A Strike in India: Part III

When public sector employees in India go on strike, they create economic disruption on a scale proportional to the importance of the public sector. Consider the days when Indian Airlines, a public sector carrier, was the sole domestic airline. A strike by its workers would—just like that!—shut down all air transport in India. Even today, despite the presence of some private airlines, a strike at Indian Airlines cripples air transport within India. The same goes for banks, post offices, railways, land-line phones, colleges and universities, you name it. The price that India is paying for its socialist past—during which the “commanding heights” of the economy were brought under state control—is that it has been taken hostage by the public sector employees’ unions. The government remains keenly aware that there policies must never, never, never alienate the unions; otherwise, the unions would strike and bring the economy to its knees.

This is actually well understood by most Indians. I have known many Indians in my life but have not met even one who expressed any real sympathy for strikes by public sector employees. Most Indians seethe with anger at the indignity of having to deal with public sector employees who they see as underperforming, corrupt, and unaccountable people, living it up at taxpayers’ expense. To make matters worse, they are unable to see a way out of the situation; as long as the public sector remains dominant the government will remain vulnerable to threats by the unions, and as long as the government remains vulnerable to the unions’ threats it will be unable to privatize the public sector and cut the unions down to size.

The only way out of this vicious circle may be for economists to keep making the case that we are in a vicious circle and to highlight the indignity of a large and proud nation being held hostage by a tiny minority of its citizens. Another thing that economists could do—that no one else can—is to come up with a sound econometric estimate of the economic costs of having a humongous public sector, and to do whatever possible to make that rupee figure as much of a commonplace in India’s daily discourse as the GDP growth rate or the size of India’s foreign exchange reserves, two factoids that most educated Indians have at their fingertips.

Indians already know how awful a bind they are in with the public sector unions thanks to their socialist past. All that they need to win the fight against the unions is a vocabulary to express what they have known all along.

In the rest of today’s entry, I will talk about another aspect of the role of India’s public sector unions that has not been discussed much: the fact that they are an anti-democratic force.

Some Indians may see the Indian curse of periodic public sector strikes as an essential (or, at any rate, inevitable) part of the boisterous pageantry of democracy and may, as a result, look upon these strikes somewhat indulgently. I, on the other hand, have lately begun to see a darkly anti-democratic side to India’s public sector strikes.

In a democracy, government policies are supposed to be determined by—and only by—the popular will as expressed through the ballot box. Given that public sector strikes (and the threats thereof) surely do influence the Indian government’s policies (especially those regarding privatization of the public sector, the disciplining of underperforming or corrupt public sector employees, and the salaries of public sector employees), it follows that public sector strikes must necessarily be anti-democratic.

If one admits—as I believe most Indians would—that India’s democratically elected governments would (a) privatize the public sector faster, (b) try harder to punish underperforming and corrupt public sector employees, and (c) slow the rate of salary increases for public sector employees, were it not for the threat of strikes by public sector employees, then one would be admitting that public sector strikes do affect the decisions made by India’s governments. And that admission would be tantamount to an admission that public sector unions are an anti-democratic presence in Indian society.

It is abundantly clear that government policies in India on privatization, on the disciplining of underperforming or corrupt public sector employees, and on public sector salaries would have been significantly different were it not for the threat of strikes. In other words, the constant threat of strikes is pushing India off the course dictated by the ballot box. Moreover, this distortion is being brought about by a small minority—in the billion-strong Indian population—that happens to have the disproportionate power to cripple the economy through strikes.

Ideally, a government in a democracy should come to power by winning a majority of all votes. As long as it does not violate the Constitution, the new administration should be able to formulate its policies freely and govern freely during its term of office, at the end of which there would be another election in which the people would render their verdict on what the outgoing administration did while in power. Now, how can it be democratic if, say, ten thousand railway employees go on strike halfway through the government’s term of office, bring the economy to its knees by shutting down the entire rail network for a month, and compel the democratically elected government to abandon its privatization policies? And how would this be different from, say, a military coup?

I think it is high time for Indians to realize that the public sector is not just taking a bite out of the economy; it is handcuffing India’s precious democracy.

A Strike in India: Part II

Returning to the recent strike in India that I discussed briefly in my last entry, let’s consider the demands of the strikers. According to the PTI report that I mentioned in my last entry, some of the reasons given for the strike are:

• The current UPA government’s proposals to sell some of its shares in certain public sector companies


• Proposed “dilution” of a law by which any firm with 100 or more employees needs the government’s permission (almost never obtained) to fire any employee (I am not making this up!)


