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New Institutional Economics: A brief introduction

By Pritika Fernandes

An understanding of human institutions is imperative for understanding and creating policies and rules that govern it.

Much like scientists attempt to understand the working of the physical world in order to control and predict outcomes, social scientists have attempt to understand and explain the complex nature of human behaviour and interactions in order to control and predict the outcomes of such interactions. Institutions form the structures upon which societies are built and are run by and hence are studied in order to either identify structures that work well and hence one would want to replicate or to identify structures that need to be dissolved or even to identify the need for structures where none previously existed.

Institutions are defined as mere constructs formulated by humans over time to bring about order in the structure of social, political and economic transactions (North, 1991). Since time immemorial institutions have been set in the bid for social order. These structures have been in the form of informal institutions such as social norms, taboos, customs, and traditions and also in the form of formal institutions like laws and constitutions. The need to find the method in the madness, the want to reduce uncertainty all arise from the want for profitability, for the feasibility of economic transactions, social interactions which must all adapt and function under the purview of political structure and stability. Institutions are a result of a continuous evolution of a society with changes arising from mistakes and triumphs of the past, needs of the present and aspirations for the future.

Reviewing the blueprints

Reviewing the blueprints

In the realm of economics, the study of the flows of and structures of production, consumption, and distribution of goods and services there lies a wicked problem. A problem that is complex because of the continuously changing characteristics of its nature, its complex interdependencies that would lead to a new problem when one aspect if the problem is dealt with. The method to tackle such a problem was to break it down. To focus of smaller aspects of it in order to turn the wicked problem into a tame one, a problem that can be easily defined and hence easily tackled. The deep interdependence on political, social, anthropological, psychological effects on those simple acts of production, consumption, and distribution was so complex that it needed to be broken down and turned into a tame problem. Hence assumptions were made, assumptions of perfect information, rationality, and the universal want for profit maximization (Kapp, 1968) Main stream economics is built on the foundation of these assumptions and more. As a result, economics over time has been growing more and more abstract. Economists study the relation between the demand and supply of goods and services but fail to take into consideration the reason behind those particular goods and services being traded and in turn their price levels. The economic phenomenon studied in books are seldom observed in real life. The success of main stream economics despite these flaws is solely due to the theoretical underpinnings it abides by which although strong on theory is weak in facts (Coase, 1998).

New institutional economics arose from this disconnect between theory and reality. A productive economic system leads to a healthy flow of goods and services and in turn increases the welfare of human society. Adam Smith talked about productivity being dependent on specialization of labour however specialisations of this kind lead to the need for exchange. The costs of exchange or transaction costs dictate the level of specialisation with higher costs leading to lower levels of specialisations and vice-versa. Transaction costs are furthermore costs dependent on the institutions of a nation and hence institutions run the performance of a nation (Coase, 1998). The recognition of the importance of the existence and effects of transaction cost as well as property rights have led to the formation of this branch of economics.

Pritika Fernandes (@pritikafernan) is an intern with the Takshashila Institution and is pursuing her masters in applied economics from Christ University, Bangalore.

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Rare Earth Elements: A Primer

By Arjun Govind

Everything you need to know about the rare earth elements industry

What are rare earth elements?

Rare earth elements (REEs) are a set of 17 elements: the fifteen lanthanide elements as well as two others – scandium and yttrium. The phrase “rare earth” might be a bit of a misnomer. REEs are fairly abundant in the earth’s crust; some are more prevalent than gold and platinum, and a select few more than copper and lead. That being said, the reason that the prices of REEs like lutetium and europium far surpass that of precious metals like gold and platinum is because of the former’s difficulty to mine. Despite their abundance in the earth’s crust, the low concentration of REEs in rock deposits and the tedious refinement process required made them, until recently, economically unviable. However, with REEs becoming increasingly associated with a range of industries from security to renewable energy, studies estimate that the demand for REEs will increase by an average of 5.6% annually. But endeavours into this sector require prudence. Molycorp, for instance, was a venture founded in 2010 that sold rare earth oxides – the most common way for REEs to be traded – and other rare earth concentrates. Despite its initial success and skyrocketing stock price in 2011, Molycorp filed for Chapter 11 bankruptcy about a month ago, with its stock being valued at a mere $0.35 a share.

Rare Earth Metals in pictures. Click to expand

Rare Earth Metals in pictures. Click to expand

REEs in Industry
Needless to say, the demand for REEs is based largely on the demand for their derivative products. Among the myriad applications of REEs, there are two industries that stand out in particular: defense and renewable energy. Scientific organisations in the United States, have found that certain rare earth metals are vital to national security. Estimates indicate that the Department of Defense’s consumption of rare earth metals comprises approximately 5% of the domestic consumption in the USA. In particular, magnets formed by alloys of REEs hold particular promise. Samarium cobalt magnets, for instance, retain their magnetic strength at high temperatures and are used in a variety of technologies from precision-guided missiles to aircrafts. Notwithstanding that, with the exception of small amounts of yttrium, rare earth metals are not a part of the United States’ strategic materials stockpile for national security purposes.. The United States Magnet Materials Association, a coalition of companies spanning medical, aerospace and electronic industries, have recently begun focusing on the supply chain of rare earth elements; they even made a six-point plan to address an “impending rare earth crisis” in 2010.

