Thursday, December 30, 2004

India still has a long way to go

Rediff Interview with Michael Porter, head, Strategy Insititute, Harvard

Harvard Business School's Michael Porter is said to be the world's greatest authority on strategy and global competitiveness.

Definitely a good read if you are gung-ho about 'India Shining'.

The overwhelming message from Porter is that it is still too early for India to think it has been successful -- or even partially successful. And there's a worry that India's globalisation story may be aborted by short-sightedness in policy or blindsided by misguided ambition.

Wednesday, December 29, 2004

Countrywise GDP list

CIA - The World Factbook -- Rank Order - GDP This should be a good place to check latest GDP estimates.

The trouble with outsourcing

The country's forex earnings on account of software and BPO service exports were around $12.5 billion for the year ending March 2004. Never did any sector grow in the country at such speed and in such a short span. Exports to the US alone account for 68 per cent and have been growing at 30 per cent per annum.

When the controversy over outsourcing broke, the initial attempt of the academia was to minimise its impact. Daniel Drezner wrote in Foreign Affairs (May/June 2004) allaying the fears about "The Outsourcing Bogeyman." Economists like Mann and Schwartz at the Brooking's questioned the estimates of job losses given by consultants like Forrester.

Three well-known Indian economists (Jagdish Bhagwati, Arvind Panagariya and T. N. Srinivasan) analysed the "Muddles over Outsourcing" (The Journal of Economic Perspectives, Fall 2004) and tried to dispel the fears.

Surprisingly, in the paper by Bhagwati and two other Indian economists referred to earlier, such a notion, that is, India and China acquiring sophisticated skill, is dismissed as "ludicrous."

Paul Anthony Samuelson, has joined in the debate to upset the apple cart. In an article in the same journal (Summer 2004), he dismisses their claims about the US gains being large enough to compensate the losses as "dead wrong." His thesis is that a low-wage nation that is rapidly improving its technology has the potential to change the terms of trade in technical fields and reduce per-capita income in the US. "The new labour-market-clearing real wage has been lowered by this version of dynamic fair trade."

Bad Ideas are Winning

With profound sadness I have to record that Bad Ideas seem to be trouncing Good Men

Tuesday, December 28, 2004

August 2009: How Google beat Amazon and Ebay to the Semantic Web

A work of fiction. A Semantic Web scenario. A short feature from a business magazine published in 2009.

Drugs, patents and options by Alok Ray

The Hindu - Business Line Monday, Dec 27, 2004

(The author, a Professor of Economics at IIM Calcutta, is now a visiting Professor of Economics at University of Rochester, US.)

While economists recognise the need for continuing R&D, they feel that options other than the current patent system must be explored which can encourage research and, at the same time, keep new drugs affordable. Under the prevailing fiscal problems in all countries, government funds for research would be inadequate and the government research organisations may like to play safe, affecting risky innovation

Monday, December 27, 2004

Guaranteeing employment

The Hindu Monday, Dec 27, 2004

This article rejects two widely held beliefs :

  1. It is quintessential to maintain a low budget deficit
  2. A higher budget deficit will cause a higher inflation

If this Government still has eyes to see and ears to hear the poor, it must be bolder with a much larger employment programme.

IT IS puzzling why even democratically elected governments find it so hard to attach utmost priority to the problem of unemployment.

It is putting the cart before the horse to talk about a range of human rights or enhancing individual capabilities, until some very basic needs such as food, clothing, shelter, and health are ensured for all citizens.

Theoretically, under the highly artificial assumptions of perfectly functioning markets, it can be shown that the free market would provide some solution. However even in theory, under the best of circumstances described by perfect competition, there is no guarantee that the distribution of income would be tolerable.

Even more strikingly, there is nothing in this branch of economic theory studying the properties of the price system, which specifies how long it might take for the market to reach its solution, if it reaches that at all (that is the system is stable).

Economists these days tend to be wary of ambitious employment generation programmes for two reasons. First, they believe there is not enough `money' because a ceiling on fiscal deficit must be respected. Secondly, often extrapolating from past experiences, they suspect this would become no more than a way of income transfer from the taxpayers, which would soon become unsustainable. On both counts, they are wrong in the present Indian situation.

