INDIA BEFORE THE TRAINS

I wrote this in the Calcutta Telegraph of 12 January 2010. The British razed Delhi to the ground after the Mutiny of 1857; Captain con Orlich's memoirs give a rare picture of it just years before the event.

A JOURNEY TO CALCUTTA

On the morning of February 5, 1843, Lord Ellenborough buttoned his white jacket, adjusted his plumed hat, and stepped out of his tent. Outside, an elephant knelt, but it was too tall to climb on to by stepping on its bent leg. A ladder was brought, and Ellenborough climbed into the howdah. He rode to the head of the waiting columns, and they followed him on the way to Delhi. They proceeded past waving fields of wheat and arches, domes and ruins peeping through the trees. Some miles outside Delhi, they approached a long row of richly painted and adorned elephants on which in silver howdahs sat the noblemen of Mogul empire, each bedecked in jewellery and covered with a Cashmere shawl thrown over his right shoulder. Each of them touched his forehead with the right hand as he bowed low to the Lord. On the way to Delhi was the ridge, which today stands between the ISBT terminal and Delhi University campus. On its peak stood a flagstaff flying the Union Jack. On both sides of the kankar-made road descending from there to Cashmere Gate were beautiful villas in large parks. Delhi was protected by a seven-mile wall of red sandstone, 30 feet high and 3-5 feet thick, surrounded by a moat 20 feet broad, and pierced by seven arched gates. It had two million inhabitants in Aurangzeb’s time. By the 1750s, the population had fallen to half a million; by the time Ellenborough arrived, there were barely a quarter million — some 60,000 Muslims, the rest Hindoos. Beyond Cashmere Gate were more walled gardens of gentry and, standing out amongst them, the spire of a Protestant church. Finally one came to Chandni Chowk, a street forty paces broad, running westwards from the palace of the Great Mogul; in its middle ran a walled canal which cooled the air in hot weather. Next day, Lord Ellenborough received various princes. They had all pitched their camps in the surrounding wilderness — 5,000 men from Bhurtpoor, 4,000 from Alwar, 10,000 from Dhoolpur, 600 men from Shapurah etc. The Rajah of Jeypoor did not come because he considered the Mogul Badshah his inferior. Rajah Kour Rattan Singh, the Rajah of Bickaneer, came on February 8. He was preceded by his camel corps, and himself rode in a richly gilt takt-i-rawan, otherwise known as palanquin. He was accompanied by his son and heir, his brother, nephew, 22 barons, 22 ministers and several hundred lancers and swordsmen. The courtiers were dressed in long white robes and wore red conical turbans; they had sabers in their hands and shields on their backs. The Rajah, well versed in ancient Indian etiquette, entered the tent treading slowly and heavily like an elephant, and shook Ellenborough’s hand. He told Ellenborough that he was from a younger branch of the house of Joudpoor, which was the oldest in India. Their tribe used to rule in the valley of the Jumna, but was driven out by the Moguls. He stayed for half an hour, and then left sprinkled with ottar and loaded with rich presents. The Rajah of Alwar was proud of his country, which he said teemed with tigers, boars and antelopes. He had trained dogs to attack and kill tigers. He had brought along a tiger and a dog to exhibit a combat. Ellenborough refused to see it, but watched the dance of a very pretty and richly dressed bayadère. Her petticoat was full and wide, and she wore ample silk pantaloons. She was covered with jewels, and her ankles were adorned with silver rings and bells. Captain Leopold von Orlich, who chronicled the above, was a young German nobleman who went to England, enlisted in the British army, sailed via Egypt to Karachi and joined Ellenborough’s cavalcade. From Delhi he travelled to Calcutta, which “has the appearance of a city of palaces. A row of large superb buildings extend from the princely residence of the Governor General, along the Esplanade, and produce a remarkably striking effect, by their handsome verandas, supported by lofty columns.” The city extended six miles from Fort William. It consisted of two parts, divided by a line drawn from Bebee-Ross-Ghaut eastward to upper circular road, and from Hastings Bridge to Tolly’s Nallah northeastwards to lower circular road. This part of the city was occupied by Christians; natives occupied the northern areas to Chitpoor Bridge and the Maharatta Ditch. In 1837, Captain Birch, the superintendent of police, counted the population of Calcutta to be 229,705 inhabitants — 3,138 British, 3,180 Portuguese, 536 Americans, 160 French, 203 Jews, 40 Parsees, 35 Arabs, 362 Moguls, 683 Mughs and Burmese, 4,748 Eurasians, 58,744 Mussulmans, 137,651 Hindoos and 19,804 of low castes. Von Orlich stayed in Bengal Club, where he watched the Mussulman servants get together for prayer every morning and evening, kneeling on a glass plot, led by Mr Maddock’s hoockaburdar. He called on Dwarkanath Tagore, who was having differences with his family and was thinking of returning to England for his son’s education. His wife, however, lived in strict seclusion; and his eldest son did not share his father’s Eurocentric views. Dwarkanath had become one of India’s wealthiest merchants by his ability and enterprise. He invited von Orlich to a dinner at his villa, five miles outside Calcutta. It was surrounded by a lawn in a small park with a mosaic of flower beds around a pond and groves of mangoes, bananas and tamarinds; on the edges were coconut and fan palms. Dwarkanath often invited young married couples to the villa, which had two floors. He pointed out a portrait of a beautiful Indian lady, to whom he was evidently much attached. At the dinner, roast beef was served with the finest wines. After the dinner, six bayadères came in and danced. They had pretty, delicate hands and feet, and fine contours. In the end, their dance became so daring that the European guests asked that it be stopped. Von Orlich also went to the mint on Strand, built on a plan of Major Forbes in 1824 and completed in 1830. It was the largest in the world, going down 26½ feet below the ground and rising 60 feet above it. It was built in the Doric style; its centre portico was a copy of the temple of Minerva in Athens. It employed 3,000 men, and had six steam engines. It minted 200,000 coins in seven hours; since 1831, it had turned out 200 million rupees. In those days, a typical Calcutta European family would bathe and meet at 9 o’clock for breakfast. Then the ladies went off for visits or shopping, while the gentlemen worked in their official residences. At 2 o’clock they met for a hot tiffin, after which they went back to work. At sunset, they got on horseback or into carriages, and went to the Strand, Garden Reach or Allipoor. Dinner was served at 8 o’clock. If one was invited out to dinner, one took with one one’s own kidmatgar to serve one. These are some of the things Captain von Orlich wrote in his letters to the German savants, Alexander von Humboldt and Carl Ritter.

BRAND INDIA 3

I wrote this in the Calcutta Telegraph of 29 December 2009. It is the third in the series on Brand India.

