One would think that this decision would be received in the UK (one of four partnership in the Eurofighter consortium) with some reflection on why the bid lost out? Rather, it is leading to some fairly childish complaints emerging from the once great colonial power that suggest the UK hasn’t entirely gotten used to its new place in the world.

For one, comments from Britain’s politicians suggest that the Typhoon is actually the far better aircraft and the Indians are essentially idiots to pick the Rafale. It is hard to comment on which of the two are technically superior, but someone should tell David Cameroon that calling your prospective client an idiot is not the best way to get back in the game. Moreover, even the UK’s own analysts suggest the Typhoon may eventually be the better aircraft, but one that the Brits themselves don’t support at the moment. Then why should India?

The Brits go one further, asking how India has the temerity to accept millions in development aid and not reciprocating by giving the UK defence contracts worth several times as much.

Here’s why. For one, a little bit of aid does not a true ally make. The Calcutta Telegraph has an excellent article that highlights how, over the past several decades, it is the French and not the Brits that have stood by India in its time of need. Whether politics was a consideration in the final decision is hard to say, but again the Brits would do themselves a favor by looking at their own actions rather than blaming India for poor judgment.

Second, the question of development aid is, in general, irrelevant to the fighter jet order. It cannot be denied that India can use help in poverty alleviation but to my knowledge, has never asked Britain for aid money. Indeed, it is India that does Britain a favor by allowing it to assuage its colonial, developed world guilt. Indeed, this may be a good time for India’s Prime Minister to preempt the British debate by banning aid from the UK. You keep your aid money, we will keep our freedom to make our own decisions, which we gained when you left the country in 1947. Fair trade.

First, it decrys the increasing influence of philanthropic institutions backed by private individuals in public policy. Two examples:

In 2008 Koch, or rather the Charles G. Koch Charitable Foundation, entered into an agreement with Florida State University to support the school’s economics department. The catch, according to the St. Petersburg Times was that Koch would have the authority to approve who ultimately filled the positions.

Gates (The Bill and Melinda Gates Foundation) financed the New Teacher Project to issue an influential report detailing the flaws in existing evaluation systems. The National Governors Association and Council of Chief State School Officers developed the standards and Achieve, Inc., a non-profit organization, coordinated the writing of tests aligned with the standards, each with millions of dollars from the Gates Foundation. The Alliance for Excellent Education received half a million dollars “to grow support for the common core standards initiative.

Concerns have been raised previously, including by the NYTimes and BMJ, that philanthropists may today have undue influence over public priorities and spending in ways not previously imaginable. A recent study found that giving by UK foundations for international development was just under half that of the DFID. Relying on philanthropy to solve public good challenges is simply a delegation of public responsibility but increasingly philanthropy is seeking to not just complement but change public financing, and this is not without consequence.

Morris, however, adds another critical argument. That such big ticket philanthropy is actually being subsidized by the state – and by extension the taxpayer.

We should bear in mind that what is reported as charitable giving by the 1% significantly overstates the actual private sacrifice, as economist Uwe E. Reinhardt points out. If the wealthy donate $10,000 and are in a combined 50% federal, state and local tax bracket their effective sacrifice is $5,000 and society as a whole, without its advice and consent, subsidizes the rest.

In the last few years a growing number of billionaires have established their own private foundations. They receive an immediate tax deduction for the full value of their contribution even though the foundation is only required to give away 5% of that endowment each year. Which means that for every $1 million contributed, which can mean a $500,000 loss to the public sector, the foundation must give away only $50,000.

This has long been the elephant in the room that no philanthropist will acknowledge. Most large foundations do not operate as charities – which spend all of their money each year. Rather, they operate as investment funds with large grantmaking teams, that spend only modest amounts on actually charitable causes. The rest goes to preserve the institution.

Charity enthusiasts also claim that philanthropy supports the public good and in many cases that is indeed the case – responding to humanitarian disaster, feeding the hungry, and supporting the local community. But the largest philanthropists are not content with those modest goals and are targeting more challenging issues – reforming public education, improving health systems, addressing the global AIDS epidemic, encouraging entrepreneurship.

These more ambitious objectives often tread on the public space. This would be good, if it led to a debate on how these challenges should be addressed. In reality, however, the wealth of these groups mean they not only advocate a particular viewpoint but also can finance its implementation. And the general popularity of philanthropy implies organizations, and viewpoints, not affiliated with them get short shrift in public opinion. The net result is not to increase, but decrease, debate.

This may well be unavoidable until philanthropists become more self-critical but does the taxpayer have to subsidize Bill Gates’ view on how education should be offered to people? Particularly when people are not even motivated by the tax incentive?

