, S285-S300.
Marwell, Gerald and Ruth Ames, “Economics Free Ride, Does anyone else?: Experiments on the provision of Public
Goods IV.” Journal of Public Economics, June 1981, 15:3, 295-310.
Sujoy Chakravarty, Carine Sebi, E. Somanathan, and Emmanuel Theophilus (2009) “The Demographics of
cooperation: Evidence from a field experiment in the Gori-Ganga Basin” unpublished draft.
Tversky A., and Kahneman, D., “Rational choice and the framing of decisions”, Journal of Business, Vol. 59, No 4, Part
2, 1986.
Whitt, Sam “Great Expectations or wishful thinking? Ethnicity in a reverse dictator game in Bosnia”, Working Paper,
2010.

47
Lessons of a Tiger Ride EOSTRE 2012

Lessons of a Tiger Ride

…..and the Difficult Residues of the Lokpal Movement for Civil Society
Aruna Roy & Nikhil Dey
Aruna Roy is a notable social activist and a member of the National Advisory Council. Recipient of the
2000 Ramon Magsaysay Award for Community Leadership, she was a prominent leader of the Right to
Information movement and has founded the Mazdoor Kisan Shakti Sangathana. Social Activist Nikhal
Dey is also a part of the Mazdoor Kisan Shakti Sangathana and has been actively working for human
rights organizations such as Right to Information, Mahatma Gandhi National Rural Employment
Guarantee Act, Lokpal Bill and Right to Food.

2011 has been a tumultuous year dominated by the failed
attempt to pass a law that was supposed to sort out all our
problems. While the failure to enact the Lokpal Bill
might be a reason for deep disappointment for some, it
can safely be said that the passage of any of the versions
of the law would have been contentious. A campaign,
carefully planned and choreographed, took over the
mainstream national discourse in a manner that could not
ever have been hoped for. However, its tall and simplistic
claims of removing 90, 70 or even 60 percent of
corruption through the enactment of a “strong Lokpal”
would have ensured its dramatic failure as well. Even if a
law was passed, corruption would have continued in the
midst of a continuous blame game. In fact, the biggest
legacy we are going to be left with after this year-long
effort is a series of claims and counter claims of what
could have been, but never was.
We have now clearly understood how television can be a
force multiplier that can beam a sense of urgency into
every home and be a perfect advertising space for instant
remedies. We are beginning to understand how it can also
define ‘flop shows’ and ‘failures’, almost dismantling a
movement in the course of an afternoon. Can one say that
if you ‘live’ by the media, you must be prepared to ‘die’
by it as well? There is a more sober lesson on the potential
role of television in people’s movements. Not all media
attention is necessarily helpful.
out all our problems. The fact is that no matter how good
this law and how powerful the Lokpal might have been,
no agency could have delivered on the kind of
expectations being created, and we were creating the
breeding grounds for mounting frustration and cynicism.
The chaos in Rajya Sabha might just give us time to
reflect and turn this into a more sustained and determined
campaign based on specifics that inspires ordinary
Indians to fight injustice and corruption. What are the
lessons of the last year?
At Jantar Mantar
Joint Drafting Committee, a marriage that never was:
The first hunger strike in April, while demanding
citizens’ participation, made a demand that was against
the principles of inclusiveness and participation. One
particular group of civil society wanted to negotiate with
a sub-group of the Union Cabinet to have their particular
vision of an anti-corruption regime implemented. What
could have been an important exercise in pre-legislative
consultation and drafting became an acrimonious
exercise in failed negotiations. Had this exercise
succeeded, there could have been many dangerous
implications for our democratic set-up. Even sectarian
groups, with the requisite numbers and the capacity to
put pressure, could demand that the government sit with
them to draft a law that reflects their vision.

The ups and downs also left little time and space for
reflection. Popular anger against corruption was
accompanied by a neat and convenient solution: a law
that would place responsibility on a huge—and we
assumed ‘benevolent’—investigating police force to sort
At Ramlila Maidan
Speaking for the people: The second hunger strike in
August was preceded by an unjustified attempt by the
government to snuff out democratic protest by refusing
to give permission and space for the hunger strike, and

