Few have approached marketing as a science like V Kumar. “My significant contribution to marketing is bringing science into it. Bridging science and practice,” says the IIT Madras alumnus, who has been greatly inspired by Philip Kotler. VK, as he is better known, is the Richard and Susan Lenny Distinguished Chair Professor of Marketing, and executive director, Centre for Excellence in Brand and Customer Management, Robinson College of Business, Georgia State University, in the US. He was recently ranked amongst the top five marketing scholars worldwide, based on his research productivity. He is also the recipient of eight lifetime achievement awards (in various areas of marketing), which is a record and a consultant to some of the biggest companies in the world. In this interview, he speaks to Vivek Kaul.
One of your core areas of work has been customer loyalty. Can you talk about that?
Fourteen-fifteen years ago the universal metric was that if somebody is loyal they are the most valuable customers. We questioned that linkage. Why is loyalty equal to profitability? Maybe in contractual relationships it is so. But most of the transactions between a firm and a customer are non-contractual .I am free to go and buy a shirt anywhere, a computer anywhere, a phone anywhere. Very few things are contractual. Your monthly subscription to your wireless plan is contractual. Maybe your internet connection at home and utilities, like electricity are. Given that we started to empirically test the relationship between loyalty and profitability and found it to be a very weak relationship. We went to the companies and said that if you want to engage customers then don’t use loyalty as a metric.
How was customer loyalty defined?
Loyalty was defined as how long a customer has been shopping with a company. How much money out of the total wallet size they have been spending with the company. How frequently they are coming and buying from the company. But there was nothing about profitability or the fact whether the company is making money out of the relationship. Banks were the first ones to start looking at how much profit a customer was bringing in and that too they were looking backwards i.e. how much profit the customers gave in the past and not how much profit they were likely to give in the future.
And you challenged that notion?
Yes. This prompted us to come up with a metric to value the customer. How much profit a customer is likely to give in the future? And we went to companies, got their transaction database of what customers are buying, how much the companies is spending on them in direct marketing costs, and accounting for all this we calculated the gross margin for each product sold. With these three pieces of data we were able to put together a customer life time value(CLV) metric. We did this in 2003-2004 and one of the first companies to implement this was IBM. In a pilot study we tested the customer life time value model and they made $20million instantly. Then that became the mantra for them into becoming a customer centric organisation and allocating resources to those customers where the most bang for the buck is. In India we worked with ICICI Bank . We worked with the Wells Fargo bank in the United States. We worked with the HSBC bank in Middle East. In telecom we worked with AT&T for six years. Then in the retail environment we worked with the Polo Ralph Lauren, Gallery Furniture, etc.
So the focus was on profitable customers and not necessarily the loyal ones…
Yes. In 2007 what happens is that suddenly there is a headline that the telecom company Sprint fires 1000 customers because they were unprofitable. So was it the right thing to do? The media came to us and said, you said profitability is the metric to chase and they are doing that and they are firing unprofitable customers. I said, if they are unprofitable what can you really do? It’s better to fire them, so that they will go to competition and make them unprofitable. It’s good for the company. But what if these customers spread bad word of mouth about the company, I was then asked? Who will listen to them, I replied. Because they are bad customers and hence they were fired. So if bad customers go and say they were fired, the response they will get is that of course something must have gone wrong in the relationship.
How did the company handle the situation?
Sprint also wrote about saying that these customers were calling the call centre eight times a month. At the rate of three minutes each time, it amounted to 24 minutes. Each cost call Sprint three dollars a minute. So the total cost was 72 dollars. And Sprint was making 15 dollars on them .So net net Sprint was losing 57 dollars a month on them. Over a year the company was losing over 600 dollars on a single customer. Sprint communicated to the customer base and told them that if they had not fired these customers, then the rest of the customers would have had to subsidize them..
Could you give us other examples of companies firing people?
After Sprint fired 1000 customers then the internet service providers Comcast and Verizon and all started putting a hold on the bandwidth. If people were hogging internet usage by constantly downloading movies and so on, then they said I am not going to service you or I am going to slowdown your speed. Proactively they tried to ensure that they did not lose money on somebody. They also fired a few consumers..