Uses of Rare Earth Elements in Industry. Source: AFP, phys.org

Uses of Rare Earth Elements in Industry. Source: AFP, phys.org

REE magnets play a crucial role with regard to the renewable energy sector too, especially in the field of wind energy. Fang Junshi, the head of the coal department of the National Energy Administration in China, is hopeful that China will have 100 gigawatts of wind power by 2020. Mark Smith, the former CEO of Molycorp, estimates that, in some applications, around two tons of rare earth magnets (specifically neodymium iron boron or NdFeB magnets) are present in the permanent magnet generator on the top of the turbine. Neodymium, an REE, makes up 28% of NdFeB magnets.

Distribution and Market for REEs
Rare earth metals are distributed unevenly across the world. China has, by far, the largest reserve of REEs; they have accounted for at least 90% of the world’s REE supply since the 1980s. Interestingly, China is also the leading consumer of these elements, accounting for around 65% of the total demand. Prices in this market are particularly volatile owing to supply restrictions from China. As such, manufacturers dependent on a constant supply of REEs are currently looking for resources outside China, such as firms like Molycorp. Assuming continued rates of growth, the total demand for REEs is projected to be around 5.6% per year. Under such assumptions, demand for Rare Earth Oxides is set to rise to around 210,000 tons in 2025, which is double the demand of 105,000 tonnes in 2011.Considering the variety of applications of these elements in industries, the prospect of possessing a reserve of such metals certainly merits consideration at the very least. Given that REEs are becoming an integral part of industries as crucial as defense and energy, it is important to ensure a steady and streamlined supply chain. This requirement is made all the more necessary in the light of price fluctuations caused by variances in supply from China.

Arjun Govind is an Intern at the Takshashila Institution. He is in 11th grade at The International School,  Bangalore.

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The aftermath of the Greek ‘No’ in referendum

By Anita van den Brandhof

The EU is failing to offer a strong answer to the Greek debt crisis, due to divergent interests between member states.

How did it all start?

When Greece joined the Euro in 2002, the economy and government structures were much weaker than other EU countries. This all changed when the Euro was introduced. Suddenly cheap loans became available, because the Euro offered more liability and lenders thought that the EU would repay the debts if Greece was unable to pay. Greece borrowed money on the international market and the economy grew fast. The borrowed money was not only used to support structural growth, but also for higher social benefits and the Athens Olympics.

The global financial crisis in 2008 hit hard on Greece. In 2009 the country admitted that the low deficit figures reported in 2002 were false. This ruined the Greek financial reputation: the deposits in Greek banks shrank and new loans from the international market became hard to obtain. In 2010 Greece had to accept the first bailout from the EU to prevent a complete bankruptcy. The loan of 110 billion euro came with a list of conditions that included reforms in the revenue collection system and significant budget cuts to bring down government spending. A second bailout of 109 billion euro was needed in 2011. The Greek government implemented most reforms and budget cuts, but it didn’t result in a healthier economy. The cuts in government spending increased unemployment, decreased consumer spending and also tax revenues went down. Since 2008, the economy has declined 25 percent and more than a quarter of the population became unemployed.

Grexit

The economic crisis resulted in a humanitarian crisis and political unrest. The Greek population is fed up with the conditions that came with the loans and are protesting against the European oppression. The leading leftish political party Syriza promised the Greek population that they will not accept new restriction from the EU. When the package deal for a new bail out scheme was finalized at the end of June 2015, Syriza decided to hold a referendum among its population. The majority of the Greek population voted against the new bailout program, to show their discontent to the EU. Without a new bailout, Greece would have to default. So what are the scenarios after the Greek rejection?

What could happen next?

In a sovereign country there are two methods to combat an economic crisis, but these measures are not available for Greece. Monetary measures, such as devaluing the Euro is not possible, are not supported because it will harm the stronger EU economies. Fiscal measures contain an increase in government spending, to bring about more investment. Greece cannot use fiscal measures, because the conditions of the loans stipulate that the Greek government has to cut its spending.

One way to get Greece out of the crisis is to waive the debts or postpone the payment, in order to give Greece space for investment and economic recovery. Waiving the debts would cost billions to the rest of the EU and is not popular among the stronger EU economies. In 2010 the Greek crisis was seen as a European crisis, because other Southern European countries also needed a bail out. However, the other countries have recovered and solidarity of the other EU members states towards Greece has evaporated. Especially the Dutch and Germans view Greece in terms of lazy, unreliable and incompetent. To raise public support in these countries for a new bailout plan is almost impossible.

A Greek exit of the Euro, “Grexit”, became a realistic possibility. Initially, the costs of introducing the old currency would be high, but it would give Greece the possibility to use monetary measures. The cost for the EU would be high as well, because it would hurt their reputation as a reliable financial partner and might cause a plunge in the stock market.

