Thursday, September 18, 2014

[Many poor countries came close to reneging on the international debt in the late 1990s; industrial countries and the Bretton Woods institutions tried to introduce some order into their descent into bankruptcy by prolonging the tenure of their debt and writing some off. I reviewed this process in Business Standard of 16 October 1999, and proposed a mechanism of national bankruptcy.]

The Jubilee Initiative

Ashok V Desai

President Clinton has announced that he will recommend to Congress write-off of a billion dollars of debt owed to the United States by poor countries. This follows a decision by the heads of the Group of 7, at their meeting in Cologne last June, to forgive 80 per cent of the poor countries’ debt; Clinton is going to propose the write-off of the entire debt of some countries.
These proposals are rooted in the Heavily Indebted Poor Countries (HIPC) initiative that the International Monetary Fund and the World Bank launched in September 1996. The Fund and the Bank were faced with three problems. First, they claim to have no bad debts; but there were developing countries that were incapable of repaying their debt, and the Washington institutions’ record was on the point of being besmirched. Second, neither institution can lend to a government that cannot service its loans (unless it is Russia); if the further aid was to be given to the overindebted countries that were otherwise deserving of aid, it was necessary to remove their overindebtedness. Finally, there was pressure for debt forgiveness from various groups of do-gooders.
But it was important to leave out of the debt forgiveness countries like India which, however poor they might be, meticulously serviced their debts. So the Bank devised criteria that would exclude them: only those countries were made eligible whose debt-to-export ratios were over 250 per cent and whose ratios of debt service to exports exceeded 25 per cent. This criterion excluded certain very open countries whom the Fund and the Bank wanted to help. So they added another: countries with an exports-to-GDP ratio of at least 40 per cent, a minimum ratio of fiscal revenue to GDP of 20 per cent and a ratio of the net present value of debt to exports of over 280 per cent also qualified. Armed with these criteria, the Fund and the Bank have reviewed the cases of 16 countries, placed 12 of them before their Boards, of which seven qualified for assistance and another three were on the way to be qualified, and assistance to two – Bolivia and Uganda – has already been released. Burkina Faso, Cote d’Ivoire, Mali, Guyana and Mozambique are waiting for release of assistance, and Guinea-Bissau, Ethiopia and Mauritania are on the way.
The Fund and the Bank make an agreement with each of these countries in which they promise to reform their policies over six years. The conditions are typical of Fund-Bank programmes – fiscal correction, opening up of trade, repair of banks, privatization etc. The debt write-off starts immediately but is substantially backended.
Earlier this year, the Fund and the Bank invited comments from NGOs; they received 65 written comments and held consultative meetings attended by about 500 participants. The comments of charitable organizations were all in favour of more generous write-offs. The most active campaign is the so-called Jubilee 2000 campaign. Apparently there is an ancient Jewish tradition or myth, according to which all debts were forgiven every 48 years. On the same lines, the Jubilee 2000 campaign is for complete debt write-off. In actual fact it recognizes the differences in the circumstances of individual countries.
Another active campaigner has been the Catholic Fund for Overseas Development. Its objective is to abolish poverty by 2015. To this end, the resources a government devotes to basic needs and productive investment should be deducted from its revenue, and not more than a fifth of what remains should go to debt service. Oxfam is dissatisfied with the target debt reductions of the Fund-Bank, which it feels still leave the debtor countries so indebted that they are deprived of initiative in domestic policy-making; it advocates deeper debt reduction.
The six-year qualifying period also has drawn much criticism. Some NGOs feel that it is too long – that it should be reduced to three years. But then there is the danger that a country would not manage to do much in three years and would therefore fail to qualify for write-off. So Christian Aid advocated a floating conditionality on the lines of IMF’s floating tranche: the qualifying conditions would be laid down at the beginning, but the country could take its own time to reach them.
My own preference is to make provision for national bankruptcy. Just as an imprudent businessman can be taken to court for not paying his debts and his assets liquidated to pay the debts, so a country should be taken to court, and its assets used to pay its liabilities. This may sound shocking, but is in fact the practice in respect of local governments in the USA. Local authorities that cannot pay their debts are taken into receivership by a liquidator appointed by Congress; their elected governments are suspended, and financial powers transferred to the liquidator. He repairs the revenue collection mechanism, and redirects expenditures to ensure that as much of the debt as possible is serviced; the rest is written off. He operates under Chapter IX of the Insolvency Act, which applies only to governments. Over 500 municipalities have been under receivership since this legislation was passed some 60 years ago; almost all have been restored to health and returned to elected governments.