Some of your more recent work has been in the area of trying to figure out who is influential in the social media and using that insight in marketing. Could you take us through that?
This is the new wave. In 2008 me and my team developed this model. We basically wrote a software that could track everybody’s twitter and facebook conversation. Therefore when you put something on Facebook and others like it, then my software will see it. My software will also capture the tweets. You can ask if all this is legal? They had an open gate system at that point of time. Anybody could monitor anybody. Now they are putting plugs.
So how did the software work?
My software could crawl and track who is on Facebook and Twitter, what they are saying, who is tweeting to whom etc. Not only that, if I tweet something, you forward it to somebody else, they forward it to somebody else and they again forward it to somebody else, we could find out how far your tweet spreads. How far your Facebook like spreads? So when I tweet to you it spreads to 10,000 people. But if I tweet to someone else it only spreads to 200 people. So I then try and I figure out, why in a two week period your tweet spreads to 10,000 and the other person’s goes to only 200 people. And I find that you have more followers on Facebook and Twitter. And you are pretty active in the social media world and you are talking about multiple subjects or even a single subject but more of it. And whenever you say something to somebody they also reciprocate to you. We come up with eight measures like that. With the help of this we can pretty much say something like that if I use you as a seed to plant a message then it will reach 8500 people. That is what we have done.
Could you take us through a real life example on the above subject?
An ice cream retailer from Mumbai approached us and asked us to help them to promote this ice-cream. Our target group is college students and young adults, they said. They are the ones who are going to spread the word. They are active in the social media. So we want to use social media. We have a very limited budget.
So what did you do?
We created a stickiness index. Of all the conversations happening we tried to figure out who are the people who have a high degree of category relevance. So in this case who is talking about ice cream related products on Facebook or Twitter. People could be talking about milkshakes, or gelato. It could be just ice and of course ice cream. We applied the stickiness index on the influencers i.e. if there are 10,000people with a high customer influence effect meaning those who can spread the message the farthest, applying the stickiness index, we narrowed down the number to 300. So we take this 300 and bring them to the ice cream parlour and got them to taste the ice-cream. We also asked them to create their own ice cream and give a name to it.
And what happened after that?
After this we asked these guys to spread the word about the ice-cream. So in next step they put it up on Facebook. Tweeted about it. Other people who saw this on Twitter could take the hashtag associated with the tweet to the ice cream parlour and could buy the specific ice-cream created by the person tweeting. The parlour boy registered the hashtag. At the end of each day our computer read from each ice cream parlour of this chain and related it to the person who sent the message on Twitter. So what is in it for the person sending the message? Each week we had a competition where the winner got a t-shirt, tote bag, etc.
Which chain was this?
This was the Hokey Pokey ice cream chain.
So there are varying things that companies get their customers to do for them…
Yes. If I am the customer and you are the firm, then I can buy from you. If not buy, I can refer customers to you through incentives. If not, then I can write about you on my social media. If not, I can give you ideas to improve your service quality. Introduce this product. Add this feature to your product. When I give ideas to you, you take that idea commercialise it and then whatever profits you make you give a share of profits to me.
Can you give some examples on that?
Many women when they are getting married in the United States hunt for the right bridal wear and often they don’t find the one they like. So they create their own design and send it to the bridal wear company which can post it on its website and say here is a design which one of our prospective customers created. How many others like this? If 200 others like it and are ready to buy it then the company can produce 200 dresses of that design at the stated price and share profits with the person who came up with the design. Another good example is IBM. They put up the Linux operating system as an open source software. So you and I can create an application for IBM that runs on Linux code, give it to IBM, they will market it and share the profits.
Any other examples?
A fast food chain got into trouble when on a YouTube video somebody caught two of its employees picking their nose and then putting their fingers into one of their products. This was a challenging situation. The company decided to have a competition and let the customers design the ingredients. They had a competition. And two people won. The product the winners had designed entered the menu of the fast food chain and the profit was shared.
Can organised retailing compete with mom and pop stores in India?
