Banking under Economic Crisis

It is now agreed, a la IAASTD, that 'Business as usual is no longer an option'. Lot of tax payers money is being infused to revive the global economy. However, bankers' who got used to doing business with larger players are taking time to get out of their usual mode of doing business. True, larger transactions reduces per unit costs but exposures are also greater. It is the excessive reliance on a few large players that is identified as one of the reasons for the current problem. The banks should consider wooing smaller players. This is a different ball game. It requires understanding, propagating and examining the viability of small projects. This can be done with poorest of poor people also. The understanding that doing business with poor will lead to losses is a myth. This has already been shown by Grameem Bank of Bangladesh (through the work of Nobel laureate Mohammad Yunus) and other similar experiments across the globe. Bankers have a stake in reviving the economy if they have to stay in business. The mantra is to do business with a large number of small entrepreneurs, but with viable economic projects. Small is Beautiful, see the E.F. Schumacher's Society. There is a vicious cycle of prosperity waiting. Please do not let the opportunity get out of hand. Grab it.

Another Secular Poem, Aahe Dayamaya ... by Ramakrushna Nanda

In continuation with the previous blog... as my father put it: "Another gem of a prayer of the secular genre which is widely sung, and known for its simplicity of thought and expression which pour out of the hearts of the innocent children and adults alike."

Aahe Dayamaya Biswa Bihari
Ghena Dayabahi Mora Guhari
Jala, Sthala, Bana, Giri Akasha
Tuma Lila Sabuthare Prakasha
Tume Subha Budhipara Sikhaa
Tume Bhala Bata Para Dekhaa
Mora Kamaku Karaa Sarasa
Mora Mukhe Dia Chira Harasa
Mote Khala, Alasua Nikate
Nia Nahin Sukha Aba Sankate
Dukhi Arakhita Seba Karane
Bala Dia Mora Kara Charane
Tuma Charanere Mora Bhakati
Dia Bipade Sahasa Shakati
Sata Kahibaku Kian Daribi
Sata Kahi Pache Male Maribi
Mote Atiki Sikhaa Sain Hai
Mora Dhana Jana Loda Nahin Hai

See the earlier blogpost on Mashusudhan Rao's He ananadamaya koti bhubana palaka

A Secular Poem by Madhusudhan Rao in Oriya (Odia)

Last time when I was in Bhubaneswar (December 11-12, 2008) my father jotted down two Oriya secular poems for his grand daughter, Nerika. I am putting them in the blog for their timeless value. One of the the poems by Madhusudhan Rao is:

He Anandamaya Koti Bhubana Palaka
Adhama, Akhyama Muhin Abodha Balaka
Gyana Data Bhagaban
Dia Mote Subhabudhi Dia Dibyagyana
Satyapathe Dharmapathe Gheni Jaa Mote
Bhasaa Parana Mama Taba Prema Srote
Prabhu Parama Karana
A Jibana Sricharane Kali Samarpana

My father also wrote down the following lines.

"He (Madhusudhan Rao) was of Maharastrian roots, but turned out to be a staunch Oriya who was one of the pioneers (others being Radhanath Ray, a Bengali, Fakirmohan Senapati, Gangadhar Mehar, Girija Shankar Ray, another Bengali) responsible for establishing Oriya as a separate language with rich literary traditions in the face of stiff opposition from Calcutta Bengalis who tried to claim that Oriya was only a dialect of Bengali. This they could achieve through their great writings. Madhusudhan Rao's Varnabodha was perhaps the first primer in Oriya to spread the Oriya language among the Oriya speaking people far and wide and is still popular.

This prayer constitutes part of the Varnabodha. Being a Brahmo, this prayer is secular in nature addressed to the supreme power who transcends any particular religion understood in the narrow and the limited sense of the term.

The spontaneity of expression which directly appeals to the spiritual mind and heart is a little sanskritized which was the practice in his time."

