The fundamental problem with the world economy

… is that wages are sticky.

With increased globalization, it has become significantly cheaper to produce certain goods and services in countries that were hitherto “low income” or “less developed’ or whatever you call it. In the past, in part due to protectionism at various levels and in part due to high transaction costs (transport, communication, etc.) “developed economies” such as the US or Europe had got adjusted to a reasonably high wage structure. In fact, it is possible that in the absence of trade with the rest of the world these countries might still be able to support that structure.

However, with the walls of protectionism and transaction costs falling, these traditionally high wage economies haven’t been able to compete with the up and coming economies where production costs are significantly lower. And because wages are sticky, i.e. it is impossibly hard to cut wages across the board, this has resulted in unemployment. Worse, a lot of other benefits (such as Social Security or Medicare in the US) have been set based on the high wage structure these countries used to enjoy.

And then you have unions, which makes it even tougher for you to cut wages which might make you competitive. It’s a combination of sticky wages and unionism that the various austerity measures in Greece haven’t managed to go through (of course, Greece has another set of problems in terms of law enforcement and tax collection).

And so, in short

1. Wages are sticky. Even though your current wages are not competitive enough, you can’t cut wages

2. That leads to high unemployment

3. That leads to lower economic activity and thus depression

4. The government needs to spend more to “stimulate” the economy, but hasn’t collected enough in good times. And the “level” of the economic cycle itself has gone down now. And the government itself has other obligations linked to the high wage levels

And so it goes. One thing I can think of is “devaluation” (in these times of floating currency rates, that term has lost all meaning), but then now these countries import so much that will again not be a good idea.

Fun!

PS: please note that this post has been filed under “Arbit”

The curse of geography on Air India

International flights are regulated by a strange agreement, in which at least one end of the flight should be in the country that is the “home” of the airline. For example, Jet Airways runs flights along the Mumbai-Brussels-New York route, but is forbidden from carrying passengers solely from Brussels to New York (that market is a monopoly for airlines based in EU or USA). However, if Jet has flights from Mumbai to say Brussels and Singapore, it can carry passengers from Brussels to Singapore, since they’ll be touching the ground at Jet’s home country.

Secondly, airline ticketing is usually done on a “source-destination” basis, and not based on each leg. For example, the price of  a Brussels-Singapore ticket on Jet Airways has nothing to do with the price of Brussels-Mumbai and Mumbai-Singapore tickets. As far as the airline is concerned, all these are independent “markets”, and the price for Brussels-Singapore is set partly based on what other airlines charge for Brussels-Singapore (taking into account flying time, layover time and all that).

These two together give an undue advantage to airlines that are situated in countries that are “in the middle”. The best example for this is Emirates, which flies, on the one hand, to several destinations in Asia, and on the other to several destinations in Africa, Europe and the Americas. This allows Emirates to effectively aggregate demand from all these destinations and connect them up in the form of a hub.

For example, there may not be too many people who want to fly Bangalore-Venice. However, if you aggregate all destinations Emirates serves to the West of Dubai (in Europe, Africa, US, Middle East, etc.) there will be a lot of people who will want to fly from Bangalore to all these places put together. Similarly, if you aggregate all destinations in Asia, there will be enough people from Venice to fly to all these places put together and thus Emirates, by providing a hub, creates an effective market. This is what I mentioned earlier as the advantage of geography, of being situated “in the middle”.

Now, if Air India were to be profitable in the international sector, one way of doing so would be to create a “hub” in India, where Air India connects up passengers to the east to those in the West. While that sounds simple enough, what we need to see is if any place in India is situated conveniently enough to function as a hub. Now, look at the map of India, and see what is around.

To the north-east lies China. There is a lot of nothingness between India and the parts of China that generates high airline traffic (the coast). To the northwest, you have Pakistan, Afghanistan and barren republics of Central Asia. The “business parts” of Russia, again, are quite far away. To the South of India you have vast oceans, the south-east and west already have thriving hubs (Singapore, KL, Bangkok, Dubai, Doha, etc.) and India is again not well placed to compete effectively with any of them. I know this isn’t a rigorous analysis, but look in any direction, and you’ll find it hard to believe that there is reason enough for people living there to fly internationally using India as a hub.

This is the curse of geography that India suffers from, and there is nothing we can do about it, and this is something we need to accept. Given this scenario, the best airlines from India can do is to connect various places in India to places abroad where there exists a “direct market” (for example, Kochi-Dubai by itself is liquid enough so you can have Indian carriers operating that route). Thus, airlines from India can never aspire to achieve the scale and connectivity of an Emirates or a Malaysian. The sooner the airlines accept it, the better.

The moral of the story for Air India is that it should recognize this curse of geography and give up on its dreams of connecting the world. It should stick to connecting destinations within India, and “direct markets” from India  to destinations abroad.