The same needs to be done in respect of indebted countries. An international insolvency council should be set up on the lines of or the International Court of Arbitration.  It would appoint a panel of three judges, one a nominee of the country, one a nominee of the creditors, and one chairman acceptable to both. The country’s foreign assets – included those of its bureaucrats and politicians – would be placed under the custody of the panel. The country’s finance ministry would also be placed under the panel’s orders. The panel would put into place a scheme of debt reduction and repair the country’s fiscal machinery, and then give it back to its elected rulers or dictators as the case may be.
[Alexander Graham Bell is one of the most famous inventors; he is also one of my heroes, because he led such a colourful life. This column tells readers of Business Standard history; it was published on 12 October 1999]

The later lives of Bell and Watson

Everyone knows that Alexander Graham Bell and Thomas A Watson invented the telephone in 1876. Bell died in 1922, Watson in 1934. Their invention made them rich at a young age. What did they do with the rest of their lives?
In 1876, Bell was a 29-year-old man of no fixed occupation. His father, Alexander Melville Bell, was professor of elocution in London University; he coached actors, and taught the deaf to speak (both he and his son married deaf women). Alexander Graham Bell (Alec) left school at 11. At 16 he went to Elgin, and by neglecting to state his age, got a job as a schoolteacher.
By then, however, his father was gaining a reputation as a teacher of elocution. He was invited to give lectures at Lowell Institute in Boston in 1868; Alec went with him to America.
Alec’s elder brother died of tuberculosis in 1866, and his younger brother in 1870, leaving him as the last sibling alive. Alec was also diagnosed with tuberculosis. Fearful that he too may die, his father gave up his professorship and migrated to Canada. On recovering his health, Alec set up a School of Vocal Physiology in Boston in 1872.
At that time his father told Alec about a paper by Hermann Ludwig Ferdinand von Helmholtz on the use of electric tuning forks to produce vowel sounds. Alec got hold of the paper, but did not understand it since it was in German. He thought Helmholtz had transmitted speech electrically. That misconception fired him, and he began experiments to do the same.
For help with the construction of the device, he turned to the 20-year-old Thomas Watson in 1874. Watson worked in a local workshop as a machinist. At that time there was no mass production, accuracy required manual dexterity, and people who had it were prized. Watson was one of them. In his spare time, Watson went to mediums and dabble in psychic phenomena; he also went to beaches and declaimed poetry.
The idea of the telephone started from the telegraph. The telegraph had been invented in 1837 by William Cooke, who had served as a soldier of the East India Company and had been sent back to England on account of ill health. He patented it together with Charles Wheatstone, professor of natural philosophy at London University. Samuel Finley Breeze Morse, who invented an alphabet consisting of dots and dashes, turned it into a practical device. In a telegraph, an electric current sent down a wire made a reed magnet at the other end vibrate; a pen attached to it put down dots and dashes in the pattern conveyed by the wire. The first telegraphic message was sent from Washington to Baltimore in 1844: it was “What hath God wrought?” By the 1870s, America was crisscrossed with telegraphic wires owned by a mammoth monopoly, Western Union. Bell and Watson’s idea was to make reed magnets reproduce human speech instead of dots and dashes.