See the next post on Ramakrushna Nanda's Aahe Dayamaya ..., another secular poem

Mumbai...Lives on

Kudos to the security forces, National Security Guard (NSG) commandos, Marine commandos, Army personnel, Maharashtra/Mumbai Police and particularly its Anti-terrorists squad (ATS), State Reserve Police, Railway Police Force (RPF) and Home Guard among others. The Taj staffers, fire services personnel (without bullet proof jackets), the medical professional, the railway and BEST bus service providers, the media and many others also contributed. I salute all of them.

The siege started on Wednesday night and went on till Saturday afternoon (26-29 November 2008). Nearly 200 dead (including 20 security forces) and more than 300 injured. The attack has been meticulously planned and designed, the terrorists well trained and familiar with the place. It is very hard to believe that there were only ten of them. There is a very high possibility that more people must have been involved in providing logistic support even during the operation. The question that disturbs is who are they and where are they?

There are obviously some lessons. The worst of them have been the politicians. At least this is one time where they should have come together. Is this the state of the largest democracy? Are we expecting a bit too much from them? It is a sorry state of affairs that not a single party has a semblance of intra-party democracy. And, on important issues, voting in the parliament is not based on one's reasoned understanding but by the whip issued by the party that one represents - this is the state of freedom enjoyed by a people's representative.

The Police did a great job. Arriving on the multiple scenes immediately. Nevertheless, it is a fact that they are ill-equipped and cannot handle such situations. Loosing three senior personnel in a single encounter is a pity. In future, if possible, they should avoid travelling in the same vehicle and take escort. The government should seriously think of revising the pay scales, provide decent housing and other amenities to the police as well as other public service providers.

The media's role, I reiterate, has been of help, but there is a strong case of restraint to be followed in future. The real time telecast (by most) revealed some vital aspects of preparation but it does leave one thinking of whether this was a mere absence of foresight or by design.

Some of the news channels have given lists of the deceased/injured, but they may consider identifying the security/police personnel. Some of them have also come up with video homages which includes all the twenty personnel who lost their lives. Despite this, I am sorry to state that the coverage was hierarchical. The junior personnel who died in the operation have not been given adequate space. This is sad. Get out of this hierarchy at least during their death. All these bravehearts live on. Mumbai, and its spirit, also lives on.

Economics needs a scientific revolution: a comment

The essay Economics needs a scientific revolution by Jean-Philippe Bouchaud has been published in 30 October 2008 issue of Nature 455, 1181, is stimulating and an interesting read. It points out the inability of mainstream economics or financial engineering to either predict or avert a crisis.

This outcome is a result of the huge divide between normative (theory) and positive (empirical) economics. In the process, as Bouchaud indicates, assumption have taken the form of axioms: rational economic agents maximize profits, each agent's pursuit of profit is also best for society and markets are efficient that through prices reflect all known information. At best, these results are about some ideal situations, which do not exist in real life. Striving for a particular ideal situation is one thing, but considering that the features of this ideal system are a part of the real life situation is another. It takes us to a belief system.

Adhering to a belief system can make updating of knowledge difficult. For instance, Tycho Brahe, who despite being credited for his accurate and comprehensive astronomical and planetary observations, could not entirely got out of the Geocentric model that the Earth is at the centre of the universe. It was his assistant, Johannes Kepler, who used the observations and came out with his three laws of planetary motion that conclusively showed that the Copernican system, Sun is at the centre, is correct.

There are no two opinions that a scientific inquiry requires a questioning mind. If required, questioning the very premises by cross checking with empirical observations. The reign of empiricism is in a Bayesian world. A minimum requirement for this is that your prior cannot be certain - you cannot begin with a belief system. The reason is that if your prior is either zero or unity, then whatever be your observation, your posterior will be equal to your prior (see my working paper Understanding Fundamentalist Belief Through Bayesian Updating. All empirical observations become irrelevant.

