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Kerala Development Model - VIII

People learn from mistakes. Sometimes, soceities learn by mistakes too. Children learn walking etc. by mistakes. This is a very powerful tool for animals like us, and we got this capability in the evolutionary process.

But this has several drawbacks too. There is a learning horizon for us. If we can see something as an immediate result of our actions, we can learn from it. But this learning horizon is short. The problem is that some problems are not visible immediately. Also, we don't see slow changes with this mindset. That is why societies and companies die slow deaths sometimes.

If we put a frog in hot or boiling water, it immediately tries to escape from it. But if we put the frog in a pot of cold water and heat the pot slowly, the frog will not try to escape and eventually die there. The reason is that the frog doesn't sense the slow change in its environment. This danger from slow change happens to societies too. Kerala is a good example. The last two decades or so, we have been experiencing this. But because of protectionism, we keep on postpoing the eventuality. For example, we knew that WTO rules will take effect (and most of them are good too) and we will have to compete on cash crops etc. If we cannot improve our productivity and compete with other players in various sectors, we will lose in those markets. But the changes are slow. Now, we can wake up to the dangers when things come crashing down. But then we cannot do much about that. Change doesn't have to be so sudden, if policies reflect realities of the time.

Let me take the example of protecting jobs. Let us say, one company employing 1000 people is showing losses. What can we do? Sometimes companies cannot be saved, because of change in technologies etc. In such cases, finding new jobs (state help in training etc.) is the best solution. Sometimes, by improving productivity, the company can save itself. This requires flexibility and cooperation among employees and management. This is the only viable solution in this circumstance, because nobody wants to see the company going down. Also, if a company is not profitable, nobody wants to run it for long. It is simply unsustainable. Now, if the company cannot reallistically increase the market share to support increased productivity or create new products, then may be 200 employees will have to be laid off. On the other hand, if the market share can be increased, then increased productivity (say 25% productivity improvement in two years) can save the 1000 jobs. Again, everybody wants to share the pain.

Now, let us see what the ideallistic Kerala will be doing in such a circumstances. If the factory is a private one, first of all, employees typically will resist most changes. They will put as many hurdles as possible. Employees and employers develop a hostile relationship. Typically, such a company will increasingly become less competitive over time and there will come a time when management will think of moving the factory to other states or simply shut it down. But this doesn't happen overnight. Now another thing also happens in the process, further expansion will not take place. Also, other companies watching such things would not come to Kerala. So, the net job creation because of the problems is a big minus.

Now, let us bring government and society into the picture. If natural laws take their course, the company will eventually be shut down. But when that is about to happen, employees will start demanding for governmen takeover. Government takeover is in simple words, a subsidization by the society. Other members of the society pay part of the salary to these employees. Sometimes it makes sense to protect some jobs, BUT on a temporary basis. But that is not the case in Kerala. Everybody wants protection. Every organized sector employee need subsidization from the society. Remember that, without increasing the productivity, a society cannot improve its standard of living in the long-run. So, what happens if government in fact takes over the company and subsidizes it? As the government spending increases (by taxing etc.) the private spending decreases, because total GDP is same. Private spending is more efficient. As government size and spending increases, economic growth decreases. Government spending in areas like primary education, infrastructure, defense, research etc. are required (only) because everybody needs it, and private sector is not going to do that. But government spending on other areas is less efficient and mostly counter-productive.

Now, suppose that government has a habit of protecting all employees like this. What will happen over the period of time? Economic growth suffers. The cumulative effect literally kills the economy. People become lazy and less competitive. Remember that if society doesn't want or not willing to buy the products of such a company at the price the company can sell, why is then the society supporting the company? The answer is probably because of compassion or pity. (But the long-term effect of such pity is more pity and self-pity.) But, if people really know the cumulative affect of all these uncompetitive practices, most people would really support this. Here is one example.

Let us say, it takes 3 crores of rupees as government subsidy to protect 1000 jobs/year in this company. So, let us say each Malayali shares 1 rupee each. Well, this is a small amount. Now let us consider all the protected employees and the subsidies. Let us say 1million jobs are protected like this. (I don't know any good figure for this.) So, we are talking about each Malayali sharing 1000 rupees for subsidizing all the subsidized jobs in Kerala. Our per capita income is about 20,000 rupees. Does this mean we are spending 5% of our GDP on subsidy? This is probably an understatement. It may be more than that. Now, what is the effect of such a prolonged subsidy on the economy? If we spend this (3000 crores a year, in this example) on other productive areas, we can probably create jobs for 50,000 jobs a year. This means all the 1million people can be re-employed within 20 or so years. Now, the new jobs will typically be more competitive. The figures may be even more dramatic. Saving ecoonmically unviable jobs is almost always a bad thing to do. But since the effects are slow and the the learning horizon is shorter, the society doesn't see it. This is where thinkers, economists, leaders, institutions etc. come to the picture. They have to tell the truth, have a long-view, and people who don't understand these should follow them. That is how societies should develop.


By Haridas

Part I

Part II

Part III

Part IV

Part V

Part VI

Part VII

Part IX

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