Most likely, the EU and Greece will come up with a temporary solution this week and postpone a Grexit. But the EU will not be able to find a sustainable solution for the crisis, due to its fragmented decision making procedures and divergent interests between the member states. It is possible that the EU will slightly increase the loans, to keep the Greek economy alive, but not enough to keep it from collapsing in the long run. In the long run a Grexit seems inevitable. Important for a Greek recovery after the Grexit is that it remains part of the single market economy of the EU, so that trade barriers are avoided and exports as well as tourism can be increased.

Anita van den Brandhof is a research scholar at Takshashila Institution.

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The Science of Scarcity

Why having too little means so much

Scarcity picture

Senthil Mullainathan and Eldar Shafir, in their book, look to explain some of the world’s problems through the theory of scarcity. They begin by describing scarcity as a mindset, not just defined in physical terms. Scarcity, therefore takes on more dimensions than the physical one. It becomes applicable to various domains like scarcity of money (being poor), scarcity of time (being overworked), scarcity of partners (being lonely) or even a scarcity of choice (a dieter’s food options).

The book examines the effects of a scarcity imposed on someone and the consequences of it. It particularly looks at the implications this can have on the poor. Scarcity explains why the poor frequently do not make the best decisions for themselves in many areas and perform worse in their jobs or education.

First, to understand the consequences of scarcity, its effects must be looked at:

  1. Focusing: Focusing arises as a by-product of facing scarcity of any kind. When a person realises that they face scarcity, they automatically block out other un-related activities and dedicate all of their time and resources towards the area they face a scarcity in. A perfect example of focusing is when people are facing a deadline. The work completed the night before a deadline is usually far greater than the work done preceding it. Scarcity, in this sense has a positive outcome than the usual negative precedents it sets. Indeed, it was shown in a study that students with shorter, more regular deadlines fared better in timeliness and quality than students with a single long period deadline. The question then arises, why is scarcity a bad thing if it leads to better focus on important tasks. The answer to that lies in tunneling.
  2.  Tunneling: Another similar by-product to scarcity is the tendency to tunnel. Short-term important tasks fall within the tunnel, while medium to long term but equally important tasks or commitments are often ignored. For instance, getting insurance falls outside the tunnel for a person who is scarce on money to meet his immediate obligations. They have immediate costs but realise their benifits only later.

The Consequences of Perpetual Scarcity

The authors argue that scarcity mindset imposes certain cognitive costs upon individuals which in turn affect their processing and decision making abilities. Scarcity imposes a bandwidth tax and affects the executive control of the people facing it.

A bandwidth tax decreases a person’s cognitive abilities which in turn affect their performance at their respective jobs. Fast food chain owners often complain of their employees being very distracted and not performing well. According to this principle, it is because they face a scarcity of money (in terms of a looming rent or mortgage payment) that they are distracted from their jobs and do not perform well. The scarcity of money imposed a bandwidth tax upon their minds which led to decreased cognitive abilities of the workers.

A bandwidth tax also affects the executive control area of our brain. Executive control refers to our brain’s ability to resist temptations and urges. Facing scarcity, the executive control employed by our brain diminishes. It is a major reason why dieters cheat on their diets or the poor make expensive, impulsive purchases.

narayan

The Scarcity Trap

The scarcity trap is a situation in which a person’s behaviour contributes to their scarcity. In such cases, the effects that a scarcity mindset imposes upon a person creates further scarcity or amplifies their effects are observed. It was already seen how scarcity decreases cognitive abilities and executive control, however scarcity can lead to further scarcity if not dealt with correctly.

Juggling is a feature of scarcity that contributes to further scarcity. Juggling mainfests when individuals tunnel through tasks, leaving important things outside the tunnel to when they are urgent. For example, the poor often look to solve problems one at a time and when they are immediate. If the interest on a loan is due the next week but the school fees are not due until the next month, the poor focus on the more immediate problem of the interest payment leaving the school fees out of the tunnel. This though, leads to more scarcity as when the school fees are due; they are short on cash and will have to borrow money again.

Combating Scarcity

Combating scarcity is a daunting task since it affects individual behaviour so adversely. Getting out of scarcity involves taking a step back and planning clearly. This is seen less often due the effects of tunneling.

An important way to combat scarcity is the creation of Slack. Slack refers to that extra bit that should be reserved for unforseen events that occur. For instance.the time scarce it should have an extra hour of unscheduled time, the poor must have savings or insurance. Slack helps keeping people out of the scarcity trap by giving them some breathing room.

Conclusion

Understanding the scarcity mindset is vital to policy-makers and individuals alike. Designing against scarcity can hopefully solve and eradicate some of the world’s most common yet intriguing problems.

Narayan Sharalaya is an intern at the Takshashila Institution and is currently pursuing his Bachelors at NMIMS, Mumbai.