Bell was busy giving speech lessons by day and making experiments at night. He was earning little and always in debt. But he was giving lessons to Mabel, the deaf daughter of Gardiner Hubbard, who was rich and more practical than Bell.
Bell had gnawing doubts about his telephone. But he was not the only one working on the idea; many were in the race. Hubbard filed patent papers for him without his knowledge, and thus closely beat Elisha Gray. Hubbard also drove Bell to exhibit his telephone at the Centennial Exposition at Philadelphia celebrating the centenary of independence of the United States in 1876. There the telephone caught the fancy of Dom Pedro II, Emperor of Brazil, who inaugurated the Exposition. It also brought Bell in contact with Lord Kelvin, one of Britain’s foremost scientists who visited the Exposition and carried the word of the invention to Britain.
Although the telephone was shown to work, it was still to make some money. Bell started giving lecture demonstrations with it. The money he earned from them was enough to relieve him of his debts and marry Mabel in July 1877. They left for Britain on honeymoon, and returned fifteen months later.  Bell had little to do with the commercialization of the telephone; Hubbard and Watson organized it.
They offered the patent rights to Western Union for $100,000. It rejected the offer; instead, it began to sell and instal telephones in breach of the patent. Watson filed a Nsuit and won it; Western Union had to sell its telephone business to National Bell Company, which was formed in February 1879. The early history of Bell Telephone was full of suits, financial crises and intrigue. But it was also a story of explosive growth, which made Bell and Watson millionaires.
Bell took American nationality in 1882, built a huge mansion in Washington and settled down. He built a country house at Cape Breton in Canada and spent summers there. He lived a life of leisure, entertained lavishly, played the piano, read literature to guests, and indulged in amateur dramatics.
On the beach at Cape Breton he began to fly kites. He designed various kites, some as big as a room. Big kites collapse in high wind; to give them strength with the least addition to weight, Bell invented the tetrahedron or four-cornered, three-dimensional pyramid; it led later to the trapezoid structures of Frank Lloyd Wright, and continues to be used in structures. With some friends he experimented with motorized kites, and invented the aileron and the tricycle undercarriage. Then he became interested in hydrofoils, and built one in 1919. It reached a speed of 70 miles an hour – a marine record it held for 10 years.
Watson retired from Bell at 27, and sailed for Liverpool in 1881. He traveled to Norway, Denmark, Germany and Switzerland, where he spent some time learning French. Then he went to Italy, learnt Italian, and worked for a while as a tourist guide in Rome.
On returning to Boston, he married Elizabeth Kimball, and bought a farm at East Braintree, Massachusetts, on which he introduced state-of-the-art mechanization. But soon he lost interest in farming. He set up a machine shop on the farm and started making steam engines for boats.
Then Elizabeth and he joined MIT and studied geology and paleontology. Meanwhile, his engine shop prospered; he went on to build destroyers, cruisers and submarines. At that point his company failed; in 1903, he was forced out of the company, and lost his entire investment. For a time he earned a living as prospector and by means of public readings.
In 1910, at the age of 56, he left for England and joined Frank Benson’s Shakespearean Company. Starting as a member of crowd scenes, he rose to doing secondary parts, and wrote plays for the company based on Dickens’s novels. After two years of travel he returned to Boston, where he spent the rest of his life in amateur dramatics, elocution and geological exploration.