Over at the WSJ’s Speakeasy blog is a story much more relevant to technology for the masses – about the Aakash Ubislate 7+. This 7-inch table runs Android, has support for 2.5G GPRS and wifi (the OLPC did not have both), is currently shipping, and one month after launch has pre-orders for over 2 million units – essentially more than the OLPC has delivered in its either 6+ year lifetime.

This obsession with a project that failed long ago is unhealthy for a number of reasons.

First, it encourages the disc0nnect between the real world and the development community – represented by the OLPC organization and those that comment on it. Much of this community believes it knows best how to help the poor and what technology developing countries deserve. Meanwhile, the poor (or the aspiring middle class in this case), are busy helping themselves to technology that is good enough.

Second, (and this doesn’t happen often), it vindicates a decision taken by the Indian government years ago to refuse rolling out the OLPC in India. Back then critics claimed India was reinforcing the digital divide amongst its citizens. In hindsight, it seems, the Indian government may have saved the taxpayer billions and seems to have had a better grasp of how to incentivize the private sector to deliver a more functional product for less. This is a useful lessons to governments – if they must support such initiatives it is not by subsidizing purchases but by ensuring a large enough market exists for the private sector to do what it does best.

Finally, and perhaps most important, it allows Mr. Negroponte to hog more money and media attention. The founder of the OLPC has a long history of failing to achieve his own constantly downsized objectives. The OLPC  has  captured the attention of millions of do-gooders in its lifetime and has helped raise the profile of many. But even if it now reaches the USD 100 target, lower priced alternatives already exist.

In any darwinian system, a project that failed so completely and spectacularly would have been shuttered long ago. So it is a sad commentary on the non-profit sector that the OLPC plods along. It is time this relic too went the way of the dinosaur.

Commentators have compared this victory to the “freedom movements” in the Middle East. But there are few comparisons and this may well prove to be Pyrrhic victory. For while battling the corruption endemic in India’s political and administrative systems is certainly laudible, the way by which Anna Hazare and his supports plan to do so will only undermine India’s political freedoms and the faith the majority of Indians still hold in the system.

To control widespread corruption, the proposed Lokpal bill forsees the creation of an independent ombudsman consisting of representatives selected through a “participatory process.” Such an ombudsman would have widespread powers to investigate and prosecute anyone, yet be neither representative nor accountable to any branch of government.

Middle class Indians will probably say that all branches of government have failed them and they will be at least partly correct. The average middle class Indian today prefers to avoid any contact with the public sector. This apathy also extends to elections, where the middle class rarely participates. For them, the easiest solution to corruption in the system is simply to create an independent ombudsman.

Yet, only utopian naivete can explain why Hazare and his supports expect that an independent ombudsman would be any less corrupt than a system that has at least some checks and balances. Rather than fixing corruption and rent-seeking, it would simply move the problem from one place to another.

Worse this approach highlights, and will likely broaden, the rift between the middle class and the rest of India.

For while the middle class may have tuned out of participating in India’s politics, the majority of Indians continue to believe in the political system. They participate in elections and regularly reward or punish their politicians with amazing acuity. It is this majority that kicked out the BJP for suggesting India was shinning, when they were not; and this very majority that re-elected the Congress with a strong majority last time around, for proposing the motto of “inclusive growth.” It is this political vitality that has led to a competition amongst the states to grow faster, and that has taken Bihar from being a basket case to a success story.

So while the political system may not be working for the middle class, it is working for the many that continue to believe in it. Therefore, this middle class revival should not be compared to the protest movements in the Middle East. Rather, it is a tamer version of the yellow shirt protest movement in Thailand in 2008, which split Thai society apart. And it is a reflection of the middle class’ desire to blame someone else for their own failures.

Middle class Indians tend to see themselves as victims of corruption. Yet, they have done little about it. Facebook, Twitter, and the efforts of a Gandhian make it easy for them to let their anger be known. But Gandhian ideals require personal engagement and sacrifice, which is lacking from this movement. If Indians opt out of the political system and condone corruption in broader public life, they should not be surprised when it becomes endemic. And without a change in that apathetic attitude, it is only a matter of time before the ombudsman itself becomes a source of corruption, rather than a solution to it.

In 1983, I founded Grameen Bank to provide small loans that people, especially poor women, could use to bring themselves out of poverty. At that time, I never imagined that one day microcredit would give rise to its own breed of loan sharks.

Commercial microcredit has given microfinance a bad name and suffered for it. Following on a political backlash against MFIs in India, shares in SKS Microfinance have plunged to less than half of their peak in Sept-Oct 2010. The industry has seen collection rates fall to 20%, from the enviable 99% it enjoyed previously. The state of Andhra Pradesh, where much of the lending is concentrated, has passed a new law substantially restricting the activities of MFIs and the national government and central bank are likely to come up with new nationwide regulation as well.

