The Indian Economy Blog

October 6, 2006

Lavish Weddings Are Good For The Economy

Filed under: Basic Questions,Miscellaneous,Politics — Amit Varma @ 2:42 pm

When populism is so stupid, what does it say about people? IANS reports:

The Kerala Assembly united on Thursday to condemn ostentatious weddings in the state and came out with suggestions to curb wedding expenses. With the increasing demand that the state government should intervene to curb extravagance in marriages, Law Minister M Vijayakumar said his department would soon come out with a law to limit marriage expenses.

A Congressman named George Merceir says that “the new law should see the number of guests invited is limited.” The finance minister of the state, Thomas Isaac, has said that “he would consider levying a luxury tax, too.”

This is a law borne out of jealousy, not sensible economics. The state should actually welcome lavish weddings, for they pump money back into the economy, and provide employment to people in associated industries, from catering to decor to entertainment to transport. Not only would a tax on wedding expenses disincentivise such expenditure, but it would inevitably find its way back into the economy far less inefficiently than had it simply been spent by the people paying it. Not only is it immoral — as it always is when the state assumes jurisdiction over what other people do with their property — it is also impractical, and harmful.

But it’s populist, and therefore popular. Green, green monster, out with thee!

33 Comments »

  1. Hi Amit
    I agree that this is a ridiculous area for the government to enter into. Counting and limiting the number of guest is just absurd.

    However, your statement: “The state should actually welcome lavish weddings, for they pump money back into the economy, and provide employment to people in associated industries, from catering to decor to entertainment to transport.” is equally off the mark. If people chose to spend their money elsewhere, it would provide equal or even greater benefit.

    Why greater? Because a wedding is a form of traditional socialism – the kind that tribes always provided. The host of the wedding spends a lot of money to provide food for the last 100 guests – people who are not close friends or relatives of either the bride or groom. These people pay nothing for the food so they come and eat. Their benefit might be less than the host’s cost but they will still come and eat because it’s free. So there is the potential for large weddings to be a waste. But if the host is a fool and wants to throw money away – which he is doing – then he should be free to do that.

    There could be a problem of one-upmanship here. Each person wants to play the “I want my daughter’s wedding to be bigger than my neighbor’s daughter’s wedding”-game. This is a classic negative sum “prisoner’s dilemma” game. It would be best if people didn’t play it but maybe a lot of fools do and it could be bad.

    But the best way to combat this is just to tell people not to play this game. You don’t win if your daughter’s wedding is slightly larger than than his neighbor’s daughter’s wedding.

    If people want to show off their wealth during their daughter’s wedding – it might be more sensible to donate some money in the daughters name to charity. That, in effect, is what inviting the last 100 guests is – an act of very wasteful charity not well targeted at the needful.

    Comment by Michael H. — October 6, 2006 @ 4:41 pm

  2. Sorry to say this…

    Please become aware of the ground realities. Kerala is a place where grand weddings are a “social problem”. What else would you call when the family goes bankrupt after a daughters wedding? What else would you call when the family gets forced to suicide after a daughters wedding?

    BTW, i would love to know the guy who taught you grand weddings are good for economy? Is this how you measure prospirity?

    Comment by Raj — October 6, 2006 @ 5:02 pm

  3. The way this discussion (and others about free markets in India) is going is disturbing. We should stop talking about economic freedom as a utilitarian issue (increasing efficiency, prosperity etc.) and start discussing it as a moral issue (freedom to acquire and secure and “spend” property). I found Amit’s emphasis on the latter towards the end of his post relatively insufficient (though I know from his blog that he does value the moral aspect). But the comments on the post focus more on the utilitarian aspect, which is sad.

    Comment by sumeet — October 6, 2006 @ 5:32 pm

  4. I don’t think the author meant that the lavish wedding is good. In this context perhaps he means that lavish wedding is better than the alternative proposed by the government of taxing the wedding.