So there is life after early success for those who made their million before they were 30; they do not have to sink into sloth and drink.
[When I was a professional economist in the 1970s and 1980s, I did some research on innovation. So a study of the US patent system by Adam Jaffe in 1999 caught my eye. This column was published in Business Standard of 5 October 1999.]

The Expanding US Patent System

For decades, the number of patent applications in the US remained around 60,000-70,000 a year; about a quarter of the applications were rejected, and the number of patents granted hovered between 30,000 and 50,000. The numbers began to decline in the 1970s – the applications gently, patent grants quite drastically. The decline of patenting activity was even more drastic when viewed in relation to population or R&D activity. The number of patents per thousand adults declined from almost 0.4 in the early 1960s to 0.2 in the late 1970s; the number of patents granted to US corporations per million 1992 dollars of research and development fell from over 0.6 to below 0.3. These sobering figures were grounds for widespread fear that the innovative spirit of the Americans was on the wane.
From the 1980s, however, as US growth picked up, so did patenting. The number of patent applications has risen over 100,000 in recent years, and the number of patent grants over 60,000. Though more gently than these absolute figures, the number of patents per adult and the patent productivity of corporate R&D have also risen. What is behind this revival of innovative activity in the US? Has the innovative spirit returned? The answer emerges from the recent work of Adam Jaffe at the National Bureau of Economic Research; apparently, the rise has as much to do with institutional changes as with changes in American creativity.
The US has had a lasting allergy towards monopoly, embodied in anti-trust laws going back to the 1880s. This allergy spread to patents as well in the 1960s; they were considered state-created monopolies, and the administration itself began to undermine the patent system. Thus, almost half the patent applications were rejected. Of those that were granted, a number were contested in courts. Once the district courts ruled on the validity of the patent, their verdict could be contested in appeal courts. Thus, the judicial process diluted the reliability of the patent.
This uncertainty was greatly reduced in the 1980s. In an effort to improve the quality of the judicial system, US Congress created a Court of Appeals for all federal district courts. All appeals on patent cases went to this Court, which greatly improved the consistency of the rulings; it was no longer possible for a litigant to find a court that was likely to be more friendly than another. At the same time, the US Supreme Court itself gave an important signal in its rulings that the monopoly granted by a patent overrode anti-trust laws. As a result, the judicial system today is more likely to uphold a patent.
Another major change is in the attitude of the government towards innovations made out of its funds. Originally, the government believed that its innovations were a common good which should be available free to everyone. But if an innovation required substantial investment to exploit, it was likely that making it available free might actually ensure that it would not be exploited. The patent system is supposed to stimulate the exploitation of innovations by giving a temporary monopoly to the innovator; temporary monopoly encourages the use of government-owned and government-financed innovations no less than of private ones. So in 1980, US Congress passed a law authorizing universities to patent their innovations even if these had been financed from federal funds; over the 1980s, the same right was extended to national laboratories.
Finally, both the US patent office and the Supreme Court have expanded the ambit of inventions that can be patented. Thus biological, genetic and software innovations that would have been unpatentable only a couple of decades ago are now patentable.
It is, of course, true that the proportion of applications in the new areas – biotechnology, genetics, software – has gone up considerably. Data processing and molecular biology, each of which in the late 1970s accounted for less than half a per cent of all patents granted, now account for over 2 per cent each. But it does not entirely account for the rise in the total number; there has been a surge in 70 per cent of the fields.
This suggests that there has been a rise in innovation activity. There are other indications: for instance, more new firms and small firms are now patenting. But there is also the phenomenon of competitive patenting. It has existed in pharmaceuticals for a long time. A drug can often be produced by a number of different processes; many products may show potential as drugs even though they may not be of obvious commercial value. Drug companies have long been in the habit of taking out a lot of related patents even though all are not commercially useful. The idea is to prevent raids in which other drug companies patent innovations which may later prove indispensable in the exploitation of a company’s own patents.
The result is a thicket of patents; one company cannot produce a product without straying into another company’s patents. As long as this dependence is mutual, the companies can come to cross-licensing agreements, or ignore the infringement of each other’s patents. They would not, however, be so tolerant of patent infringements by companies which did not hold extensive patents. Something similar has now happened in computer chip design. There too, companies cannot design chips without impinging on other companies’ patents; so similar cross-licensing agreements and tolerance of patent infringements arise. In this area, therefore, many innovations are patented whose value lies, not in their commercial potential, but in their importance as bastions of corporate defence.
One of the most remarkable increases in patenting is by US universities. They took out less than 200 patents a year in the early 1970s; now the number is touching 2500. This increase would not have taken place without a change in law. But following that change, universities have attracted research funding from industry, which expects the results to be patented or kept confidential. Before this change, university innovations used to be more important; they were more frequently cited in subsequent patents. Now the difference has disappeared. The number of patents granted to national laboratories is not so dramatic; but from being negligible, their number has risen to about 300 a year.

Thus the US has become less ambivalent about patents in the past two decades, and revamped its judicial system for better defence of patent rights. The result has been a considerable expansion of patenting activity, and its extension to new areas and to government-financed institutions that once did not patent at all. The change in domestic attitudes and activity was reflected in the Uruguay round, in which the US vigorously pushed for better protection of patent rights in developing countries, including India. This internal exposure is about to lead to changes in US patent practices: there are proposals to give priority to the date of filing, as in Europe, instead of the date of innovation, and to publish all patent applications 18 months after they are filed, thus making a challenge before grant of patents possible.
[I know some German, and follow events in Germany. In 1999, an official enquiry in Germany threw doubt on the desirability of coeducation; this is my reaction to it, published in Business Standard of 2 October 1999]

Is coeducation such a good idea?