To believe industry pundits much of this has to do with political convenience. Asking the poor not to pay their debts is a populist measure to score easy political points. MFI proponents have also indicated that the industry itself needs to be better at elaborating on the benefits it provides.

Is commercial microcredit an illustration of mission drift?

Yet it cannot be so simple. If MFIs do provide an irreplaceable service to the poor why are those same people happy to see MFIs go out of business? Perhaps the backlash is simply a reaction to what we know is wrong with microcredit, and to how far it has drifted from its roots:

Commercialization has been a terrible wrong turn for microfinance, and it indicates a worrying “mission drift” in the motivation of those lending to the poor. Poverty should be eradicated, not seen as a money-making opportunity.

We have known for some time that microcredit may not be a panacea for poverty. Neither the impacts nor mechanics of poverty alleviation through microcredit are obvious. Microcredit, as a business, is immensely successful. Microcredit, as a tool for socio-economic development has been of questionable effectiveness.

Rather than address this obvious disconnect MFIs in India have been busy growing big. And some have been busy cashing in. Little thought has been given to fixing what does not work or explaining what we do not understand.

What is clear is that the industry, which emerged with the express purpose to help lift people out of poverty, has simply neglected the most basic of infrastructure requirements such as a credit bureau. If the backlash has been politically convenient for bureaucrats and politicians, the lack of any emphasis on development has been economically convenient for the industry.

What happens in microcredit will happen in any social business

No doubt the industry will be forced to address these shortcomings and may move closer to the social roots from which it had drifted. However, this backlash exposes a fundamental contradiction most social businesses face.

A growing view in western thinking has been that for-profit business models can serve as a complement or alternative to philanthropy and public spending. Failing public schools can be replaced by (or have been replaced by) cheap private ones; ineffective health systems can be replaced by private clinics; lack of electricity, water, and other basic necessities can all be addressed by private providers.

This view, that difficult social issues can be addressed by businesses “at the bottom of the pyramid” has been propogated by many and has led to a rush of professionals from investment banking and management consulting to the sector. The logic is that since public money is insufficient to tackle these issues, profitable approaches will encourage the trillions of private wealth to enter this field. JP Morgan even went so far as to call impact investing an “emerging asset class.”

Yet, this entire movement can trace its roots back to microcredit. And if microcredit hasn’t proven to be particularly successful at balancing social impact with business returns, can impact investing do better?

We expect that social businesses (to use the term loosely) provide social impact as a direct corollary to the business objectives. Thus, microcredit helps people out of poverty through provision of loans. Yet, the two impacts are rarely in alignment – more loans to an individual does not translate into a faster climb out of poverty, just to indebtedness. Private education may be better than public education and help empower a generation. But a private provider, once entrenched, would be encouraged to maximize profits to the point acceptable to customers – yet, it is hard to imagine how higher fees could possibly benefit the poor. The same can be said for healthcare providers. They, like private schools, would be encouraged to provide the lowest level of service acceptable to customers, so long as it beats that of the public school.

If we are to ensure this does not happen in the broader universe of social business and impact investing we must first be intellectually honest about one thing.

Social businesses are essentially businesses. Private capital may help them grow but it brings with it a strong tendency to turn social businesses from being social to being businesses.

For investors, this means if we wish an organization to remain true to its social objectives we can ask it to operate as a charity. Alternately, we can require it to meet its social objectives either through regulation or incentives. But to expect that social businesses will, without being coerced, somehow not drift from their social objectives towards their business imperatives is naive.

For businesses themselves, it means they must acknowledge this dichotomy and be clear about where they position themselves. Being seen as social comes with a responsibility to live up to that promise, or risk a subsequent backlash when the disconnect between promise and reality is exposed.

Measuring the American Dream

Policy debate on economics has usually focused on economic inequality – which has been growing in America, together with many Asian countries, including India. The financial crisis has brought home this point in very simple ways, as reported in a Pew study:

Between 1979 and 2004, the real after-tax income of the poorest one-fifth of Americans rose by 9 percent, that of the richest one-fifth by 69 percent, and that of the top 1 percent by 176 percent.

That may not, in and of itself, be unfair. But it does become so if only a few people ever have a chance to be in that top one-fifth or top 1 percent. That is where socio-economic mobility becomes important. Americans believe they live in a particularly meritocratic society that allows its people to move up the ladder – the quintissential American dream. Ben Bernanke called it thus:

Although we Americans strive to provide equality of economic opportunity, we do not guarantee equality of economic outcomes, nor should we. Indeed, without the possibility of unequal outcomes tied to differences in effort and skill, the economic incentive for productive behavior would be eliminated, and our market-based economy — which encourages productive activity primarily through the promise of financial reward — would function far less effectively.