48
Lessons of a Tiger Ride
then arresting Anna Hazare. People across the spectrum
spoke out to protect the democratic right to protest. Large
numbers also turned up to support the anti-corruption
campaign. The support the movement drew perhaps gave
the leadership the feeling that the Jan Lokpal Bill was
supported in every detail by the people. A new language
of a protest group claiming to speak for “the people”
emerged, which had even more dangerous implications
for democracy.
The euphoria in mid-August was palpable. But one
wonders how seasoned activists and political analysts
perceived an impact that was predictably impossible.
Crowds did come, but with what intent? The solution that
the campaign offered to eradicate corruption was too
simplistic. The law, however potent, would have just
begun the process of the accountability of public office.
There is much more to corruption than that. The
simplistic targeting of only politicians, the remedies to
hang the corrupt, did have a certain appeal for some.
The rhetoric got progressively sharper and moved further
away from the need to define corrective action. The
media rode on higher TRPs and converted Ramlila
Maidan into a mass television studio. The cameras acted
as a stimulant and the statements became more strongly
condemnatory as the people at the dharna responded with
approval.
The government could not have done more to dig itself
into a hole. First, the shocking sycophancy with Baba
Ramdev was followed by the irate State putting Hazare in
jail. Neither of them were mature acts and the
government lost both face and credibility. The people
were bewildered and enraged by a government that could
not respond with a sense of consistency and maturity. The
inefficiency on top of corruption was the icing on the
cake. The government should have had a series of all-
party meetings on this issue and even its discussions with
civil society should have been more inclusive, open and
consultative. Although this was a Bill widely debated, the
space for open honest debate was restricted in many
ways.
The response of the National Campaign for People’s
Right to Information (NCPRI) to the Lokpal Bill and
suggestions made for a basket of measures was
deliberately misunderstood and several whispering
campaigns surfaced as accusations. Substantive
arguments about the law again got diffused into
personality debates and simplistic one-liners. The ‘sense
EOSTRE 2012
of the House’ resolution in Parliament seemed to offer
grounds for a national consensus, but the support
received at Ramlila seemed to give Team Anna the
feeling that they had a complete mandate from the
people. With the Jan Lokpal Bill so much in focus and
repeated assertions from Team Anna of “no
compromise” on any of its formulations or on the time-
frame it had set, it was clear that the Winter Session
would be stormy and contentious. The most disturbing
assertion that came out of Ramlila was the fact that Team
Anna seemed to feel that it was speaking for “the
people”. The implications of that were even more
dangerous than the Joint Drafting Committee.
At Parliament and MMRDA Grounds
Where numbers should and should not be the benchmark:
There is no doubt that the events in Parliament during its
extended session were a disappointment. Parliament
clearly left behind its unity displayed at the time of the
‘sense of the House’ resolution. The government also
formulated some progressive provisions in the
Grievance Redress and Whistleblowers’ Bills, along
with bringing the Lokpal and Judicial Accountability
Bills to Parliament. However, it has become obvious that
each one of the four important Bills will require sustained
attention to get them passed even in the Budget session.
Just as it was wrong to evaluate this movement by
numbers at Jantar Mantar and Ramlila, it would be wrong
to condemn it to failure at the MMRDA grounds. In fact,
once Parliament was in session, the protest in Mumbai
should have been seen as no more than the voice of one
important civil society group.
But revolutions for social change need to be in the public
domain. The worry is that the sensational rise of the anti-
corruption campaign hyped up by media attention will
now turn into disappointment with public action. There
are some issues related to “people’s politics” that need
reflection. This is a people’s movement that spoke
repeatedly of “people’s power”. Paradoxically, it
envisioned the setting up of a powerful institution of
State power as the solution. In addition, it saw law as a
solution, with little attention to society and its inherent
inequality of power.
The second question is of dissent. There is a continuum
about the freedom debate. The eternal question of where
does my freedom end and yours begin can only be rooted
in equality, not only in speech but in action. Because
much as we may dislike or reject another point of view,
49
Lessons of a Tiger Ride EOSTRE 2012

persons expressing that point of view have the right to Our collective challenge is going to be to persevere with
articulate. We only retain the right to reject their points of the momentum and emerge with an understanding that
view in substance. fighting graft needs more sustained struggle and personal
commitment. While we must ensure that appropriate
The most important lesson for all of us who argued
legal enactments are made, it is time this movement
against plurality as betrayal is to stretch the logic further
started focussing on the need for citizens to participate in
to see what disastrous consequences may ensue. We can
shaping the movement through personal battles against
then argue that one religion must be the right religion,
injustice and corruption. No law or agency of State can be
one political ideology the right ideology, and after a
a substitute for that. Even though the Lokpal may not
series of such arguments, the grounds for a fascist
have been enacted, the people will continue to act. n
dictatorship could be prepared.