    In fact this is the classic case where one can cite how a lavish wedding is better than the alternative. In all other cases it is the least beneficial thing for the society.

    -=- Neeraj

    Comment by Neeraj Kumar — October 6, 2006 @ 6:18 pm

  5. if there is some way of shaming people who spend lavishly on weddings please let us know. the involvement of government is a recipe for disaster. but we have a social issue here .. the forcible spending on marriages by the bride’s parents.

    nowadays, our girls are just as educated as the boys. they are wage earners. why should the parents be dealt with the task of footing the marriage bill by themselves? it should be a 50-50 affair at the most. if the groom is earning well, and so is the bride, they should be spending THEIR money, and not depend on the parents. shame on our youth.

    Comment by phantom363 — October 6, 2006 @ 7:03 pm

  6. At one level, we can look at the proposed curbs on lavish weddings as a consumption tax (infinite tax for that above the ceiling) and analyze the consequences for economic growth. Of course, any tax, other than as payment for government services, distorts market prices, and therefore, introduces inefficiencies.

    The move by the left government in Kerala, however, is merely a symptom. The deeper malaise that I see in India today is the resurgence of socialism all around. From caste-based reservations to setbacks in privatization, from the imposition of Kannada as the medium of instruction to curbs on private consumption, like a phoenix rising from the ashes, the bureaucracy and politicians are once again asserting themselves, and intervening in the economy and private lives. During my recent visits to the local (nationalized) bank and the regional passport office, I noticed a subtle but perceptible change in the attitudes and behavior of the officials. Perhaps, I am reading too much into all this, but the trends are disturbing nevertheless.

    Comment by The Rational Fool — October 6, 2006 @ 7:23 pm

  7. While I consider myself a free-market guy, I don’t necessarily think that a luxury tax is a bad idea if (and only if) excessive wedding expense is as big a social problem as Raj says.

    I strongly believe in what Sumeet calls the “freedom to acquire/secure/spend property” but I don’t consider this an innate right, but something which has to be ‘earned’ by a society by proving to itself that it is socially just. In a just society, market freedom is the surest way towards empowerment; however, in an environment where there is inherent social injustice, freedom of property can just as well exacerbate it. It should also be noted that there can (and should) be limits on freedom of property. Even in the US–that paragon of the free market–regulation exists in almost every area of the marketplace. The key is that regulation must be ‘smart’–in that it must not seek to ban anything–but instead to balance the freedom of the market with the equally precient necessity for social justice.

    So, in this case, I don’t think the solution is an outright ban on lavish weddings. A luxury tax on lavish weddings might be a good idea, as would legislation which seeks to combat oppression of the bride’s family by the groom’s family.

    Comment by Nandan Desai — October 6, 2006 @ 7:28 pm

  8. This kind of government intervention is bound to be misused. Dowry is banned in India, but how effective is the ban?
    Indian daughters are allowed to get a share as equal as the son in the father’s wealth- but how many daughters have a right to any share?
    Laws that are in direct contradiction with accepted social practice never work.
    Besides, any kind of moral intervention on the part of the government-dictating someone how to spend money on something as personal as a family wedding- should be unacceptable. Its a democractic society and everyone has the right to decide what to do with his/her money.
    If there is serious social problem of expensive weddings, then debate, education and protest within society is the only viable solution. It may take time but it is more effective.
    shivani

    Comment by Shivani Ratra — October 6, 2006 @ 8:27 pm

  9. Nandan Desai wrote:

    [The key is]…to balance the freedom of the market with the equally precient necessity for social justice.

    Perhaps, we need a post from Nandan on what he means precisely by social justice, and why it is an equally precient (sic) necessity as a free market.

    Comment by The Rational Fool — October 6, 2006 @ 8:34 pm

  10. Simply put: by ‘social justice’, I mean a levelled starting point (in terms of health, education, job availability, access to resources/property/credit) for EVERY SINGLE CITIZEN of a polity, regardless of caste, sex, family income, etc.