• Proposals to turn the Security Press, which prints paper currency, and the government mints into independent corporations


• Proposals to involve private companies in the modernization of the airports, which are all government owned and operated


• The postponement of the Pay Commission’s review of the salaries of public sector employees


• A new system of taxes on savings schemes


• Proposals to merge weaker public sector banks into the larger ones

This list of demands may leave many non-Indian readers scratching their heads in incomprehension. In America, where I live, fewer than 10 percent of private sector employees belong to trade unions. I happen to be a proud member of the faculty union at the C.W. Post Campus of Long Island University in Brookville, New York. We are no patsies; we have gone on strike during all of the last three contract negotiations (with varying degrees of success). But on all those occasions, we—that is, all members of our union—voted by secret ballot on the strike proposal before going on strike. And we struck about things like pay increases, health insurance, pensions, tenure, more time to do research, and other similar issues focused narrowly on our concerns about how our employer was treating us. Going on strike to protest against the economic policies of Bill Clinton or George W. Bush was, needless to say, never on the cards.

The key to the contrast between strikers’ demands in India and America lies in understanding that the main unions in India are extensions of its main political parties. Each political party has its own affiliated labor union and these unions dominate the labor landscape. As a result, the labor movement in India has become hostage to the larger political battles within India.

Another important contrast between strikes in America and in India is related to the use of coercion. I have already said that my union does not go on strike without taking a vote on the issue first. Moreover, the union never even tries to punish those who cross the picket line. We stay angry at our recalcitrant colleagues for a while, but pretty soon all is forgotten and forgiven. Things are very different in India. Violence is routinely used by union members and their hired toughs to shut down entire cities, and not just to prevent the crossing of picket lines by members of the striking unions. During Thursday’s strike, the entire state of West Bengal was shut down by the strikers. There was no public transport. All offices, businesses, schools, and colleges were shut down for the day. (The American equivalent would require that when Long Island University professors go on strike they shut down all activity on Long Island.)

The government does nothing to stop this. During Thursday’s strike, the West Bengal government issued special stickers for cars that were meant to take employees of information technology firms, which stood to lose heavily because their foreign clients would be unlikely to tolerate a daylong interruption of services, to work, hoping that those cars would be let through. But that did not happen; the stickered cars were blocked and their tires deflated. (Incidentally, the issuance of the stickers was an implicit acknowledgement by the government that compliance is coerced in Indian strikes; if those who wish to go to work could go to work, the stickers would not have been necessary.)

Jo Johnson’s report on the strike in The Financial Times of September 29, 2005, begins as follows:

Tensions between India’s Congress-led government and its communist allies are
expected to erupt on to the streets today during a nationwide strike by more
than 1m bank and airport workers against the administration’s economic
policies.

American readers must not assume that all those one million bank and airport workers were polled by secret ballot on the strike proposal. The union leaders, who usually are also members of the political parties that the unions are spawned from, make these decisions and the party muscle is then used to coerce compliance.

This deadly combination of unions affiliated to political parties and union decision-making that disdains grassroots democracy has reduced the Indian labor movement to a very costly joke at the nation’s expense and turned unions into pawns on the political chessboard.

The Communist Party of India-Marxist (or, CPI-M) is particularly reliant on this cynical use of labor’s power. It is actually a relatively weak party with a base limited to the Indian states of West Bengal (where I spent the first 23 years of my life and where I still have strong ties), Kerala, and Tripura. It is precisely its lack of an India-wide grassroots base that has led the CPI-M to rely so desperately on strikes and strike threats. It has no power except the power to use its labor unions to shut large parts of the country down and thereby inflict widespread economic pain.

The cynicism of the communists is reflected in a phrase in Jo Johnson’s report that may have startled non-Indian readers: “communist allies.” The CPI-M is actually part of a quasi-coalition with the UPA government. The communists actually sat down with the UPA and thrashed out a plan called the Common Minimum Program before the current government took office. The UPA depends on the communists’ support in parliament for its very existence. The communists could bring the UPA government down by simply voting against any bill that they do not like. So, why are they causing mayhem on the streets instead?

If the UPA government is brought down the CPI-M would lose all the advantages of being a member of the governing quasi-coalition. Moreover, they don’t want the right-wing parties to return to power. The strike was a pre-emptive move designed to scare the UPA government into not bringing any bill to parliament that the CPI-M would be forced to vote against (and thereby bring down the UPA government). The whole idea was to keep their unions happy by stymieing all attempts at reform and to at the same time ensure continued rule by the UPA-communist quasi-coalition.

I feel sorry for the UPA government and especially Dr. Manmohan Singh, its distinguished leader. With “allies” like the communists, who needs the opposition?

A Strike in India: Part I

Today, I will discuss a general strike that took place in India on Thursday, September 29, 2005. American readers may find in this discussion of the Indian labor landscape yet another reason to consider themselves lucky to be American.

Here are the lead paragraphs of a Press Trust of India report on the strike:

Industrial and commercial activities as also air services were affected in large
parts of the country today as the day-long strike by Left trade unions crippled
work in the public sector banks and insurance companies and government
undertakings to protest the UPA government’s economic policies.

The impact of the strike was the maximum in the Left-ruled West Bengal where life
came to a standstill with public transport, including train services, remaining
paralysed.

If this were not enough, the unions promised more to come. The PTI report quotes Gurudas Dasgupta, a union leader, as saying, “If the government does not yield to our demands, there will be a larger strike and for a longer duration. … Let the government read the writing on the wall and change its policies.”

