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.

The result: Today in India, some poor neighborhoods are being “carpet-bombed” with loans, says Rajalaxmi Kamath, a researcher at the Indian Institute of Management Bangalore who studies the issue. In India, microloans outstanding grew 72% in the year ended March 31, 2008, totaling $1.24 billion, according to Sa-Dhan, an industry association in New Delhi.

This development should hardly be surprising as commentators have long warned of the perils of too much credit chasing too few good candidates. That, and poor governance, were identified last by the MF Banana Skins 2008 report as key challenges for the future of the industry.

There is a parallel here with the sub-prime crises which had its origins in these same twin problems – too much credit and moral hazard on the part of those doing the lending (see this post for more). Yet, despite these problems, microfinance continues to grow.

According to the Monitor Institute microloan volume grew from USD 4 billion in 2001 to USD 25 billion in 2006. And new microfinance investment vehicles (MIVs) are going beyond debt financing to take equity stakes as well (e.g. the DWM Microfinance Equity Fund I closed this summer with USD 82 million from four institutional investors), illustrating a growing confidence in this sector.

An interesting observation is that loan volume growth seems to be outpacing actual investment growth by a large margin. While loan volumes were USD 25 billion in 2006, a CGAP brief estimates assets in MIVs in Europe and the US at only USD 6.5 billion. The remaining money must be coming from savings, public equity (e.g. Compartamos), philanthropic grants, IOs, and other public institutions. Nevertheless, MFIs must still be heavily leveraged to have such large loan books.

A second observation is that while private MIVs have the most incentive to ensure quality of microloans they also have the most incentive to charge higher interest rates. This is particularly so now that microfinance advocates have advertised themselves as a new and uncorrelated asset class resilient to the economic recession.

This makes microfinance doubly vulnerable compared to housing finance before the sub-prime crises. While the latter was only vulnerable to defaults from below, microfinance is also vulnerable to ethical pressures. Having sold itself as a “social investment,” microfinance cannot be seen to create indebtedness. Should that happen the flood of money in this sector will likely dry up quickly, putting pressure on the MFIs and in turn on the borrowers.

It is time that social investors and microfinance proponents scaled back their optimism – both on the impact of microfinance and on its investment potential. Microfinance cannot be immune to the basic rule of finance that risk and return are correlated. Moreover, such high expectations provide incentives to actually undermine both the social impact and potential returns of microfinance. An expectation of growth incentivizes providing loans even to those that cannot use them for anything other than consumption. And an expectation of higher or more consistent returns provides incentives for higher rates, which in turn can lead to indebtedness.

Microfinance investors may be doing damage to their own investments in this manner, by compromising the sustainability of the model. It is time for some realism, because regardless of whether microfinance is good or not endless growth cannot be without consequences – as the subprime crises showed.

On July 16, Indian Prime Minister Manmohan Singh met his counterpart Gilani in an effort to restart the stalled peace process. Much has been said about the joint statement that was issued, which was criticised both for “delinking” action on terror from dialogue, and for iincluding references to Balochistan.

In the face of substantial criticism the Prime Minister stepped into parliament to give his interpretation of the statement. Yet, his explainations have been largely ignorant of reality.

The Delinking of Action on Terror

The Congress has defended the delinking of anti-terror actions from dialogue by presenting its own interpretation of the statement. According to the Congress the statement implies that Pakistan must act on terror regardless of the status of the stalled peace process. If that were the case one must ask then why the statement does not say just that? Why is it open to interpretation?

One possibility is that it was “bad drafting“. If that is the case heads should roll – starting with Foreign Secretary Menon himself. But the more likely, and more worrying, possibility is that the ambiguous wording was intentional. This would be consistent with Manmohan Singh’s assertion that he would go “more than half way” to find peace with Pakistan. Yet, it is dangerous to go anywhere when Pakistan has not even budged an inch.

The Inclusion of Balochistan

The second about face in the joint statement was the inclusion of Balochistan, something that has never been a factor in any past discussions with Pakistan. So why now? Mr. Singh’s naive explaination is that India has “nothing to hide.” But that is, as Kanwal Sibal stated, a moral argument, not a diplomatic one. Following that logic we should also have included Kashmir, FATA, and Afghanistan?

