Economics – Random Dispatches

A Different Way Of Comparing Canada & America

Since I’ve come back to Canada, I find myself continually (even subconsciously) comparing it with the US. I’ve noticed that while Canada is roughly 1/10th the size of the States, it feels like it’s way less complicated (and sophisticated). This also worries me, as I wonder how we’ll continue to compete in a more networked, global, insert your favorite 21st century economy cliche here world.

But I’ve struggled with how to best articulate this. Whats the language to reflect complexity? How does it affect nations? How can we have a data-driven conversation about this?

After listening to a podcast with Cesar Hidalgo I stumbled onto the Harvard MIT Atlas of Economic Complexity – and I finally think I’ve the tools to talk about this.

So what is “economic complexity” and why does it matter?

Well, economies produce things. Some of these can be produced by everyone (think dried fish) while some can only be produced by a few (think x-ray machines).

It takes a lot more knowledge to build an x-ray machine than dry a fish. It’s more complex (plus a lot of that knowledge is locked in people’s heads) ergo fewer countries can do it.

By comparing trade statistics amongst countries you can figure out the relative complexity of all goods produced and traded by all nations.

You can also use these comparisons to map out how products are related. By looking at what countries co-export, you can see the degree to which products are related. This lets us statistically demonstrate concepts that make sense like “countries that export textiles also export finished garments but not airplanes”.

Here’s what this map looks like:

In order to understand the rest of this blog post, let’s take a walk through it.

Start with the oil well in the upper middle of the map. There’s a big brown dot. This shows you that crude oil accounts for a lot of global exports. And it’s connected to the teardrop-shape that represents petrochemicals. This means that if you export crude oil it’s reasonable for you to move on to refining the oil and exporting it.

Since it’s only connected to the teardrop, it means that the only thing you can naturally move into is petrochemical refining (more on this later). If I was to propose that a country’s expertise in exporting crude oil should make them succeed at making airplanes, you can now explain why my logic intuitively feels flawed. Airplanes are off to the left of the map, several nodes removed and crude oil is an edge connected only to refining. Success at exporting oil does nothing to directly encourage the ability to build planes.

Conversely, if your country is good at manufacturing, you are thrown into the center of the map and you have more places to go. It wouldn’t be surprising to see you get into chemicals or metal products.

It’s also important to note that many countries have more than one industry, so Canada for instance exports both crude oil (oil sands) and airplanes (Bombardier). The mapmshowsnthat this is due to historical factors; the two aren’t “naturally” related.

The map above is weighted for global trade. The size of each ball (in jargon: a node) corresponds to that node’s share of trade. But what if we looked instead at how complex each product is?

Crude oil is simple stuff; an airplane is complex. If you redo the map based on complexity that crude oil dot is now tiny; the airplane is still big.

And here’s where things get really important. It turns out that if you want to predict how well countries are going to grow, you should look at their ability to export more economically complex products over time.

A great example comes from comparing Thailand with Ghana. In the mid-60s they had similar GDP capita. Adjusting for all other factors (read the paper), you see that the biggest reason Thailand is now wealthy is that they’ve invested in producing more complex things. This “movement up the value chain” and ability to export it is what has driven their increase in living standards.

So back to Canada and the US. How do we compare and why do I feel uncomfortable?

Let’s start by looking at the Canadian and US product maps. Here, we take the map from above and put a black box around the nodes on the map that matter to a country. Here’s Canada:

Good news: we’ve a lot of black boxes and several are on big circles. Bad news: these circles tend to be commodities with low complexity and off on the edge of the map.

Let’s look at how this is changing. Here’s how our exports break down over time:

We can see that oil and other commodities increasingly define our exports.

Now let’s look at America:

Dots everywhere; you’re looking at a complex, diverse economy that makes just about everything except clothing and electronics. And has no oil to export.

This shows up in the export statistics. Look at all that machinery, chemicals, aircraft and (relatively declining as a share) electronics. Clothing is nonexistent.

And this disparity is why I worry about Canada.

Living in Canada you constantly hear about two things:
1) Housing
2) The Oil Sands and other commodities

The Oil Sands and commodities live on the edge of the maps above and have low economic complexity. This means that they don’t do a lot to stimulate other industries and build a robust, diverse economy.