50
When the Corrupt Support an Anti-Corruption Movement
When the Corrupt Support an Anti-Corruption Movement
Smit Gade
M.Sc. Economics
Indira Gandhi Institute of Development Research
The recent anti-corruption movement for the support of a
strong Lokpal (Ombudsman) had its share of criticism.
One of the main criticisms is that the supporters were
themselves engaged, directly or indirectly, in various
acts of corruption. Bluntly, they were criticized for being
hypocrites. The best way to support an anti-corruption
movement is to get rid of corruption from daily lives. The
bottomline of this argument is that to resolve the issue of
corruption, we should take a hard look at ourselves and
once we have implemented these moral codes, then, and
only then, can we get a hold on this issue of corruption.
However true this argument may be, there is a case to be
made where citizens, who are themselves involved in
acts of corruption, try to make a stronger anti-corruption
framework and earnestly do so. For this seemingly
contradictory behaviour we turn to a simple two stage
sequential game.
We assume that a citizen’s behaviour depends on the
perception about the character of the government, i.e.,
whether the government is corrupt or non-corrupt. The
citizen decides whether he wants to be corrupt or non-
corrupt.
There are four possible cases. The payoffs to the citizens
are defined as High, Medium and Low.
1. Corrupt Government and Non-corrupt
Citizens
When the government is corrupt, the citizen’s cost of
being non-corrupt is very high. As the system is corrupt,
EOSTRE 2012
the citizen would face corruption during almost every
interaction with the government. But if he refuses to be
part of the corrupt system, he faces hurdles at every step.
This makes his life difficult. For this reason his payoff
would be low.
2. Corrupt Government and Corrupt Citizens
If the government is corrupt but the citizen is willing to
be a part of the corrupt system, he stands to gain,
compared to the case when he is not willing to be a part of
corruption. He can get his government related work done
faster by paying a cost. Even though this is better for the
citizen, compared to him being non-corrupt, he still has
to undergo some discomforts which would make his
payoff medium.
3. Non-corrupt Government and Non-corrupt
Citizens
This is the best situation for the citizen. The citizen’s
interaction with the government is hassle free and
costless. The payoff for the citizen is high.
4. Non-corrupt Government and Corrupt Citizens
If the citizen tries to gain from his corrupt behaviour in
his interaction with the government, he stands to lose as
the non-corrupt government will impose a high penalty
for this behaviour by the citizen. The payoff for the
citizen would thereby be low. The optimal behaviour of
the citizen depends upon the structure of the government.
If the government is non-corrupt it is better for the citizen
51
When the Corrupt Support an Anti-Corruption Movement
Citizen
Corrupt
Government
Non-Corrupt
Citizen
to be non-corrupt than to be corrupt. However, if the
government is corrupt, the optimal response reverses and
it is better for the citizen to be corrupt. The crucial
observation here is that the optimal payoff for the citizen
when the government is corrupt is lower than when the
government is not corrupt. Thus, it is in the citizen’s
interest if the government is non-corrupt. If the citizen
has a mechanism to make the system non-corrupt, he will
utilize it.
This explanation can be seen in the light of the recent
movement. The citizens in their day to day life were
involved in corruption; but when they saw a chance to
change the system from corrupt to non-corrupt, they
supported it. If the change is brought about successfully,
the citizens stand to gain from it since the payoff goes
from medium to high. Hence, the so called privately
52
EOSTRE 2012
Payoff
Corrupt Medium
Non-Corrupt Low
Corrupt Low
Non-Corrupt High
corrupt and publically anti-corrupt crusader
phenomenon can be perceived as perfectly rational.
An important question now is can a government be
corrupt or non-corrupt independent of its citizens? This is
a difficult question. We want to see whether a top-down
approach for corruption reduction will work. Can some
efforts which are taken by the government itself, such as
the creation of a new institution, lead to lower corruption,
without a change in the citizens’ behaviour? There are
countries such as Singapore and Hong Kong where the
introduction of tougher rules by the state has changed the
status of the government from corrupt to non-corrupt.
But the important fact here is that citizens are neither
irrational nor fake when they are supporting an anti-
corruption movement. n
Sin of Perfection
Sin of Perfection
Sugandh Tibrewal
M.A. Economics
Delhi School of Economics
It is every man’s dream to witness sheer bliss, lush green
landscapes, an eternity of cerulean seas, an oasis of sinful
delights and an isle of decadence. We aspire for a land
without sorrow, misery, perversion, plague, strife, death
and any discrimination of caste and class. A land of
abundance, prosperity and affluence. However the
desire for perfection or the yearning for equilibrium
induces the mind to generate a parallel thought to elude
reality. This is the reason I have taken upon myself the
task of cracking the myths. It is today that we will realise
how idle idealism is, how frivolous flawlessness is and
how unworthy a utopia is.
For those who find my words disturbing (deranged
even!) or the concoction of a diabolical mind, busting the
myth is the only way to prove my point. The myth I speak
of is that of utopia: a land of socio-political and economic
ideals. Utopia is not a place, but a concept, one which is
very personal. It could range from sealing a
multimillion-dollar contract to getting a monthly
monetary allowance of choice.
It would indeed be perfect if the world were devoid of all
that we consider malignant to the fabric of the society:
limited income, poverty, cultural differences, high
taxation, illness and death. If there were enough
resources to satisfy all our wants, we would have no
concern about making choices. However the
repercussions of our arcane dreams are far-reaching and
complicated.
The most common utopia is an egalitarian one: where
everyone has an equal share in resources and people
cannot be distinguished on any basis. Come to think of it,
would you mind if it started raining money in your own
backyard? If everyone was equally rich or poor. It would
be perfect, wouldn’t it? Maybe it would, from an
individual’s perspective, but not from the viewpoint of
society. How long do you think will it be, before riots
actually start dictating who gets how much of the money
rain? A day or maybe two? There is no affirmative
EOSTRE 2012
answer. The fact is that the currency rain would not affect