Organised retailing at best in India could be at 9%. My prediction is this that mom and pop stores or kiranas as we call them will become more and more sophisticated. Today the store owners know people by their names, as the number will grow they will have to start building a database, but they don’t have the capabilities. So organised retailing will start buying mom and pop stores individually. And then they will put all of them under one banner. It will be like how Tesco is operating in the U.K with different store formats.. You have Tesco supermarket, convenience store, street corner store, express etc. So that is the way in India you will be see this evolving because otherwise there is no growth for them.
What is the evidence from other emerging markets?
If you look at evidence from China organized retailing has got more traction. That’s because they did not have many mom and pop stores to begin with. They were cultivating their own things which was locally community based. But with more cities coming up and migration of people from rural areas to cities, gives more scope for organised retailing in China. Also space is not an issue in China. In India space is a constraint. Look at China and India. China is much bigger than India but the population is pretty much similar. Look at Brazil, it is as much bigger than India but the population is maybe one sixth that of India. So they also have space.
Any other factors at work?
There is another major factor on which it depends whether they will survive or not, it is the homogeneity of the population in consumption behaviour. Does the country as a whole consume common things or there are regional biases? In a country like Brazil people eat similar foods that every retailer can sell. In India between South, East, West and the North, there is so much heterogeneity that you need localized catering and marketing .So consumption behaviour varies therefore unless you are willing to carry heterogeneous products in each of the locations it is tough. But the organised retailers have a choice now. Do they invest capital and build their own infrastructure or should they buy out these kiranas and build them up? And clearly I see the latter as a more viable strategy than putting up their own real estate.
Should we allow the likes of Wal-Mart into India?
Wal-Mart is a value conscious store. Even if Wal-Mart is there in every place, the way they are located is typically outside the city limits. So only people with time, motivation and a vehicle, will be able to go and buy things. And the combination of these three things is very rare. Therefore their ability to grow organically in a country like India by systematically expanding the number of outlets is going to be difficult. There will be a market if they are content at not being the largest retailer. If they say in India I am one among many, they will have a presence. Maybe at some point in the future, things might change, like Wal-Mart buying other retailers and that’s the way they can expand. Their specialty is supply chain and turning the inventory over multiple times than other retailers. They cannot turn it over multiples times here. Each time if they make a 1% margin they get a higher margin due to turning the inventory over multiple times. Here I don’t see them turning it over as many times as in other markets. It’s very difficult to do that.
(The article originally appeared in the Daily News and Analysis on September 10,2012. http://www.dnaindia.com/money/interview_tesco-uk-model-shows-organised-retail-will-buy-out-kirana-stores-in-india_1738905)
(Interviewer Kaul is a writer. He can be reached at [email protected]
Most economists talk about the graver things in life. Fiscal deficits, interest rates, GDP growth rate and once in a while about why they think that the financial world is coming to an end. But that is not the case with Steven E Landsburg, a Professor of Economics at the University of Rochester in the United States, where students recently elected him Professor of the Year. Nearly twenty years back he wrote The Armchair Economist, a book which brought an easy understanding of the dismal science to the masses. The book has been a bestseller since then motivating him to write a new and revised edition which was published this.
Landsburg is also the author of Fair Play, More Sex is Safer Sex and The Big Questions. He considers himself as the most important figure in the world of modern poetry, in consequence of the his status as the only living being who reads poetry but does not write it. In this freewheeling interview to Vivek Kaul, he talks about why safe belts are unsafe and more sex is safer. He also speaks on why he has no clue of why people vote and popcorns being so expensive at the movies.
You write that “most of economics can be summarized in four words: people respond to incentives. The rest is commentary.” Why do you say that?
I say that because it’s true, and because it’s important. When the price of lettuce falls, people buy more lettuce. When the price of haircuts falls, people get more haircuts. When the penalty for murder becomes more certain, people commit fewer murders. Due to some combination of arthritis (which makes it difficult for me to turn my head to the right) and irresponsibility, I had a years-long habit of backing the right rear corner of my car into lamp posts, trees and other stationary obstructions. Often enough so the body shop owner joked about giving me a quantity discount. I paid $180 to get my bumper repaired, and I came to think of this as an unavoidable expense. Then in 2002 I got a new car with a fiberglass bumper, backed it into a tree, and discovered that this repair was going to cost me over $500. I have not backed into anything since. Even economists respond to incentives.