True, the models used by contemporary mainstream economics fail to explain how small perturbations can have 'wild' impacts. It is not true that fringe attempts by econo-physicists (including Bouchaud himself) and behavioural economists are not being taken seriously. Paul Ormerod's Butterfly Economics that followed the East Asian Crisis is a best seller (aside - most Economists may not know of this). Daniel Kanheman, a behavioural economist, received the Nobel in 2002. There have been some hiccups, but then many prominent economists have done work on asymmetric information, uncertainty and missing market that cannot be brushed aside.

Having largely agreed with Bouchaud, I point out some differences. First, inability to predict and avert a crisis cannot be a basis to gauge a discipline's success or failure. Just as the space shuttle Columbia's disaster on 1 February 2003 cannot be construed to be a measure of judging Aeronautics and Space research, the current financial crisis cannot be a measure of judging Economics. Crisis or disaster by nature is rare and not predictable. Like the violation of some safety regulations in the Columbia disaster the current global financial crisis, to put it simply, is an outcome of greed by some players who manipulated the markets for their advantages. Modelling apart, an economic system should have effective regulation to safeguard us against possible disasters.

Second, understanding the market with more appropriate tools and techniques of modelling is necessary, but it is more important to acknowledge that market is a tool, albeit, an important one. It is a means, but not an end in itself. This is the approach of the larger human development paradigm, which is people-centric.

Third, which in a way is related to the previous point, is that the dominance of utilitarianism, and hence, of markets in economics, was first successfully challenged by a prominent moral philosopher of the 20th century, John Rawls. He argued against the monoconcentration of utilitarianism and its associated formulaic reductionism in favour of plural concerns. On his concerns of justice his focus was on the least advantaged while assigning priorities to equal liberties and equal opportunities (that is, against arbitrary privileges). This is made possible by invoking the original position, that is, by putting decision makers under a veil of ignorance - they do not know which group they belong to. This in essence does away with vested interests. Thus, the silent scientific revolution, which goes beyond Economics, is already under way.

Financial Crisis, Mental Health and ...

The current financial meltdown, with its epicenter in the United States, has been having serious global repercussions. The 30-share sensitive index (Sensex) of the Bombay Stock Exchange which had peaked to 21,206.77 in January 10, 2008 has fallen to 7,697.39 at 1330 hours before stabilizing at 8509.56 by the end of the day on October 27, 2008. On the eve of Diwali (October 28, 2008), this belies hope.

This will have serious implications on the mental health of the population. Particularly so, for those directly involved in the financial/stock market. There are already indications that sale of over-the-counter anti-depressants have increased. A possible fallout is increase in incidence of self-harm (suicides). The earlier East Asian Crisis and earlier financial crisis are witness to such occurrences. In India, as well as elsewhere, the public health system, the medical fraternity (particularly Psychiatrists) and other civil society groups like The Samaritans, Mumbai. Sooner or later such incidences would come to the media's notice. Before reporting, they should have a look at the World Health Organization's Preventing Suicides: A resource for Media Persons.

True, despite the unprecedented fall in the Sensex, the levels are still around what was reigning in October 2005. Some say, the correction was necessary, as the higher levels was more on account of an hype in the financial sector, rather than being in sync with good fundamentals in the real sector. It is the unregulated greed that has led to this situation.

A question that comes to mind is why such a fall would be associated with mental health leading to self-harm. An anecdote cited in some discussions on farmers' suicides would help. A farmer while comparing his situation to that of a labourer indicated that the latter has been living under dire circumstances, and of course needs attention, but our situation is akin to a fall in level. Recourse to self-harm is complex and multifaceted. But, if reductions in level is one of the risk factors then this is definitely the case with the current financial crisis.

It is also worth mentioning that the current financial crisis, the ethnic strife that one sees within the country as also elsewhere in the world, and the larger agrarian crisis which manifested in a food crisis globally are not independent occurrences. They are part of the larger scheme of things, which as some commentators say, involves displacement of people as well as displacement of ideas.