RENOVATING OUR IMAGE

A couple of hours’ drive out of Delhi, there is the ancient fort of Neemrana stuck on a hill. Francis Wacziarg and Aman Nath renovated it some years ago; it has since been a popular conference venue. In 1995, an Indo-Pakistan friendship group invited me to give a talk there. I looked at national income figures of major countries, and found something striking. Converted to common prices, India’s national income in 1980 was a fraction of the national income of all major countries; it was a half of Germany’s, a third of Japan’s, and an eighth of America’s. In the 1980s, India grew much faster than most other countries. In 1992, India had overtaken all European countries except France and Germany; its national income had risen to two-fifths of Japan’s and one-sixth of America’s. I projected the 1980-92 growth rates to 2004, and predicted that India’s national income would overtake that of all countries except the United States of America, Japan, China and Germany, and that it would rise to a quarter of the US’s and a half of Japan’s by 2004. In 2003, Goldman Sachs did projections similar to mine for what it called Bric countries, with one difference. It did not correct for price differences between countries. Prices in India are only about a fifth of those in industrial countries, so in the Goldman Sachs report, it started with a much lower base and took much longer to catch up with other countries. According to Goldman Sachs, India’s gross domestic product would catch up with Britain’s in 2022, Germany’s in 2023 and Japan’s in 2032. But income comparisons with correction for price differences are wrong and misleading. Now the World Bank has published GDP figures for 2008 at purchasing power parity for 2008; they are comparable to my calculations of 1992. According to them, India had overtaken all countries by 2008 except the US, China and Japan. Its GDP was 77 per cent of Japan’s, 42 per cent of China’s and 24 per cent of America’s. If we take the World Bank figures and apply the growth rates of the last 15 years to them, we must conclude that by 2020, India will overtake Japan and will have the world’s third largest GDP. But it will be decades before it overtakes the US; and it will never overtake China. On the contrary, China’s national income will be a progressively increasing multiple of India’s. Just now it is two-and-a-half times India’s; it will rise to three, four and five times India’s. We Indians tend to be paranoid about China; a trivial encounter between our troops and theirs at the borders leads to banner headlines. Everyone thinks a war is going to break out; and if we look at the forces and the logistics, we can be sure that in a war, India would be as badly mauled as in the 1962 encounter. I do not want to add to this paranoia, because I do not believe that there is going to be a war. The Chinese leadership is far too intelligent. The projections I have cited suggest that the 21st century is going to be a Chinese century; it will fall into China’s lap without China having to fight for it. From this I draw three conclusions. First, India should aim at higher growth — at least as high as China’s. We are so proud of growing at eight or nine per cent; instead, we should aim to grow at 12, 13, 14 per cent. Second, we are not going to be a global power; we should accept this and work out our strategies on that assumption. And finally, we cannot do everything and achieve everything; we should choose what we want to do and do it well. Look at the map of the world. India is on the southern edge of the Eurasian continent stretching from Spain in the southwest to Russia’s Kamchatka peninsula in the northwest. This continent is being divided up into a Chinese sphere of influence in the east and a European sphere of influence in the west. The border between the two is uncertain, and there may be none; the European Union and China are not in open competition. India is not affected by this division of Eurasia, and cannot do anything about it. But between the two, the EU is a better ally for us; we should get closer to Europe, and work together with it. The other regions of the world — around the Pacific and the Atlantic — are even more remote from India. The ocean that surrounds us is the Indian Ocean; this is where we should concentrate. It is the countries around it to which we should try to sell Brand India. We do not realize it, but this has been happening already in a small way. The share of our exports to the Indian Ocean region in our total exports was six per cent in 1991-92; by 2007-08, it had risen to 20 per cent. Its share in our imports grew very little, from 12 to 14 per cent; but this area has been increasingly looking to us as a supplier of industrial goods. It would do so even more. But these developing countries of Africa and Asia are always short of foreign exchange; they would buy more from us if they had more foreign currency. And we can give them more by buying more from them. India has always been very protective of its agriculture, and so has missed out on becoming a market for African and Asian countries. We have reduced our industrial duties to single figures. We should do the same with our agricultural duties, and import cotton from Chad and Burkina Faso, coffee from Burundi and Ethiopia, cocoa beans from San Tome, cashewnuts from Guinea Bissau, tea from Kenya and lentils from South Africa. In return for their exports, we should not confine ourselves to our commodities. We should build on the specialities we have been developing in the last two decades, namely tertiary education and healthcare. In these two industries, we have built up volume without much care for quality. Now we should introduce grading and standardization. We should aim to become the educational and medical fulcrum of our region. These two industries will lead to other fields of specialization. For instance, education can lead to computer hardware and software, telecommunications and broadband; healthcare can lead to biotechnology and medical engineering. We are saving 40 per cent of our income; in 10 years, we could be saving 50 per cent or 60 per cent. We will have plenty of savings; we should build up a robust, efficient capital market to channel them into these industries. We should give Indian Ocean countries access to our capital market, and invest in their growth and diversification. They can be our hinterland. We can go to see their wildlife, and they can come to see our holy men. Together with our neighbours, we should work out our own brand of a good life — a more relaxed, more meditative, less frenetic, less energy-intensive way than the West’s. That way, we would maximize our gross national contentment as Jaswant Singh called it.

BRAND INDIA 2

I wrote this  second column on Brand India in the Calcutta Telegraph of 15 December 2009.