 

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Anchoring Bias

Why irrelevant facts and numbers can affect your judgement

By Narayan Sharalaya

The anchoring effect is a cognitive bias that describes the human tendency to rely too heavily on the first piece of information they receive (anchor) while making judgements. This can happen even if the anchor provided has little or no relevance in the decision making process. A classic example of this is a study where people were divided into two groups and asked the following questions:

Group 1 Group 2
  1. Was Gandhi more or less than 144 years old when he died?
  2. How old was Gandhi when he died?
  1. Was Gandhi more or less than 9 years old when he died?
  2. How old was Gandhi when he died?

The results of the study showed that the participants in Group 1 tended to give a mean age of 80 years as compared to 50 years by the participants in group 2. The first question acted as a suggestion towards describing Gandhi’s age. While no one really believed that he had lived for 144 years, or less than 9, the associative memory produced a picture of an ancient man or a young man based on the question they got.

Anchoring effects are not unknown and are used by salesmen and marketeers all the time. Flipkart came under the spotlight last October when it was found that it had jacked up the prices of all its products leading up to its big billion day sale.The increased price acted as an anchor price making the discount look bigger.

The use of anchoring is not limited to retail businesses only. Anchoring and framing also affect how objectively we look at news presented to us.

New Bitmap Image

The above headline comes in the wake of the recent ban on Maggi by regulators. By using an anchor of Rs 445 crore, the article looks to show the lack of quality testing by Nestle on its food products. But, judging the adequacy of spending on quality testing by comparing it to advertisement expenditure is a clear case of a cognitive bias. Testing expenditure is an outcome of factors like shelf life, research costs, equipment costs, etc. while advertisement expenses are dependent on market size, differences, competition and so on. To compare the two is akin to comparing apples and oranges. The article even mentions later on that this spending was consistent with the other noodle brands.

Anchors are also a useful tool during the negotiation process. Sellers are often advised to move first during a negotiation. When the seller opens negotiations, he subtly manages to decide the price by using the anchoring effect. Even if the seller receives a lower amount than his offer, he still receives an amount close to his asking price.

Anchoring Effects on Financial Markets

Recent studies on behavioural finance show a strong tendency of anchoring effect by analysts and experts. The anchors used by investors fall into quantitative and psychological anchors. Quantitative anchors lie in the form of past prices, industry averages and indexes or price earning ratios of other companies. Psychological anchors take the form of stories or antecedents that influence stock prices. It is often found that those who sell stocks to the public often use vivid stories about the history of the company, nature of the product and its demand rather than relevant statistical data about the stock. These serve as moral anchors to the public and decide the share prices.

Resisting the Anchoring Effect

Anchors serve as a useful tool to decision making in many cases where information is not easily available and decisions are hard to arrive at. The problem arises when the anchor used has little or no implication towards the decision being made. Successfully avoiding anchoring bias requires the identification of the anchors or situations where anchoring bias could prevail. People are less likely to be influenced by an anchor when making a decision if they have knowledge of it. However, recognising anchors requires an impressive amount of intelligence and self-awareness; the problem with anchoring is that it is like an invisible phenomenon that operates outside our consciousness. Resisting the anchoring bias is an exceedingly hard task because the anchors we use are often subtle and random cues from the environment.

Narayan Sharalaya is an intern at Takshashila Institution and is currently doing his Bachelors in Economics at NMIMS, Mumbai.

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Irrational Exuberance

Robert J. Shiller’s book examines the effect of irrationality on financial markets and asset pricing

By Narayan Sharalaya

Irrational exuberance

Coined after Alan Greenspan’s famous speech in 1996, Irrational Exuberance by Robert Shiller correctly predicted the 2000 and 2005 stock market and housing bubbles that were to occur. In the third edition of this book, the author explains the factors behind over-valuation and pricing with empirical data of previous stock market crashes and housing bubbles. The book analyses specifically the structural, cultural and psychological factors behind them and suggests methods to prevent future bubbles that are bound to occur.

Structural Factors and Amplifying Mechanisms

Certain factors lie outside of markets yet affect pricing in a non-rational ways; the book identifies twelve such precipitating ‘structural factors’ that together lead to a collapse. These vary from the capitalist explosion to technological advancements or even the growth of mutual funds.

The book also argues that there exist certain ‘amplifying mechanisms’ that intensify the effects of these structural factors. These are identified as

  1. Changes in investor attitudes towards stocks as a long term investment that could not go wrong.
  2. Increased public attention towards stock markets leading to more money being available for stocks.
  3. The feedback loop which keeps stock prices high as people invest more in the markets upon hearing of its good performance.

Cultural Factors

The book identifies two cultural factors that affect the financial and housing markets. The first one being news media reports on stock markets during periods of booms and busts. News stories have often contributed to the psychological feedback loop and contribute towards asset prices. The role of news media on the stock market highs of 1920, 1970 and 2000 have been studied and explained.

The second cultural factor that explains over valued markets is the opportunism of new era economic thinking. This is an old phenomenon that has existed since the 1900’s when railroads and increased industrialisation led to optimism in the financial markets that was unjustified. New era thinking has dominated many periods of over priced markets with the most recent one being the technological boom that raised the prices of many internet companies.

Psychological Factors

Cognitive biases in decision making play a huge role in the stock market. Overconfidence, anchoring, and availability all play a role in investor decisions. Herd behaviour and the need to conform cause other investors to make similar decisions in the market.