    Economists also tend to ignore that this is one of the most fundamental assumptions in saying that ‘a free market is an efficient market’.

    A luxury tax is fundamentally a redistributive tax and would move towards accomplishing that.

    Comment by Nandan Desai — October 6, 2006 @ 8:56 pm

  11. I’m no fan of ostentatious weddings and I’m all for social justice.

    Nandan says that A luxury tax is fundamentally a redistributive tax and would move towards accomplishing that.

    How is a luxury tax more effective or efficient than letting the expenditure flow through to the various components of the wedding management industry — catering, decor, entertainment, apparel and such like? Especially in a country like India where the government is notoriously leaky. A luxury tax would further fuel the “black” economy… that’s all.

    Comment by Prashant — October 6, 2006 @ 9:29 pm

  12. [...] Thanks to IndianEconomy.org for the link [...]

    Pingback by Krishworld Politics » Blog Archive » Kerala Govt. has gone nuts — October 6, 2006 @ 10:02 pm

  13. To be perfectly clear, I’m not advocating taxing people willy-nilly anytime someone says there is a “social problem”. I was using the luxury tax argument in order to highlight the larger point that free markets have a limited ability to achieve social goals (goal in this case would be reducing suicides caused by marriage-induced debt).

    I am as skeptical as everyone else here about the government’s ability to implement a sensible solution to this problem — so I do think that a luxury tax would tend to be abused by the bureaucrats (this does not however make the tax wrong in principle). The purpose of raising it was just to show that we need to have a balanced approach towards managing the economy – that growth and equity are related and equally important, and that efficiency does not cure all ills – as the author of the post suggests.

    Comment by Nandan Desai — October 6, 2006 @ 10:18 pm

  14. Surprising how the discussion tends to focus only on luxury tax on weddings. The main idea is that a government that can stipulate a luxury tax on your wedding preferences can tomorrow dicate a luxury tax for a lot of other things, maybe even honeymooning!

    One, government regulations are a slippery slope.
    Two, the government would not be efficient in deciding private preferences except maybe public goods, and that is a big MAYBE!

    Comment by Naveen Mandava — October 6, 2006 @ 10:36 pm

  15. Lavish spending in marriages by wealthy is 1. no doubt good for economy as many thought here because of the consumption demand and services it creates 2. but in Indian context you have to consider that lavish ceremonies are not exclusive to well-off but is a social custom

    If the families’ expenditure on marriages etc. are proportinate to their income/wealth – no probem at all. On the otherhand, luxury tax on large scale ceremonies by wealthy would not hurt them and would not impact their spending habits. No doubt a source of income for exchequer but is needlessly discriminatory. Instead, the governments should think about distress spending by poor. Wonder if governments can do anything about them.

    Comment by Sridhar — October 6, 2006 @ 10:36 pm

  16. Maybe Kerala could try that Japanese thing – and hold mass weddings for everyone at once in a football stadium or something. After all, they are communists!

    Comment by Nandan Desai — October 6, 2006 @ 10:41 pm

  17. Interesting debate! Personally, I am not a big fan of lavish weddings. Speaking from the wedding process in Delhi and North India, it’s almost disgusting to see people display wealth and load up on gold jewellery and pig out on multiple courses/cuisines, men getting drunk in the parking lots…It’s even more disgusting when the bride’s family goes broke with all the expenses. I am not a economist but I see limited “real economic” value added by these activities even though it generates income for the vendors. Only plus I see is that at least black money comes out of mattresses and gets redistributed into the local economy. Instead of imposing taxes directly on the “wedding” process, government can tax/raise taxes on banquet halls, jewellery, or any other luxury item associated with weddings so we don’t compromise on freedom of citizens. Luxury taxes on bigger cars, 5-star hotel tariffs seem to be working.