We’re building a less sophisticated, less dynamic economy that’s dependent on one thing we don’t control: commodity prices.

A commodity price collapse will be death to Canada; the map shows us that a lot of our major industries will literally have nowhere to go. In contrast, America’s have a lot of leeway. You can retool your factory to do something else; oil rigs only drill oil.

And what about housing? Well, I now have a sense of why so many Canadians “invest” I’m real estate. The map suggests how industries evolve and therefore where your expertise would be most likely to succeed.

If you’re an oil exec, you could invest in a refinery and legitimately contribute knowledge (and therefore reduce risk/make the venture more successful). You are “dumb money” if you invest in a tech startup or an airplane manufacturer.

But good luck opening up a new oil refinery. It’s way too capital intensive for any individual investor. Instead, you go buy another house or financial assets like stocks. And that’s probably part of the reason why every Canadian newspaper has large sections on commodities, housing and stocks.

The other scary thing here is that it explains why Canada is so crappy at producing globally competitive companies outside the commodity space. When you’re at the edge of the network, there’s just not as many places to go. We don’t have the expertise at the center of the network necessary to create those companies in meaningfully large sectors like electronics, chemicals or vast swathes of manufacturing.

So, what can we do? Well, the map isn’t destiny; you can go anywhere on it, it just might be really hard to get there.

The first thing we should do is decide where we want to play on the map (hint: in the middle in heavily connected nodes like high end machinery, chemicals, electronics and construction equipment).

Then, we’d do all we could to encourage it. Kill any subsidy to other industries (why do we subsidize aircraft if they’re at the edge?), do everything reasonable to reduce red tape or obstacles for companies in the middle of nodes, better training for those folks (let the oil patch pay more if they need more workers in Fort Mac), etc.

It remains to be seen what will happen to the Canadian economy, but I’m betting on a very hard landing over the next five years. The map gives us one more tool to explain why – and shows just how different Canada is from America.

The China Fall?

The past few years have been a fascinating time to watch China’s mighty rise. However, the notion that they’re going to become the most powerful nation in the world over the next few years has always seemed ridiculous to me.

Recently I’ve noticed quite a few signs that suggest I’m not alone.

A few weeks back I had lunch with an alum of my grad school whose moved to Vancouver because it offers such a better life than China. He spoke of the boom there as being over and that everyone wants to get out in the next two years before a crash occurs.

But the malaise may be deeper that just an economic crash. Today’s NY Times includes this fatalistic gem (from What Keeps The Chinese Up At Night)

Their [locals in Chongquin] wishes and worries were candid, heartfelt and startling: people had lost their optimism and were yearning for security and freedom from anxiety. Income is a primary worry for those who have lost their jobs or land. Pensions and social welfare payments are almost nonexistent. People struggle to pay for education. They can’t afford medical treatment; clinics and hospitals require patients to pay cash in advance. A serious illness can spell financial ruin for an entire family.

China’s one-child policy has turned family life from a source of solace to a font of anxiety. Parents now get just one chance for a child to succeed and to support them in their old age. Single children carry an unbearable burden of parental and grandparental expectations.

In sum, a spiritual hunger has taken hold even as physical hunger has receded. Anxiety and resentment are turning people inward; the Chinese are being consumed by anomie, a listless sense that life has little meaning.

And following along with From Peter Thiel’s CS183 – nominally about startups but really about so much more – includes this even more fatalistic passage:

In a strange way, China falls squarely in the determinate pessimistic quadrant. It is the opposite of the U.S.’s optimistic indeterminacy. The China view is that there is indeed a calculus as to what to do to improve things for society. Things are determinate. But when you go through that calculus, there’s no cause for celebration. China will get old before it gets rich. It is forever destined to be a poor version of the U.S. It can and will copy things. But there’s not enough time to catch up, even if it executes perfectly. This explains why you end up with all these things that seem draconian from a more optimistic perspective; e.g. the one child policy, massive environmental pollution, and thousands of people dying in coal mines each year. The fundamental view is pessimistic, but in a very determinate, calculated way.