Yet, it is increasingly clear that the twin assumptions therein – that a) there is equality of economic opportunity, and b) effort and skill are the only or even the most important variables to success – are wrong. It turns out that economic mobility depends much more on our birth and our upbringing than our own effort and skill. One measure – the extent to which individual and parental earnings are correlated – suggests that:

…about half of the advantages of having a parent with a high income are passed on to the next generation. This means that one of the biggest predictors of an American child’s future economic success — the identity and characteristics of his or her parents — is predetermined and outside that child’s control.

Malcolm Gladwell called this “accumulative advantage” in his book Outliers – the phenomenon of the rich getting rich and the poor getting poorer. Such accumulative advantage should not be a surprise – even if the extent of its influence is. Yet, if we are to strive for a meritocratic society that offers everyone a chance at success a critical question must be to what extent does a state manage to shield its population from the ravages of destiny?

On this point there is much evidence within the OECD showing that America falls far behind European and particularly Nordic countries. On the previous measure (earnings elasticity) the USA is just below Italy and the UK, with the least correlation in Denmark, Australia, Norway, Finland, and Canada.

Overcoming “accumulative advantage”

There are, then, two ways to measure a society – to what extent is it equal (more economic equality), and to what extent is it just (providing economic mobility). America hopes to be just, providing equal economic opportunity while accepting higher levels of economic inequality. Europe, meanwhile, believes that economic opportunity will never be truly equal and thus seeks to overcome or protect from hereditary disadvantages. Ironically, Europe’s model proves not only to be more just, but also more equal (with sufficient correlation between equality and mobility).

Ironically, though, as Europe’s model proves to be better, its very existence is threatened for being financially unsustainable. European governments, faced with massive debt, must choose which social programs to cut.

India is thus offered two models – one that fails to sustain itself, while the other that fails to deliver on the goal of an equal and just society. What do the policy choices of Indian politicians reveal about their preferred model?

India has since liberalization in 1991 been trying to seek high growth. Such growth ensures some form of economic mobility – incomes of successive generations increase along with overall growth. Put another way as the pie gets bigger everyone gets a bigger absolute part of the pie.

Yet, policy emphasis on growth itself resulted also in a more unequal society as those with a privileged birth – with at least well-educated parents – benefit disproportionately from the opportunities provided by liberalization. They do better than their parents. Meanwhile, the farmer in the hinterland – without the means to send his children to an English speaking school – must see his children continue to toil the land or seek opportunity in low-paid manual labor. Both equality and relative economic mobility thus go down.

In recent years, however, India has recalibrated its policies to be more welfare focused. In particular, a realization that the country cannot survive united nor compete unless everyone benefits, has brought forth some interesting compromises.

For one, government is starting to accept its welfare role in some areas – as illustrated by the rural employment guarantee scheme. Second, there has been some political pressure on competitive capitalism – this explains the edict of Andhra Pradesh’s politicians to the population not to pay back microfinance loans. And finally, companies and their wealthy seem to be taking some responsibility for good governance into their own hands – evident in the massive philanthropic efforts of individuals such as Azim Premji who focuses disproportionately on strengthening public schools, rather than creating a more efficient, but perhaps more expensive, private system.

Thus, India returns ever so often to the left, while seeking to convince the world it is the future of capitalism, with Ambani’s multi-million dollar mansion a clear reminder to those that may forget.

There is, therefore, hope that the disadvantaged in India will still see the benefits of growth. But a sustainable middle path requires combining two hard to reconcile social preferences – people must be highly motivated for the spoils of success (as in America and Asia), but hold a healthy regard for the welfare of others to allow for the redistribution of those spoils (as in Europe). To date no society has managed to do so, though the voluntary redistribution of wealth by the newly wealthy may provide some temporary relief.

India’s growth over the past several years has certainly raised wealth. But it has also led to a more unequal and a more unjust society. Of course, no society can be expected to completely shed its bias towards aristocratism. That would be against human nature. But the purpose of a state is not necessarily to change human nature, but rather to help those disadvantaged by some elements of it. In that, the American Dream has failed to become reality for too many people. India, looking for a dream of its own, can certainly promise – and ask – better to its citizens.

To be clear, BP must carry substantial blame for what happened. And given the very public pressure on it, it is clear that BP will pay both now and later. Indeed, President Obama made it clear that the escrow account is “not a ceiling.” But there is plenty of blame to go around beyond BP. What of the others?

Let us start with the oil industry itself. BP has been criticized for being totally unprepared to handle this oil spill, despite having submitted contingency plans for a much larger spill. Yet, virtually the same contingency plan, prepared by the same consultancy, was submitted by all other companies. In short, nobody in the industry ever expected or planned for this spill.