A NEW BRAND DRIVER

We Indians implicitly believe in India’s great past. Recently, that past has been given a statistical underpinning by Angus Maddison. To celebrate the beginning of the 21st century, Maddison wrote a book called The World Economy: A Millennial Perspective. There he says that India was the world’s largest economy in the first millennium AD. It produced one-third of the world’s income in the first century, and 29 per cent in the 11th century. Under the Mughals in the 17th century, India’s share of world income was 24 per cent. Although China had overtaken us by that time, India’s share was greater than that of the whole of Europe. By 1951, India’s share had fallen to 4 per cent. Why it fell so far is a question we can leave to historians. What is striking is our poor performance since Independence. India had an extremely high brand value in 1947, despite Partition and the communal riots. Its new rulers got much publicity and goodwill because of the way they had won independence without violence; the world assumed that now that India was independent, it was bound to emerge as a major power. But the expectations were belied, and the opportunities went to waste. The government tried State-led industrialization, and wasted the one major national asset it had, namely private enterprise. It introduced comprehensive import substitution, and built up inefficient industries. As a result, they could not use international markets to expand. The global market is 25 times as big as India’s; an industry that can access it can grow much more than an industry confined to the home market before it faces a market constraint. A number of countries, which were initially poorer than India, did just that; they built up internationally competitive industries. As a result, they grew much faster and became richer than India. And by establishing their presence in the world market, they built up their brands. By the 1980s, little countries like Korea, Taiwan, Thailand and Malaysia had better brands than India. Luckily for us, the import substitution strategy finally broke down in 1991, and India went bankrupt. Liberalization was forced on India. When I was taken into the government in 1991, changing the world’s image of India was one of our most serious problems. After forty years of socialism, instability and failure, people across the world were sceptical that India had changed stripes. But the reforms of 1991 worked. India opened up to foreign trade and investment. As trade and investment flows increased, so did the interest of the outside world in India. Today, the circumstances have completely changed. Indian government officials do not have to go round the world trying to interest investors today; instead, they spend their time making complicated rules about which foreign industrialists can invest in India and which cannot and on what terms. India’s image has also changed over the years. Before Independence, India was known as a country of elephants and snake-charmers. Maharajas were its brand ambassadors. Their pomp made for good spectacle; their foibles were lapped up by the Western press. But the rulers who took over India in 1947 were not fond of the Maharajas, whom they regarded as remnants of a feudal age and friends of the British. They were ashamed of elephants and snake-charmers; they dreamed of a metallic, modern, industrial India signified by dams and steel mills. So they wasted the images they had inherited. But the image they wanted to project was different from India’s reality, and it continued to be different from the image abroad of India. The disjunction between the two images — the image that people had abroad and the image that the rulers of India wanted them to have — has persisted. The rulers wanted the world to see India as a modernizing, industrializing, dynamic nation. But industrialization was slow to come, so it added nothing to India’s brand. Instead, India became a large-scale importer of foodgrains in the 1950s, and became known as a country of the starving poor. The last famine we had was in 1966; we have been producing enough foodgrains since the 1970s. Nuclear bombs were exploded, first by Indira Gandhi in 1974 and then by Atal Bihari Vajpayee in 1998. They made no difference to the balance of power; both explosions were purely public relations exercises, designed to create an image of a strong India. But strength does not come from an atom bomb. The explosions only created the image of strutting rulers who thought a lot of themselves. What changed the image of India was something that the rulers had nothing to do with. In fact, they did not know when it began to happen, and did not get a chance to stop it. It was the coming of the information technology industry, and the creation of the market abroad for programmers. India just happened to have a large number of engineers who could turn to programming; American IT companies began to come to India in the 1980s and hire them away. And it is these code writers that changed India’s image. During a visit to Germany some 15 years ago, a German came up to me and said, “You Indians are so intelligent!” I thought he had gone mad. It was the Germans who were most intelligent; theirs was a most difficult language, and even their children could speak it. But the German was referring to our software engineers. The IT boom, which transformed India’s image, had nothing to do with our rulers. But they did recently do one thing right, namely the Incredible India campaign. It was a short, simple, snappy slogan; no Indianisms in it. It was not descriptive; instead of telling, it mystified. And the visual images that accompanied it were not of steel mills and dams; they were just images of beauty. So Indians — even official Indians — are capable of doing things right; that gives me hope for the future. Now, the IT boom has done its work for India’s image. Net exports of software earned $44.2 billion — a quarter of our invisible receipts and 15 per cent of our total current account receipts. Industry leaders continue to make optimistic projections of its growth, but it is likely to slow down for two reasons: first, because India has already conquered the easier markets and second, because Indian wages have gone up. The Incredible India campaign created enormous interest in India, but it has gone to waste: transport within India has become crowded and chaotic, and Indian hotels have become absurdly expensive. Even for Indians, a holiday in Malaysia or Thailand costs less than a comparable holiday in India. Today, Indians spend nearly as much abroad as foreign tourists spend in India, and our net earnings are negligible. In 2008-09, Indians spent $9.4 billion abroad; foreign tourists spent $10.9 billion in India. So we need new drivers for Brand India in the next ten years. What might they be? It depends on where we want India to go. Our plans should be ambitious but realistic; they should be located in our international environment, and use our strengths. My ideas must wait for the next column.

BRAND INDIA 1

I wrote this in the Calcutta Telegraph of 1 December 2009. I am still concerned about the fact that India is the world's fourth largest economy and amongst the top dozen industrial countries but is hardly known as such outside its frontiers. This was the first in a series of three articles.

RAISING OUR AMBITION

At the end of World War I, there was a poor boy in Japan. He worked as a domestic servant in the house of a workshop owner. The workshop repaired and serviced Ford trucks. The owner saw an opportunity to make money in Manchuria, which at that time was a Japanese colony. So he left the workshop in charge of his young servant, and went off to Manchuria. He came back after eight years. Then his young servant got ambitious; he left his master and began a business of making engine oil. He continued in this small business till World War II. Just a fortnight before the war ended, an American bomb sent his factory up in flames. The man was very depressed. He started drinking, and stayed drunk for a year. The time after World War II was a time of terrible food shortages. The people of Tokyo used to wander into the countryside and dig for roots to eat. It was also a time when there were a lot of small, idle petrol engines. The Japanese army used these engines to power their field telephones; after the war, the engines were useless. Our young man bought up these engines, put them at the back of bicycles, and turned them into primitive motorcycles. The people who were scouring the countryside for sweet potatoes were delighted with these motorized cycles. Our man did brisk business, and grew rich. He then decided to go on a world tour. He went to Le Mans, and watched the motorcycle tournament. He was flabbergasted. He said to himself, I am making junk. He wanted to make a motorcycle that would win the Le Mans race. So he improved his technology and started making motorcycles. He then wanted to export his motorcycles to America. But the Japanese government did not let him. It was keen to get Nissan and Toyota cars exported to the United States of America, and did not want Americans to think of Japan as a manufacturer of second-rate motorcycles. So our man designed a light two-wheeler, an early scooter which the Japanese government could not object to, and it allowed their export to the US. Our man advertised it in California as a fun vehicle for young men and their girlfriends; it was a roaring success. Finally, after the Japanese government gave up its preference for Toyota and Nissan, our man began to export cars. Today, they are a leading brand across the world. The man’s name was Yuichiro Honda. Why did the Japanese government promote Nissan and Toyota, and not Honda? It was because it wanted to promote Japan as a brand, and wanted good cars to be a part of that brand. It did not simply want to promote Japan; Japan was already well-known all over the world. Japan was the country that had fought World War II as an ally of Germany. It was defeated, and its brand was in a shambles round the world. Its army had become notorious all over Asia and the Pacific for its atrocities. Japan’s was an embarrassing brand; the Japanese government wanted the world to forget Japan as a warring country, and to recognize it as a manufacturer of the world’s best products. Apart from its image as a belligerent country, it also faced the handicap that Japanese products were known before the war for their shoddiness. That is why it was so keen that exported Japanese cars should be as good as the best in the world. It tried hard for decades; today Japan is a well-known and respected manufacturing nation. Germany has gone through a similar transformation. The German troops had become notorious for their atrocities in Poland and Russia. But Germany had become even more notorious for its killing of six million Jews. Amongst these Jews were businessmen, financiers and industrialists; they were amongst the most respectable Germans till the 1920s. Then Hitler took power; he robbed them of their wealth, and killed them. It was a terrible blot to overcome after the war. Germany, like Japan, rebuilt its industry at the cutting edge of world technology. Audi, the German car, had an advertising slogan, “Technik die begeistert (technology that amazes)”; later it was replaced by “Vorsprung durch Technik (leap forward with technology), which became one of the world’s most famous advertising slogans. But Germany could not create its brand as a technology leader until it wiped out its disgrace as a mass killer. If it had waited for the world to forget the massacre, that would have taken centuries. Instead of waiting, the German government distanced itself from the massacre by acknowledging and publicizing it. One of the most conspicuous museums in Berlin is the holocaust museum, which documents the massacre. And Germany gave billions of marks and euros to Israel. Today, Germany has achieved respectability, but at a tremendous cost. I am sure that not all Germans regret the holocaust. I am sure some think that it was a good thing. Whatever they think, denying the massacre or keeping silent about it would have been a bad strategy — just as the Gujarat government’s silence on the massacre of Muslims in 2002 was and continues to be a bad strategy, for the government and for Gujarat. Today, not only have the Germans left behind the stigma of Nazism, but they form the bedrock upon which the European Union has built its status as a power competing with the US. Gujarat apart, the problem for India is not one of overcoming shame, but one of building a reputation. There was a time when countries and kingdoms built up a brand on military successes; Romans, Ottomans and Mughals for example. But after the Industrial Revolution, countries that have built up global reputations have been technologically good at something. Britain is remembered today as the hegemonic power of the 19th century. It reached there by means of military power. But what it then achieved had much to do with its technological leadership in shipbuilding, steel and textiles. The US followed Britain; its leading role in the two world wars sealed its role as a world power. What gave it a lead over other countries was mass production, which it first developed in car manufacture: the Ford Model T was the best-known forerunner. Then it applied mass production to all industry, including steel, guns, ships, planes and shoes. China’s rise as a world power is related to its ability to take over technology from abroad for a very broad range of goods, and to produce them with world-class efficiency and much lower wages than abroad. It is so competitive in manufacturing that it has built up an enormous export surplus. The surplus enables it to invest abroad; it has been investing in foreign mines, oilfields and other resources that its own industries need. It has given unprecedented amounts of foreign aid to African countries, and has got access to its natural resources as a result. If we are interested in building up Brand India, we must make India best in the world at doing at least some things.