By including Balochistan Mr. Singh has shown an absolute ignorance of diplomacy and bargaining. And the results are already there for us to suffer. Within days of the statement Pakistani officials were accusing India of fomenting terror in Balochistan. In the words of Pakistani officials, Mr. Singh has allowed Pakistan to “externalize an internal problem.”

Pakistan has been immensely successful in doing so in the past, and nowhere more so than in making Kashmir an international problem. As mentioned by the Daily Times, ”after the Simla agreement in 1973, Kashmir had almost disappeared from the India-Pakistan discourse. But it made a comeback in the early 90s after India agreed to discuss Kashmir, interpreting it as discussing issues related to militancy and cross-border terrorism.” Now India has allowed Pakistan to do the same with Balochistan.

War, Peace, and Something in Between

Mr. Singh’s ambiguity in the choice of words and in including Balochistan may have been part of his bigger peace strategy. It certainly has strengthened Mr. Gilani’s position at home. Also, as some Pakistani news outlets have pointed out, delinking action on terror from dialogue with India may actually make it easier for Pakistan to act on terror – since it would not be seen as acting under pressure from India.

Nevertheless, by indicating to Pakistan that India is willing and desirous of peace, India has weakened its hand in future peace negotiations. Here, a few lessons on international negotiation are necessary.

First, by indicating that India is willing to reshape its foreign policy and go “more than half the way,” Mr. Singh has indicated that India is desperate for peace. And by doing this unilaterally, he has shown that India is willing to talk even on Pakistan’s terms. The words of that joint statement may be interpreted either way, but Mr. Singh’s actions in Egypt make one thing clear – that India will be willing to talk even after Pakistan foments terror in India. In other words, India wants peace at any price.

The reason for this is that, in Mr. Singh’s view, short of war dialogue is the only way forward for the two countries. This is a fair point. Yet, for this to work both sides must want peace and Pakistan does not. Instead, it has chosen to support a proxy war against India for the past several decades. In view of that, India should not seek dialogue with Pakistan. Rather, it should make Pakistan seek dialogue with India. This would be fitting, given it is Pakistan that must prove its good intentions. But by making utopian public statements that dialogue is the only way forward for India, India takes off the table options that Pakistan continues to retain and exercise.

If You Want Peace, Prepare for War

At the root of Mr. Singh’s peace initiative is the belief that both countries should be desirous of peace and that India stands to benefit from a strong and stable Pakistan. Yet, both assumptions must be questioned.

First, Pakistan is not desirous of peace with India. The belief to the contrary has been costly in the past. As noted by M.J. Akbar,

In 1965 Lal Bahadur Shastri thought a little give would purchase a lot of take at Tashkent. In 1972, Indira Gandhi bought Bhutto’s plea that what remained of Pakistan would crumble without her sympathy. She did not insist on a written agreement ending the Kashmir dispute along the Line of Control. Atal Bihari Vajpayee reached out to shake Pakistan’s hand at Lahore, and got slapped in the face at Kargil.

Second, history suggests that regardless of whether Pakistan is a dictatorship, democracy, or anarchy, the state will remain hostile to India. To believe that Pakistan will willingly disown terrorists it has long nurtured is naive when even American pressure has not weaned Pakistan’s establishment from its love of jihadis. The ISI and army continue to support Al Qaeda, Taliban, and Kashmiri terror outfits such as the LeT. And we must remember that the Mumbai terror attacks took place during Gilani’s reign.

The bottomline is that Pakistan cannot be trusted. And there is no reason to hope, as the PM appearently does, that Pakistan will change its behavior. In view of that, “it is Pakistan that must reshape its policy towards India, not vice versa.” Yet, if history is any guide, Pakistan is most likely seeking a detente till its troubles in the West have receded.

Nor should India try to prevent Pakistan’s disintegration by compromising on its own foreign policy. If Pakistan wishes to fail as a state, by breeding terrorists, that is its choice and India cannot (even if it wished) prevent that fate. The sole purpose of India’s actions should be to want Pakistan to speak to India, not the other way around.

Prime Minister Manmohan Singh has done exactly the opposite and weakened us in the process. Mr. Sibal said it well:

Past experience shows that Pakistan would construe our reasonableness as weakness, and those who would applaud our moderation would not stand by us when needed. The bane of our Pakistan policy has been our inability to stay the course whichever the party in power. In time, we begin to see our reasonable position as undue rigidity and, disregarding the lessons of the past, we are ready to commit the same mistakes again.