There has never been any systematic statistical evidence in India either that a larger budget deficit results in higher inflation. So the link between budget deficit and inflation tends to be more imaginary than real, and for good reasons. A larger budget deficit by pumping more money into the economy would raise prices if goods and services do not expand proportionately.

Saturday, December 25, 2004

Finance : What is Sweat equity ?

Sweat equity on Hindu Business Line

The phrase `sweat equity' refers to equity shares given to the company's employees on favourable terms, in recognition of their work. Sweat equity usually takes the form of giving options to employees to buy shares of the company, so they become part owners and participate in the profits, apart from earning salary.

Friday, December 24, 2004

America, the Indifferent

America, the Indifferent on NYTimes

An NYT editorial on how USA is the stingiest country !!

Macroeconomics II - Theory of Comparative Advantage

The Theory of Comparative Advantage

A very counter-intuitve concept. But very essential to appreciate International trade.

Just answer this question before you read the article :

"There are two countries A and B. And two products X and Y. Assume there are no other countries and no other products. If A is better in producing both X and Y, will it be beneficial for A to do trade with B ?"


Cranberries on Economist

History of Cranberries, floating and jumping cranberries, brand management, FFPs.

Watch (out for) the New Asian Tigers

Watch (out for) the New Asian Tigers :: AO on AlwaysOn

Key Issues : 'Innovation blowback', US Vs Asian Education, US Complacency, Outsourcing/Offshoring as a Strategic option

Five big tech stories for 2005

Five big tech stories for 2005 on AlwaysOn.

Thursday, December 23, 2004

Macroeconomics I - Money Supply

This is a small story to illustrate what happens if money supply in a country increase without anything else changing. (An excerpt from The Mystery of Banking By Murray N. Rothbard)

To show why an increase in the money supply confers no social benefits, let us picture to ourselves what I call the “Angel Gabriel” model. The Angel Gabriel is a benevolent spirit who wishes only the best for mankind, but unfortunately knows nothing about economics. He hears mankind constantly complaining about a lack of money, so he decides to intervene and do something about it. And so overnight, while all of us are sleeping, the Angel Gabriel descends and magically doubles everyone’s stock of money. In the morning, when we all wake up, we find that the amount of money we had in our wallets, purses, safes, and bank accounts has doubled.

What will be the reaction? Everyone knows it will be instant hoopla and joyous bewilderment. Every person will consider that he is now twice as well off, since his money stock has doubled. But, as they rush to spend the money, all that happens is that demand curves for all goods and services rise.(What this means is people want more of the same goods at the cureent prices). Society is no better off than before, since real resources, labor, capital,goods, natural resources, productivity, have not changed at all. And so prices will, overall, approximately
double, and people will find that they are not really any better off than they were before. Their cash balanceshave doubled, but so have prices, and so their purchasing power remains the same.
Because he knew no economics, the Angel Gabriel’s gift to mankind has turned to ashes. But let us note something important for our later analysis of the real world processes of inflation and monetary expansion. It is not true that no one is better off from the Angel Gabriel’s doubling of the supply of money. Those lucky folks who rushed out the next morning, just as the stores were opening, managed to spend their increased cash before prices had a chance to rise; they certainly benefited. Those people, on the other hand, who decided to wait a few days or weeks before they spent their money, lost by the deal, for they found that their buying prices rose before they had the chance to spend the increased amounts of money. In short, society did not gain overall, but the early spenders benefited at the expense of the late spenders. The profligate gained at the expense of the cautious and thrifty: another joke at the expense of the good Angel.

The moral of the story is :

  1. Plain increase in money supply does not change how society produces goods. This is called the Classical Dichotomy. Modern Macroeconomics refutes this theory. I will try to cover it later.
  2. Another important point if you had not noticed is that the immediate sufferers of such an inflations are people who earn fixed incomes, i.e. whose cash balances does not increase in such a situation.
So, what should the government be doing with the money supply ?
The fact that every supply of M is equally optimal has some startling implications. First, it means that no one—whether government official or economist—need concern himself with the money supply or worry about its optimal amount. Like shoes, butter, or hi-fi sets, the supply of money can readily be left to the marketplace. There is no need to have the government as an allegedly benevolent Uncle, standing ready to pump in more money for allegedly beneficial economic purposes. The market is perfectly able to decide on its own money supply.