Containing Speculative Volatility in Free Society

The book ends with suggestive measures to prevent future speculative bubbles from taking place. The author stresses on the need to curb the phenomena of economic bubbles as it is the poor and middle class who are affected the most during a stock market crash. A gentler monetary policy during stock market highs, stabilising opinions by leaders, a restructuring of savings and social security schemes, better risk management, and diversified portfolios are some of the measures suggested.

Conclusion

With behavioural finance gaining steam in today’s world, the book perfectly captures investor sentiments and thinking during times of highs and lows. It is now to be seen whether these can be incorporated into models that play an active role in public policy. Until then, ensuring better social insurance and more effective financial institutions to manage risk is necessary to prevent future volatility.

Narayan Sharalaya is an intern at Takshashila Institution and is currently doing his Bachelors in Economics at NMIMS, Mumbai

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Nudges – a Real Third Way

An influential book by Richard R. Thaler and Cass R Sunstein, “Nudge” looks into the science behind decision making and how it can be applied to policy formation.

By Narayan Sharalaya

Sometimes, even the best intended policies do not have the required effect. Why don’t people eat healthily, save wisely or become environment friendly even though incentives exist to do so? ‘Nudge’ provides answers to these questions using Behavioural Economics and proposes that the most simple and effective solution is the nudge. The book begins by explaining the rationale behind nudges and the authors’ guiding philosophy in using them. It then examines real life situations where nudges can or have helped.

Before going into further detail about nudges, it is important to look at some of the concepts used in the book.

  1. Libertarian Paternalism
    Coined by the authors, this term may seem somewhat oxymoronic but it is a guiding philosophy in this book. The authors wish to preserve the libertarian demand of the right to free choice but also advocate self-consciously guiding people towards a certain choice. It can be described as a kind of ‘soft’ paternalism. According to this concept, it must be cheap and easy to opt out of the nudges provided. For example, placing healthy food at eye level in supermarket displays would be following libertarian paternalism whereas banning all junk food would not.
  2. Choice architecture
    The way choices are presented to us influence the decisions we make.A choice architect organises the context in which people make decisions. The book shows how choice architecture can play a significant role in multiple scenarios ranging from organ donation to choosing an apartment. The authors also provide guidelines on how to select an effective choice architecture as this would ensure that people select the best choice available to them. For example, the Amsterdam airport managed to reduce spillage in its urinals by 80% by sticking a picture of a fly.

Urinal

  1. RECAP
    A frequent solution proposed by the book, RECAP stands for Record, Evaluate and Compare Alternative Prices. It is a mild form of government regulation where companies are required to post their prices publicly in an easy, readable form. While this imposes very little costs on the companies, it significantly helps in improving consumer decisions.

When do we need a nudge?

A nudge is needed when the decisions to be made are difficult (selecting the right mortgage), rare (buying a house), do not yield immediate benefits (eating healthy food) or are not fully understood (investing in retirement funds). A nudge in any of these situations helps improve decision-making drastically. The book also looks into the functioning of markets and whether they solve people’s problems. On this subject, the authors have a mixed view. Market competition ensures fair prices and welfare of the consumer but on the other hand, companies have a strong incentive to exploit human frailties and profit from them. In this case, the authors favour a nudge towards the favoured options.

Examples of Effective Nudges

  1. Savings
    The “Save More Tomorrow” campaign initiated by Tahler and Bernatzi in three private companies, successfully educated workers about saving for retirement. Participants were given an option of selecting between a default rate at which their salary increments would go towards their retirement fund or make their own savings decision. Workers that chose to enroll in this program showed much higher saving rates as shown in figure 2. The program followed libetarian paternalism by actively guiding workers towards a preferred option while retaining their freedom of choice.Save More Tomorrow
  1. Credit Markets
    The market for mortgages and credit cards are alike. They both involve making hard choices regarding fixed and variable interest rates, teaser rates, etc. They also tend to have dozens of hidden fees and charges most people are unaware of. The book proposes a form of RECAP, where companies will have to disclose the list of charges and fees they levy in an accessible format. This would help consumers make better choices while avoiding excessive regulation.
  2. Organ Donation
    Rather than have an ‘opt in’ option for organ donation, countries that have an ‘opt out’ policy for organ donation tend to have a higher number of donors than c. In other terms, a person’s consent to be an organ donor is presumed unless the person states otherwise. This is a good example of how choice architecture can have a direct bearing on subject behaviour. Another type of choice architecture that the authors suggest is a mandated choice. For example, where the grant of a license is dependent on people choosing between options.Organ Donation

The Real Third Way

Nudges can preserve freedom of choice while still guiding people to act in a certain way. The book emphasises the use of Nudges as a “third way” to influence behaviour which strikes a middle ground between the strict regulations favoured by the Left or the laissez faire approach championed by the Right. Furthermore, the scope of using a nudge is not limited to certain domains. With policy makers recognising the human frailties inherent in decision making, nudges are slowly finding their way into policy formulation.