Mr. Singh’s embrace of Pakistan is another such insulting mistake. As Kargil showed, it is India’s soldiers that pay the price of the naivete of its political leaders. They did so with China in 1962, and with Pakistan at Shimla and then again in Lahore. It is time India learnt from its lessons. And the first step would be to remove the Prime Minister, who has no understanding of foreign policy, from any role in shaping it. Then, we can start shaping a foreign policy in line with our aspirations.

To be sure, President Rajapaksa has made the right noises – such as addressing the country in Tamil. Yet, there are ominous signs that there will be no quick return of Tamil civilians to normalcy. The latest of these is the news that the ICRC has suspended its work in the north because the government is denying aid agencies access to relief camps. Simultaneously, Sri Lanka has also arrested its own doctors, that had served in the warzone, for providing “false” casualty figures. This suggests that Sri Lanka’s government intends to control both the destinies of Tamils and the opinions of the Sinhalese for some time to come.

To be fair, what has been achieved in Sri Lanka is most remarkable. Seldom in the history of the world has a dissident terrorist and militant movement been so strong and yet been defeated so quickly. For this the credit (or discredit) must go to the government of President Rajapaksa, which used the LTTE’s atrocities “as a license for its own abuses.”

Certainly, the LTTE’s own actions in the last days of the war showed it to be no more than a terrorist organization and the passing of Prabhakaran and his ilk should not be mourned. But in managing the aftermath Rajapaksa can learn from the experiences of Israel and India before metting out a collective punishment on those Tamils strong and lucky enough to survive.

The Palestinian community has no state to call its own, but is spread out across Gaza and the West Bank, as well as in Egypt and Lebanon. In order to keep alive international claims for a separate Palestinian homeland, Arab States have denied these refugees citizenship or resettlement. As a result, Palestinians live 2nd-class lives and their ghettoization, to which Israel contributes substantially in the Gaza strip, engenders violence and anger against Israel and its allies both inside those camps, and out.

India’s handling of militancy in Punjab provides a more positive example. That movement was also silenced by the gun. But it was similar to the LTTE in that both were financed by diaspora abroad. Khalistan was funded by Sikhs in the UK, USA, and Canada. Eelam was funded by Tamils in Europe and North America.

While counter-insurgency was responsible in defeating militancy militarily, peace was won through political negotiations, a quick return to full civilian control, and by equipping a war-weary population with the tools for growth. As a result, even though support for Khalistan remained high abroad, it ebbed locally.

Sri Lanka may yet face a similar challenge because Tamils abroad are not yet ready to surrender. And no matter how hard it tries to weed out LTTE members, Sri Lanka is sure to miss some. To ensure that those that do escape remain marginalized, Sri Lanka must ensure that the bulk of the Tamil population moves forward and is not stuck in relief camps.

Sri Lanka would do well to show grace in its hour of victory. This is not a time to be searching for LTTE cadres but to prevent another LTTE from forming. To do so, President Rajapaksa should move the “biggest hostage operation” from rescue to relief. He can start by providing relief agencies unlimited access and funding.

There is a risk, of course. War crimes were probably committed on both sides and those of the government will surely come to light. For a State that has silenced dissent for so long that prospect is no doubt unsettling. But this too may be good, for a little introspection may go a long way in aiding reconciliation.

The irony of this war is that both sides purported to fight to “liberate” the Tamils. The LTTE wanted a Tamil homeland while the government called its endgame the largest “hostage rescue operation in history.” Oddly enough, they both killed, shot at, and bombed those very civilians they claimed to serve and protect. Well, the Tamils have now been liberated. If the LTTE defined the past, Sri Lanka’s government has the opportunity, indeed the obligation, to define the future of Sri Lanka. With such an overwhelming victory and public opinion in its favor, it also has the tools to do so.

But hidden amongst those massive numbers is something that is far more relevant to India – the variance in the achievement gap across income and racial groups.

Furthermore, the gap between students from rich and poor families is much more pronounced in the United States than in other OECD nations. In a world-class system like Finland’s, socioeconomic standing is far less predictive of student achievement. All things being equal, a low-income student in the United States is far less likely to do well in school than a low-income student in Finland. Given the enormous economic impact of educational achievement, this is one of the best indicators of equal opportunity in a society, and one on which the United States fares poorly.