What about the regulator? BP might have been at fault for not being prepared, but the regulators did little better. It is, after all their job to hold oil companies responsible for their preparedness and safety standards. But rather than ensure accountability, regulators have ensured confusion prevails, in order to keep the oil flowing. As the NY Times reported:

Deepwater rigs operate under an ad hoc system of exceptions. The deeper the water, the further the exceptions stretch, not just from federal guidelines but also often from company policy.

So, for example…when company officials wanted to test the blowout preventer, a crucial fail-safe mechanism on the pipe near the ocean floor, at a lower pressure than was federally required, regulators granted an exception, documents released last week show.

And finally, what about the American people themselves? Deepwater oil exploration started in the Gulf in the 1970s, but expanded in the 1990s after new technology made it possible. But it was also encouraged by federal incentives. At the heart of that expansion has been America’s addiction to oil. This is a general and global challenge – as easily accessible oil reserves are depleted, oil prices go up and US citizens complain about their commute getting more expensive. The US government then encourages oil companies to go deeper under the ocean and further into the wild for oil, and simultaneously encourages them to ignore its own regulations. 

Of course, when things go wrong someone must be blamed. So much the better if that evil is foreign and not the American President or the people themselves. Thus, rather than blame regulators who granted BP the fatal exception, President Obama has taken to bullying a foreign owned corporation. Quick to find someone to blame, and to score political points, the US Congress too has already found BP guilty. Yet, Congress conveniently ignored that for every safety rule that BP might have broken, it had federal permission to do so.

Ironically, the American government and industrial lobby have in the past protected American corporations guilty of massive damage abroad. As John Elliot points out, the US protected Union Carbide and its CEO Warren Anderson in the aftermath of the Bhopal gas leak in 1984.

Since then Anderson has been protected by the US business-political establishment from being extradited to India to answer for the appalling human and environmental damage wrought by his company’s gas leak in Bhopal a few days earlier. That was one of the world’s worst industrial disasters, leading to the death of over 5,000 people and continuing ill-health of over 500,000.

Now that same American establishment that has protected Anderson has been pillorying Tony Hayward, BP’s chief executive, following BP’s oil leak in the Gulf of Mexico. The tirade has been led by President Barack Obama, who has been behaving like a spoiled child for the past 50 or so days, casting around for someone to blame when it is his own officials who are primarily at fault.

The real tragedy in all of this is that the focus on finding someone to blame will prevent a fix of the problem. In particular, two issues will remain unresolved.

First, the regulators that encourage risky oil drilling will not be held accountable. By finding a single organization to blame, the US President has made it easy to explain the disaster: “BP was reckless.” Yet, such a simple explaination hides the truth – that at fault was a complex system of oversight and ownership – and prevents fixing what does not work.

Second, and more important, it hides the fundamental fact from the US public – that deepwater drilling is dangerous. If the US wants to avoid another Gulf disaster the only way to do that is by not drilling in the Gulf. And the only way to do that is to reduce America’s dependence on oil. Of course, that requires some difficult changes in America’s lavish lifestyle. But that is hardly a message President Obama can deliver to his public – that it is their lifestyle that led to the Gulf’s oil spill.

In “What’s wrong with democracy” Loren Samsons points out that a democracy requires leaders that are willing to challenge the popular will. This is a startling contrast to modern political leadership, as demonstrated by President Obama. The tragedy is that the political posturing of Obama and Congress will force us to repeat the mistakes that led to the Gulf oil spill. And those that are really responsible for it will not be held accountable.

Writing on Desicritics on the Women’s Reservation Bill, Sandeep Bansal provides us with the equivocal conclusion that “reservation is an easy shortcut,” that while laudable in parts must have “proper backup steps to have any significant impact.” As a counterpoint, I believe it is worthwhile looking again at the very valid questions he raises, viz:

• Do we need reservation for women?
• Is reservation really needed at the highest level?
• Are reservations really going to make any difference?
• Do we need sub-quotas?

Do we need reservations for women?

That, of course, is a matter of opinion. More important is the question of why we might want reservations. Two reasons come to mind.

At the level of principle, this might be because in an ideal, fair, and just society lawmakers would represent their consituents – in the ratio of the constituents. Ideally, that representation should emerge naturally – not by legislation. But as Sandeep points out, reservations are one way to empower women and to change attitudes, so as to lead to that natural order.

A second reason, often overlooked, is that such a policy is likely to increase the pool of talent needed at the top of our political class. Few would argue that India’s politics suffers from a lack of credible leaders. To the extent that that is the result of limiting our talent pool to men only, this policy is likely to increase the number – if not the probability – of better leaders.

Is reservation really needed at the highest level?