Another clue is found in a recent blog post by David Eaves:

He contrasts that with the “Generation 90,” those now in mid teens to mid twenties and he sees a generation with small dreams and growing frustration. Forget about access to the top international universities in the world. Indeed, forget about access to top Chinese universities. Such opportunities are now reserved for the super rich and the super connected. What many have felt was a system that was relatively meritocratic is now flagrantly not. According to Anti, the result is that Generation 90 does not have big dreams. Forget about become a world class scientist, founding a leading company, leading an interesting organization. Many do not even dream of owning an apartment. This evolution (devolution?) in moods was summed up succinctly in a poster Anti saw at a demonstration a few months earlier which nihilistic read “We are Generation 90: Sacrifice Us.”

…

They agreed with Anti. Here I was, in the nation’s capital, sitting in an upper middle class restaurant, with a vibrant, intelligent, bilingual group of young Chinese. This is a group that would easily fit in the top 5% in terms of education, opportunity and income, and most probably in the 1%. And they felt that opportunity for their generation were limited. Their dreams, were more limited than the generation before them.

I’ve been telling anyone who’ll listen that China’s on an inexorable rise – but it doesn’t necessarily end at number one. It’s going to be interesting to see how this movie ends.

Update: a buddy of mine sent me another great article similar to the above, this time from The Prospect:

The domestic Chinese lower education system does not educate. It is a test centre. The curriculum is designed to teach children how to pass them. In rural China, where we have lived for seven years, it is also an elevation system. Success in exams offers a passport to a better life in the big city. Schools do not produce well-rounded, sociable, self-reliant young people with inquiring minds. They produce winners and losers. Winners go on to college or university to take “business studies.” Losers go back to the farm or the local factory their parents were hoping they could escape.

…

I pity the youth of China that cannot attend the international schools in the cities (which have to set limits on how many Chinese children they accept) and whose parents cannot afford to send them to school overseas, or do not have access to the special schools for the Party privileged. China does not nurture and educate its youth in a way that will allow them to become the leaders, inventors and innovators of tomorrow, but that is the intention. The Party does not want free thinkers who can solve its problems. It still believes it can solve them itself, if it ever admits it has a problem in the first place. The only one it openly acknowledges, ironically, is its corruption. To deny that would be impossible.

Wrapping Up India

We’ve spend the last few days skulking eastwards from Rajasthan towards Delhi. This has given us a chance to see all sorts of little towns that most people won’t see as they don’t have enough time. This is one of the little joys of India: the density of history is so high that there are literally hundreds of towns with something worth seeing. Compared to the great sights of India each is unremarkable, but most countries would kill to have just a couple of towns like them.

We spent a few days in Bharatpur. It initially appeared as a charmless, dusty city but in the middle of it is a massive fort. The moat now swells with plastic bottles instead of water. Once you make it past the ramparts though, things start to change.

It’s a “working” castle: many people live inside the grounds plus there are the remains of various different palaces. Impressively, there’s a park within the walls; this might not sound like much, but it’s quite the luxury for India. Getting a fresh pomegranate juice and sitting in the park was a welcome moment.

The highlight is one of the palaces that has an ancient hammam (Turkish bath) attached:

Palace

Hammam

The main reason people come to Bharatpur is to go to Keloadeo National Park. About 150 years ago the Maharajah decided that he wanted a private duck hunting area. He irrigated a 29 square kilometer plot of land and then would invite people over to slaughter animals with extreme prejudice. The British took him up in earnest; on one particularly bloody day, 39 men managed to kill over 4,000 birds (there’s a plaque to memorialize these brutal hunts).

Fortunately, it’s been a national park for over forty years now so there’s no more hunting. You can while away a pleasant day by renting bikes and exploring the park on your own. We say a wealth of wildlife: black ibises, painted storks (below), kingfishers, peacocks, cormorants, parrots, hare, giant squirrel and the ubiquitous cow (there’s not supposed to graze in the park, but hey, you know…).

Painted Storks

Conveniently, the folks at Keoladeo had jacked their prices – presumably for the Commonwealth Games. The price increase was so sudden that they didn’t even have a chance to update their flyers, which still had the 50% lower price:

Jacked prices at Keoladeo Ghana National Park

About 40 kilometers away from Bharatpur is Deeg, which is famous for its water palace. This massive complex has over 200 fountains (alas, not turned on) and many of the building still contain the original furniture (alas, photography is not allowed).