Do seatbelts bring down the number of traffic related deaths?
This is a good illustration of why it’s important to think about incentives. A seat belt makes it easier to survive an accident, and so reduces the incentive to avoid accidents in the first place.
But research shows that drivers with seat belts drive less carefully —to such a large extent that they’re just about as likely to die as drivers without seat belts. Also pedestrian deaths seem to have increased. If you find it hard to believe that people drive less carefully when their cars are safer, consider the proposition that people drive more carefully when their cars are more dangerous. This is, of course, just another way of saying the same thing, but somehow people find it easier to believe. If I took the seat belts out of your car, wouldn’t you be more cautious when driving? What if I took the doors off? So if we really wanted to reduce the number of driver deaths, the best policy might be to require every new car to come equipped with a spear, mounted on the steering wheel and pointed directly at the driver’s heart. I predict we’d see a lot less tailgating.
Why is popcorn so expensive at the movies?
Not for any of the reasons that pop quickly into most people’s minds. It’s not enough, for example, to observe that the theater owner is exercising his monopoly power. If that were the whole story, he’d be charging monopoly prices not just for popcorn but for everything else in the theater — the water fountains, the restrooms, and the right to sit down once you’ve entered the theater, for example. The reason he doesn’t charge monopoly prices for those things is that his theater would become less desirable, and to maintain his clientele, he’d have to slash prices at the box office. The same would be true of popcorn, if everyone bought the same amount of popcorn. What’s gained at the popcorn stand is lost at the box office. In fact, it would be even worse than that: By jacking up the price of popcorn, he makes the entire theater experience less desirable, so the total amount he can extract from his customers is lowered, not raised. So the high price of popcorn can’t be explained as a way to exploit customers generally; it must be a way to exploit popcorn-lovers in particular. And this makes sense only if the theater owner believes that popcorn-lovers are more likely to tolerate high prices than popcorn-haters are. Why should that be the case? I’m honestly not sure.
Why is more sex safer sex?
In economics, we’re always thinking about the incentives faced by decision-makers. A decision-maker who does not face all the consequences of his actions often makes bad decisions from a social point of view. For example, the factory owner who decides to pollute the air usually does not feel all the consequences to other people’s health, and therefore over-pollutes. Likewise, people who are very likely to be infected with terrible diseases, when they take new sexual partners, are not accounting for all the consequences of their decisions, which means that from a social point of view, they have too many partners. But the flip side of that is that people who are very likely to be *un*infected, because of their cautious past behavior, when they take new sexual partners, make sex (on average) *safer* for the rest of us. If the likely-to-be-infected are like polluters, then the likely-to-be-uninfected are like anti-polluters: People who go out and pick up trash in the parks.
Why do people vote even when they know that there one single vote is unlikely to influence the outcome? Do they do it because they think that in a democracy it’s a good thing to do?
I haven’t the foggiest idea why people vote. But to say that it’s “a good thing to do” is hardly an explanation. There are lots of good things to do. Instead of spending 15 minutes at the voting booth, you could spend 15 minutes picking up trash in the street. If all you’re looking for is “a good thing to do”, it’s still not clear why you’d choose to vote.
Why are failed corporate chieftains often retired by their boards with very high pensions and a lot of other facilities?
Partly so the chieftains won’t be afraid to take risks. We want our corporate executives to take reasonable risks in order to boost profits. Sometimes reasonable risks lead to failures. If every failure meant personal ruin, executives would be far too cautious. When a corporate risk turns out badly, it’s often hard for the stockholders to know whether the executive was foolish or just unlucky. In case he’s proven foolish, they want to fire him. In case he was just unlucky, they want to treat him well, so that future executives will be willing to risk bad luck.
What is common between college education and long useless peacock tails?