anybody. The problem with this situation is as simple as it
is complex. If it indeed rained money, money will simply
lose its value. It is an economic fact that only the
resources that are abundant become cheap or even free
(as is air). It is not the money income (the income
volume), but the real income (what the income can
purchase) that matters. Even though money income
increases, real income falls because of inflation. The
burger which costs you Rs.40 before the rains would now
cost you Rs.4000. Therefore you are as well off or as
worse off as before! The point here is that the phenomena
that are good at the micro (individual) level are not
welcome at a macro (aggregate) level. The same applies
if everybody decides to start saving for a rainy day, even
though individual savings increase, what happens is that
consumption of goods and services—that drives the
economy—falls, thereby reducing the total income
generated in the economy. Thus if everyone starts saving
to avert a crisis, they actuate it.
I do not propagate the need for extreme disparities or any
biases in income, but what we have to grasp is that
disparities are a necessary evil; they have to exist because
all the resources cannot be distributed fairly. These
discrepancies serve as an incentive for an individual to
work. Economics is as much psychology as it is a social
science. An individual needs an incentive or motivation
to work. Once absolute egalitarianism comes into play,
the motivation is murdered and people lose the will to
work because they have nothing to work towards.
Another version of the economic utopia is the one where
all you earn is yours; taxes do not exist. All income is
disposable income and you are free to consume whatever
you want. The government is reduced to a mere executive
body, maybe even non-existent. Power lies in the hands
of the corporate sector and the freedom of choice is that
of purchasing power. This again restricts the power of the
consumer who acts as a mere respondent to the corporate
decisions and attractive advertisements. Some might feel
53
Sin of Perfection
that this is a contradiction to the assumption of a rational
consumer, but you really cannot help situations if the
consumer psyche is impressionable, pliable and
susceptible to extraneous influence. Thus, the consumer
is not perfectly independent to spend his untaxed income
even without a government sector.
When a country taxes its people at extremely low rates, it
is termed as a ‘tax haven’. This kind of a utopia is actually
more realistic than we think. An example of a tax haven
utopia is a small European nation called Liechtenstein. It
is prosperous, highly industrialized and a free enterprise
based economy. Its maximum tax rate is of 18%. It thus
encourages industries to set up, boasting of a sizeable
national income of US$ 1786 billion, 30% of which
surprisingly comes from the 18% tax rate. Many
corporates set up their offshore subsidiaries here, thereby
adding to industrial integration and growth. Thus, tax
havens gloat of wealthy industrial organizations
establishing themselves in their domiciles. Countries
have very attractive incentives to become tax heavens.
They can attract large multinational conglomerates to set
up subsidiaries and employ a part of the local populace.
Liechtenstein has an unemployment rate of 2.2 %. They
have access to the latest technology. The citizens of this
country are satisfied because they do not have to pay high
taxes and so, where is the glitch?
“Ay, there’s the rub”
Tax havens are the hornets’ nest of money laundering,
black marketing, illegal drugs and diamond trafficking.
Funds which travel from public to private hands are
nowhere to be found. The parent multinationals, which
set up subsidiaries, conceal the amount of profits that
they earn. The cost of tax havens on the global economy
is an astronomical US$255 billion. This is of course not
inclusive of the amount subject to tax evasion. The
damages rendered by tax havens on the international
monetary and trade system are deep felt. The US$255
billion could have gone as aid to sub Saharan Africa, to
alleviate poverty and for meeting AIDS treatment funds.
The opportunity cost of not paying these taxes is much
more severe than the cost of paying them. Then again, I
54
EOSTRE 2012
do not advocate taxing people at exorbitant rates, which
is also a murder of incentive. A high tax rate is suicidal
and the tax revenue will eventually fall after a crash in
productivity.
A variation in the economic-egalitarian utopia is a social
and ethnic utopia, which is culturally integrated— where
there is no factionalism and there exists thorough
amalgamation of regions and religions. Wouldn’t that be
perfect? Ethnic issues, riots, wars, community based
terrorism and any kind of discrimination would not be
possible. Nothing wrong with this, unless you are
intending to create an artistic black hole. A world devoid
of differences will result in a bottleneck of expression.
Multicultural identities make the world fascinating. Here
again I do not encourage ethnic violence or
discrimination, that is of course, a strict no-no.
Nevertheless, to establish cultural unity would be taking
the idea too far. Imagine the blandness of life if there
were no Indian cuisine or European art or Japanese
technology! An individual’s place in society (not the
hierarchical concept of it) is after all determined by his
colour, region, religion, gender and of course his own
merit. Killing that would not only create a bland world,
but also a world sterile of any daring form of art or
creation. Whenever I think of a world based exclusively
on utopian ideals, I shudder at the price which all of us
will have to pay. A staid, bourgeois lifestyle, that fails to
stimulate.
Therefore it is not the attainment of perfection that has
driven the ideal of utopia, because perfection is in itself a
contradiction. The absolute removal of negation from
life is an ideal. Such an ideal is impossible to achieve
because the good has no place without the bad. So then
what is it? It is a state of near perfection, which is the most
satisfying. It is the dark streak across the white marble
that gives it an endearing charm. The state of perfection is
actually a state of near perfection. Imperfection is
variable, forceful and vigorous. It brings about change
and inspires both—greatness and madness.
It is after all a siege, a mission to have your cake and eat it
too, that makes utopia such a beautiful illusion. If you
could have your cake and eat it too, with the cherries and
the cream, then that would indeed be perfect! n
An Interview with Dr. Bharat Ramaswami
An Interview with Dr. Bharat Ramaswami
Dr. Bharat Ramaswami is a Professor of Economics in the Planning Unit of the Indian
Statistical Institute. He has made significant contributions to the research and