Sandeep argues that reservations might be necessary at the lowest levels to “bring about social change”, but perhaps at the highest level “merit should prevail.” And he argues that there is a good reason for the lack of women at the top – their family duties.

This explaination is hardly satisfactory. Women may well have “family duties” but that is not why they do not reach the top. They fail to do so because they often have no opportunity to balance that “duty” with their professional aspirations. Where such opportunity is provided they manage to be both good mothers and good leaders. This is evident from a recent NYTimes article on India’s banking industry:

HSBC, JPMorgan Chase, Royal Bank of Scotland, UBS and Fidelity International in India are run by women. So is the country’s second-biggest bank, Icici Bank, and its third-largest, Axis Bank. Women head investment banking operations at Kotak Mahindra and JPMorgan Chase and the equities division of Icici. Half of the deputy governors at the Reserve Bank of India are women.

One in five of India’s big bank, insurance and money-management companies is headed by a woman, according to a study by the headhunting group EMA Partners. By contrast, there are no women leading major American or European banks, and no woman has ever run a Wall Street investment bank.

Are reservations going to make a difference?

Sandeep argues that a reservation policy brings with it the risk of extending that policy to perpetuity. Yes, that risk is certainly there – but do the immediate resulting benefits outweigh that possibility? And even if that risk remains, it is a risk derived not from the principle (of better representation) itself, but from how that principle is translated into policy. So, avoiding that risk is simply a matter of better policy design – for instance by having rotating quotas to avoid institutionalization of the positive discrimination.

Sandeep concludes his answer to this question by saying it is too early to tell. But is it?

Enough countries now have quotas of one form of another to provide indications of the impact – both on performance of politicians and on public attitudes to women at the top. Indeed, if the objective of this policy is to encourage greater female representation and change attitudes, India’s own experiment with reservation at the panchayat and sarpanch levels offers substantial hope for a positive outcome:

Here, the evidence from a study of councils in urban Mumbai points to a positive effect. Women who have gained political office are more likely to run and to win in elections where there are no quotas.

Both men and women report a higher assessment of women’s performance as leaders once they have experienced it. A study of the state of West Bengal suggests that bias against women leaders remains, but is less likely to be based on the assumption they will prove incompetent.

Do we need sub-quotas?

For one thing, sub-quotas institutionalize into perpetuity exactly the kind of positive discrimination that Sandeep cautions against earlier in his post. Moreover, he argues that “real empowerment” can only happen at the bottom, but we need proper representation “across communities” at the top.

It is true that a women’s reservation bill without sub-quotas will benefit certain sub-groups more than others. But is that reason enough for sub-quotas? Or, can that problem be overcome in other way?

Which groups benefit will depend very much on which seats are reserved. For instance, if a muslim-majority constituency is reserved for women it is extremely likely that most parties will field muslim candidates and the winner would be a muslim. Hence, again the problem of unequal representation against communities is one of design (i.e. which seats are reserved), rather than one of principle (i.e. having sub-quotas).

Finally, of course, we must also acknowledge that a single bill cannot solve all social injustices. It is useful, therefore, to remind us of why we should have a reservation policy. If the objective is to increase women’s representation, then this bill should address that problem, regardless of others that exist in society.

Conclusion

Women’s reservation has been a long-time coming. This bill may not be the best solution or only solution to empowering women. But let not the perfect be the enemy of the good.

Activists, generic producers and their allies will applaud trading future gains for access to cheaper drugs now. India’s government, however, should look at the nation’s longer-term interests. Apart from living up to the country’s international commitments, decisions like the High Court’s Nexavar ruling will deter investments in innovations that will help secure India’s future—doing more for the nation’s health and economy than copying can. After all, access to copies isn’t worth much when there’s nothing to copy.

Breaking down the argument

Mr. Cass’s conclusion is based on a series of arguments that must first be recognized and that go something like this - national health is heavily influenced by the availability of new drugs, drug innovation is driven by investments in R&D, R&D investment is tied to patent protection, and patent protection must be absolute for it to encourage R&D investment. Since the HC decision weakens (in Mr. Cass’s interpretation) patent protection, it results in reduced drug innovation and hence puts at risk the country’s state of healthcare.

There are four arguments in this causal chain and each of them is at least partly wrong. Let us take them in turn.

What was the HC decision about?

First, does the HC decision weaken patent protection? No. In fact, the case was not about patent protection and the court did not even consider whether Cipla had a patent for its generic copy of the drug. Rather, the question being addressed was whether a company needs to have a patent to receive marketing approval from the drug regulator (the DGCI). As BNET reported, “The high court’s ruling suggests that the DCGI should look only at safety and efficacy in granting approvals, and leave patents to the courts.”