Narayan Sharalaya is an intern at Takshashila Institution and is currently doing his Bachelors in Economics at NMIMS, Mumbai

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China-Zimbabwe Relations

In addition to trade, aid, and diplomatic ties, China – Zimbabwe relations are strengthened by a mutual desire for development

By Fraderick MujuruChina-Zimbabwe

Zimbabwe is located in the southern part of the African continent, immediately north of South Africa. The country has a population of 13 million and an area of 151,000 square miles. Zimbabwe gained independence from British colonial rule on April 18, 1980. Zimbabwe’s government is ostensibly a Presidential Republic, with Robert Mugabe being its President since independence. In 2014, Zimbabwe’s economy recorded a GDP of US$ 12.8 billion and an annual growth rate of 3.1%. However, this paints a misleading picture; the economy witnessed negative growth of about 16% during the hyperinflation years (see Figure 1). Though it has recovered since then to post positive growth rates, it must be noted that having a range of over 27% in the growth rate (-16% to 11%) is an indication of macroeconomic instability. There is no better proof of this instability than the episode of hyperinflation where the inflation rate rose to a whopping 231 million percent in July-August 2008.

Figure 1: Showing the real GDP growth of Zimbabwe from 2005-2014. The numbers for 2012-14 are IMF Staff estimates.

Zimbabwe Fig 1

Source: IMF World Economic Outlook Database.

However, Zimbabwe has stabilized since then and there are encouraging signs of growth in the near future. A part of this revival has to do with Zimbabwe’s immense mineral wealth, as it is a source of economic returns. One major factor is the political and economic relationships that Zimbabwe has managed to develop with the fast growing East Asian countries, the biggest of which is the People’s Republic of China.

China has a web of alliances across Africa: there is even a popular mantra to describe the Chinese presence and investments in Africa – “the Chinese are coming”. China’s relationship with Africa has historical roots; in 1971 many African nations supported the claim of the government of the People’s Republic of China to represent China’s seat in the Security Council of the United Nations. This may be because Beijing spent the early part of the 1960s establishing relations with left leaning states such as Ghana, Angola, Zimbabwe, Sudan, etc.

Starting from as early as the 1950s, Africa has seen several large projects spearheaded by the Chinese government that have set the tone of engagement between the two areas. Major projects include the construction of the Tanzam railway joining Tanzania and Zambia. China’s trade with the African continent has increased from US$10 billion to US$120 billion between 2000 and 2014. It has given as much as US$ 5 billion towards at least 800 projects in Africa, an amount higher than the World Bank’s contribution since 2005 (US$3.2 billion).

China-Zimbabwe Political relationship

China and Zimbabwe have cooperated politically in the past. In 2005 the European Union and the USA imposed economic sanctions on Zimbabwe for alleged human rights violations. In response, Zimbabwe crafted its ‘Look East Policy’ which targeted Asian economic giants like Singapore, China, and Malaysia. China responded quite quickly and the communist Chinese government supported Zimbabwe in its ‘Land Reform Program’ which sought to address the predominantly white minority ownership of property.

The pinnacle of China-Zimbabwe political relations was likely China’s use of its veto to axe the 2008 United Nations Security Council resolution that sought to apply additional sanctions on Zimbabwe. The resolution was also vetoed by Russia and they both justified their stance with the argument that the alleged incidents were an internal matter and not a threat to international security.

From Politics to Economics

The economic relationship between the two countries has recently been the source of deepening ties between China and Zimbabwe. In 2010, both countries celebrated 30 years of their relation with over US$ 560 million generated on bilateral trade.

The trade relationship between the two countries is obviously dominated by China; Zimbabwean exports to China are exceeded by Chinese imports in Zimbabwe. Major imports from China include telecommunication equipment, and manufactured goods such as soap, plastics, shoes, etc. Exports by Zimbabwe to China are mainly raw materials such as tobacco, platinum, chrome, steel, and diamonds.

Fig 2: Exports and Imports of Zimbabwe to and from China (US$ thousands)

Zimbabwe Fig 2Courtesy: World Integrated Trade Solution (WITS) 2015

Apart from trade, China has also provided aid to Zimbabwe to help the latter in its developmental efforts. For instance, it provided US$103 million in official development aid to Zimbabwe from 2004-2010, through grants and concessional loans (see Table 1).

Table 1: Summarizing some of the Zimbabwe-China economic deals and aid agreements.

Year Amount (millions) Types Description
2000 $5.8 Concessional loans Used to invest in Cement production plant
2004 $240 Sale 12 jet fighters and 100 military vehicles’
2006 $25 Preferential loans  –                –                 –                   –
2007 $200 Export credit Farming Inputs
2007 $200 Sale SINOSTEEL purchased ZINASCO
2010 $700 Loan Rejuvenating Agriculture sector
2012 $180 Loan Airport Upgrade, neonatal equipment, economic and technological cooperation

 

Extraction: Ministry of Finance and Economic Development of Zimbabwe (2014)

China also funds many infrastructure projects in Zimbabwe. It recently invested US$ 98 million in a military complex entitled the Robert Mugabe School of Intelligence. The trade relationship is not limited to the Chinese government; Chinese companies have invested in Air Zimbabwe, the Zimbabwe Broadcasting Corporation (ZBC) and Zimbabwe Electricity Supply Authority.