debates on food policy and technology in agriculture.
The introduction of Genetically Modified (GM) crops
in India has been a contentious issue. On the one hand,
there have been media reports blaming GM crops as a
major cause of farmer suicides in India, while on the
other are claims of increased agricultural productivity
and yield of Indian agriculture due to introduction of
GM crops. What is your position on the issue?
It is true that there have been reports of farmer distress for
a long time. Suicides seemed particularly rampant in the
first half of the 2000s but such reports were coming
through even before the planting of GM crops. I know of
no research investigation that concluded that GM crops
were responsible. The proximate economic causes were
usually seen to lie in crop failure and debts. Small farm
sizes, lack of non-farm employment opportunities and
limited capacity to bear risks explain why growers are
vulnerable to adverse economic shocks. It is
particularly cruel that some of our poorest economic
agents are trapped (because of poor skills and asset base)
in occupations with high volatility. Unless this changes,
how can we expect (with or without GM crops) farmer
distress to decline?
Cotton is the only GM crop grown in India. Since about
2003, there has been a near doubling of yield. In the 40
years prior to the introduction of Bt cotton (the insect-
resistant GM cotton grown here), yields stagnated. Such
a shift of the yield frontier surely constitutes an
agricultural revolution. Was it due to Bt cotton alone?
Like in any other similar question, a decisive answer
depends on controlling for other inputs. However, other
inputs (in per hectare terms) have not doubled. More
subtle explanations have been offered in terms of
improved germplasm and so on. Cross-sectional studies
have readily confirmed that Bt cotton is associated with
higher yields. Now we are beginning to see similar
results with panel studies.
The other fact that is important to consider is that the
adoption of Bt cotton is now extensive (80% and more).
EOSTRE 2012
Doesn’t this say something about farmer perceptions
about Bt cotton? This is worth remembering in relation
to media announcements that assign guilt to GM crops
for everything wrong with Indian agriculture. Second, it
is also worth remembering that technologies can become
ineffective too. This might well happen with Bt cotton
when the target pests develop resistance to Bt toxin.
How this should be managed is an important question.
The issue is not specific to GM crops. It is relevant to
conventional inputs as well as to technologies outside
agriculture (e.g., antibiotics in medicine).
Through the PDS, the government principally sells
rice, wheat and kerosene. Do you think that a
distribution system which caters to different food habits
in different states (principally consumed grains vary
from place to place) can be more helpful for the poor?
What possible impact do you think it will have on the
cropping patterns in different regions?
A food subsidy system that caters to local preferences is
better for the poor, the local grain economy and for food
subsidy expenditure. An example of all three benefits
comes from Maharashtra during the international price
spike of wheat in 2006/07. Because of a shortfall in
procurement, the government decided to import wheat at
prices above the level prevailing domestically. Yet
during this time, jowar and bajra (important in the diets of
the poor in Maharashtra) prices were below that of wheat
prices (domestic and international). If the poor had the
choice, they would have used the food subsidy to procure
jowar and bajra; the demand would have been directed to
locally produced goods and the government subsidy
needed to preserve the welfare of the poor would be
lower. Note that local staples could also mean local
varieties of rice (of which there is an astonishing variety
in the country) as opposed to the standard FCI varieties.
55
An Interview with Dr. Bharat Ramaswami
The rights based approach to food should—by
definition—be universal. However, the proposed
National Food Security Act proposes to give different
PDS entitlements to people, depending on the group
they belong to (Priority, General or Excluded). What
possible problems could arise in the implementation of
such a proposal?
Within the eligible group of beneficiaries, the National
Food Security Bill (NFSB) makes a distinction between
‘Priority’ and ‘General’ households. Priority households
are entitled to more subsidized grain and at a higher
subsidy rate than general households. At current prices,
an individual in the priority category would receive the
monetary equivalent of Rs.1330 per annum. The similar
benefit for an individual in the general category is Rs.
418 per annum.
Existing methods do not allow for even a reasonable
division of the population into these groups. On the other
hand, it is clear that substantial difference in program
benefits across these classifications will lead to much
jostling and scrambling as households attempt to get
themselves classified as ‘priority’. Past experience
should make us fear that many of the truly poor and
deprived will find themselves tagged as a ‘general’
household.
Yet, there is a simple solution that does not increase the
fiscal burden either. The provisions of this bill will cost
the government Rs.78,575 crores per annum. Distribute
this amount equally across all individuals in the eligible
population and eliminate the distinction between priority
and general households. This means a subsidy transfer
of Rs.966 per eligible person per year. In grain
equivalents, it amounts to 25 kg, at the priority subsidy
rate, for every eligible household (of five individuals) as
against the entitlement of 35 kg for a similar sized
priority household and 15 kg for a general household in
the current proposal.
Equal subsidy transfer is easy to implement and does not
require controversial targeting methods. It is also more
respectful of our federal structure and the joint
responsibilities of the Central and State governments in
delivering food subsidies. Indeed, State governments
have long been aggrieved that while the Central
government sets the targeting parameters and transfers
resources accordingly, the messy business of targeting
has to be done by the States themselves.
In your article titled “Sectoral Labour Flows and
Agricultural Wages in India, 1983-2004: Has Growth
56
EOSTRE 2012
Trickled Down?” you write that “the stock of labor
force already locked into agriculture is large and the
best way to improve their living standards would be the
most direct one – of boosting farm productivity”. In
your opinion, how important can agricultural subsidies
prove to be in this regard? What changes, if any, would
you want to suggest in the present trends of the