A PANEGYRIC ON GERMANY

I wrote this in the Calcutta Telegraph of 3 November 2009. I tried to remove some preconceptions about Germans, whom I lived amongst and came to know closely. WALLS BETWEEN MINDS

It is 20 years since the fall of the Berlin Wall, the cataclysmic event that changed the face of Europe, and 50 years since I first went to Germany. I studied in Kiel in the early 1960s; the scars of defeat and division were then still etched on the landscape and on the minds of Germans. I remember visiting Berlin soon after the wall was erected. The wall was only for Germans; it did not stop foreigners like me. I had gone with an American friend; we drove past the checkpoint. There was little traffic — not even many Trabis around. We parked the car close to Checkpoint Charlie and went for a stroll. When we came back to the car, we found a Volkspolizist keeping watch on the car. The Kiel number plate made the car suspicious. At that time I remember thinking, how impractical all this is. The East Germans would have to build hundreds of miles of wall; in Berlin itself they built over a hundred miles of it, 12 feet high. And yet it could be scaled or breached anywhere. So they would have to build watchtowers to keep an eye on every yard of the wall, and man them with thousands of soldiers. It was possible that a guard may go to sleep — or over the wall. So he had to be provided with a companion to keep watch over him. The border went over mountains and across forests; so a swathe of land had to be cleared all the way along it. Anyone intent on escaping would study the location of watchtowers and find a place where he could evade detection. So mobile patrols had to keep driving along the border all the time. Jail was not enough to deter many who wanted to leave; so they had to be shot. Such were the consequences of the logic of division. Yet there are many borders across the world; only a few of them have walls or fences. Some of them are not even marked; for example, the border between Norway and Sweden, or between the United States of America and Canada, is hardly noticeable. The reason why East Germany fenced off its long border with West Germany was that if it had not, it would have become a wasteland, for most of its people would have migrated to the west. Between 1949, when East Germany was separated from the West, and 1961, when the wall was built, 2.7 million people crossed the border into West Germany. Of them, 160,000 escaped between January and August, 1961. East Germany survived as long as it did because of the wall. And it ceased to survive because its people found a way of escaping that a wall could not block off: they went to Hungary and asked the West German embassy there for asylum. The East German government would not, of course, have admitted that it was preventing people from leaving its territory. It called the wall an “anti-fascist protection wall”; in other words, it was saving its people from being contaminated by the virus of fascism. The original fascist was Mussolini, who defined fascism as reaction — reaction to, and rejection of, the liberal avalanche unleashed by the French Revolution which engulfed much of the West by the 20th century. Liberty, Equality, Fraternity — that was the slogan of 1789. The liberal civilization of the West went into crisis after World War I; all the industrial countries suffered terrible unemployment and economic decline. Capitalism was discredited; people sought alternatives. Russia sought it in communism; Italy and Germany sought it in fascism. So it is ironic that the East German communists called the West fascist. Behind it was a fallacy of association. After World War II, the political and military leaders of Nazi Germany were tried and sentenced. But in West Germany, the Allies thereafter called a halt. They decided not to pursue the thousands who had served the Nazi government, and called it a day so that their part of Germany could recover and return to a normal life. The East Germans did not do it any differently, but found it convenient to transfer the mantle of fascism to Western shoulders. That was political rhetoric. But what led millions to want to leave the east and migrate to the west was not fascism or liberty or democracy, but the sheer prosperity of West Germany. When I went to Germany, large parts of its cities were still in ruins. The hills along the north coast of the Bay of Kiel are dotted with luxurious villas today. So they were in the 1930s too; but in 1962, they were like haunted houses — broken and surrounded by unkept, overgrown gardens. But people had jobs; they had work to do, and they were paid to do it. Work was the new religion of West Germany; the people I came to know just put their past behind and worked to build a future. I remember getting into a train once and finding myself next to a man who had recently been released by the Soviets and had come back to West Germany. He started talking to me of the past — of how times were better under the Nazis. Our neighbours shut him up; they just did not want to remember the past. Life was hard enough. For many of them, life must have been better under the Nazis. But that was all past; all that mattered was the future, and they wanted to make it better. And the reason why they were so focused on the future, and on economic success, was that unlike the socialist societies, national or otherwise, they had to compete to succeed in the new Germany. Germany has very good social services, and had elements of them even in the 1960s; but when it came to the goods and labour markets, there were no hiding places. Everyone had to compete, and had to do his best. When East Germans came west, the West German government gave them 100 marks. But for the next 100 marks, they had to find work. Everyone admires the way the Germans work. This is justified. The Germans are extremely methodical; they lay even paving stones with the precision of a surgeon. But they do so not because of any biological quirk. It is not because Germans are addicted to work and do not know how to relax or enjoy themselves. One only has to visit Berlin over a summer weekend today to see how relaxed — and even cheerful — Germans can be. They work so well because that is how their labour market works. Their employers expect perfection, and their training schools make that perfection universally attainable. So the German miracle — the miracle that melted the Berlin Wall — is a miracle of the market economy, of an economy that makes everyone compete, but which also gives people a helping hand when they cannot compete — for instance, when they are too young, too old or too sick — and helps everyone hone his skills for getting the best out of the market economy. More than being a free country, it is a school for freedom.