Main Palace at Deeg

The entire place is a celebration of India’s scarcest resource. Check out the maze created below for catching rainwater:

Maze for rain water

India is a case study in social norms – because when you get here, you realize that so many of the things you take for granted are completely different here. To wit:

Spitting. Every morning the men compete with one another to see who has the greatest lung capacity and can summon forth the largest loogie. This is particularly charming when you’re lying in your hotel bed and all you can hear is the sound of nearby hawking.
Littering. Almost everyone throws their garbage in the street. If you pay attention you’ll notice the various different ways people dispose of their garbage: carefully pouring it on the curb for a cow to eat, tossing it off the roof or maybe just freely flinging it out the window. If, like me, you’re unlucky, someone will throw their garbage out a bus window at the exact moment you’re passing by in an open-aired tuk tuk.
Dress. Shorts are vulgar and a sign of disrespect, particularly if worn in a religious building. However, it is nothing to wear a sari that exposes one’s sagging stomach.
Pedestrian rights. In a nutshell, they don’t exist. People will drive right up into you and if you don’t get out of the way you will be hit. If you’re going to cross the road, you’re taking your life into your own hands: don’t expect anyone to try and dodge you. Caveat pedestor.
Personal space. Like pedestrian rights, this is non-existent. In an overpopulated country this shouldn’t be unexpected, but it takes a while to get used to people coming right up to you. More awkward is when you’re riding on the bus and the unperfumed man in the seat next to you puts his arm behind you and rotates toward you, allowing his ample stomach to sag over your leg. Did I mention that I hate being touched by people I don’t know?
Personal space II. Indians love music and associate it with a good time. Consequently, people play music here all the time (see Agra below). For most people this means on their cellphone. However, nobody uses headphones: they just blare their music without consideration of what anyone else. Manufacturers have caught on: the #1 feature in an ad for a popular phone is its dual stereo speakers.
Queueing: forget it, it’s a battle. Everyone for themselves. Sharp elbows are mandatory or you’ll still be standing in line an hour later.

Now, these are social norms and that means that they’re learned behaviour and changeable. The Indian government seems to think that a few of them might be worth trying to change: there are ads on tv to teach people that cutting in the line is bad behaviour and that some civility in driving can be nice. Moreover, in the few areas of the country that have garbage cans (e.g., Amber Fort, parts of Agra) you will see nary a piece of litter.

It will be interesting to see which ones society chooses to keep vs. change.

After Bharatpur we went to Fatahpur Sikri. This tout-filled town used to be the capital of the great ruler Akbar, but it lacks a steady supply of water and was abandoned after Akbar’s death. It’s now a UNESCO world heritage site with an impressive mosque and equally incredible palace.

The only thing more ‘impressive’ than the buildings is the tenacity of the touts. We arrived via a motorized rickshaw; touts actually jumped into the front seat where our driver was sitting (people are always hopping on/off the front of your rickshaw, hence this was nothing new) and persuaded him to drop us off far from our hotel. I fell for this, forgetting the basic rule of travel: never get out of the vehicle before your destination, and thus had to deal with the touts.

This was not my finest moment. I was soon swarmed by at least 8 guys all trying to sell me postcards, multiple rickshaw rides, trinkets, bangles, guides, hotel rooms, etc. And nobody would take no for an answer. After trying to walk away and telling everybody “no” at least three times, I lost it. I quickly became that guy I never wanted to be and found myself screaming expletives at the touts to get them to go away. LIke I’ve said many times in this blog, traveling in India can be hard.

After we checked into our hotel we went to Akbar’s great mosque, graced by the mighty 54 meter tall Buland Darwaza (Victory Gate).

Buland Darwaza (Victory Gate)

The touts have taken over this mosque complex – I think mainly because it does not charge an entrance fee. You have to leave your shoes outside where, if you’re a foreigner, you’ll have to pay a kid for the privilege of not having them stolen. Once inside, a tout – who insists that he is not a guide and will not, under any circumstances, accept payment – guides you around the complex; you have no choice but to accept. As you marvel at the architectural details and finery of the mosque and adjoining buildings, you’ll also get to fend off his attempts to sell you blankets, soapstone carvings and the eventual negotiation of a ‘gift’ for his services (and all the while he will tell you that you’re being rude/cheap by not buying anything/giving him more money).