agricultural subsidies?
Agricultural input subsidies have to be carefully used.
Fertilizer, water and electricity subsidies have improved
the profitability of farming. However, the sustainability
of these policies is in serious question. Subsidies have
distorted input choices. In the case of fertilizer, soil
health is a concern. In the case of electricity and water, it
has led to inefficient and excessive use. Electricity
boards are on the verge of bankruptcy which has led to
rationing of supply. Ground water levels have fallen
drastically and as acquifers get depleted, the future of
such farming is bleak.
There is no easy solution as subsidies are hard to
eliminate because of political opposition. Growers
would have to be compensated with direct subsidies. In
some cases, they might be willing to pay more for inputs
if that means that they get regular supply.
How useful can Biofortification be as a strategy for
dealing with micronutrient deficiency in India?
(Biofortification is a method of breeding crops to
increase their nutritional value. It differs from ordinary
fortification because it focuses on making plant food
more nutritious as the plants are growing, rather than
having nutrients added to the food when it is being
processed. This is an improvement over ordinary
fortification when it comes to providing nutrients to the
rural poor, who rarely have access to commercially
fortified food. As such, biofortification is seen as a
strategy for dealing with deficiencies of
micronutrients). What measures do you think should be
taken to encourage usage of biofortified crops by
Indian farmers?
Biofortification of staple foods could indeed be very
useful. Poor households receive much of their
sustenance from these staples. As they become richer,
they would consume more of milk, fruits, vegetables and
other foods that supply the necessary micro-nutrients.
However, not only would this process be slow (and
uncertain), the costs of nutrient deficiency would persist
across generations (which in turn could feedback into
their economic capabilities). Biofortification holds the
An Interview with Dr. Bharat Ramaswami
promise of immediate change and therefore ought to be
given priority.
Whether farmers will grow biofortified crops depends on
whether such crops will receive a price premium over the
non-fortified crops. This in turn would depend on
whether the market and consumers value
biofortification. I am aware that there is research bearing
on this issue; however, I have not studied it and I am
unable to provide an answer.
What according to you is the role of Research and
Development (R&D) in improving farm productivity?
What possible steps could the Indian polity take in order
to promote efficient R&D in agriculture?
R&D is a broad term encompassing basic research,
technology development and commercialization. A key
complement to R&D is extension that allows effective
dissemination of technology to farmers.
This interview has been reported by Aditi Gupta, Arushi Dhingra and Kritika Narula.
EOSTRE 2012
R&D is critical in agriculture. The social rates of return
to agricultural R&D are typically very high – of the order
of 30% or more.
Private sector R&D is increasingly important; however
much of R&D is such that its benefits cannot be
appropriated by the technology supplier (such as basic
agronomic research, breeding of open-pollinated
varieties). In such cases, incentives for private sector
R&D are weak and public sector R&D needs to be the
major player. More funds are needed; equally important,
public sector R&D needs to be more productive. Past
studies have found the institutional design of public
sector R&D to be bureaucratic and that projects often get
mired in red-tape. Political support for agricultural R&D
(and reforms) is weak. Probably, a crisis will lead to
greater attention to these issues. The impending food
security act may well act as a catalyst. n
57
Wrong Shade of Green: Biofuels
Wrong Shade of Green: Biofuels
Stuti Saksena
M.Phil. Economics
University of Cambridge
Necessity is the mother of all invention. The human race
truly showed its ability to find ingenious solutions to our
present day environmental problems by coming up with
the idea of biofuels: an alternative to the non-renewable
petroleum derived fuels. However, little did they know
that their invention may well prove to be a disaster, not
only environmentally, but may also adversely affect food
availability.
As pointed out by The Economist (24th February, 2011),
nations the world over, be it Brazil, Japan, Indonesia or
the European Union, have set for themselves ambitious
targets for meeting their energy requirement from
biofuels. China has set the target at 5%, to be achieved by
2020 whereas the United States of America aspires to
meet 30% of such needs from biofuels by 2030.
India too has not remained far behind in the race to set
fancy biofuel targets. Biofuel development in India
mainly hinges on the cultivation and processing of the
Jatropha plant seeds: a source which has received much
appreciation not only because of its ability to grow on dry
non-agricultural lands but the oil derived from it also has
a carbon neutral nature, thereby making the country’s
carbon emission profile environment friendly.
Unlike maize and sugarcane, it is claimed that the
Jatropha plant will not displace food crops from viable
agricultural land. However, given the projected biodiesel
requirement in India at 3.6 million metric tonnes in 2011-
12 along with the target set by the National Biofuel
Policy to meet 20% of India’s diesel demand with fuel
derived from Jatropha plant by 2017, one cannot help but
look at the former claim with a certain degree of
scepticism.
To achieve the above target, close to 1,40,000 square
kilometres of land needs to be brought under cultivation
of the Jatropha plant whereas the current area under
cultivation is less than 5,000 square kilometres. In the
face of shrinking frontiers of the ‘free’ land—whether
agricultural or non-agricultural—due to an increasing
58
EOSTRE 2012
amount of land being brought under construction either
for housing or for setting up industries, it seems unlikely
to bring the required area under cultivation of Jatropha
plant without adversely affecting the cultivation of food
crops.
This will only worsen the competition that cultivation of
food crops is facing from cash crops owing to the
emphasis laid on the exports of primary commodities as a
source of foreign exchange. A hint of what holds for us in
the future is evident from America’s situation regarding
Ethanol. Ethanol that comprises merely 8% of USA’s
fuel for vehicles, consumes almost 40% of its maize crop.
Apart from the above challenges, there is a need to
express concern about the growing involvement of the
Multinational Corporations and domestic business