Though the China-Zimbabwe relationship may have been more political in its early years, the two countries are currently bound more by economics and diplomatic ties. China has offered loans, grants, concessions, and preferential loans to Zimbabwe. To increase their engagement, Zimbabwe allowed Beijing investors to have a share and invest freely in Zimbabwe. The relation between China-Zimbabwe has been branded ‘all weather friendship’.

China still lags behind other countries in terms of humanitarian and economic engagement with Zimbabwe. The USA remains Zimbabwe’s biggest provider of aid – its contribution (above US$ 2 billion since 1980) is substantially more than other countries; China does not make it to the top ten list of donors. However, China has emerged as Zimbabwe’s fourth biggest trade partner and there is still potential to further strengthen what are already robust economic ties between the two countries.

Fraderick Mujuru is an intern at Takshashila Institution and is presently doing his Masters in International Relations at Christ University, Bangalore

 

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A Tale of Two Cities

Delhi is not the only city that the BBMP can learn from before implementing a trifurcation scheme

By Shobitha Cherian

 

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Much has been made about the recent proposal by the BBMP to restructure itself. While some are describing it as a move to delay the upcoming elections there is also a rational justification for it: decentralisation. Decentralisation is the administrative principle of devolving powers to local units of the government where each unit will be responsible for governance in a defined area. The main argument for decentralization is that it leads to increased efficiency in governance; making local units the nodes of governance results in a more focused deployment of services as each unit’s jurisdiction will be relatively smaller. Decentralisation also reduces the number of citizens that government representatives have to interface with, making them more accessible to their constituents.

A majority of the criticism invariably cites the failed experiment of Delhi’s trifurcation as grounds to avoid trifurcation. But this criticism fails to take into account that decentralisation has been successful in multiple countries across the world and that the current structure of the BBMP is too bloated, inefficient and is rife with many issues to continue unchanged. One of these is the many irregularities present in the collection and management of the BBMP’s funds. Aside from the usual stories of kickbacks and corruption, deeper problems exist; the BBMP has been unsuccessful in achieving the gargantuan task of satisfactorily providing services to around 10 million people. While there is a case for dividing the BBMP into separate municipal corporations, certain criteria need to be met in order for it to be successful.

The new structure must be clear and transparent in its delegation of duties. Operational irregularities like fiscal leakages must be removed and additional revenue streams must be found; no amount of restructuring will improve efficiency if the BBMPB’s finances aren’t in a healthy state. The various departments and localities must have a defined hierarchy within which they can co-ordinate towards improving the state of Bengaluru.

It is essential that the BBMP be divided in a scientific and economically viable manner. The delimitation of future municipalities must be equally balanced in terms of revenue, financial viability and administrative functions. For decentralization to work, the city must be divided in such a way that no locality is given an undue advantage for growth at the expense of the others.

Thankfully, Bengaluru is nowhere close to being a pioneer in decentralisation. Much can be gained from examining previous attempts to implement decentralisation in other cities, both in India and abroad.

New Delhi

In 2012, the Sheila Dikshit government passed a bill that divided the Municipal Corporation of Delhi into the North, South and East Delhi Municipal Corporations. The trifurcation was opposed on the grounds that equitable distribution of assets and funds amongst the corporations would be impossible without one or more corporations running into a deficit. Unfortunately, this is exactly what ended up happening. Currently, the East and the North corporations are facing severe financial crises and have been unable to pay salaries to most of their employees. In contrast, the South Corporation remains largely self-sufficient.

The reasons for this dismal state of affairs stem from poor division of the corporations. The East and North Corporations ended up inheriting most of the old Municipal Corporation’s debt of Rupees 1831 crores. In addition to this, the jurisdiction of the East Corporation included 30 unauthorised colonies from which property tax could not readily be collected. In comparison, the areas coming under the purview of the North Corporation includes many of Delhi’s five star hotels and office buildings, thus making property tax a large source of its revenue. The division was unsuccessful as certain corporations were better off than others, creating unequal channels for growth.

London

If Delhi was a lesson in what mistakes to avoid, London is more a case study of best practices. Greater London, or the total urban area of London, is divided into 32 administrative areas or boroughs. Each borough is governed by a council that is responsible for carrying out various civic amenities within their jurisdiction. Each borough is further divided into electoral wards that are used to elect councillors for that borough council. The boroughs are tied together by a strategic regional authority known as the Greater London Authority (GLA), which is responsible for tasks like policing, economic development and emergency planning.