This is lesson number one for an India that is still deciding on which model is best for its education system. Since India must provide equal opportunity to its many minorities, no matter which model it chooses its defining purpose must be to promote upward mobility through equal access to education. Or, in other words access, not just quality, is important.

Highlighting the problem is the fact that the differential in achievements is even wider for minority groups:

On average, black and Latino students are roughly two to three years of learning behind white students of the same age. This racial gap exists regardless of how it is measured, including both achievement (e.g., test score) and attainment (e.g., graduation rate) measures.

In India one would expect the same to be true of students from lower castes or from economically poor backgrounds. The vast majority of those students go to government schools, and thus this adds weight to the argument made by Azim Premji that India must improve its government schools:

This is what the government school classroom represents; it represents the dreams and aspirations of India in a way that no other school system can. If we wish to transform India, this is where we have to begin. I suppose it is clear why we do grave injustice when we think of government schools as “schools for the poor”.

The third insight is that higher expenditure on the education system does not automatically translate into better achievement. The US spends the most, per capita, of any OECD country, yet is ranked 25th. The McKinsey report concludes that “by one measure we get 60 percent less for our education dollars in terms of average test-score results than do other wealthy nations.”

Of course, I do not wish to say that India does not need to spend more. It does. Yet, more money is not the only solution, and for a resource constrained country other alternatives must be looked at. A lot can be achieved through non-monetary incentives involving social engineering and treating the teaching profession with an element of decency.

There is much that separates the US from India. But appearently one problem that we do share is the inability of school going children to access a relatively decent education, despite the presence of world-class institutions. This problem is not simply one of quality, but also of access to quality, and there is a dichotomy between the two because resources must be addressed to only one problem at a time. In finding a solution Indian policymakers would do well to learn from the reality in the USA. They must turn the debate on education away from a focus on improving quality per se, to one of improving the quality of education where it is most lacking.

In a new article (by yours truly) in the latest issue of the Economic and Political Weekly (India as an Emerging Donor), I have sought to understand both the size of India’s giving and its strategic drivers and strengths. Some interesting points highlighted below.

• In 2008, India allocated approximately INR 26.7 billion (USD 547 million at current Jan 2009 exchange rates) to aid-related activities.
• In addition, it also approved USD 704 million in lines of credit through the EXIM Bank. By March 2008, USD 2.96 billion in LOCs had been approved – much of it for Sub-Saharan Africa
• The aid program has changed in two critical ways. First, the aid periphery has expanded beyond South Asia. Second, India’s giving is increasingly bilateral and thus focused more on projecting “hard” rather than “soft” power.

For more and an analysis of the implications, see the article online.

MI would have us believe that the problem with securitization was only its implementation, and therefore, can be fixed. But there is a more fundamental problem with securitization – as applied to subprime or microfinance loans – that is not one merely of implementation, and thus cannot be fixed by regulation and transparency.

As pointed out by this World Bank paper, securitization creates a moral hazard that “adversely affects the screening incentives of lenders.” In the MFI world this means that if MFIs do not own the risk of a loan, they are less likely to screen potential creditors properly. The result is likely to be an increase in default rates.

This is not all, though. If the subprime crises was caused partly by moral hazard, the impact of that hazard was magnified by the availability of cheap and plentiful credit. Banks vastly increased credit availability to subprime creditors simply because money was cheap and easy to be had. This reduced any remaining incentive on the part of lenders to conduct proper due diligence.

Microfinance was, till recently, in a similar situation – overfunded but with few good organizations to lend through (see the 2008 MF Banana Skins report). Given the availability of cash, it is unclear why securitization – as a means of increasing capital for MFIs – is even necessary. Any good MFI should have no trouble raising cash. And any bad MFI should not get cash – even through securitization.

Finally, the idea of securitization for MFIs also ignores another article in MI that talks of the Dangers of Leverage. The author argues that many MFIs are blind to the risk of credit default.

Further analysis from the Risk Roundtable in Mumbai supplies an eerie parallel to the early stages of the downfall of banks and investment banks. The risk survey leading up to the Roundtable found that most respondents, including MFIs, investors and lenders, felt that liquidity risk is the major risk, not risk of credit losses.