Hallway

Inside Jama Masjid

Hallway in Jama Masjid

Fortunately, next door is Akbar’s tout-free palace complex. Akbar is one of history’s most fascinating rules: while a muslim, he had three wives – one Christian, one Hindu and one Muslim. He understood that it was much more efficient to subdue the Hindu population by negotiation than force and his reign was marked by prosperity and growth. This is evident from the remarkable complex he left:

Panch Mahal

Inside Jodh Bai Palace

Rumi Sultana

One of the most interesting buildings is the Diwan-i-Khas (Hall of Private Audiences) where Akbar would speak with is advisors. He stood on an upraised plinth, each connected by a gangway to a corner where a minister would stand. He would ask a question and rotate through his advisors for answers:

Diwan-i-Khas/Hall of Private Audiences

There’s not a heck of a lot to do in rural India at night, so when we’ve tired of reading, we’ve watched tv. Indian television is a 200 channel universe of soap operas, Bollywood movies, singing, dancing, Business Television (talking heads and scrolling headlines who take themselves very seriously), holy men and the odd foreign channel.

You start to realize that there are certain archetypes in the tv culture:

The man-child: an early twenties to mid-thirties male who wears jeans and frequently a wife beater (known here in its less pejorative term, the “sleeveless vest”). He is truculent and insolent and incredibly cool yet still able to respect his elders.
The urban modern: an early- to late-twenties woman who wears western clothes, works, and lives in an apartment in a major city. She represents all of India’s hopes for the future yet secretly also their fear that modernizing may require them to sell out their culture
The self-confident traditionalist: also an early- to late-twenties woman who only wears saris and traditional clothes. She is much more reserved and subdued than her urban modern counterpart, but do not try and run truck over her. She embodies an India unsure of what it wants, trying to balance all of the nation’s history and traditions amongst the technology and pace of the modern world
The dominator: mid-forties to mid-sixties men and women who play overbearing father – and more usually – mother-in-laws. Again, this is the best and worst of India. They hold the family together and ensure that traditions and heritage are passed from generation to generation. Simultaneously, they do not easily let their children grow free and learn to live for themselves.

You may notice that there are a couple of groups that aren’t too well represented here:

Kids: you only see them in commercials
Seniors: as far as tv is concerned, they might as well not exist
Women with kids: ditto. You should be at home raising your kids, not being on tv. Only men of this age should be on tv.

Equally interesting are the breadth of commercials (I subscribe that the best way to get a feel for what a society feels about itself is to watch its television commercials). Almost all are deludedly aspirational: people sip coffee or eat snacks in beautiful, modern apartments that look like they’re out of New York or London. Some are ridiculously macho: a beautiful woman in an evening gown signals with a handkerchief, causing a jeep to burst over a sand dune; a man gets out with a golf club and knocks a ball into a cup. And many play to your emotions by using children as pawns; perhaps that why you otherwise don’t see many on tv.

A couple of the more interesting commercials we saw were related to matrimony. Most marriages here are arranged (a Western style marriage is called a “love marriage”) and it’s near impossible for guys to meet girls. One ad we saw was for a matrimony service; think online dating where the goal from the outset is finding a wife.

Another ad started with a stunning woman staring at the camera stating unhappily and stating: “ours was an arranged marriage”. Cut to various scenes of her and her husband feigning interest for one another while obviously masking an inner indifference. However, then one day on the train they try to find each other and realize that they actually love one another! And then they go out and buy matching rings to celebrate the day they fell in love after they were already married.

Probably the strangest thing on Indian television are the channels devoted to various gurus and religious leaders. These channels are pretty basic: a guy sits on a stage and yells/dictates/sings while an audience watches or calls in. This is a very conservative society so there’s no boobs or bad words on tv, but occasionally something odd slips in via these channels. We were flipping channels and witnessed a ceremony where an overweight, naked, middle-aged guru walked up to a row of seated disciples and touched each of them on the head. These brave pilgrims sat unblinking.