They’re both used to show off. And for that reason, they can both be wasteful. Growing a longer tail than your neighbors’, just to outshine him, is, from a social point of view, a waste of effort — you gain status but your neighbors lose status, so on average nobody comes out ahead. Likewise, getting more years of schooling than your neighbors, insofar as you’re doing it just to advertise your willingness to endure the ordeal, can be socially wasteful. Of course, some students actually learn something useful while they’re in school, so the analogy with the peacock’s tail is incomplete.
Do death penalties deter crime or are there better ways out?
The bulk of the evidence is that passing a death penalty law has very little effect on crime, but that actually executing people has a very substantial effect. In the United States, quite a few studies have found that each execution prevents several murders — typically the studies find that “several” means approximately eight. Of course that doesn’t prove that the death penalty is a wise policy — you might worry, for example, that a government empowered to exact the death penalty will not always use that penalty wisely or even honestly.
An increasing amount government debt puts more money into people’s pockets. What is the logic behind saying that?
There are two ways the government can increase its debt. One is by spending more; the other is by taxing less. Obviously, when they tax less, they put more money into people’s pockets. In that case, the net effect on individual finances is mixed: On the one hand, you, as an individual taxpayer, will eventually be taxed to pay off not just the government’s debt, but also the interest on that debt. On the other hand, you, as an individual taxpayer, not only have more money in your pocket, but also the opportunity to earn interest on that money. Those effects roughly balance out. So if government debt is causing you harm, it must be for reasons more subtle than the ones we usually hear about.
Why do celebrity endorsements increase the sales of the product even when we know that the celebrity has been paid to recommend the product and isn’t really an expert on that product?
The company that hires a celebrity endorser is sinking a lot of money into advertising — money that will take them years to earn back. You can be pretty sure this is a company that cares about its reputation, and so is likely to provide a quality product.
You write that advocates of mandatory helmet laws for motorcycles argue that arider without a helmet raises everyones insurance premiums. The opposite might very well be true. Why do you say that?
If helmets are voluntary, then helmet-wearers get better insurance rates for two reasons. First, helmets prevent injuries. Second, by wearing a helmet you can advertise that you’re a generally cautious person — the sort who probably gets his brakes checked regularly and so on. If helmets become mandatory, you still get the first break — the helmet is just as effective when it’s mandatory. But you no longer have an opportunity to earn the second break, so your premiums might well rise.
Why are employees better off with some amount of monitoring from their employers?
If your employer had no way of knowing whether you were showing up for work or performing any of your duties, it’s unlikely he’d be willing to pay you very much. The more he can verify, the more valuable you’re likely to be. So, for example, software programs that keep track of office workers’ keystrokes, while they might feel intrusive to the worker, are also making that worker more valuable and quite likely account for the employer’s willingness to pay the worker’s salary.
Why does the business world reward good dressers?
I don’t know for sure, but I suspect that the ability to dress well is a signal of several valuable skills: The ability to observe fashion trends, the intuition to understand the limits of what’s acceptable, and the talent to be creative within those well-defined limits.
What made you write the book The Armchair Economist?
One day in 1991, I walked into a medium sized bookstore and counted over 80 titles on quantum physics and the history of the Universe. A few shelves over I found Richard Dawkins’s bestseller *The Selfish Gene* along with dozens of others explaining Darwinan evolution and the genetic code. In the best of these books, I discovered natural wonders, confronted mysteries, learned new ways of thinking, and felt I had shared in a great intellectual adventure,
founded on ideas that are dazzling in their scope and their simplicity. Economics, too, is a great intellectual adventure, but I could find, in 1991, not a single book that proposed to share that adventure with the general public. There was nothing that revealed the economist’s unique way of thinking, using a few simple ideas to illuminate the whole range of human behavior,shake up our preconceptions, and jolt us into new ways of seeing the world.
I resolved to write that book. *The Armchair Economist* was published in 1993, and attracted a large and devoted following. In the intervening 20 years, it has earned much high praise. But what I take most pride in is that *The Armchair Economist* is still widely recognized among economists as the book to give your mother when she wants to understand what you do all day. After 20 years of correspondence with readers, I found new ways of explaining this material that I thought were even clearer and more engaging than in the original book. That — plus my desire to update many of the examples for the 21st century — motivated me to write the new and revised edition that was published in 2012.