But isn’t it necessary, one might ask, to make sure that more money is supplied in order to “keep up” with population growth? Bluntly, the answer is No. There is no need to provide every citizen with some per capita quota of money, at birth or at any other time. If M remains the same, and population increases, then presumably this would increase the demand for cash balances, and the increased D would, as we have seen in Figure 3.6, simply lead to a new equilibrium of lower prices, where the existing M could satisfy the increased demand because real cash balances would be higher. Falling prices would respond to increased demand and thereby keep the monetary functions of the cash balance—exchange at its optimum. There is no need for government to intervene in money and prices because of changing population or for any other reason. The “problem” of the proper supply of money is not a problem at all.

What the above piece means is that if the government does not intervene an increase money supply, but the population is rising, the prices will keep falling. Eventhough this is true, Modern Macroeconomics does not view such a scenario as favourable to the economy. Can you guess why ? Just give it a thought. Just post your questions if you have any.

'PV': A scholar, a statesman

'PV': A scholar, a statesman on Rediff

PV, as he was popularly known, would be remembered for initiating far-reaching economic changes which turned Nehru's public sector penchant upside down.

Rao, whose famous pout was a cartoonists' delight, did not contest the 1991 elections and had virtually wound up his establishment here reconciling to political retirement.

But fate willed otherwise.

After Rajiv Gandhi's assassination, he became the consensus candidate for the Congress president's post that put him in the prime minister's seat after the elections.

If Rao has left a legacy as prime minister, it is of LPG (liberalisation, privatisation, globalisation) and economic reforms under the then finance minister Manmohan Singh as the duo pulled the country from the economic brink it was facing at the height of a severe foreign exchange crisis.

One black spot of his rule was the demolition of the disputed structure at Ayodhya in December 1992 and nationwide communal riots that followed.

He was Union Home Minister when riots erupted after the assassination of Indira Gandhi in 1984 and even then he was blamed for 'criminal inaction.'

Taking a cue from the then prime minister Rajiv Gandhi, Rao was over 60 years old when he became a computer addict spending hours on his word processors when most politicians were not computer literate.

After the 1992 Ayodhya demolition, he pacified Muslim clerics in chaste Urdu. Later, he was quoting slokas from the Bhagwad Gita while addressing the IAS probationers at his residence.

Wednesday, December 22, 2004

A brief history

A brief history , an Economist cover story. runs an online service for the millions of born-again Christians in America who believe that an event called the Rapture is coming soon. During the Rapture, Christ will return and whisk believers away to join the righteous dead in heaven. From there, they will have the best seats in the house as the unsaved perish in a series of spectacular fires, wars, plagues and earthquakes.

In Christian tradition, the world is created perfect. There is then a fall, followed by a long, rather enjoyable (for some) period of moral degeneration. This culminates in a decisive final battle between good (the returned Christ) and evil (the Antichrist). Good wins and establishes the New Jerusalem and with it the 1,000-year reign of King Jesus on Earth.

In his book, “The Great Year”, Mr Campion draws parallels between the “scientific” historical materialism of Marx and the religious apocalyptic experience. Thus primitive communism is the Garden of Eden, the emergence of private property and the class system is the fall, the final gasps of capitalism are the last days, the proletariat are the chosen people and the socialist revolution is the second coming and the New Jerusalem.

The alien then revealed that his species had created everything on Earth in a space laboratory, and that the aliens wanted to return to give humans their advanced technology, which would transform the world utterly. First, however, Rael needed financial contributions to build the aliens an embassy in Jerusalem, because otherwise they would not feel welcome (a bit lame, this explanation).

As Mr Cohn has put it, “The old religious idiom has been replaced by a secular one, and this tends to obscure what otherwise would be obvious. For it is the simple truth that, stripped of their original supernatural sanction, revolutionary millenarianism and mystical anarchism are with us still.”

Mr Fukuyama's pulpit oratory suited the spirit of the 1990s, with its transformative “new economy” and free-world triumphs. In the disorientating disconfirmation of September 11th and the coincident stockmarket collapse, however, his religion has lost favour.

Perhaps, deep down, there is something inside everyone which yearns for the New Jerusalem, a place where, as a beautiful bit of Revelation puts it:

God shall wipe away all tears from their eyes; and there shall be no more death, neither sorrow, nor crying, neither shall there be any more pain; for the former things are passed away.