Like I said, tv is a fascinating window into a country.

What is that noise? Is someone throwing squirrels in a meat grinder? Has a hyena been run over by a steam roller? Oh no, it’s just 5:30 in the morning in Agra and the local sound system (they’re everywhere in some towns) has decided to crank some Hindi music at 150% of tempo.

Indian sound system

Well, sleep is blown, so let’s get up and go see the Taj Mahal.

But before the Taj, let me tell you about a couple of other stunning attractions that Agra has.

If it were in another city, the Itmad-Ud-Daulah, aka The Baby Taj, would stand on its own as a powerful tourist attraction. Due to the Taj, it gets barely any traffic. Which is a shame, as most people will miss out on the incredible detail that has gone into its construction (like the Taj, it too is a mausoleum to a lost wife):

Details at Itmad-Ud-Daulah (Baby Taj)

Itmad-Ud-Daulah (Baby Taj)

Agra Fort is another of India’s innumerable UNESCO world heritage site (no other nation has done as good a job of getting their monuments listed as India; it seems like there’s one in every city – and each is legitimately on the list). This massive fort is steeped in the complex political history of India. Aurangzeb’s father built the Taj Mahal; he overthrew his father and locked him up for the rest of his life (8 years) in a room that overlooked the Taj; Aurangazeb’s throne overlooked both his father and the Taj.

Aurangzeb's Throne

Wall of Agra Fort

Despite their individual grandeur, each of these sites is overshadowed by the Taj Mahal. Simply put, the Taj is just that much more amazing that just about any other building you’re seen. Viewed in the morning sun at a distance of 200 meters or so, it radiates like the perfect embodiment of one man’s love for his lost wife. As you get closer the immensity is replaced by the ornate detail and the subtlety of the carvings combined with marble so polished that it reflects.

Taj Mahal

Archway at Taj Mahal

Details of Taj Mahal

Reflecting Tower at Taj Mahal Persian Calligraphy at Taj Mahal

It would be criminal to visit Delhi and not go to the Taj.

Speaking of which, as we drove into Delhi everything began to make a little bit of sense.

As we’ve been traveling through this country, one the biggest mystery to me has been “what does everyone here do for work?” This has been made even more puzzling for two reasons:

As we’ve driven through dozens of towns – some with populations in the millions – we’ve hardly seen any factories. Contrast this to the Factory To The World that is Southeast Asia/China where the social contract is obvious: move to a town, work in factory, remit money home and live a better life than your parents
We see ads everywhere – and I mean literally everywhere: in magazines, on billboards, painted on walls – for IT, engineering and management education. My favourite ad showed two young women in leggings sitting at their laptops happily working away; nothing could have been a better embodiment of what this country oh so yearns to be. However, all of these factory-less towns have also been IT-less towns; no squat, shiny, campus-style mirrored buildings that smell of technology companies

This has compounded the disbelief I’ve had watching television here; especially when watching commercials, I haven’t been able to figure out where in India it’s supposed to be. The apartments? People in parks? Most of the scenes look as foreign from where I’ve been as Mars. Now I know that Indians have a great suspension of disbelief – witness your average Bollywood movie; sheer escapism – but this was bordering on the delusional.

But back to Delhi, as it all started to come together.

As you drive into town, you immediately notice how different it is. On the outskirts, brand new technical universities (Fully air-conditioned! 100% placement assistance!) are emerging out of the dusty plains. The tentacles of a metro (infrastructure!) reach into the hinterlands and tower over many city neighbourhoods.

The metro has brought with it easy transportation and alongside it sprout multi-storey shopping malls, giant apartment complexes and corporate offices. Those fancy, glass-enclosed, three storey testaments to technology that India so covets as its hope to becoming a superpower.

Bingo. Now this country is starting to make sense! Now I have an inkling of how it works and what it might mean.

So, what do I think? Well, I think that in India we’re witnessing the eradication of poverty and the rise of a middle class on a pretty massive scale. I also don’t think it’s happening anywhere near fast enough – and particularly not fast enough for India to become a major superpower any time in the next twenty years.