(The interview originally appeared in the Daily News and Analysis on August 13,2012. http://www.dnaindia.com/money/interview_the-more-your-employer-snoops-the-more-valuable-you-re-likely-to-be_1727258)
(Interviewer Kaul is a writer and can be reached at [email protected])
India badly needs a second generation of economic reforms in the days and months to come. But that doesn’t seem to be happening. “What makes reforms more difficult now is what I call the original sin of 1991. What happened from 1991 and thereon was reform by stealth. There was never an attempt made to sort of articulate to the Indian voter why are we doing this? What is the sort of the intellectual or the real rationale for this? Why is it that we must open up?” says Vivek Dehejia an economics professor at Carleton University in Ottawa,Canada. He is also a regular economic commentator on India for the New York Times India Ink. In this interview he speaks to Vivek Kaul.
How do you see overall Indian economy right now?
The way I would put it Vivek is, if I take a long term view, a generational view, I am pretty optimistic. The fundamentals of savings and investments are strong.
What about a more short term view?
If you take a shorter view of between six months to a year or even two years ahead, then everything that we have been reading about in the news is worrisome. The foreign direct investment is drying up. The savings rate seems to have been dropping. The economic growth we know has dropped. The next fiscal year we would lucky if we get 6.5% economic growth.
How do we account for the failure of this particular government to deliver sort of crucially needed second generation economic reforms?
The India story is a glass half empty or a glass half full. If you look at the media’s treatment of the India story, particularly international media they tend to overshoot. So two years ago we were being overhyped. I remember that the Economist had a famous cover where they said that India will overtake China’s growth rate in the next couple of years. They made that bold prediction. And then about a year later they were saying that India is a disaster. What has happened to the India story? The international media tends to overshoot. And then they overdo it in the negative direction as well. A balanced view would say that original hype was excessive. We cannot do nor would we want to do what China is doing. With our democratic system, our pluralistic democracy, the India that we have, we cannot marshal resources like the way the Chinese do, or like the way Singapore did.
Could you discuss that in detail?
If you take a step back, historically, many of the East Asian growth miracles, the Latin American growth miracles, were done under brutal dictatorial regimes. I mean whether it was Pinochet’s Chile, whether it was Taiwan or Singapore or Hong Kong, they all did it under authoritarian regimes. So the India story is unique. We are the only large emerging economy to have emerged as a fully fledged democracy the moment we were born as a post colonial state and that is an incredibly daring thing to do. At the time when the Constituent Assembly was figuring out what are we going to do now post independence a lot of conservative voices were saying don’t go in for full fledged democracy where every person man or a woman gets a vote because you will descend down into pluralism and identity based politics and so on. Of course to some extent it’s true. A country with a large number of poor people which is a fully fledged democracy, the centre of gravity politically is going to be towards redistribution and not towards growth. So any government has to reckon with the fact that where are your votes. In other words the market for votes and the market for economic reform do not always correlate.
You talk about authoritarian regimes and growth going together…
This is one of the oldest debates in social sciences. It is a very unsettled and a very controversial one. For any theory you can give on one side of it there is an equally compelling argument on the other side. So the orthodox view in political science particularly more than economics was put forward by Samuel Huntington. The view was that you need to have some sort of political control, you cannot have a free for all, and get marshalling of resources and savings rate and investment rate, that high growth demands.
So Huntington was supportive of the Chinese model of growth?
Yes. Huntington famously was supportive of the Chinese model and suggested that was what you had to do at an early stage of economic development. But there are equally compelling arguments on the other side as well. The idea is that democracy gives a safety valve for a discontent or unhappiness or for popular expression to disapproval of whatever the government or the regime in power is doing. We read about the growing number of mysterious incidents in China where you can infer that people are rioting. But we are not exactly sure because the Chinese system also does not allow for a free media. Also let’s not forget that China has had growing inequalities of income and growth, and massive corruption scandals. The point being that China too for its much wanted economic efficiency also has kinds of problems which are not much different from the once we face.