Bayer, in its case, had tried to prevent the DGCI from granting a license to Cipla on the grounds that the drug may be “spurious.” But as the court pointed out not all drugs made in India are spurious nor does a patent guarantee safety. It is the DGCI’s job to ensure a drug is safe. Patents, however, are to be enforced in court.

Therefore, this decision does not weaken existing patent protections. What it does do is prevent multinationals from raising patent protections beyond what has been provided for in existing law – which according to the WTO is very much within the provisions of the TRIPS agreement.

Does patent protection increase R&D investments, which increases drug innovation?

The next two causal steps in Mr. Cass’s thinking are that patent protection would lead to increased R&D, which in turn would lead to increased innovation. Yet, this is clearly wrong. It has been known for quite some time that drug R&D investment by big pharma is driven not by patent protection, but by expected returns. While patent protection does help ensure expected returns, the primary variable is the size of the market. This was known as the 10/90 gap. Today it is visible in the lack of investment by big pharma into TB, malaria, Chagas’ disease and other tropical or developing world diseases. In other words, no amount of patent protection will get big pharma to invest in the diseases that inflict billions of India’s poor – simply because they do not constitute a viable market.

Nor does increased R&D investment and protection lead to drug innovation. A study from Thailand “found no increase in technology transfer and foreign investment as a result of increased patent protection.” On the contrary, increased patent protection can lead to perverse incentives that actually reduce drug innovation, encouraging companies to invest not in R&D but in protecting their patents.

What improves national health?

The last argument Mr. Cass makes is that national health is tied to drug innovation and availability. On this he is certainly partly right. National health will improve as drugs become available to tackle diseases prevalent in the local context. However, he overlooks two critical aspects of his argument.

First, healthcare delivery issues aside, drugs for many diseases will never be available in India till people are rich enough to afford them. And second, that drug availability is not simply a matter of innovation but of price. In other words, national health will improve not only if a drug has been created for a disease, but if it is also affordable for the local population.

How much patent protection?

It would appear each of the four assumptions Mr Cass makes are partly or entirely wrong, rendering the article invalid. Mr. Cass also ignores a growing body of evidence, including scientific studies, that suggest that the patent system is reducing innovation in general and drug R&D in particular.

In view of this, the HC judgement seems to be a good balancing act. It retains the letter of the law and does nothing to reduce patent protections. But it does clarify the division of labor between the courts, the DGCI, and the Intellectual Property Appellate Board. Most important, it prevents multinationals from trying to raise patent protections through judicial action, rather than by legislation.

Mr. Cass, who is Chairman of the Center for the Rule of Law, should have been elated at the judgement. Instead, he is content to condemn India’s poor to death for the benefit of a future not yet certain (and for Bayer’s profit). This may be an easy tradeoff to make ensconsed in Boston. But I would go with the judge’s interpretation of the case.

In order to help get some kind of bearing on the impact of microfinance, we present here a short literature review on how microfinance affects the lives of the poor. The selected papers are organized into three categories: the broader context, the impact of microcredit, and the impact of microsavings (surprisingly, there seems to have been more work done on savings than credit).

The broader context

Effects of Financial Access on Savings by Low-Income People
Fernando Aportelo, Bank of Mexico
December 1999

This paper assesses the impact of increasing financial access on low-income people savings. Effects on households’ saving rates and on different informal savings instruments are considered. The paper uses an exogenous expansion of a Mexican savings institute, targeted to low-income people, as a natural experiment and the 1992 and 1994 National Surveys of Income and Expenditures. Results show that the expansion increased the average saving rate of affected households by more than 3 to almost 5 percentage points. The effect was even higher for the poorest households in the sample: their saving rate increased by more than 7 percentage points in some cases. Furthermore, the expansion, in general, had no effect on high income households. In the case of informal savings instruments, evidence of crowding out of these instruments caused by the expansion is limited. Results do not rule out the possibility that a considerable fraction of the increase in households’ savings could have come from new savings.

Do Rural Banks Matter? Evidence From The Indian Social Banking Experiment
Robin Burguess & Rohini Pande; LSE, Yale University
August 2003

Lack of access to finance is often cited as a key reason why poor people remain poor. This paper uses data on the Indian rural branch expansion program to provide empirial evidence on this issue. Between 1977 and 1990, the Indian Central Bank mandated that a commercial bank can open a branch in a location with one or more bank branches only if it opens four in locations with no bank branches. We show that between 1977 and 1990 this rule caused banks to open relatively more rural branches in Indian states with lower initial financial development. The reverse is true outside this period. We exploit this fact to identify the impact of opening a rural bank on poverty and output. Our estimates suggest that the Indian rural branch expansion program significantly lowered rural poverty, and increased non-agricultural output.