The agrarian/food crisis and the ethnic strife do reflect that something is fundamentally wrong in the real sector; it is not people-centric. The problem was accepted, but instead of addressing the problem the solutions tried to address the symptoms. Or, to put it in a different perspective, the emphasis was on means rather than the ends. To conclude, one would state "Business as usual is no longer an option." (IAASTD)

PS: The Interactive Panel of the United Nations General Assembly on the Global Financial Crisis, 30 October 2008, United Nations Headquarters had presentations by Joseph Stiglitz, Sakiko Fukuda-Parr, Prabhat Patnaik, Pedro Páez, Calestous Juma, and François Houtart.

Agrarian Crisis and Farmers’ Suicides in India

The larger agrarian crisis has two dimensions. On the one hand, there is a livelihood crisis that threatens the very basis of survival for the vast majority of small and marginal farmers as also for agricultural labourers. On the other hand, there is an agricultural developmental crisis that lies in the neglect of agriculture arising out of poor design of programmes and allocation of resources and having resulted in declining productivity and profitability. This twin dimensions could also be equated with the developmental discourse where the former is about displacement of people and the latter is about displacement of ideology. The outcome is that planning is not people-centric.

In monsoon India, abundance or paucity of water has always been considered as a major source of agricultural uncertainty. Today, this yield risk could also be because of spurious inputs or inappropriate use of technology. Increasing costs, price volatility, non-availability of credit from formal sources and other risks further compound it. Social responsibility of education, healthcare and marriage instead of being normal activities add to the burden. All these would even put the semi-medium farmer under a state of transient poverty.

An extreme response to this distress is the increasing incidence of farmerss suicides. Between 1995 and 2006, more than 190,000 farmers have committed suicides, 83 per cent of these being males. The suicide mortality rate (SMR, suicide death for 100,000 persons) for male farmers increased from 10.5 to 19.5 whereas that of male non-farmers has more or less remained around 13. The major states with SMR for male farmers greater than the all India average of 18 during 2001-06 are Kerala (233), Maharashtra (53), Chattishgarh (47), Karnataka (39), Andhra Pradesh (35), Tamil Nadu (31) and West Bengal (21). It is to be reiterated that suicide is a symptom of the larger crisis, and its absence does not in any way indicate the absence of a crisis.

It is only in Kharif 2008 that one observes a substantial increase in the minimum support prices of the 16 major crops. In fact, the absolute increase would be almost equal to increments in the entire decade. Though welcome, this vindicates the established fact that returns to agriculture had turned out to be abysmally low. Per-capita per day returns to farmer households from cultivation in 2002-03 was eight rupees. Another recent public policy intervention has been the Rs.70,000 crore debt waiver package. This is just a book keeping exercise and at best will reduce the burden from formal sources. Indebtedness, like suicides, is another symptom.

Risk mitigation has to go beyond suicides and debt. What is more important is to spruce up public investments that will increase returns to cultivation. Skill enhancement and linking of opportunities to local resources are required to increase non-farm income. Success of the credit and input markets require effective regulation. There is a case of encouraging technological and financial products that would reduce costs while increasing returns. Institutions that can organize farmers are required.

My earlier blog on a related theme is Indian Agriculture in Doldrums.


Selected Readings:

Bhaduri, Amit (2008), Predatory Growth, Economic and Political Weekly, 43 (16), 10-14.

Government of India (2007), Report of the Expert Group on Agricultural Indebtedness, Chairman: R Radhakrishna.

Mishra, Srijit (2007), Agrarian Scenario in Post-reform India: A Story of Distress, Despair and Death, Orissa Economic Journal, 39, (1 & 2), 53-84. IGIDR Working paper version is WP-2007-001.

Mishra, Srijit (2008) Risks, Farmers’ Suicides and Agrarian Crisis in India: Is There a Way Out? Indian Journal of Agricultural Economics, 63 (1), 38-54. IGIDR Working paper version is WP-2007-014.

Reddy, D. Narasimha and Srijit Mishra (eds.) (2008) Agrarian Crisis in India, Oxford University Press, forthcoming.

This is the abstract of a presentation at a one day international seminar, “Environmental degradation and food crisis – Lessons for India” being organized by Greenpeace India on 24 October 2008 at India International Centre, Lodhi Road, New Delhi, India.