That’s an interesting point you make…
Here again another theory or another idea which can help us interpret what is going on. When you have a period of rapid economic growth and structural transformation of an economy, you are almost invariably going to have massive corruption. It is almost impossible to imagine that you have this huge amount of growth taking place in a relatively weak regulatory environment where there isn’t going to be an opportunity for corruption. It doesn’t mean that it is okay or it doesn’t mean that one condones it, but if you look throughout history it’s always been the case that in the first phase of rapid growth and rapid transformation there has been corruption, rising inequalities and so on.
Can you give us an example?
The famous example is the so called American gilded age. In the United States after the end of the Civil War (in the 1860s) came the era of the Robber Barons. These people who are now household names the Vanderbilts, the Rockefellers, the Carnegies, the Mellons, were basically Robber Barons. They were called that of course because how they operated was pretty shady even according to the rules of that time.
Why are the second generation of reforms not happening?
What makes reforms more difficult now is what I call the original sin of 1991. We had a first phase of the economic reforms in 1991 where we swept away the worst excesses of the license permit raj. We opened up the product markets. But what happened from 1991 and thereon was reform by stealth. Reform by the stroke of the pen reform and reform in a mode of crisis, where there was never an attempt made to sort of articulate to the Indian voter why are we doing this? What is the sort of the intellectual or the real rationale for this? Why is it that we must open up? It wasn’t good enough to say that look we are in a crisis. Our gold reserves have been mortgaged. Our foreign exchange reserves are dwindling. Again India’s is hardly unique on this. Wherever you look whether it is Latin America or Eastern Europe, it generally takes an economic crisis to usher in a period of major economic reform.
So the original sin is still haunting us?
The original sin has come back to haunt us because the intellectual basis of further reform is not even on anyone’s agenda. Discussions and debates on reform are more focused on issues like the FDI is falling, the rupee is falling, the current account deficit is going up etc. Those are all symptoms of a problem. The two bursts of reform that we had first were first under Rao/Manmohan Singh and then under NDA. If a case had been made to build a constituency for economic reform, then I think we would have been in a different political economy than we are now. But the fact that didn’t happen and things were going well, the economy was growing, that led to a situation where everybody said let’s carry on. But now we don’t have that luxury. Now whichever government whoever comes to power in 2014 is going to have to make some tough decisions that their electoral base, isn’t going to like necessarily. So how are they going to make their case?
So are you suggesting that the next generation of reforms in India will happen only if there is an economic crisis?
I don’t want to say that. Again that could be one interpretation from the arguments I am making of the history. It will require a change in the political equilibrium and certainly a crisis is one thing that can do that. But a more benign way the same thing can happen that without a crisis is the realization of the political actors that look I can make economic reform and economic growth electorally a winning policy for me. But India is a land of so many paradoxes. A norm of the democratic political theory in the rich countries i.e. the US, Canada, Great Britain etc, is that other things being equal, the richer you are, the more educated you are, the more likely you are to vote. In India it is the opposite. The urban middle class is the more disengaged politically. They feel cynical. They feel powerless. Until they become more politically engaged that change in the equilibrium cannot happen.
What about the rural voter?
The rural voter at least in the short run might benefit from a NREGA and will say that you are giving me money and I will keep voting for you. We have all heard people say they are uneducated and they are ignorant, no it’s not like that. He is in a very liquidity constrained situation. He is looking to the next crop, the next harvest, the next I got to pay my bills. If someone gave him 100 days of employment and gives him a subsidy, he will take it.
How do explain the dichotomy between Manmohan Singh’s so called reformist credentials and his failure to carry out economic reforms?
One of the misconceptions that crops up when we look at poor economic performance or failure to carry out economic reform is what cognitive psychologists call fundamental attribution bias. Fundamentally attribution bias says that we are more likely to attribute to the other person a subjective basis for their behaviour and tend to neglect the situational factors. Looking at our own actions we look more at the situational factors and less at the idiosyncratic individual subjective factors. So what am I trying to say? What I am saying is that it has become almost a refrain to say that Dr Manmohan Singh should be an economic reformer. He was at least the instrument if not the architect of the 1991 reforms. There are speculations being in made in what you can call the Delhi and Mumbai cocktail party circuit, about whether he is really a reformer? Was it Narsimha Rao who was really the real architect of the reform? Is he a frustrated reformer? What does he really want to do? What’s going on his head? That in my view is a fundamental attribution bias because we are attributing to him or whoever is around him a subjective basis for the inaction and the policy paralysis of the government.