In India today, it is taken for granted that schools should be coeducational. Some private boys’ schools, and fewer girls’ schools, survive from colonial times; but the newer ones are all coeducational. When we read of separate education for girls in Muslim countries, we smirk: what do you expect of these Muslim backwoodsmen? It appears self-evident that if women have to live and work with men through their lives, they should get used to doing so early in their lives. If boys and girls are to be equal, the simplest way of ensuring equality in education would seem to be to give them the same education – and a taste of life to come. The presence of girls may also be expected to help in the socialization of boys. And yet, the idea that girls benefit from separate schools is gaining ground in western countries.
Girls do less well than boys in science and mathematics. Is it due to an inherent weakness, or is it a social phenomenon? The education ministry of Baden-W├╝rttemberg commissioned a study by educationists which investigates this fact. Its conclusion is that girls’ schools offer a more favourable atmosphere for girls’ development. The reason is that in any school with boys, children spend considerable energy establishing a space in a competitive and often conflictual social field; girls save on that energy in a girls’ school where aggression is less prized. Psychological studies indicate that under stress, girls become introverted and sensitive, whereas boys become active, aggressive and unstable.
The difference is most striking in the intervals. In schools where boys are present, recesses are noisy, and children are hyperactive. These characteristics also exhibit themselves at outings and visits, to the despair of accompanying teachers and drivers. In subjects that require deep, individual submersion, such as literature, music and art, boys are unwilling to sit down and bury themselves.
In the subjects at which boys are better, such as mathematics and sciences, girls do better when educated separately. The girls who enter university courses in information technology come overwhelmingly from girls’ schools; so do girls who enter managerial and supervisory grades in later life. This can be related to the fact that the roles of leaders in coeducational schools (monitors, editors of school magazines, organizers of events) are mainly filled by boys.
Do these generalizations, based on German reality, apply to India? There is no doubt that boys, and in later life men, dominate public life and institutions as much in India as in Germany. Boys’ behaviour at school is perhaps less violent and destructive in India than in Germany. But this may be related to the lower spread of education. As education spreads downwards from the middle class to the poor, the standards of boys’ behaviour also change. Boys take after fathers. If the fathers have a hard struggle in life, if they regard fighting for their place to be the norm, their aggressiveness will be inherited by their sons. In households that are better off, where the struggle for survival is not so harsh, where conflicts are more muted, boys also grow up more civilized.
Many traditional families in India are unwilling to send girls to school. Girls in Gujarat are entitled to free schooling, but still, less than half of them go to school.
We may regard this the result of their families’ undeniable backwardness. In a society where the majority of women are illiterate, illiteracy cannot be socially shaming. But in reaching such a snap judgment, we are perhaps missing something of our social reality. These backward families are afraid that their daughters will be “dishonoured” – that their names will be so tarnished that they would not find husbands. But there are degrees of dishonour, all the way from eve teasing to rape. Delhi is notorious for eve teasing; although other cities do not get into the press with the same frequency, horrific incidents are reported from them from time to time.
It is right, even for backward families, to expect that their daughters should not have to suffer any of these in the course of education. It is possible that Indian boys create an environment in schools which is as deleterious to girls’ development as it is in Germany. So what should be our solution? Purdah? Purdah may be acceptable to a large proportion of our population; but in an unequal society which we are trying to make less so, it is unacceptable as a part of social policy. Even if women get separate education, it must be equal.
This is why I am against separate women’s schools and colleges. I have often given talks in women’s colleges. Our male students are in general inarticulate, lacking in quick response, public speaking ability, and self-confidence; but the atmosphere in women’s colleges is funereal. Often there are no questions after the talk; if there are, they seldom show a brain ticking away. The Germans find their women more reflective; I still have to find them in India.
My solution is separate boys’ schools. Boys should have to qualify for admission to coeducational schools. They should have to take a test. It would involve being able to sit quietly and work alone for two hours at a time. It would require being able to talk intelligently with girls for 15 minutes. It may involve ballroom dancing.

The rest of the boys should be sent to corrective schools. They should have a chance every year to take the qualifying examination and be admitted to a coeducational school. But until they pass it, they should be confined to boys’ schools. And as long as they are not qualified to be coeducated, they should not be admitted to university buses, or students’ canteens, or to any public facilities where men and women mingle. Believe me, if coeducation comes at a price, boys will give their lives to be with girls.