It is instructive to see in all this how the Left is leveraging India’s socialist past, during which crucial sectors such as banking, railways, and air transport were reserved for the public sector, as a weapon in today’s political skirmishes.

Public sector employees in India have never been accountable for their performance or for their ethical choices. And their salaries have always been politically determined variables immune to the laws of supply and demand. (For example, bureaucrats’ salaries are determined by something called the Finance Commission, which happens to be staffed by—guess what—ex-bureaucrats! The last Finance Commission set wages so high that most state governments had very little money left over for developmental expenditure after paying the salaries.)

How do they get away with this? Simply by going on strike—or threatening to go on strike—from time to time. Because the public sector dominates all crucial economic gateways, a strike by public sector employees can impose such heavy costs on India that no government dares to privatize the public sector or to hold the public sector employees accountable for poor performance and get-a-load-of-this levels of corruption. Dr. Frankenstein’s monster can now take care of itself.

To the catalog of reasons against the expansion of state power we can now add a new one: the Indian experience shows that it is not the leaders at the top but the employees at the bottom that make a powerful public sector a formidable roadblock for even a democratic society that seeks to undo its past mistakes.

Perils of Foreign Aid

In spite of the best efforts of Columbia University’s Jeffrey Sachs and U2’s Bono, the idea of using foreign aid to help poor countries keeps taking it on the chin. And it is not just the pull-yourself-up-by-your-bootstraps Republicans either; academic economists—other than Sachs—haven’t lately found anything nice to say about foreign aid. (Academics can be pretty snarky; which is why I should perhaps have begun this post with “because of” instead of “in spite of.”) In the near future, I hope to discuss recent work on foreign aid by two IMF economists. In today’s post, I will discuss a recent paper by Francesco Caselli of LSE and James Feyrer of Dartmouth: “The Marginal Product of Capital,” National Bureau of Economic Research, August 2005, http://www.nber.org/papers/w11551.

Caselli and Feyrer find that you can get a lot more output out of one unit of physical capital in a typical poor country than in a typical rich country. (Using the juicy piece of jargon in the paper’s title, the marginal product of capital is higher in poor countries than in rich countries.) One would have thought that this would have provoked a large flow of capital from rich to poor countries. After all, people in rich countries who have savings could take their dollars, euros, and yens to the poor countries and buy machines, factory buildings, land, etc.—collectively called physical capital—which would then yield huge outputs, as one would expect from the (genuinely) high marginal products of capital in the poor countries.

Unfortunately, it doesn’t work out that way. We don’t see a large flow of private capital from rich to poor countries despite the latter’s high marginal products of capital. The question then is: Why? Why are the poor countries so starved of capital despite their high marginal products of capital?

Caselli and Feyrer claim to have found an answer: capital goods—machines, factory buildings, etc.—are way too expensive in poor countries. This prevents the financial return to capital in poor countries from rising above rich-country levels despite the high marginal product of capital in poor countries. Consequently, you don’t see private capital flowing from rich to poor countries.

Let’s consider a simple made-up example. Suppose $10 buys you one unit of physical capital—say, a machine of some sort—in rich countries and this additional unit of capital yields $2 of additional output—this, recall, is the marginal product of capital—in every subsequent year.

Now, suppose a unit of physical capital in a poor country yields $4 of additional output annually—that is, the poor-country marginal product of capital is twice the rich-country marginal product of capital. But suppose—along the lines of what Caselli and Feyrer found—that you need $20—not $10—to buy one unit of physical capital in a poor country. Then, the poor countries’ advantage of high marginal products of capital is neutralized. A rich-country investor can get the same annual payoff from $20 irrespective of where the money is invested. Therefore, he or she has no particular reason to invest in poor countries.

Now, what does all this have to do with the effectiveness of foreign aid in helping poor nations out of poverty? Caselli and Feyrer have explained why private money does not flow from rich to poor countries. But what does that have to do with foreign aid?

We all know one important lesson of supply and demand: whatever’s abundant is also cheap. If there is a sudden influx of, say, immigrant labor, wages will fall. And if there is an inflow of foreign capital, the return on capital will fall. Going back to my example in which a $20 investment generated $4 of additional annual output in both the rich and the poor countries, let us consider how foreign aid would affect the situation.

The greater availability of capital in the poor countries would reduce the return to capital: $20 would now generate, say, a mere $3.95 of additional output every year. On the other hand, the (slightly) reduced availability of capital in the rich donor countries would leave the rich-country return on $20 either unchanged at $4 a year or maybe even a bit higher, say, at $4.01 a year. As a result, investors in poor countries—these could be rich-country citizens or poor-country citizens—would take their money out of poor countries and send it to rich-countries.

In fact, this reverse flow of capital from poor to rich countries would continue till the earlier parity of the return to capital is restored. The effect of foreign aid would be totally neutralized.

Think of it in terms of hydraulics. Think of it in terms of water seeking its own level. If there are several connected bodies of water, pumping water out of one and into another in an effort at raising the latter’s level would, quite naturally, be a complete waste of time.

Bummer!