Government finances versus public interest

In an op-ed in Business Standard (I think) yesterday, Praveen Chakravarti (he’s with Anand Rathi now, used to be with UIDAI when I met him at the Takshashila Conclave last year) argues that fixed price allocation of telecom spectrum wasn’t such a bad thing since it kept prices for customers low and reasonable. As part of his argument, he mentions that due to the auction of 3G spectrum and licenses, prices of 3G services have been really high, way over the reach of the common man. Similarly, after the auction of the 4th telecom license in 2001, mobile telephony prices remained high, and came down only after the backdoor entry of Reliance and Tata Teleservices a couple of years later.

One of the points that the CAG mentioned in his report on Air India a few days back was about the granting of “sixth freedom” rights to international carriers flying from India. For example, twice this year I flew west (once to the US, once to Europe) from Bangalore, stopping over at Dubai. For both trips, Emirates sold me a single ticket (i.e. I purchased a Bangalore-New York ticket, not separate tickets for Bangalore-Dubai and Dubai-New York). The granting of this sixth freedom to carriers such as Emirates, points out the CAG, has resulted in substantial loss to Air India since no one flies Air India for international flights anymore. I didn’t believe it when I read it but one of the recommendations for the CAG was to cancel sixth freedom licenses to carriers such as Emirates. Another report around the same time recommended that “interior markets” (Bangalore, Hyderabad, Ahmedabad, etc.) be made Air India monopolies in order to protect its finances.

Now, there is a fine balance that needs to be achieved between government revenues through grant of licenses, and the economic impact on the general public because of the grant of such licenses. For example, the government (through Air India) may have lost significant amounts of money thanks to the grant of sixth freedom licenses to carriers such as Emirates. That has been counterbalanced with lower fares and easier flying options for travelers from hitherto less connected sources like Bangalore or Hyderabad. The government may have lost significant revenue by granting backdoor entry to Reliance and Tata Teleservices, but that was compensated by sudden drop in charges for mobile telephony, and the subsequent growth of the sector.

Given Air India’s history and performance, the government could have never invested enough to make Bangalore and Hyderabad as well connected with the rest of the world as, say, Bombay or Delhi. In that sense, granting of sixth freedom rights to Emirates was a cheap way for the government to provide international connectivity to these cities. Similarly, it would have been hard for the government to invest in MTNL or BSNL in order to take mobile telephony to the masses. Backdoor entry to two operators was a “cheaper option” to achieve this objective.

So what was the problem with what Raja did, you ask. The problem there was the creation of a playing field that was not level. He blatantly favoured certain players against others, and made hefty kickbacks from the process. That is the real tragedy of a non-auction process – in that there is “consumer surplus” left over with some of the companies after they’ve paid the fixed price for the resource, and some of this consumer surplus can be channeled in the form of kickbacks to government officials. I don’t know the parallel for this in the aviation space so I’m not able to comment on that.

Why I can never be a great lone wolf quizzer

I admit that of late one of the unifying themes of this blog has been “correlation”. So what does that have to do with quizzing? Thing is that while I absolutely enjoy qualitative logical reasoning (which is why I still quiz actively), there is very little in common in terms of areas of interest between me and a lot of other quizzers. Specifically, unlike most other good quizzers, I have absolutely no patience for reading fiction (or “literature”), watching movies or indulging in generic American “pop culture”.

Now, it is known that a quizmaster tends to be biased in favour of the topics that he himself is good at. For example, I’ve personally found that the questions I set have more than a “fair share” of questions with a background in Economics or European Football, and nothing related to fiction, or movies. So, given that most good quizzers are good at the topics I mentioned earlier (literature, movies, pop culture), it’s likely that most quizzes will have a healthy dose of these topics. And since I know little about them, and don’t have the required levels of interest to know more about them, it’s unlikely I’ll do well in an individual quiz. Essentially, I’m at so much of a disadvantage in these heavily represented topics that it’s very tough to make up the deficit in the remainder of the quiz.

On a related note, I wonder if fashionable-ness of topics is static or dymanic. I wonder, if twenty years down the line, we’ll still find quizzes being as heavily dominated by the subjects that are in fashion today, or if there will be a new set of subjects that will be in fashion. It’s hard to say because there is positive reinforcement that is at play here. If, for example, a certain set of subjects constitutes a large portions of questions today, today’s “good quizzers” will necessarily be those that are good at these subjects. And given that the pool of quizmasters is usually drawn out of the pool of “good quizzers”, you will have more quizzes that have a large proportion of these fashionable topics. And so forth.

Again, I’m assuming here that a lot of people (unlike certain Chennai quizzers) don’t prepare for quizzes, and that they don’t try to develop interest in certain topics for the sole purpose of being good at quizzes.