The Economic Lives of the Poor
Abhijit V. Banerjee and Esther Duflo; Abdul Latif Jameel Poverty Action Lab, MIT
October 2006

This paper uses survey data from 13 countries to document the economic lives of the poor (those living on less than $2 dollar per day per capita at purchasing power parity ) or the extremely poor (those living on less than $1 dollar per day). We describe their patterns of consumption and income generation as well as their access to markets and publicly provided infrastructure. The paper concludes with a discussion of some apparent anomalous choices.

The Impact of Microcredit

Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila
Dean Karlan, Jonathan Zinman;
Yale University, Darthmouth College, IPA, Financial Access Initiative, MIT Jameel Poverty Action Lab
July 2009

Microcredit seeks to promote business growth and improve well-being by expanding access to credit. We use a field experiment and follow-up survey to measure impacts of a credit expansion for microentrepreneurs in Manila. The effects are diffuse, heterogeneous, and surprising. Although there is some evidence that profits increase, the  mechanism seems to be that businesses shrink by shedding unproductive workers. Overall, borrowing households substitute away from labor (in both family and outside businesses), and into education. We also find substitution away from formal insurance, along with increases in access to informal risksharing mechanisms. Our treatment effects are stronger for groups that are not typically targeted by microlenders: male and higher-income entrepreneurs. In all, our results suggest that microcredit works broadly through risk management and investment at the household level, rather than directly through the targeted businesses.

The miracle of microfinance? Evidence from a randomized evaluation
Abhijit Banerjee, Esther Duflo, Rachel Glennerster, Cynthia Kinnan; MIT Jameel Poverty Action Lab, Indian Centre for Micro Finance, Spandana
October 2009
Hyderabad, India

The researchers from the Abdul Latif Jameel Poverty Action Lab (J-PAL) at MIT and the Indian Centre for Micro Finance worked with Spandana to randomize the roll-out of its microcredit operations in Hyderabad, India’s fifth-largest city. Spandana chose 104 areas of the city to expand into eventually, rejecting some districts as having too many construction workers, who come and go and might take Spandana’s money with them. In 2006–-07 Spandana started lending in a randomly chosen 52 of the 104. Researchers followed up by surveying more than 6,000 households between August 2007 and April 2008, restricting their visits to families that seemed more likely to borrow: ones that had lived in the area at least three years and had at least one working-age woman. The surveyors made sure not to visit an area until Spandana had been there at least a year. They surveyed in “treatment” areas (ones where Spandana worked) and control ones (where it did not yet).

The impact of microsavings

The Impacts of Savings
Dean Karlan
Financial Access Initiative
January 2008

A summary of literature on the impact of microinsurance up to January 2008.

Female Empowerment: Impact of a Commitment Savings Product in the Philippines
Nava Ashraf, Dean Karlan, Wesley Yin; HBS and Jameel Poverty Action Lab, Yale, University of Chicago
March 2008

Female “empowerment” has increasingly become a policy goal, both as an end to itself and as a means to achieving other development goals. Microfinance in particular has often been argued, but not without controversy, to be a tool for empowering women. Here, using a randomized controlled trial, we examine whether access to and marketing of an individually-held commitment savings product leads to an increase in female decision-making power within the household. We find positive impacts, particularly for women who have below median decision-making power in the baseline, and we find this leads to a shift towards female-oriented durables goods purchased in the household.

Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya
Pascaline Dupas and Jonathan Robinson; UCLA, UCSC, NBER
March 2009

We conducted a field experiment to test whether savings constraints prevent the self-employed from increasing the size of their businesses. We opened interest-free savings accounts in a village bank in rural Kenya for a randomly selected sample of poor daily income earners. Despite the fact that the bank charged substantial withdrawal fees, take-up and usage was high among women and the savings accounts had substantial, positive impacts on their productive investment levels and expenditures. These results imply that a substantial fraction of daily income earners face important savings constraints and have a demand for formal saving devices (even for those that offer negative de facto interest rates).

Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines
Nava Ashraf, Dean Karlan, Wesley Yin
July 2005

We designed a commitment savings product for a Philippine bank and implemented it using a randomized control methodology. The savings product was intended for individuals who want to commit now to restrict access to their savings, and who were sophisticated enough to engage in such a mechanism. We conducted a baseline survey on 1777 existing or former clients of a bank. One month later, we offered the commitment product to a randomly chosen subset of 710 clients; 202 (28.4 percent) accepted the offer and opened the account. In the baseline survey, we asked hypothetical time discounting questions. Women who exhibited a lower discount rate for future relative to current tradeoffs, and hence potentially have a preference for commitment, were indeed significantly more likely to open the commitment savings account. After twelve months, average savings balances increased by 81 percentage points for those clients assigned to the treatment group relative to those assigned to the control group. We conclude that the savings response represents a lasting change in savings, and not merely a short-term response to a new product.