KEEPING THE POVERTY INDUSTRY ALIVE

I wrote this in the Calcutta Telegraph of 20 October 2009, in continuation of the column of 25 August 2009. ADVERSE SELECTION

Americans devote twice as much of their income to medical treatment as Europeans, and are still considerably less healthy. This fact has attracted much notice and, recently, analysis. The American healthcare system uses more private enterprise than the European systems, many of which are fully State-owned. So devotees of capitalism, of whom there are many in the United States of America, belittle the difference and try to find innocuous reasons for it. Barack Obama was the first politician to contemplate doing something about it, and asked his vice-presidential candidate, Joseph Biden, to draw up a plan. Now that they (I will call them Barjos for brevity) are both in power, we may see some of it implemented. What does it involve? In the US, as in India, someone who feels sick goes to a doctor, the doctor asks him to go and get tests done, he gives his blood or urine, and takes the test results to the doctor. This happens every time he gets sick. Barjos propose that the results of whenever tests are done be fed into a website. Then when a patient seeks out a doctor, the doctor will seek out his test records on the web, and if they are not too old, the tests will not be repeated; so much testing will be prevented. As people get old, they acquire diseases that are a nuisance but do not kill quickly — diseases like heart trouble, obesity and cancer. The longer they live, the more do they need treatment for such chronic diseases. Some of the diseases reduce people’s ability to look after themselves; they then need care. In the US, where labour is expensive, such care costs a lot. Barjos want to reduce the cost of chronic disease treatment by persuading people to live physically more active lives and to avoid harmful habits like smoking and gluttony, so that they will suffer less of chronic diseases for fewer years. Most Americans’ medical costs are paid out of private or public insurance. Still, many are not covered; for them, Barjos want to start a government insurance company or devise an insurance policy. But this company or policy will not pay doctors for the number of patients seen or laboratories for the number of tests done; it will pay them on outcomes — that is, how sick or healthy the doctors and labs leave their patients. American patients can collect millions by suing their doctors for wrong or inappropriate treatment. So doctors take out expensive malpractice insurance. Barjos think that insurance companies are overcharging doctors, and will sue the insurance companies under anti-trust law for profiteering. They will also sue insurance companies that give health insurance policies if there is not enough competition amongst them, and force them to reduce their profit margins. They will start a government insurance exchange which will advise people on what insurance to buy, and perhaps bargain for them with insurance companies. Insurance companies often exclude from policies diseases that the insured have contracted before they were insured; Barjos will force them to stop this practice. The US is home to the world’s biggest pharmaceutical firms. They spend huge amounts on research and development, patent the drugs they thus develop, and use the monopoly that patents confer to make big profits. Apparently, they make bigger profits out of Americans than others; they charge Americans 67 per cent more for the same drugs than they charge Europeans. A simple solution would be to reduce or abolish patent protection, and to import the drugs from India. Barjos will not do such radical things; they will import the drugs from “other developed countries”; that is, Europe and Japan, if they are cheaper there. The big drug companies file expensive patent infringement cases against generic drug companies like ours, and often bribe the companies not to enter the US market. Barjos will “prohibit” the companies from doing such things; just how, I do not know. The drug companies used their influence with Congressmen to get legislation passed that prohibits the government’s Medicare organization to bargain with the companies over drug prices. The department of veteran affairs runs a similar healthcare programme for ex-soldiers. It faces no such prohibition, and freely bargains and brings down drug prices. Barjos want the constricting legislation repealed, so that Medicare too can bargain. The most interesting and least clear of the Barjos proposals is one for a national health insurance exchange. It is not clear whether this exchange will be an insurance company, or will help everyone to get insurance; probably both. It will introduce a benefit package similar to what employees of the federal government get; presumably, the government has negotiated with private insurance companies to provide this common benefit package to government employees, and will similarly negotiate for the rest of the population. So the Barjos plan is to give to all uninsured Americans the choice of getting an insurance package similar to that of government employees. But they will not get it free; they will have to pay for it. Those who pay taxes will get tax rebates on the premiums. Premiums will be “fair”, co-payments (the proportion of his medical costs a patient has to pay himself because the insurance company will not pay it) will be “minimum”, paperwork will be “simple”, and the plans will be “easy” to enrol in. This is all admirable, and vague. Barjos face a problem — that they cannot touch the current business of the private insurance companies. They want to extend coverage to those whom insurance companies have avoided because they cannot afford the premiums or because they have ailments and conditions that the insurance companies do not want to insure against. Barjos cannot simply use the government to cover these uncovered people and conditions because insurance companies would then weed out even more people and make even more money out of healthy people. This is a classic case of what economists call adverse selection. So Barjos are split between helping the uninsured people and conditions directly, and forcing insurance companies to insure the uninsured. There is no ideal balance between the two, and whatever balance is decided, it will be difficult to achieve it. Barjos should stop trying to repair a dysfunctional market. Instead, they should start at another point. They should aim at a basic, fully government-funded, entirely free national health service. It would consist, first, of a doctor within reach of every American whom they could see without paying; these doctors should be full-time employees of the government, and groups of them would be backed by free laboratories. Second, the drugs prescribed by the doctors would also be free provided they fall within a government list of generic drugs. Third, the government doctors should give every American a check-up once a year, and if it shows that they are fit and are living healthily, they should get a reward. Finally, for those who need hospital and nursing care and cannot afford it, the government should negotiate with private hospitals to have a certain proportion of beds at its disposal. What the government should ensure is not the probability of treatments given by insurance, but certainty of specific treatments guaranteed by itself.

FRATERNAL CONTENTION

I wrote this in the Calcutta Telegraph of 11 August 2009, at the height of the feud between the Ambani brothers. It was unnecessary and undesirable; the Reliance empire was large enough to engage two brothers. The eventual truce came none too soon. UNANSWERABLE CHARGES?