A Modest Proposal

Jonathan Swift (1667-1745), author and satirist, famous for Gulliver's Travels (1726) and A Modest Proposal (1729). This proposal, where he suggests that the Irish eat their own children, is one of his most drastic pieces. He devoted much of his writing to the struggle for Ireland against the English hegemony.

"For Preventing The Children of Poor People in Ireland From Being A burden to their Parents or Country, and For Making Them Beneficial to The Public"

I have been assured by a very knowing American of my acquaintance in London, that a young healthy child well nursed is at a year old a most delicious, nourishing, and wholesome food, whether stewed, roasted, baked, or boiled ...

Browser Wars

Browser Wars on Yahoo!

My vote goes to FireFox. Reasons :
  1. Tabbed Browsing
  2. Amazing Plugins written by geeks around the world
  3. And the latest "Live Bookmarks" which is a great tool to track News and Blogs
For the first time since Microsoft launched its flagship browser in 1995, Internet Explorer is actually losing market share. Research firm WebSideStory reported that the enormous chunk of IE users declined from a high of 95 percent in June to 92.9 percent in October.

Perhaps more frustrating than security leaks is the fact that Microsoft quit adding new features to its browser. The last major feature refresh for IE dates back to August 2001--and it shows.

In fact, the future of Web browsing comes down to one word: tabs.

Firefox: The best all-around alternative to IE. Great for power users who want to add functionality to the browser, and appropriate for newbies just getting started.

Internet Explorer: Best for corporate users in controlled environments and those who spend most of their time on Microsoft-branded or IE-specific Web sites.

Netscape: Best for AOL subscribers (with AOL Instant Messenger integration) and those who are willing to put up with some rough edges to use other goodies, including an HTML editor and e-mail program.

Opera: Best for power users who keep many pages open at once and perform frequent downloads. There's an e-mail program included, but banner ads on the free version of the browser are annoying.

So is it time to ditch Internet Explorer once and for all? In a word, no. Microsoft requires its browser to access its Windows Update and Office Update services, and it's not uncommon to find Web sites that are designed specifically for IE.

For the time being, most users will need to keep IE handy, just in case. Keep in mind that you can have more than one browser on your computer. If one acts up, close it and launch the other.

Peer-to-Peer TV

Peer-to-Peer TV on Red Herring
Forget Wife Swap, the next fad to hit TV, and the courts, could be swapping live video feeds.

German software engineers Guido Ciberski and Petra Bauersachs are promising to introduce software they call “Cybersky TV” this January. They claim Cybersky TV will use peer-to-peer technology to carry live television feeds. If the service gets enough users, its first broadcasts in February could revolutionize TV ‑ and guarantee a deluge of lawsuits.

Tuesday, December 21, 2004

Indian outsourcing: an alternate view

Excerpts from an article titled Indian outsourcing: an alternate view. Obviously not an unbiased view.
There is little innovation among the software crowd, just mindless drudge work. But while the Indian rupee is 43 to the US dollar, 57 to the euro, 85 to the British pound and 33 to the Australian dollar, foreigners will continue to send work to this impoverished nation.

Though nobody says it openly the fact that one US dollar is equivalent to around 45 Indian rupees drives this migration. The excuse of plenty of educated staff being available is just incidental.

But given that the governments of both Karnataka (of which Bangalore is capital) and Andhra Pradesh (capital, the twin cities of Hyderabad and Secunderabad) were both voted out in elections earlier this year, by rural poor who cared little for the techno-focus of these administrations, it is unlikely that the politicians will be over-eager to indulge people like Azim Premji of Wipro, now the richest man in India.

About Bangalore

Earlier, people would travel from the periphery to the centre to work; now the rush is both ways. The evening traffic jam in the city takes the better part of five hours to dissipate. And it is nothing short of chaotic.
Now land values are so high that villagers are increasingly tempted to sell out to developers and migrate to the nearest slum close to the city. In a typical scenario, the farmer loses his land, gains a lump sum of cash which he uses to marry off some of his daughters. He then migrates to the nearest slum, becomes a drunkard and finally a beggar.