The crux of this is due to India’s focus on services and allowing China to have all the manufacturing fun. Services, on a per person level, probably bring in more income per job than manufacturing. But it comes at a cost: you need a highly trained workforce. That education is not going to come from the government alone (a high school diploma ain’t enough), so India has been building out a massive higher educational infrastructure.

However, it takes a heck of a lot longer to build a university and get it up to speed than it does to build a factory to assemble irons or lampshades. So you can’t grow as fast as your neighbour to the north. It also means that you’ve got a small part of your workforce (the service sector) fully employed and the vast majority of your workforce (the other 90+% of your workforce) vastly underemployed.

There’s a more subtle – and potentially more socially jarring – long-term consequence to this as well. People who work in services are going to want to work almost exclusively in big cities. Intellectually stimulating work tends to require intellectually stimulating play in your spare time and alas that’s typically not found in villages (for more, read Richard Florida or John Hagel). Moreover, these people are going to move to cities where there are already people like them; they’re less likely to slug it out in a ‘boring’ city (unless the pay is really, really good; not a likely prospect right now).

I think this explains why so many of India’s highly educated elites go abroad for work and show little interest in returning. It’s not that they’re not Indian patriots, rather they’re too stimulated by what they get overseas and can’t imagine going back until something similar arises in India. And once they have kids, they almost certainly won’t go back as their kids won’t give up what they’ve got.

But something similar is arising. I believe that India is going to see the rapid rise of a few incredible cities that will be more like states. They’ll go toe-to-toe in attracting the best and brightest across the world. Think Delhi, Mumbai, Chennai and Bangalore. Maybe not for a few more years, but barring catastrophic mismanagement (which is a possibility due to the endemic corruption here), they’ll get there.

The flip side of this is that this means huge wealth disparity in the country. India’s elites will be more comfortable and able to better to relate to people in London, New York and Tokyo than people in a rural village in Uttar Pradesh or Bihar. In ten years I wouldn’t be surprised to see something like 250,000 dollar millionaires (currently about 115,000) and 400 million people living on less than $2 a day. The wealth inequality is going to make America look like a socialist country.

Is this bad for India? I honestly don’t know. It might not happen; if it happens and is left unchecked it could lead to ridiculous scenarios like secession demands by the new princely city states who want to be the new Dubai (I’m being purposely melodramatic).

It’s also definitely not irreversible. India currently has zero focus on reducing poverty in the country at either the personal or governmental level (literally: the rich don’t give to charity and there’s no national strategy or execution on improving welfare). If this changes to spread the wealth around – and this doesn’t mean higher taxes; it likely means better thought growth policies – the situation could definitely change.

It’s going to be really interesting to see how this country plays the hands it’s been dealt. Mixing metaphors, the ball’s in your court India!

Getting Ready for India

Wen and I were originally going to visit Nepal and then India but due to poor weather in Nepal (and poorer planning on our part), we’re only going to India for a now massive five weeks.

I love India, having been there twice in 2006. While the second trip was purely a vacation, the first one was a visit to a technology conference and highlighted their seemingly inexorable rise to a leading power in the 21st century.

In preparation for this trip, I’ve been doing a bit of reading on the country. If you want to get a sense of just what India’s rise could mean and a sense of the staggering challenges they’re going to face to realize their full potential, I highly recommend In Spite of the Gods: The Rise of Modern India by Edward Luce. They book is about four years old now and it’s remarkable how prescient many of his predictions/comments have been.

As a tease, here are a couple of gems from the book.

On the organization of India’s economy:

Less than 10 percent of India’s dauntingly large labor force is employed in the formal economy [i.e., not farming], which Indians call the “organized sector.” That means that fewer than 40 million people, out of a total of 470 million workers, have job security in any meaningful sense. It means that only 35 million Indians pay any kind of income tax.

…

Of the roughly 35 million Indians with formal sector jobs … 21 million are direct employees of the government. These are the civil servants, the teachers, the postal workers, the tea makers and sweepers, the oil sector workers, the soldiers, the coal miners, and the ticket collectors of the Indian government’s lumbering network of offices, railways stations, factories, and schools.

…

Fewer than 1 million – that is, less than a quarter of 1 percent of India’s total pool of labor – are employed in information technology, software, back-office processing and call centers.