The dispute between the Ambani brothers has hitherto progressed only in the courts. The weapons in courts are counsels’ pleadings. Indian counsels tend to throw in all possible arguments — good, bad and indifferent — into their briefs. Once the briefs are filed in court, they are in theory public and anyone can get hold of them. But, in fact, they are extremely difficult to get. The warring parties sometimes release the briefs to their friends in the press; but legal expertise is low and space limited in the press, and briefs are seldom fully reported. As a result, it has been extremely difficult to follow the Ambani dispute. Anil Ambani has done a public service by explaining to the shareholders of Reliance Natural Resources Limited in its Annual General Meeting the issues as he sees them. He made four specific charges. First, he accused Reliance Industries of refusing to honour its gas-supply agreement with RNRL. Second, he said that the price of $4.20 per million British thermal units that RIL proposes to charge customers is too high and would enable RIL to make exorbitant profits. Third, he accuses the petroleum ministry of siding with RIL in the gas dispute. And finally, he argues that India is going to have enough gas for its needs for years if not decades, that the costs of exploiting it are low, and that for the sake of its development, gas should be priced low — even lower than the $2.34/MMBtu that is stipulated in the agreements between RIL and NTPC and RIL and RNRL. Mukesh Ambani, through a faceless spokesman, replied that he did not wish to reply to Anil’s “baseless, malicious and wrong accusations”. This is actually a reply, though he may not realize it. It also comes straight from the pen of a legal hack — just the kind of thing mindless lawyers frequently say in courts. Last year, Anil sued Mukesh for what he said in an interview to New York Times. It was a pretty innocuous interview; it is difficult to see what was defamatory about it, unless it was Mukesh’s jocular statement that when the two divided up Reliance, Anil took with him the department in the business which spied on people in the government. For that Anil is suing him for Rs 10,000 crore. So Mukesh has grown cautious. In any case, Mukesh is a man of few words. He is a master of action, not of words; and it is action that Anil was referring to in his speech in the AGM. The specific action is that the two brothers signed an agreement in 2005 under which RIL promised to supply to RNRL gas from the Krishna-Godavari basin at $2.34/MMBtu. RIL has not delivered gas to RNRL as required by the contract. This is a simple fact; Mukesh cannot claim that he has delivered any gas. Hence it is a simple breach of contract. RNRL has sued RIL for it. RIL contends that the contract is superseded by the terms under which the government has given the lease of the K-G basin to Reliance, under which the sale price of gas has to be approved by the government. I do not know about the particular agreement with RIL. But I do know that there is no such stipulation in the conditions publicly laid down by the government for the New Exploration Licensing Policy VII, under which RIL has got its lease. Whatever evidence RIL had for its contention that the government was the arbiter was rejected by Bombay High Court on June 15, when it directed RIL to sign a contract with RNRL within a month which would promise RNRL 28 million cubic meters a day of gas for 17 years. RIL appealed to the Supreme Court against the High Court’s verdict. The Supreme Court heard both sides on July 30, and postponed the hearing to September 1. So far, RIL’s filibuster has succeeded. And as to Anil’s allegation that the petroleum ministry is hand-in-glove with RIL, the ministry filed a petition in the Supreme Court asking it to annul the agreement between Anil and Mukesh. The agreement is not in force at present; RIL has refused to comply with it. The benefit of the agreement, and consequently the loss from its non-implementation, are entirely Anil’s. Thus the petroleum ministry’s intervention is against Anil. It could argue that the intervention is equally against Mukesh, who would lose K-G gas if the government got its way. For what the government asked for is that it should be allowed to nationalize K-G gas, which it calls a “national resource”. On that logic, it could take away anyone’s private property. By giving oil concessions under NELPs, the government has created private property in mineral resources. It shares rights to that property in the form of oil-sharing arrangements that it has specified in the NELPs. It cannot then take away the private property by claiming that it is a “national resource”. Many of the oil concessions are given to joint ventures; for example in K-G, Reliance is in partnership with Niko Resources. Tomorrow the government will trick Niko Resources out of their rights in the concession on the ground that it is a national resource. This is not a legal argument; but more important, it is inconsistent with the rule-based capitalist system of which the government of India is supposed to be the guardian. The ministry of petroleum launched the eighth round of NELP on April 9. It has just extended the last date of submission of bids; that suggests that it was disappointed with the response. The response may have been poor because the hydrocarbon markets are down just now. But there may be other reasons. One could be the experience of those who won concessions in earlier rounds — for instance, the Ambani brothers. The Central government has repeatedly intervened in the lawsuits relating to their dispute. It has repeatedly taken positions that implicitly supported one brother. And now it claims that hydrocarbons are a “national resource” subject to its absolute disposal — that it can arbitrarily, and at any time, abolish the private rights to the hydrocarbons that it promises in NELP to create. That is how I would read the petroleum ministry’s maneuvers in the Ambani affair if I were Shell, Exxon or any other foreign oil company. I would note that Indian ministers have no qualms about working in favour of or against particular Indian industrialists, and of bending the rules if necessary. I would note that my legal rights vis-à-vis the government would be insecure, and that the judiciary would allow enormous delays in delivering justice. This was the reputation of India before the 1991 reforms; in one sphere — hydrocarbons — it remains unchanged. The Prime Minister has gone far beyond the reforms and is absorbed in higher matters these days. Having made friends with George W, he is courting Gilani now. But if he comes down sometimes from the higher reaches, he would do well to look into the machinations of his petroleum minister. In this case, it may not be enough to look into the matter. He may have to remove the minister.

HOW BANKING HAS CHANGED

I wrote this in the Calcutta Telegraph of 28 July 2009. I watched the banking industry closely while I was in the finance ministry; my interest continued after my exit. Bank nationalization was one of Indira Gandhi's worst mistakes. We have to live with it; much can be done even with government banks if the government tried out some experiments in management - for instance, promote people with a more entrepreneurial bent of mind. THE BANKS’ JOURNEY

Many almonds were eaten and glasses of soft drinks emptied on Monday last week, when government-owned banks celebrated 40 years of their nationalization. It would have been fitter if the government had instead published a report of what banks had achieved in those 40 years. It might have given self-congratulatory figures of how many scheduled-caste families below poverty line were given credit. But quite accidentally, it might have unveiled some interesting facts too. Here are a few examples. At the time of nationalization, 56 per cent of bank deposits were in savings accounts; the remaining 44 per cent were in current accounts. In the next 10 years, the proportion of savings deposits rose to 80 per cent, and it has stayed close to that level since. During the early years after nationalization, banks were made to give generous loans; their lending created so much money that the idle balances they generated came to be parked in savings accounts. Since banks pay interest on savings accounts (and not on current accounts), the average cost of funds to them went up. But they did not care because they earned much more on their loans than they paid on deposits. There was no competition amongst them, and their margins were fat. So they were tempted to give more loans. There was no risk to them in giving loans, for if the loans turned bad, the government would bail out the banks. So nationalization led to more rapid credit expansion. According to orthodox theory, this should have led to higher inflation. But it also led to higher real growth; its rise from the Hindu rate of three-and-a-half per cent to five-and-a-half per cent coincides almost exactly with the rise in the growth rate of loans and deposits. So nationalization led to faster monetary expansion, but also to faster growth. The banks were nationalized to take credit to the government’s favourite sectors — agriculture and small industry. They were not, however, the banks’ favourite sectors. So the government forced banks to lend to them — 40 per cent of their credit had to go to these sectors. They did lend that much to priority sectors well into the 1980s; that was one reason why both agricultural and industrial growth accelerated then. But it would look as if banks ran out of creditworthy borrowers in these sectors, for they began to lend a rising proportion of their funds to other sectors. Surprisingly, it was not their traditional borrowers in industry and trade to whom they lent more; they sought out new borrowers, such as exporters, transporters, and more recently, buyers of real estate. Banks have followed the diversification of the economy into services; conversely, India’s shift to services and neglect of industry may well have been encouraged by banks’ lending policies. The finance minister may keep giving banks homilies about lending to politically desirable candidates. But even though his government owns them, banks have followed their own noses to find profitable clients. These clients were in the normal manufacturing industries till the 1990s. But in the last 10 years, banks have begun seriously to lend to infrastructure industries — power, telecommunications, roads and ports. These would not have been considered fit industries for bank finance under traditional rules, which required banks to lend short-term against liquid collateral. But almost a quarter of their credit now goes to these unconventional industries. In normal capitalist economies, these industries would have turned to the capital market; its lack of development in India has led to the banks taking over its function. The government had created special institutions to provide long-term finance — IDBI, ICICI and UTI. But banks encroached into their business, so much so that they had to turn themselves into banks. Whether banks have taken on undue risk by giving long-term credit to infrastructure will become evident only later; if they have, many will go bankrupt, and since they are owned by the government, it will bail them out. Until then, however, ministers and officials will keep making self-congratulatory statements claiming how their wise management has saved banks from the global meltdown. Banks were heavily concentrated in metros and big cities; after nationalization, they were required to expand into small towns and villages, and so they did. But that does not mean that they did a higher proportion of their business in smaller places. They did increase their proportion of rural depositors; but their share of banks’ total deposits actually fell. The number of their depositors in metros went up about as much as the total number; but the proportion of their deposits coming from metros went up. In other words, as banks spread to villages, they simultaneously intensified their urban coverage and attracted a higher proportion of the urban population; and they persuaded city-dwellers to deposit more money with them. Whatever the government’s intention, banks did at least as much to spread the habit of banking in cities as they did in villages. Although banks found more depositors in smaller places, they certainly did not lend more there. They became more choosy about rural borrowers, identified more credit-worthy ones, and gave them relatively larger loans. But their basic strategy was to find more borrowers in big cities. Earlier they had concentrated on big borrowers; progressively, they lent to smaller borrowers, and gave relatively smaller loans. Their branching out into retail mortgages is a part of this strategy. After early experimentation, banks decided that city-dwellers were better borrowers. By taking deposits from more city-dwellers, they got to know them better, and used the knowledge to turn the depositors into borrowers. So while the government’s efforts have perhaps succeeded in making banks open branches and draw in depositors in small places, they have certainly failed in making banks divert credit to small places. Banks’ bad debts have gone down to negligible levels after the write-offs and subsidies of the early years of this century. But in the mid-1990s they were high — almost a twelfth of all advances. One might think that old banks would have captured the best clients, that new banks would have to scrounge amongst less good borrowers, and would therefore have higher bad debts. The truth is just the opposite: new banks (and foreign banks) have had consistently lower bad debts than old banks. One might think that government banks would be worse managed and would have higher bad debts; but this also is not true. Old private banks were just as bad as old government banks. It would therefore appear that bad debts depend on techniques of selecting borrowers, servicing them and following them up — techniques which new banks have mastered better than old ones. My findings are based on a cursory analysis of easily available banking statistics. So much more could be inferred from the masses of statistics accumulated by the Reserve Bank of India. All it needs is a good, elementary economist. The RBI employs economists by the hundreds; the finance ministry gives generous grants to many more. But their minds are focused on higher matters; looking at easily available figures and calculating simple ratios would not occur to them. So we continue to have one of the world’s best documented and least analysed banking systems.