Growing Old

I must admit I’m growing old. For the first time ever, earlier this week, I used a mousetrap, successfully, too. In my younger days, I didn’t ever need such deception to handle mice. I’d ruthlessly hunt them down, with a plastic pipe and a broom, and beat them to death. This time (for the first time after I moved to this house, I must say), there were a couple of occasions when I spotted the rodent, but it managed to give me the slip both times before I could hunt it down. I blame it on this house’s lack of doors (open kitchen and all that).

Back when I was a rat-hunter, I would feel no remorse while I hunted it down and killed it. The moment of remorse, and the feeling of having committed sin, would occur when it was time for me to throw out the carcass. I would feel terrible, though I never became sick. Near the earlier house, there were some vacant fields where I’d dump the carcass, for the benefit of some crow or hawk.

This time, the moment of remorse happened earlier, before I had even killed the mouse. After the mouse had been trapped, it was making a hell of a lot of noise trying to extricate itself from the mousetrap. And not knowing what to do with it, I followed the wife’s recommendation (her “native house” is frequently infested by rats, I learn) to dunk the mousetrap, along with its inhabitant into a bucket of water, thus killing by drowning. I thought this was a cowardly way to kill, rather than hunting down and beating. I remember singing “ding dong bell” as I performed the murder.

Mouse, given the havoc you created in my kitchen, and the cushions you chewed up, I think I’ve been justified in killing you. Now you can rust in peace.

Tailors

In a little street called Narayana Pillai Street, off Commercial Street in the Shivajinagar area of Bangalore there stands a building called “Ganesh complex” which can be called a tailoring hub. There are some ten to twelve shops (forgive my arithmetic if I’ve counted too low) all of which are occupied by tailors who stitch women’s clothes, primarily salwar kameez and its derivatives. I don’t know if there’s much to choose between the stores, and I think it’s a question of “tailor loyalty” the way it’s practiced among beach shacks at Baga beach in North Goa.

The wife is friends with a tailor called Ahmed, who runs a shop called HKGN tailors in this complex. Till recently (when he took two weeks with a consignment) his USP was “one hour tailoring”, where upon receiving cloth and measurements, he would stitch your dress in about an hour. I hear that there are a large number of tailors in the vicinity (though not sure if they’re in Ganesh complex) who offer the same terms. In fact, I know a lot of women who travel to that area to get their clothes stitched both for the quick delivery and also for the network of tailors that is present there.

While waiting for Ahmed to deliver the wife’s latest consignment yesterday (the one he took two weeks with), I was watching tailors in neighbouring shops working. The thing that struck me was that there isn’t much economies of scale in bespoke tailoring. Each piece  of cloth needs to be cut separately, in its own size, and there’s nothing that can be “batch processed” across different samples. Of course, there is tremendous scope for specialization and division of labour, so you see “masters” who measure, mark out and cut cloth, and “stitchers” who stitch up the stuff together.

However, across the city, except for the handful of tailors in the Shivajinagar area, the standard turnaround time for stitching seems to be about two weeks. And given the wife’s experiences (I usually buy readymade garments so not much insight there) it is a fairly disorganized industry and requires several rounds of follow-ups and waiting at the tailor’s shop in order to get the goods.

The economics of the industry (that there are no economies of scale) makes me wonder why the two-week-turnaround time has become standard in this industry. Isn’t the turnaround time solely because of inventory piled up at the tailor’s? Can the tailor not manage his inventory better (like say going a few days without fresh orders or hiring a few extra hands temporarily or working a weekend) and thus lead to much shorter turnaround time? Given the individual nature of the job, what prevents tailors from offering instant turn-around like the handful of people in Shivajinagar do? Or is it that bulk orders (one person coming with a bunch of clothes to stitch) mess up any “quick turnaround model” the tailors could offer?

There is only one explanation I can think of. “Sales” and “production”, for the tailors happens at the same spot (their storefronts). For “sales” purposes they need to be there all the time, though they don’t need to be actively doing anything. Hence, it suits them if production is also a continuous full-time process, so that the time they spend at the storefront isn’t all “wasted”. By piling up an inventory of orders, tailors are always assured of having something to do even if no fresh customers are forthcoming.

So as the wife’s experience with Ahmed has shown, the “quick turnaround” hasn’t been sustainable at all.

The Problem With a Common Engineering Entrance Test

… is correlation and concentration.

Like everything else, a student’s performance in a test can be divided into two – the predictive component (which can be explained based on preparation levels, general intelligence, ability to handle pressure, etc.) and the random component (which includes and is not limited to illness on the day of the exam, reaching the venue late leading to unsettlement, pure luck (or the lack of it) and so on).