Sites on Economics is a good site for beginners
Nouriel Roubini's Blog is excellent for current Economic issues and debates
Online Lecture Notes is a good site for notes on specific topics in Economics
The Library of Economics is a good site for all kinds of stuff about Economics

Of course, Economist is excellent for latest news and economic issues. Check out the Buttonwood column and the Finance and Economics section for interesting stuff.

Falling US Dollar

Some notes on how the falling US Dollar might affect the world.

North America

  • Borrowing over $600bn per year to satisfy its deficit
  • Imports are 50% more in value than Exports
  • It has the advantage of being the reserve currency of the world. It pay the interest on its debt in its own currency.
  • Dollar is held strong by the Asian Central Banks which are ready to buy US Dollars to prevent it from falling further. This artificial support cannot last longer if the US does not manage to narrow its deficit and increase its exports. If the US continues to borrow without trying to gradually re-align the US Dollar, it might lead to a recession if the situation worsens and the Dollar falls suddenly.
  • With the current level of trade deficit, the US Dollar would have fall about 50% from its current value to narrow this deficit. But if this happens, the standard of living in the US will be badly affected.
  • Some observers comment that the Fed can intervene and raise interest rates to strengthen the US Dollar.But such a move could affect the investment mood in the US and intensify recessionary pressures. But if the Dollar continues to fall, it will push up the interest rates eventually.
  • Some observers feel that Dollar might get stronger if the other economies of the world get stronger and increase their demand for US products.
  • Exporters who do not depend on imports might benefit for some time, but if foreign investors start taking out their investments it might lead to a fall in the US Stock markets.
  • Floating foreign exchange rate.
  • Is a net exporter to Canada. Both its imports and exports are heavily skewed towards US.
  • Canadian exports might lose preference to countries like China if the Canadian dllar keeps appreciating against the US Dollar.

Western Europe
  • European exports should face price competition from US due to the strengtheing dollar.
  • Surprisingly, European tourism has not taken a hit. UK and France are still the favourite destinations for US despite the weakening dollar.

Eastern Europe & West Asia
  • Many East European countries are more dependent on Europe for their exports. And they do not hold huge forex reserves in US Dollars. So the falling dollar should not affect these countries greatly.

East Asia

  • Holds over $500bn of US treasury bonds in its Forex Reserves
  • Has the Yuan pegged at 8.28 yuan to USD 1
  • Keeping the dollar strong is essential to help its export-led growth
  • Fall in US Dollar could cause an internal crisis due to unemployment issues
  • China holds the key in preventing the US Dollar from falling further. Termed by experts as the
  • "Lynchpin"
  • But China might change its stand when all its labor is employed. Even though this could be a long term prospect, China will not always want a strong US Dollar.

  • Holds over $720bn of US treasury bonds in its Forex Reserves
  • Yen is rising despite efforts by its Central bank. The rising Yen seriously affects its exports, worsening the situation at hand, where the government is fighting deflation.
  • Wants a concerted effort along with European economies to push up the US Dollar.


Middle East
  • Sells oil in US Dollars. Serious crisis at hand if the US Dollar continues its fall. All the oil money which is stored in dollars is fast losing its value

  • Falling US Dollar will affect its oil revenues. It has already started moving its reserves to Euros.
Historical instances and possible future scenarios
  • In 1990s, there was a high demand for the US Dollar to invest them back into the US IT companies which were sought after by investors around the globe. But this time around, the demand for dollar is rather artificial and because of Asian central banks trying to hold their currencies from falling.
  • The direction that the bond yields will take in reaction to the falling US Dollar has to be observed. In 1985-87, when bond yields fell along with the dollar, the Fed tried to prop up the bond yields. The Fed's intervention finally led to a stock market crash.
  • The Asian economies seem to be in a weird situation. If one Central Bank decides to diversify its forex reserves and starts selling the dollar before it falls further, everyone might follow suit which might lead to a major crash in the dollar.
  • If the fall in US dollar continues, the Asian economies which depend on exports to US, might finally lose their competitiveness and would have to look to other markets. This could look far fetched at the moment but nonetheless should not be ruled out in the long run.
  • Some business models like outsourcing might come under serious question if the fall in US Dollar continues. The basic selling point of outsourcing was cheaper inputs. But this basic selling point is under threat if the fall continues.