houses in the production of biodiesel. In India, for
example, Andhra Pradesh has entered into a formal
agreement with Reliance Industries for Jatropha
planting, and simultaneously, D1 Williamson Magor
Biofuel Limited (a joint venture company between D1
Oils plc., U.K. and Williamson Magor group) has
embarked on a policy of promoting the cultivation of the
Jatropha plant in the North Eastern States of Orissa and
Jharkhand.
Since profit motives and private entrepreneurship go
hand in hand, it may not sound unreasonable to doubt the
honesty of their purpose. Given the potential size of the
domestic market for biodiesel, the competition is bound
to intensify, subsequently pressing the input demands on
the farmers who will ultimately abandon the cultivation
of traditional food crops and shift towards planting
Jatropha seeds. Thus, we need to look at the situation at
hand in its entirety, taking into account the multi-
dimensional nature of the problem.
This shade of green, though much in vogue, has failed to
deliver the desired results across the world since it has
not been able to ensure energy security or retard the pace
of global warming. Ethanol production (either from
Wrong Shade of Green: Biofuels
maize or sugarcane) is extremely energy-intensive and
even in the most ‘efficient’ producer of ethanol, Brazil,
the push for the production of maize for biofuel has led to
large-scale deforestation of the Amazon, thereby
worsening the consequences of global warming.
Scientific research suggests that the diversion of land to
growing biofuel crops can produce an enormous ‘CO2
debt’ from the use of machinery and fertilisers and the
loss of natural CO2 absorption mechanism put in place by
trees and other plants that have been cleared for
cultivation. Nonetheless, as long as perverse government
incentives in the form of subsidies remain in place in high
energy import dependent countries such as USA and
elsewhere along with escalating world oil prices, biofuel
production is likely to gather speed despite the obvious
problems.
EOSTRE 2012
With the price of oil derived from edible oil seeds
mounting up day by day, villagers in rural India are
increasingly turning towards non-edible oil seeds such as
Jatropha as a lighting medium in their households. It is
for us to decide whether it is more important to burn a
lamp in a village hut in face of acute power shortage or to
run a Chief Minister’s car on the same oil.
It is time yet again to free our mind from supposedly
commonsensical thinking and look at our environmental
problems afresh. There is no guarantee that the problems
faced by nations such as USA or Brazil will not be
replicated in a country which faces the challenge of
feeding 400 starving millions! n
59
Nuclear Energy: Still the Better Alternative
Nuclear Energy: Still the Better Alternative
Yesh Vardhan Agarwal
M.A. Economics
Delhi School of Economics
The recent earthquake in Japan, followed by the nuclear
disaster at the Fukushima plant, has illustrated the
practical disadvantages of nuclear power generation. The
major fallout of this event has been the questioning of the
viability of nuclear power generation in terms of social
security and disaster management in the event of an
accident. As a result, economies such as Japan, Germany,
China and Switzerland have decided to curb or phase out
their dependence on nuclear energy and France has
started to move away from nuclear power generation
altogether. Therefore, the need of the hour is to
understand the pros and cons of nuclear energy
generation and compare them to other forms of energy
generation technology. This article is one such effort.
In a developing country, supply of energy is a
troublesome issue for the public policy makers. This
sector faces the issues of cost escalation and excess
demand. There is a sharp increase in the cost of
production of energy due to inflation. The increasing
demand of energy is pushing the prices of the raw
materials further up, especially in the international
market. The dual problem of increasing establishment
cost and rising input prices is a result of under developed
and incomplete energy infrastructure. The developing
countries are facing an ever increasing energy demand,
and the dilemma that their governments face is to either
choose a path which would be safe but not suffice the
requirement of rapid growth or to choose a roadmap of
development at the risk of the issues involving nuclear
energy generation. According to the Association of
Power Producers, India is loomed by a spectre of acute
fuel shortage. It has the potential of derailing power
sector plans of about 40,000 MW, which is 25% of
India’s installed generation capacity (CEA 2009).
Therefore, a form of power generating source which
could fulfil the energy demand on one hand and at the
same time ensure a steady supply of raw material for
power generation is the requirement today. Nuclear
energy has the potential to fulfil both these requirements.
60
EOSTRE 2012
Concerns about Safety
In the area of power generation, the prime energy source
for comparison with nuclear energy is the coal based
thermal energy which is the conventional source of
energy in most parts of the world. Therefore, in order to
check for feasibility, it is necessary to compare nuclear
energy and coal based energy on various aspects of social
safety. We consider first the health aspect of the energy
generation. According to a study titled Comparative
Health Risk Assessment of Nuclear Power and Coal
power in China, the public health risk of ionising
radiation released from the coal-fired energy chain is
around 12 times higher as compared to the nuclear
energy chain.
The main contributors to the fatality risk for the former
are the public dose caused by the use of coal ash and the
occupational exposure caused by radon and its progeny
in coal mines. Even after proposed improvements in the
coal based energy plant, the risk is about 4.4 times that of
the nuclear energy chain.
The above study shows the viability of nuclear energy
with respect to safety as compared to the coal based
energy; even though the report is based in China its
implications for other developing countries are similar,
that are expected to have significant increases in demand
of energy in the future. As mentioned above, the various
kinds of fatal risks involved in the coal based energy
chain affect the labourers of the plant, who are relatively
weak in terms of economical capability but also
constitute the largest proportion of any developing
economy’s population. So, as the numbers suggests,
nuclear based generation would be a much safer option as
compared to the coal based energy generation when
considering the aspect of social safety.
Concerns about Economic Viability
The other major concern that has been raised against the
Nuclear Energy: Still the Better Alternative EOSTRE 2012