I found this fascinating. Despite all the wealth created by India’s massive software companies it’s a drop in the bucket in terms of employment. Moreover, there are only 7 million people employed in manufacturing in India vs. more than 100 million in China. It will be interesting to see if India can turn themselves into a private sector job machine.

Another theme in the book is how the political process is breaking down as people elect people from their caste to ensure more public sector jobs for their caste members (as you literally cannot fire a public sector worker even if they do no work). This is compounded by reputed criminals seeking election as a way of making themselves legally untouchable. The net result is widespread corruption in both the political and bureaucratic sector.

Here’s a snippet of one revealing interview with a politician:

A few months after election I visited Reddy in his office at the state secretariat in Hyderabad. I asked him what he was doing to provide irrigation to the poor farmers. A large man with an equally large mustache, Reddy was every inch the local satrap. The rooms and corridors outside his office resembled a bustling railway station with dozens of local supplicants awaiting the chance to ask a favor of their chief minister. “Every detail is being taken care of,” he replied to my question. And what are the details? I asked. “Everything is possible,” he said. What was possible? “Every little detail.” Can you provide me with some? “In time, we will fix everything,” he said. And so on. At one stage during this singularly uninformative interview, Reddy started scrambling around for a bit of paper. His secretary handed him something. “Yes,” he said, reading it. “Sir Arthur Cotton built lots of irrigation for the farmers in this area. He was British. You are British.” But what are you doing? “We are doing everything possible to ensure irrigation gets to the farmers.”

The book is full of examples like this – and, in fairness, also inspiring interviews with some remarkable officials who are building a great future for Indians (check out the section on New Delhi’s now-former mayor).

Two other interesting areas that the book explores: gender discrimination and the spending habits of New India.

Here are some stats on gender discrimination:

In large tracts of northern and western India, the so-called “gender gap” between boys and girls has sharply increased. The average ratio of births of girls to boys for India was 945 to 1,000 in 1991. By 2001 it had fallen to 927. … Gujarat has fewer than 900 girls to 1,000 boys. Punjab has below 800.

Put another way, over time, 3-4% of the Indian population may never be able to marry because there simply won’t be enough girls to marry. Given India’s size this will mean millions of sex-starved men. Moreover, the traditional solutions to this problem never really worked and are already fading. China’s got this problem too; India’s going to have to learn from it.

The spending habits are interesting as India is its own juggernaut and is going to have to decide what values it wants to promote. Will it adopt Western consumerism or create something uniquely Indian?

Alok [a successful entrepreneur] said his employees, most of whom are dressed such that they would blend in with their counterparts in San Francisco, never talk about money in cash terms. The measure their pay in EMIs, or equal monthly installments. These are monthly deductions from your bank account that continue for years, enabling you to pay off the car, motorbike, microwave, freezer, air-conditioning units, and flats you have not earned. You can even take an EMI holiday. … “Saving is the last thing on these guys’ [his employess] minds,” Alok said.

We’ve seen how this movie ends.

I can’t wait to go back to India. I recommend that everyone go there as it’s fascinating – and read In Spite of the Gods before you go to have a better sense of what is happening behind the scenes.

Geography is Destiny

When we visited Laos, I couldn’t help but wonder if it was so (relatively) poor due to its status as a landlocked country.

So I put together the following graphs comparing PPP Adjusted GDP per Capita (IMF or CIA number if IMF not available) for all countries that are not islands (my hypothesis is that they develop differently than continental countries-different political/environmental pressures, etc.) and at least 1,000 sq kilometer in size. I’ve coloured the graphs based on whether the countries are landlocked or not. I’ve skipped North America as there are no landlocked countries.

The results are pretty clear; on average, you’re worse off economically if you’re from a landlocked country.

Africa

5 of the 10 poorest countries are landlocked; 11 of the poorest 20. Only 1 of the richest 10 and 2 of the richest 20 are landlocked.

Asia & Middle East
5 of the 10 poorest and none of the 10 richest.

Europe

The most even of the bunch. Only 3 of the 10 poorest and 3 of the 10 richest. However, you could argue that Austria wasn’t landlocked for most of its existence (due to the Holy Roman Empire) and than Luxembourg is a statistical outlier due to its small size.

South America

It’s left as an exercise to the reader to interpret the chart below.