Now, when you have a number of exams, what you expect is for a student’s “random component” to even out across these exams. If he outperforms his “predictive component” in one exam, you would expect that he would underperform in another exam. It’s like the “predictive component” of his performance is the expected “value” of his performance.

Thus, when you have a large number of entrance exams, it gives students the opportunity for their random components to even out, and take luck out to some extent from their college admission process. When you collapse all entrance exams into one, however, a student who happens to get a large negative “random component” on that given day is denied a second chance. Thus, the college admissions process will become much more of a crapshoot than it is now.

The other thing about uniform admission standards is why should every college have the same requirements for the students it wants to recruit? Having a common exam forces this upon colleges, unless they are allowed to change their weights allocated to different sections differently. If this doesn’t happen, it’ll only end up bringing all of the country’s education system to a uniform mediocrity.

I’ve done it yet again

I quit my job earlier this week. I did so on Wednesday, the fourteenth. In hindsight, I should have waited another day and quit on the fifteenth, to coincide with the anniversary of the demise of Lehman Brothers. So for the fourth time in five years of career, I’ve quit a job without knowing where I’ll go next. The plan for the first month is to just chill and detox, and get back my sanity. Once that’s achieved, I’ll start thinking about where my next paycheque is going to come from (my employer promptly put me on Garden Leave, thus effectively giving me a month of  “free salary”).

You know what I miss the most about student life? The annual vacation! That once a year, you are entitled to spend two months or more doing absolutely nothing. I remember that friends chose to do academic projects during that time. Others got internships in companies. A few others chose to travel then. I used to do none of the above. I’d just sit at home in Bangalore and fatten myself (to compensate for the weight loss during the semester), and that ensured I started each semester in fairly high spirits (no I didn’t indulge in those spirits back then). The only time I did something “productive” during vacations was when it was an academic requirement to do a project.

I seriously miss having that annual two-month detox period. Yes, I know that my last employer gave me over twenty days of paid leave per year, but it wasn’t the same. You knew that it was a rationed resource, and you’d try to use it effectively. You’d go on vacation and immediately get on to a flight. You would land in Bangalore and head back to office within the next twenty four hours. You would sometimes need a break, take a day off from work, and then feel supremely guilty. It was on one such day sometime in the recent past that I realized that I miss vacations.

There exists a reasonable chance that I might choose to be self-employed (if things work out the way I intend, that is) but otherwise I need to find myself a job that gives me substantial vacation days a year, which I can take without any guilt. I realize that is absolutely necessary for me to keep myself charged up, and that if I had access to vacations the way I did during school/college I wouldn’t have taken a career break so many times after I started working.

My other objectives for this vacation are to travel (but it’s a bit tough given that the wife works and is subject to the twenty-days-of-paid-leave rules) and more importantly figure out for myself what my tradeoffs in life are. During my last job, I realized that I’d grossly misunderstood between my tradeoff between time and money. The other tradeoff I need to understand is the one between money and perks. And I want to write more.

Going postal over verification

Sometime in the recent past, I had to go to the post office to claim some money (some deposit my late mother had made there). As in other government offices, they needed my “address proof and ID proof” before they gave me the money. While my driving license was enough proof of identity, they being the post office got their address proof in a unique manner. They asked me to write down my address in some form, and sent a letter to that address. All I had to do was to produce that letter the next time I went there and my address had been verified.

So here’s how I’d adapt this process relative to the UID Aadhaar card.

  • When you apply for Aadhaar, you apply simply with an ID proof. Address proof not required. You simply fill in an address in the required column.
  • The Aadhaar organization sends a letter to this address. You need to pick up this letter and go to the office again, and now your address is “verified”.
  • Now that your address is “verified”, your unique ID is now mapped to this address (note that this function need not have an inverse)
  • If you change residence, all you need to do is to go to the Aadhaar office and submit a new address. They send a letter to this new address which you pick up and take to them, and thus “verify” this address. Now your ID is mapped to this new address. Aadhaar can charge a fee for this “address change” service.
  • The next time you need to prove your address somewhere, you go to the Aadhaar office and ask for an “address proof certificate”, and it can be a simple automated process for them to produce a printout verifying the address you’ve registered with them.
Now, you need an address proof to apply for Aadhaar (if I understand it right), in order to prove that you exist. I understand that a lot of people, especially at the bottom of the social strata, don’t have a proof of address, and that is holding up the spread of the UID process. And I also realize that this address proof requirement is so that the same person cannot have more than one UID card. Isn’t there any other way to prevent duplicate issuance of the UID? What does the Income Tax department do in order to prevent multiple PAN accounts?
If this duplicate problem is fixed, then Aadhaar-as-address-proof will simplify several of the problems we currently have. All that needs to be done is to “go postal” for verification!