Thoughts In Progress: 3
In the Thoughts-In-Progress posts, I write about ideas some of which I may not be fully convinced of yet. Or about which I have not made up my mind yet- this way or that. Like Work In Progress, these thoughts are not done yet.
I have listened to the Montek Singh Ahluwalia(MSA) interview on Seen Unseen podcast a few times. I have mentioned the episode before (coincidentally, in both earlier Thoughts-In-Progress posts).
A few ideas from the episode were that infrastructure cannot be traded/ imported, government should ease the movement of people to cities maybe by building new cities, do better in primary education, health, etc.
The above ideas seem logical right away.
One idea he mentioned and I still have not been able to make up my mind about is this (idea mentioned a little after 1hr30min** into the episode): He mentions that at Oxford, Prof. Ian Little (who also taught Dr. Manmohan Singh) said that when you value a project you should value everything at world prices. For a steel manufacturing company, the value the company adds is the international value of iron ore (raw material) subtracted from the international value of steel. MSA mentions that when you evaluated like that Indian steel making companies were inefficient. Before 1991 reforms, due to protection from world competition those companies got iron deposits cheaply and the steel they made did not command good prices in the international market.
Makes sense, right? Why then is this thought still in progress in my mind? Well, this must be true for GCC/ Iran/ Russian crude oil, etc. But isn’t this true for Indian software as well? A lot of Indian IT is still about arbitrage advantage. If the raw materials (human resources, real estate, etc. in case of IT) are valued at international prices, what kind of value do the Indian IT companies generate? Is it good enough? But on the other hand, what’s wrong with having comparatively cheap resources? Crude oil is a natural resource there and what is wrong if those countries take advantage of that? If we evaluate everything at world prices what differentiators would be there? Now, if we are talking about efficiencies, quality, systems, world competition, value added, etc. we can say that maybe Indian IT companies could do better. (Was that too politically correct?) But if you have crude oil or IT people cheaply available, why should you evaluate everything at international market prices? Every person, country will want to take advantage of the cheap resources they have and maybe trade the arbitrage advantage for say fresh water, food (in case of middle east), foreign currency, crude oil, GPUs (in case of India), rare minerals (in case of the USA).
Well, the idea makes sense in the context in which MSA mentioned it. Indian companies were protected before opening Indian markets in 1991 and they had unfair advantage and had become complacent. They were not competitive and would have faced difficulty in open market. But on the other hand no market is really free market. Open/ Free market sounds good. But a lot of countries are pro business rather than pro market. They do favors for certain players. And sometimes correctly so. If US government had not funded the banks with stimulus package after the subprime crisis the banks would have been wiped out and some other banks would have entered the market; but the people would have suffered (if my understanding is correct). All countries do that- pro business vs pro market. USA may favor Shell, fund Stanford University, and every country will favor cronies- their own Andani families. So with these realities why not count on cheap resources, why factor in international prices of those resources?
I agree with the principle. But not yet convinced of the need. And yet my thoughts are not exactly out-of-line with MSA’s. I am just not fully sure of reasons and maybe should read more economics, project management books.
** The principle is discussed a couple of minute after the timestamp I mentioned. But around this timestamp, MSA says that he should have read philosophy (a P of the PPE) at Oxford. If I remember correctly, in one interview (I watched it on youtube; will find it and post the link later… am not able to locate it now) Bertrand Russel says that he would not study philosophy if he were to do it all over again because it’s done; not much new there. Something like that. But IMO, philosophy rooted ideas, models, allegories help refine your world model and make (maybe temporary) sense of the things you don’t know about. (Recently, due to his predictions in the past, Jiang Xueqin and his channel Predictive History have become popular it seems. I came to know about Plato’s Cave from one of his videos. And while the idea wasn’t new, it’s good to know the allegory.) And so, to me, MSA wanting to study philosophy and Russel wishing to study something new- both seem like hindsight biases.