    Comment by Ashutosh — October 7, 2006 @ 3:56 am

  18. Basically, the sociological problem of forced large spending on marriages by the bride’s family, cannot be solved either by hard laws like penal codes (too draconian and restrictive on freedoms) or by soft laws like taxes (doesn’t alleviate the problem — forced spending by the bride’s family would not be disincentivized. They would end up spending at least the same (perhaps more!), only a part of the money would go to the govt instead of being spent on festivities.

    Contrary to many posters on this thread, I believe the govt can play a role in curbing the sociological problem. But I do agree (due to reasons in the last para) that taxing it or criminalizing it is hardly the solution. But it is unimaginative and knee-jerk, so it has a high probability of flying in with both the polity and its mai baap sarkar.

    Comment by seven_times_six — October 7, 2006 @ 4:09 am

  19. Kerala has been proposing to introduce a `luxury tax\’ to discourage extravagance at wedding receptions and similar functions for the last few budgets. Luxury hotels have also come under the microscope for an increase in luxury tax as well as increasing stamp duties on land registrations etc.

    Issue #1 is that Kerala is under enormous fiscal strain with salaries and pensions gobbling up 91% of revenue receipts. Salaries are increasing at an average annual rate of 11% per cent and pensions at 18% over the last 10 years. In the 2005 budget, Kerala\’s revenue deficit was expected to touch Rs 4,072.27 crores and the overall deficit Rs 997.18 crores.

    Issue #2 is that Kerala has the worst income distribution in India (almost like brazil\’s). While the affluent 10% Keralites account for as much as 41.2 per cent of the total domestic income, the bottom 10 per cent gets a pathetic 1.3 per cent. Compare that to India as a whole where the top 20% control around 42% of national income. Maybe its this yawning income gap which makes these lavish weddings less palatable for vast majority of Kerala\’s poor. From this perspective, Amit\’s green monster may not be an inaccurate characterization.To me, it is the mark of a desperate socio-political paradigm, a society at its wit\’s end, perhaps a failing system, that considers extreme measures like taxing weddings. I\’m not sure how many \”lavish\” weddings take place in Kerala annually but it is going to take more than a few to make a dent in Kerala\’s Rs 4,072.27 crores deficit. At a 5% hypothetical luxury tax rate applied to lavish weddings, it will take Rs 80,000 crores worth of lavishness – equivalent to kerala\’s total GDP – to balance the budget.

    Comment by Sanjay — October 7, 2006 @ 7:46 am

  20. My apologies for the inadvertently crappy (boldface) formatting of the last half of my post. It will be greatly appreciated if the blog owners can fix it.

    Thanks

    Comment by Sanjay — October 7, 2006 @ 7:48 am

  21. There is some confusion here about (i) the social issue of excessive expenditure on weddings that force families into financial distress, and (ii) a tax on consumption (particularly, ostentatious or luxury consumption) as a mechanism to manage/influence the state of the economy. Both are huge topics in themselves, requiring careful analysis. Not a few Ph.D dissertations have been, and will be, written on these topics. I took the intent of this thread is to discuss the latter; I could be wrong.
    A couple of caveats are in order, with reference to Nandan Desai’s caricature of my post. First, I don’t talk about “efficient market”, anywhere in my post. Efficient market is a term used to characterize a financial market, and has to do with information efficiencies, not allocation efficiencies. What I have pointed to is the disturbing trend of increased (Indian) government intervention in the economy (often, in the name of social or distributive justice), and warn of inefficiencies that could result from such interventions. Under certain assumptions, a free market, characterized by rational and uninhibited choice by individuals, is expected to lead to a Pareto Optimal resource allocation. The result has nothing to do with the inequities at the starting point or in the resulting equilibrium.
    Second, I am not asserting that free markets will cure all the ills of a society. It is definitely not a cure for aids or wife beating! This is not to say, however, that a social or behavioral problem is not amenable to economic analysis. The excessive wedding expenditure issue, for example, may be analyzed in terms of lexicographic preferences. For the uninitiated, a lexicographic preference, simply put, is a preference ordering where an individual would prefer more of a good A, irrespective of how much a good B that she might be offered. In this context, a bride’s family will prefer to marry her off, irrespective of the financial losses it might be subjected to. Lexicographic preferences would violate the assumptions for reaching a Pareto optimal equilibrium through a free market.
    With this preamble in place, let’s take a careful look at Nandan’s definition of social justice:

    …a levelled starting point (in terms of health, education, job availability, access to resources/property/credit) for EVERY SINGLE CITIZEN of a polity, regardless of caste, sex, family income, etc…

    These are nice sounding words, but imprecise at best. For example, what does “a level starting point in terms of health for every single citizen”? Are you saying that every citizen should be equally healthy or s/he should have equal access to health resources? Does it mean that a man and a woman should have the same physical abilities? Sounds like a marxist utopia to me! Is this feasible? I agree that free market cannot ensure such a state, but how exactly, do you propose to achieve this? A Bolshevik revolution, a cultural revolution, or Fabian economic policies? The world has tried them all before and failed miserably. The Kerala government seems to be back on the slope again!

    Comment by The Rational Fool — October 7, 2006 @ 8:45 am

  22. “I agree that free market cannot ensure such a state, but how exactly, do you propose to achieve this? A Bolshevik revolution, a cultural revolution, or Fabian economic policies?”

    These are not, surely, the only alternatives we have available. How about the mixed economy model practiced in the United States? If my memory serves me correctly there was a time when Afro Americans and women generally were thought to face systematic discrimination of the kind which was only being re-inforced by market processes. So what happened? The government intervened. Positive discrimination was encouraged and backed by government money. Arguably the situation is now considerably improved and such ‘intervention’ is no longer needed.

    I would say that people who can afford to spend money should be free to do this however they chose. The problem arises when people who can’t aford to do so find themselves under systematic pressure to get themselves into excessive debt. Free markets may often produce this outcome, and that is why they are normally tightly regulated, first and foremost by the central bankers, who regulate by moving interest rates up and down.

    The phenomenon normally has a name: the bubble, and of course National Banks consider it an important part of their role to be vigilant here. So maybe in Kerala the bankers should be watching the “wedding bubble”.

    “a free market, characterized by rational and uninhibited choice by individuals”

    I think really this is the point. There are just so many cases where these conditionas aren’t given, and ‘copy cat’ and ‘status seeking’ behaviour are typical examples.

    Incidentally – since I have no constructive idea about how to solve the problem of the kind of social pressure which seems to be in evidence here – I would just mention that I had exactly the opposite impression of what the problem was going to become, namely that with all those extra men knocking around it would be the women who would increasingly be able to pick and chose.

    Comment by Edward — October 7, 2006 @ 10:31 am

  23. Edward,
    There is a difference between equal rights and equality, and then there’s a further difference between equal access to government and private resources. Abolishing slavery and civil rights for the African Americans ensured equal rights for all the U.S. citizens. The jury is still out on the efficacy of the Affirmative Action program and other social engineering experiments in the U.S, though.

    The U.S. economy is minimally regulated compared to most of the world economies. The monetarist would flinch at the suggestion that controlling inter-bank discount rates is an example of tight regulation of free markets. They’d prefer to call it, hm, “fine tuning” – imho, correctly so. Also, the Federal Reserve, although subject to congressional oversight, is a fairly autonomous institution. Btw, India was labelled a mixed economy for the best part of the 20th century!

    Comment by The Rational Fool — October 7, 2006 @ 11:10 am

  24. Although Edward has spoken aptly in my defense, I’d like to clear up a few things I said earlier. I am in no sense a Marxist utopian – I think India’s failed experiments with it, alone were enough to convince the few remaining ones that it wasn’t a good idea. I also believe that *truly* free markets are the best way for a society to grow to its potential along with its cumulative standard of living.