Microfinance, as a sector, has done well – continuing to provide moderately positive returns even in the current environment (see graph). This has led its proponents to claim that microfinance is a separate asset class uncorrelated to bonds, equities, and even alternative assets such as real estate, commodities, and hedge funds.

Symbiotics Microfinance Index (USD)

Yet, the dynamics of risk and return can not be any different in microfinance. Given that MFIs do not consider credit risk extremely high and have amply money for lending, their incentives for proper screening are already low. Securitization would take away any remaining incentives, and seems to be a solution looking for a problem, rather than the other way around, that could prove dangerous for this still unproven sector.

Update: After some research, I’ve realized that securitization of microfinance is not so new after all. The MIT Journal Innovations discussed it in 2007 (Is Securitization Right for Microfinance). Go back even further, and BusinessWeek had a feature on it in September 2004 (Tiny Loans, High Finance). And according to this discussion at Chicago’s GSB, the idea has been around “since the mid-1990s.”

But the people behind the laptop have “pedigree” – the backing of the Indian Institute of Science, and Indian Institute of Technology. Of course, nobody has seen the thing even after the laptop was announced today at the launch of the National Mission on Education, but it is expected to have 2GB of RAM and wireless connectivity. Its hard to see how a fully functional laptop could meet that price point. But here’s why Atanu Dey could be wrong.

First, all those arguing that it is not possible to build a laptop at that price are missing the point. Nobody said this would be a fully functional laptop. It does not need an Intel CPU or a Windows Operating System. As this blog points out, the laptop plan “challenges our thinking on system design.” Significant cost savings are possible simply through appropriate design.

There is an important message here. When we are addressing the developing-world market, we cannot afford to make the assumptions that we in the US don’t even recognize as assumptions any more.

Next, who said anything about a display? Much has been made of the fact that a typical LCD display costs at least $28. Clearly then, such a laptop must be vaporvare. Except, if you do away with the display. Most people presume a display is necessary, yet most of the functionality of a laptop can be provided by time-sharing a fixed display with multiple users.

And finally, the $10 value is a price point – not a cost point. It has been suggested that the laptop is probably being subsidized by the government. But the government doesn’t need to subsidize this when companies would be lining up to pay to be on this platform. Imagine a computer in the hands of 100 million Indians. Which corporation would pass up the opportunity to be on it? Commentators suggest that Microsoft’s Windows would probably be missing from this device, given it would increase cost. I think Microsoft would pay to be on this device, for fear of missing the boat.

Its clear that it is hard to build at $10 laptop that matches what most netbooks today offer, at cost. However, it is entirely possible to sell a computer at that price, that offers basic computing with a few tradeoffs and caveats.

No doubt, when Ratan Tata announced the 1-lakh car, people said it was not technically possible. But in building the Nano, Tata demonstrated that what we can build is limited not by technology but by our imagination and the assumptions that frame our world. This laptop may well be too ambitious or prove to be more expensive than announced. But critics should think far outside the boundaries of their frame of reference, before concluding it isn’t possible.

Slowly a picture has emerged of how the Mumbai attacks were planned and executed, mostly in Pakistan. The NY Times highlights evidence that Pakistan was the source of the attackers and the group behind it had received substantial support from the ISI. The report quotes not just the Mumbai police, but former Defense Department officials.

A picture is also emerging of the “rot” in India’s own criminal justice and intelligence systems, pointed out most effectively by the BBC.

The attacks and their aftermath again point to the rot that has set into the country’s internal security system and a lack of cohesion between civilian and security wings of the government…One telling example: six days after the attack, even the number of dead and injured keeps going up and down, due to poor co-ordination between the police and hospitals.

The Prime Minister has pledged to act with “resolve and determination” but what does that mean? The temptation to lean on Pakistan is strong, yet India’s government might do better to learn a few basic lessons first. Here are a few.

Win the Information War

First, learn to win the war for world opinion. This should hardly be difficult, given the immense sympathy India has garnered over the attacks. Yet, the government can bungle this too.