UNITED STATE OF HEALTHCARE

I wrote this in the Calcutta Telegraph of 14 July 2009. Atul Gawande is famous now; he is one of the best analysts of the sick state of American healthcare industry. I was struck by his approach in one of his early papers. I think his idea of doctors' cooperatives is a good one, for India as much as for the US. MANAGING HEALTHCARE

In 2003, medical expenditure per head in the United States of America was $5,711 — roughly twice that in most west European countries. Americans spent almost a sixth of their income on medical treatment. In other rich countries like France, Germany and Switzerland, the proportion was 10-12 per cent; in most other industrial countries it was seven to eight per cent. And after all that spending, Americans are not healthier; health indicators for many countries, including Scandinavia and Japan, are much better. Why does the US do worse than its peers? This question was answered by Alan Garber and Jonathan Skinner in a recent National Bureau of Economic Research paper. They showed that amongst comparable countries, the US had the highest proportion of old people who did not take treatment they should because they found it too expensive. Its physicians were also least likely to use electronic records, which pool information about patients and make it available to all physicians who treat them. And administrative costs in the US were amongst the highest. But these were not the chief causes of Americans’ health backwardness. They did not have a particularly high number of physicians or hospital beds per head; nor did they consume more prescription drugs. But they consumed more intensive and expensive treatments; the number of magnetic resonance imaging machines per head of population, for example, was five times as high in the US as in most other rich countries. Garber and Skinner thought that the greatest scope lay in improving allocative efficiency — on spending less on some treatments and more on others. On which ones, they were less specific. Garber and Skinner’s approach was to analyse as broad a collection of national statistics as possible. Atul Gawande, an American surgeon, adopted a more micro approach. In the US, Miami spends the most per person on healthcare. That is understandable; that is where old people settle down when they get rich. They have all the ailments of the aged, and they have the most money and the most expensive health insurance, so it is no wonder that they have the most spent on their health. The next most expensive health-care market after Miami is a little county in Texas named McAllen. It is not particularly rich; the per capita income there is $12,000. But Medicare, the American government health insurer, paid $15,000 per insured person in a year in McAllen. Gawande went down to McAllen and asked people down there why so much was spent on medical treatment. The most common answer was that people in McAllen were poor and sick. That was not entirely untrue. The proportion of drunkards in McAllen was 60 per cent above the national average, and 38 per cent of McAllenians were fat. Still, they had less cardiovascular disease, less asthma, less cancer, less injury and infant mortality than the national average. More sickness was not the answer; more was being spent to tackle a unit of sickness. Gawande then asked if the answer lay in better healthcare. Medicare gives grades to hospitals according to their quality. The grades were no better for McAllen than for a neighbouring county. He was told that patients sued doctors and hospitals more in McAllen; to protect themselves, doctors ordered expensive tests. But that too was not true. Texas had passed a law that capped awards in lawsuits at a quarter of a million dollars; after that, litigation had died down. So Gawande too came down to the explanation that Garner and Skinner had given for the US — overtreatment. He called Jonathan Skinner and asked him to analyse the data for McAllen. Skinner got the same answer as he had for the country — that patients in McAllen were subject to more tests, more hospitalization, more surgery and more home care. And the overtreatment did not mean better treatment. America’s best hospital is Mayo Clinic; it is at the forefront of treatment technology. It is the primary hospital of Rochester, Minnesota; and Medicare spending per member in Rochester is in the lowest 15 per cent in the US. Gawande recalled another study by Elliott Fisher of a million old people who had colon or rectal cancer, a hip fracture or a heart attack. Patients in some regions received 60 per cent more medical care; but they did not survive longer, function better or show more satisfaction. A major difference between low-cost and high-cost areas was that high-cost areas got less of low-cost preventive services such as vaccines, and faced longer waits for doctors and to be admitted to emergency rooms. Why, then, did doctors in McAllen order more tests and refer patients to more specialists? The answer was suggested by the administrator of a hospital; he told Gawande to find out what proportion of the doctors’ income came from their own practice; in McAllen, it would be low. A high proportion would come from kickbacks for referrals. Why, then, does it not happen in Mayo Clinic? Two things distinguish it from comparable institutions in McAllen. Its doctors and specialists get a salary, and nothing else. They do not price their personal services, and therefore have no scope for maximizing their income. And they routinely see patients together, discuss them, and work out the best treatment for each; they are full-time professionals used to working together. That is not the only way. Gawande mentions Grand Junction, Colorado, where doctors are paid on piecework by insurance companies. But they met together and decided on a common fee structure that they would charge everyone; and they agreed to meet periodically in peer-review committees to review patients’ records. And they joined a local community electronic-record system that brought their patient notes together. They thus maximized the information to which they had access in treating any patient. Reflecting on his experiences, Gawande considered alternative models of healthcare. An economist would argue for a free market; the patient should be allowed to buy healthcare services, with a neutral State subsidy if necessary. That would not work because there is enormous product differentiation in healthcare and the patient cannot have information on it; often, he would need quick treatment and would not have time to weigh information and make a choice. Socialists would ask for nationalization. Those who disagree would point to the dismal state of Indian government hospitals. Gawande points out, rightly, that good medical treatment requires management; it requires the bringing together and coordination of specialists and facilities. So there must be someone in charge; and he must have medical knowledge. The answer lies in doctors’ cooperatives. Doctors are needed to provide the expertise that must go into the patient’s decision. They must work together to provide the expertise needed to make an informed decision. And they must be driven, not by individual profit maximization, but by their cooperative’s performance and reputation. This is only a tentative answer; Gawande himself does not think it is a complete answer. He calls for managerial experimentation, beginning from the chiefly negative lessons that have hitherto been learnt. Should we wait for the Americans to experiment, so that we can learn from them a few decades from now? Why do we not do some experimenting of our own?