    Where we differ Mr. Fool (Sorry-I wanted to put a real name, but your pseudonym left me no choice) is in answering the question: ‘what is the best way to get truly free markets?’ Like you, I am skeptical of the government’s ability to accomplish grand social engineering schemes that seek to proactively reorder society. However, I do believe it has a role as the chief arbitrator of a society, and therefore has to promote free markets and competition as objectively as possible. The only way I think it is capable of doing so is by doing the little tasks necessary to ensure that the preconditions to having true competition and fairness are met.

    Taxes and other such ‘light’ regulation are one way. They (can) correct the deficiencies (externalities) of unmitigated competition, regulate monopolistic behavior, etc. The purpose behind this type of regulation isn’t to impede competition, but to in fact, over time, promote it. Is there such a thing as over-regulation or over-taxing? Of course–but this does not mean that all regulation or taxes are bad.

    I think we both agree that markets should be left alone and allowed to work, but where we differ is that I believe the government has a role in ensuring that the conditions for a free market are met. This includes healthy (by which I basically mean decently-fed and disease-free, not genetically engineered!), educated civilians; robust infrastructure; strong and independent institutions (central bank, judiciary, etc.); and most importantly, protection from unfair competition. At the risk of falsely presuming your thoughts, I think you might argue that governments are not capable of figuring out what’s “fair”. I am skeptical too, but I continue to believe because if it’s not, then we have anarchy – and that’s the only thing I hate more than Marxism.

    (My apologies for turning this into an ideological struggle – but us University of Chicago monetarists don’t take lightly to being called “Marxist utopians”!)

    Comment by Nandan Desai — October 7, 2006 @ 12:38 pm

  25. Also, in the list of things which are the government’s responsibility, I should have also included ‘ensuring symmetry of information’.

    Comment by Nandan Desai — October 7, 2006 @ 12:47 pm

  26. Thanks all, good discussion. The Rational Fool has made many of the points I would have made, better than I could have, so I won’t repeat his words here. A few small things:

    One, I agree that the social pressure of the parents of brides to spend more than they can afford is a problem, but I strongly resist any suggestion that government intervention can help in this matter. Any attempts at social engineering by governments can at best be inept and pointless, and at worst disastrous.

    Two, to answer Sumeet’s point that I am stressing on the utilitarian aspect of this and not the moral aspect, I plead guilty. I do that simply because a utilitarian argument is more likely to convince people in an age when most people are reconciled to the absence of so many freedoms, and don’t even question the extent of taxation, leave alone the morality of it. But I always at least state the moral case, as I did here.

    I wish I could respond to some of the comments in detail, but time is a brutal strangler, and in any case, the discussion is robust enough without me. Thanks, all, for keeping it civil!

    Comment by Amit Varma — October 7, 2006 @ 2:03 pm

  27. Lavish Weddings Are Good For The Economy…

    Lavish Weddings Are Good For The Economy posted at IndianPad.com…

    Trackback by IndianPad — October 7, 2006 @ 2:03 pm

  28. “Abolishing slavery and civil rights for the African Americans ensured equal rights for all the U.S. citizens.”

    Well this is what the debate is about I suppose, formal and substantive interpretations of equality. Then it all depends what you mean by ‘equal rights’, this is the rub.

    “The jury is still out on the efficacy of the Affirmative Action program and other social engineering experiments in the U.S, though.”

    Well mine is already in, but I accept that yours may well still be out. I am satisfied that this programme worked relatively well in its day (as it has done in the UK, but not in France, Germany etc), but that the imbalance which existed may to some extent have been corrected. So it would be another question altogether whether such a programme was called for today. I doubt it.

    But you would have to agree I suppose that such affirmative action programmes are rather different creatures from Bolshevik and Khymer Rouge type revolutions, and all that horror list that the word ‘government intervention’ seemed to conjure up in your mind.

    “The U.S. economy is minimally regulated compared to most of the world economies.”