For one, constant allusions to “external elements” and “neighbors” do not help. India has made it a habit of crying wolf and pointing to Pakistan everytime anything goes wrong. This, unfortunately, increases the burden of proof on India. That India pointed to Pakistan within hours of the attacks suggested either prior knowledge or – more likely to the public eye – the usual fearmongering. That is why an NY Times article is more credible when it quotes the US Defense Department, than the Mumbai police or Shivraj Patil. Make your words count.

Second, be consistent and professional in releasing information. If there is one thing that marked the operations in Mumbai, it was the many contradictory statements released in turn by the head of the NSG, an Army General, the Mumbai police commissioner, and the Home Minister. Protecting the credibility of information is as important as protecting the information. It was never clear who exactly was in charge of the operations, leading the bystander to believe that no one was in charge.

Finally, control the channels by which information is released. Is it not surprising that to find “evidence” of Pakistan’s involvement, one has to go to the NYTImes? Why is the Home Ministry not releasing the evidence and ensuring that its security officials not “leak” information to the press?

Get Security Right

Winning the information war is about getting perceptions right – that India’s authorities are in control and not simply smoking pot when they accuse Pakistan. If India can convince the US and Pakistan that it knows what it is doing, it will also convince them of the earnestness of India’s words – and if necessary, threats.

But you cannot have others believe you are serious if your house is in disarray. And India’s security apparatus certainly is. Nine hours for the NSG to get to Mumbai, three days to get the terrorists, and another two days to clear out bombs from the train station at Mumbai!

To be taken seriously, India must fix its anti-terror mechanism. And a first step is to invest heavily in the local police. The local policeman is India’s first defense against crime and terror. It is these people – long reviled and under paid – who face the first bullets, secure crime scenes, and call in the big guns. You cannot expect to be safe if these people are not motivated to protect you. Fixing the local police will not be easy, nor cheap. It requires that every state pay its policemen more, invest in better training, offer better equipment and a safer work environment, and improve communications across state police and military intelligence divisions. The creation of a “federal” agency or a stronger law is useless, if we cannot catch the people to begin with.

Second, leverage technology. Britain’s enthusiastic adoption of video surveillance in the 1990’s, in response to IRA attacks, shows how successful it can be – at least in managing the aftermath. Today, London has over 10,000 cameras, and Britain over 4 million (1 for every 14 people – the highest in the world). The cost of technology, critical to coordinating first-response between fire, medical, and police services, is dropping exponentially. There is really no excuse for why India’s police forces still operate with WWII era walkie talkies.

Third, upgrade the NSG to be one of the best anti-terror response units in the world. India is one of the most frequently attacked countries – it needs to have a matching capability. Yet, in the BBC article a security analyst illustrates how the NSG have no dedicated aircraft and insufficient training in responding to a Mumbai-style attack:

The commandos have been trained to rescue small groups of people. “They have not been trained on multiple location operations of such scale.”

Four, India needs to be creative in its training of the NSG – and this will come from working with more creative partners. Why not train with Israeli and US security forces on a regular basis? Their agencies, amongst the best in the world, would not only be willing to share intelligence, but also tactics. Mumbai shows that whether we like it or not, the terrorists see us as one group of enemies. So it is time we embraced our new allies.

Finally, the NSG should be a dedicated anti-terror unit, not a team meant to provide protective cover to corrupt politicians. In the USA, the Secret Service does not conduct anti-terror operations, just as SWAT, Seal, and other special forces teams do not provide individual protection services. The former is dedicated to protecting key people, the latter to anti-terror operations. Likewise, the NSG should not be wasted on protecting corrupt politicians, the bulk of whom should be protected by local police. And, doing so would have the added benefit of creating incentives for politicians to improve local law enforcement.

Mumbai: An Opportunity to Reflect

Mumbai was a wake-up call. It seems increasingly likely that the attack was planned in Pakistan, yet the inability to prevent it or to respond effectively was a domestic failure. It brings home the rot, not only in our police system, but in our politics.

In such an environment, it is easy to lash out at an “external party” and in time India must do so. Yet, Mumbai offers us the opportunity to look within before we look without. India’s first act of determination must be to set our own house in order. It will be difficult and politically tricky for the Congress to admit to lapses. But if the government is serious about tackling terror, they must follow the advice of an earstwhile opponent, Iqbal:

Khudi ko kar buland itna ke har taqdeer se pehle khuda bande se khud poochhe bata teri raza kya hai