I wrote this in the Calcutta Telegraph of 25 August 2009. Though I am a liberal, I recognise that West European countries run their nationalized healthcare industries extremely well; I have personal experience: in Germany, I was in hospital within 15 minutes of having a heart attack, and I am alive and fit two decades after a bypass I had there. America, the home of private enterprise, has, on the other hand, an inefficient healthcare industry. I have been long interested in this paradox.

ADVERSE SELECTION

Americans devote twice as much of their income to medical treatment as Europeans, and are still considerably less healthy. This fact has attracted much notice and, recently, analysis. The American healthcare system uses more private enterprise than the European systems, many of which are fully State-owned. So devotees of capitalism, of whom there are many in the United States of America, belittle the difference and try to find innocuous reasons for it. Barack Obama was the first politician to contemplate doing something about it, and asked his vice-presidential candidate, Joseph Biden, to draw up a plan. Now that they (I will call them Barjos for brevity) are both in power, we may see some of it implemented. What does it involve?

In the US, as in India, someone who feels sick goes to a doctor, the doctor asks him to go and get tests done, he gives his blood or urine, and takes the test results to the doctor. This happens every time he gets sick. Barjos propose that the results of whenever tests are done be fed into a website. Then when a patient seeks out a doctor, the doctor will seek out his test records on the web, and if they are not too old, the tests will not be repeated; so much testing will be prevented.

As people get old, they acquire diseases that are a nuisance but do not kill quickly — diseases like heart trouble, obesity and cancer. The longer they live, the more do they need treatment for such chronic diseases. Some of the diseases reduce people’s ability to look after themselves; they then need care. In the US, where labour is expensive, such care costs a lot. Barjos want to reduce the cost of chronic disease treatment by persuading people to live physically more active lives and to avoid harmful habits like smoking and gluttony, so that they will suffer less of chronic diseases for fewer years.

Most Americans’ medical costs are paid out of private or public insurance. Still, many are not covered; for them, Barjos want to start a government insurance company or devise an insurance policy. But this company or policy will not pay doctors for the number of patients seen or laboratories for the number of tests done; it will pay them on outcomes — that is, how sick or healthy the doctors and labs leave their patients.

American patients can collect millions by suing their doctors for wrong or inappropriate treatment. So doctors take out expensive malpractice insurance. Barjos think that insurance companies are overcharging doctors, and will sue the insurance companies under anti-trust law for profiteering. They will also sue insurance companies that give health insurance policies if there is not enough competition amongst them, and force them to reduce their profit margins. They will start a government insurance exchange which will advise people on what insurance to buy, and perhaps bargain for them with insurance companies. Insurance companies often exclude from policies diseases that the insured have contracted before they were insured; Barjos will force them to stop this practice.

The US is home to the world’s biggest pharmaceutical firms. They spend huge amounts on research and development, patent the drugs they thus develop, and use the monopoly that patents confer to make big profits. Apparently, they make bigger profits out of Americans than others; they charge Americans 67 per cent more for the same drugs than they charge Europeans. A simple solution would be to reduce or abolish patent protection, and to import the drugs from India. Barjos will not do such radical things; they will import the drugs from “other developed countries”; that is, Europe and Japan, if they are cheaper there.

The big drug companies file expensive patent infringement cases against generic drug companies like ours, and often bribe the companies not to enter the US market. Barjos will “prohibit” the companies from doing such things; just how, I do not know.

The drug companies used their influence with Congressmen to get legislation passed that prohibits the government’s Medicare organization to bargain with the companies over drug prices. The department of veteran affairs runs a similar healthcare programme for ex-soldiers. It faces no such prohibition, and freely bargains and brings down drug prices. Barjos want the constricting legislation repealed, so that Medicare too can bargain.

The most interesting and least clear of the Barjos proposals is one for a national health insurance exchange. It is not clear whether this exchange will be an insurance company, or will help everyone to get insurance; probably both. It will introduce a benefit package similar to what employees of the federal government get; presumably, the government has negotiated with private insurance companies to provide this common benefit package to government employees, and will similarly negotiate for the rest of the population. So the Barjos plan is to give to all uninsured Americans the choice of getting an insurance package similar to that of government employees. But they will not get it free; they will have to pay for it. Those who pay taxes will get tax rebates on the premiums. Premiums will be “fair”, co-payments (the proportion of his medical costs a patient has to pay himself because the insurance company will not pay it) will be “minimum”, paperwork will be “simple”, and the plans will be “easy” to enrol in. This is all admirable, and vague.

Barjos face a problem — that they cannot touch the current business of the private insurance companies. They want to extend coverage to those whom insurance companies have avoided because they cannot afford the premiums or because they have ailments and conditions that the insurance companies do not want to insure against. Barjos cannot simply use the government to cover these uncovered people and conditions because insurance companies would then weed out even more people and make even more money out of healthy people. This is a classic case of what economists call adverse selection.

So Barjos are split between helping the uninsured people and conditions directly, and forcing insurance companies to insure the uninsured. There is no ideal balance between the two, and whatever balance is decided, it will be difficult to achieve it. Barjos should stop trying to repair a dysfunctional market. Instead, they should start at another point. They should aim at a basic, fully government-funded, entirely free national health service. It would consist, first, of a doctor within reach of every American whom they could see without paying; these doctors should be full-time employees of the government, and groups of them would be backed by free laboratories. Second, the drugs prescribed by the doctors would also be free provided they fall within a government list of generic drugs. Third, the government doctors should give every American a check-up once a year, and if it shows that they are fit and are living healthily, they should get a reward. Finally, for those who need hospital and nursing care and cannot afford it, the government should negotiate with private hospitals to have a certain proportion of beds at its disposal. What the government should ensure is not the probability of treatments given by insurance, but certainty of specific treatments guaranteed by itself.