So the government more than the individual at the helm of it is to be blamed?
Traditionally the electoral base of the Congress party has been the rural voter, the minority voters and so on, people who are at the lower end of the economic spectrum. So they are the beneficiaries just roughly speaking of the redistributive policies. Political scientists have a fancy name for it. They call it the median voter theorem. What does it mean? It means that all political parties will tend to gravitate towards the preferred policy of the guy in the middle, the median voter.
Was Narsimha Rao who was really the real architect of the reform?
Narsimha Rao must be given a lot of credit for taking what was then a very bold decision. He was at the top of a very weak government as you know. And he gave the political backing to Manmohan Singh to push this first wave of reforms more than that would have been necessary just to avert a foreign exchange crisis. And then he paid a price for it electorally in the next election. This again the intangible element in the political economy that short of a crisis it often takes someone of stature to really take that long term generation view. IT means that you are not just looking at narrow electoral calculus but you are looking beyond the next election. That’s what seems to be missing right now. Among all the political parties right now, one doesn’t seem to see that vision of look at this is where we want to be in a generation and here is our roadmap of how we are going to get there.
Going back to Manmohan Singh you called him an overachiever recently, after the Time magazine called him an “underachiever”. What was the logic there?
The traditional view and certainly that was widely in the West at least till very recently has been that it was Manmohan Singh who was the architect of the India’s economic reforms. But then how do you explain the inaction in the last five, six, seven years? The revisionist perspective would say no in fact the real reformer was Narsimha Rao to begin with. The real political weight behind the reform was his. And Manmohan Singh that any good technocratic economist should have been able to do which is to implement a series of reforms that we all knew about. My teacher Jagdish Bhagwati had been writing about it for years. In that sense maybe Manmohan Singh was given too much credit in the first instance for implementing a set of reforms. If you look at his career since then he has never really been a politically savvy actor. We have this peculiar situation in India since 2004 where the Prime Minister sits in the Rajya Sabha, the upper house. That kind of thing is not barred by our constitution but I don’t think that the framers of the constitution envisaged this would be a long term situation. It is a little like the British prime minister sitting in the House of Lords. I mean that practice disappeared in the nineteenth century. He has not shown from the evidence that we can see any ability to get a political base of his own to be a counterweight to the more redistributive tendencies of the Nehru Gandhi dynasty. And that’s the sense that in somewhat cheeky way I was using the term overachiever.
Do you think he is just keeping the seat warm for Rahul Gandhi?
It increasingly appears to be that way. If that is true then it suggests that we shouldn’t really expect much to happen in the next two years.
Does the fiscal deficit of India worry you?
If you look at some shorter to medium term challenges, then things like fiscal deficit and the current account deficit are things to worry about. Again other things like the weak rupee, the weak FDI data, things that people tend to fixate at, but those at best are symptoms of a deeper structural problem. The deeper concern is the kind of reform that will require a major legislative agenda such as labour law reform for example to unlock our manufacturing sector. And managing the huge demographic dividend that we are going to get in the form of 300-400 million young people. They will have to be educated.
But is there a demographic dividend?
That’s the question. Will it become a demographic nightmare? Can you imagine the social chaos if you have all these kids just wandering around, not educated enough to get a job, what are they going to do? It’s a recipe for social disaster. That according to me is going to be real litmus test. If we are able to navigate that then I don’t see why we won’t be on track to again go back to 8- 9% economic growth. I want to remain optimistic at the end of the day.
(The interview originally appeared in the Daily News and Analysis on August 6,2012. http://www.dnaindia.com/money/interview_reform-by-stealth-the-originalsin-of-1991-has-come-back-to-haunt-us_1724348)
(Interviewer Kaul is a writer and can be reached at [email protected])