generation of Nuclear energy is its economic non-
viability in comparison to other sources of energy. While
calculating the cost of energy production, the standard
method is to calculate the per kilowatt-hour (kWh) cost
while keeping variable factors such as capacity factors
and useful life constant. Therefore, in order to understand
how expensive a particular plant is relative to other
energy plants, we must calculate the per kWh cost of
construction. This can be done using the following
equation .1

Total Construction Cost

[(MW rating x 1,000) x Useful Life x (Capacity Factor x 8,760)]
The result of applying the above formula on various sources of energy has been shown in the figure:
Total Cost of Electricity Production per kWh
$0.25

$0.20

C Decommissioning
o Production
s
t $0.15
Construction
p
e
r
k $0.10
W
h

$0.05

$
Nuclear Coal Natural Gas Wind Solar Hydro

The graph clearly indicates the fact that even though
Nuclear energy is the only form of energy production that
involves decomposition cost, it is comparatively efficient to
most of the other forms of energy sources. In comparison to
nuclear energy, hydroelectric energy is found to be more
affordable. Since, hydroelectric energy is naturally limited
by the number of feasible geographic locations and the huge
environmental infringement caused by the construction of a
dam, its application for mass scale production is not a
feasible idea.
On the other hand, we observe similar levels of production
costs for nuclear energy production and coal based energy
production. But with the rising cost of coal and increasing
environmental costs due to emissions by thermal power
plants, coal based energy production is not feasible in the
long run. Therefore, nuclear energy as a major form of
energy source is a viable option as compared to other forms
because of its affordability on one hand and long term
benefits with regards to supply of raw materials on the other.
Potential of Nuclear Energy
The viability of Nuclear Energy in comparison to Thermal
energy can be compared on the basis of cost of production.
For instance if we consider the case of United States of
America, as per the data of present and projected energy
generation, if USA were to double the amount of nuclear
energy by replacing existing coal capacity in the next 25
years, the weighted average energy cost of per kWh would
be $0.058 which is a cost reduction by 1.7%. On an
aggregate level, this would result in a significant amount of
savings. The composition of energy generation would also
change in an eco-friendly manner, especially when we take
into consideration that there would also be 40% less coal
required (80%, if nuclear was tripled), thereby reducing the
impact of coal mining on the environment.
The above arguments have been made to project the
viability of nuclear energy as a better option to focus on the
growing energy needs. The concerns about safety and
economic viability have been made to strengthen the fact
that though nuclear energy might seem to be a thing of the
past for many developed parts of the world, it still has a lot
of untapped potential. n

1
The equation that has been mentioned is a standard formula for measuring the feasibility of any plant taking into consideration the
parameters given, with standardised and similar units of measurements for the parameters involved.
http://nuclearfissionary.com/2010/04/02/comparing-energy-costs-of-nuclear-coal-gas-wind-and-solar/

61