The main take away from London is that the local governments or boroughs are empowered to be effective units of governance but are prevented from overstepping on each other’s toes by a co-ordinating agency, i.e. the GLA. The GLA ensures that the 32 London borough councils not only work towards the development of their respective boroughs but are also in sync with the development of Greater London as a whole. The GLA recognises the independence of the boroughs and listens to their respective concerns, but also prevents the boroughs from working in a completely antagonistic manner to one another. The system works on the principle of subsidiarity; that the lowest levels of government or the boroughs are given the independence to carry out functions which can be managed at the local level. Those issues which cannot be undertaken by that level are sent up the next level of hierarchy, which in the case of Greater London is the GLA. The efficiency stems from the fact that purely local issues can be resolved immediately and with a greater level of customisation or adaptability.

The second interim report of the BBMP restructuring committee suggests a three tier administration, similar to that of London. The ward will take the place of the borough as the basic unit and will be governed by a ward committee. Each ward will be split into Area Sabhas to determine the composition of each ward committee. The jurisdiction of the multiple municipal corporations envisioned by the trifurcation will be determined on the basis of these ward boundaries. Above these multiple municipal corporations it would be ideal to have a autonomous and empowered Metropolitan Planning Committee akin to the GLA and as mentioned in Article 243Z of the Constitution. This regional authority would have the task of integrating the activities of the previous two tiers and maintaining ‘Brand Bangalore’.

The restructuring committee is expected to submit its final report to the government by the end of June. According to the committee, the ideal number of municipal corporations will be determined based on a spatial analysis on multiple parameters including finance, population demographics and infrastructure indices. It can only be hoped that the committee is successful in arriving at an economically viable and equitable scheme of separation. The greater fear is that, even if the committee was successful, the government wouldn’t actually take its recommendations into consideration and conduct the trifurcation on more political grounds.

Shobitha Cherian is an intern at the Takshashila Institution.

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What does it mean to be employable?

Why autonomous universities are essential to harness India’s demographic dividend

By Shobitha Cherian

 

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India is currently in an extremely advantageous position, demographically speaking. Half of its burgeoning population of 1.27 billion people is comprised of individuals under the age of 25 and a quarter of the increase in the global working population between 2010 and 2040 is projected to come from the country. This so called ‘demographic dividend’ could be extremely beneficial to the Indian economy. According to the IMF, it could potentially result in an increase in the GDP growth rate by two percentage points each year for the next twenty years. However, in order to harness this demographic, it is necessary that this growing population also be productive and employable.

But what determines the employability of an individual? A lot of employers would say it is the extent to which a worker can utilise his attributes, skills or knowledge in order to contribute productively. So, in addition to a bare modicum of knowledge and skills, it is essential that workers are also capable of actually translating that expertise into productive labour. Unfortunately, such workers are far from being prevalent in India, and a vast amount of work is required before the majority of India’s young workforce becomes employable.

Higher Education in India: Vision 2030, a report produced by Ernst and Young for the Federation of Indian Chambers of Commerce and Industry (FICCI) states that 75 percent of graduates from Indian universities are said to be unemployable in the IT sector. This number decreases to 55 percent in manufacturing and 50 percent in the banking and insurance sectors. While graduates from the country’s top universities are much more capable, they comprise a small proportion of the national average. Overall, there is an apparent disconnect between the skills and knowledge of a majority of the Indian workforce and the needs of their respective industries. This must be rectified as soon as possible, otherwise India’s youth will age past the point of productivity without ever realising their potential.

One major problem with the current education system is that it churns out students that are theoretically proficient in their subjects but lack the ability to adapt and apply this knowledge to perform specific tasks required on the job. Theoretical know-how is relayed in isolation through prescribed text books and written examinations; this is not enough to understand practical or real world applications in their industries. The problem is particularly pronounced with science and engineering graduates; the ability to apply scientific theories to come up with practicable solutions is an absolute necessity in a job environment.

In order to ensure that students possess this ability, it is necessary that they are given expertise in the tools and practices actually used in their respective industries. In the United States, the Secretary’s Commission on Achieving Necessary Skills (SCANS) was appointed in 1990 to determine the skills needed for young people to succeed in the workplace. In its report, which is still widely used as a guideline for educational institutions in the States, it illustrates five competencies that all graduates must possess-

  • Knowledge of how to effectively allocate time, money, materials and human capital.
  • The ability to work on a team, teach, lead, negotiate, serve customers and work with people from diverse backgrounds.
  • Knowledge of how to acquire, evaluate, interpret and communicate data.
  • Knowledge of how to design and improve social, organizational, and technological systems.
  • Having the ability to effectively use technology.

It is vital that Indian universities adopt such guidelines when setting their curricula. In this regard, universities should be granted more autonomy in deciding their curriculums and with other such vital functions. The current framework empowers regulatory authorities to micromanage universities through various laws, rules and guidelines, often to poor results. This level of regulation makes it nigh impossible for progressive minded faculty to adopt more modern and practical curricula. This autonomy could be granted without detrimentally affecting educational standards by defining some basic pre-requisites for each university.

Creating a regulatory structure where universities are empowered to produce graduates that cater to industry requirements is the need of the day. Without it, the potential of the majority of India’s workforce will not be realised into actual contributions to the economy. Currently, the demographic dividend is closer to a non-performing asset about to turn into a liability.

Shobitha Cherian is an intern at the Takshashila Institution.

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