    Yes, but it is regulated, and indeed given the minimalist nature of the regulatory system (and please don’t get me wrong, I am happy with this), it is important that these regulations be strong and effective.

    “The monetarist would flinch at the suggestion that controlling inter-bank discount rates is an example of tight regulation of free markets. They’d prefer to call it, hm, “fine tuning” – imho, correctly so.”

    Oh, come on, we just had 17 near consecutive quarter point hikes froom the Fed, you surely don’t seriously want to suggest that this is mere fine tuning, There has been a constant and concerted effort – hitching the BIS and the IMF to the train – to try and drive up global interest rates from their ‘natural level’ (ie that where demand and supply for savings are equal). Even with all this effort they haven’t been able, and the US yield curve has inverted. My point at this moment is not to say whether this was good or bad, but simply that it has been happening.

    Of course full blooded monetarism should imply the abolition of the central banks (this has been proposed), but I personally am not really sure I would want to live in that type of world any more than I would like to share my bed with the Khymer Rouge or the Naxalites.

    Incidentally, going back to an earlier discussion on SEZs, I just remembered this morning that Morocco – which is now going pretty well, and has started to act as a business services outsourcing centre for Spain and France – is into SEZs, my regional government here in Catalonia just bought a huge tract of land for local textile and other employers to transfer factories which are no longer viable here in Spain to Morocco. Basically I am arguing that in all of this, pragmatism rules.

    Comment by Edward — October 7, 2006 @ 3:49 pm

  29. If I make a bit of money and decide to spend a good bit of it on marriage (either my own or that of my children), why is it anyone’s problem? This should be a personal economic decision like many others. If some people are unwise enough to spend disproportionate amounts of their wealth on marriage, surely, that is their problem. Unless when it is forced upon them, which is illegal under law in any case.

    Yes, there are social pressures, but much like dowry (one gets the feeling the two are related issues among middle and lower middle classes), this is a ‘problem’ that cannot really be dealth with through legislation. The state cannot fix all society’s problems, the society itself needs to address these. This proposed legislation, if ever it sees the light of day, is likely to completely fail and of course, will be a manna from heaven for sundry mealy mouthed ‘officials’ to line their pockets.

    The Rational Fool has made some solid points. At the end of the day, it seems we don’t value economic freedoms enough (just like political or other freedoms). Too many people are happy to join the chorus and demand this or that law without considering long term implications.

    Comment by Nanda Kishore — October 7, 2006 @ 4:43 pm

  30. To me, this is a newsworthy item only because it is further evidence of the fact that the so-called “Kerala Model of Development” – so heavily praised in the First World as a model for the developing world – is at the crisis stage. Nor is this a recent development. In the mid nineties, delivering the presidential address at the 1994 CPIM conference, the Party’s nonagenarian leader, E.M.S. Namboothiripad said:

    “I make a request: let not the praise that scholars shower on Kerala for its achievements divert attention from the intense economic crisis that we face. We are behind other states of India in respect of economic growth, and a solution to this crisis brooks no delay. We can ignore our backwardness in respect of employment and production only at our own peril.”

    This is not meant to bash marxism. Personally, I do not discount the utility of marxism in enabling some societies to get from point A to point B. The problem happens when marxism becomes the end goal, instead of the short term crutch it should be.

    There is little doubt that state intervention has been instrumental in significantly reducing poverty in Kerala since the mid-1970s. Equally true however is the fact that this model of state intervention and politics seems to have reached its limits and has now become become disruptive of Kerala’s economic and social development. Kerala is in the throes of a major fiscal, economic, political, and cultural crisis that threatens not only its future development, but the very sustainability of what has already been achieved. From a social development perspective, both Punjab and Rajasthan have recently bypassed Kerala in important areas. From the point of view of economic growth, what was a “no growth” model of development, has clearly become an “anti- growth” one.

    One consequence of this anti-growth kind of development has been that politics has been over-emphasized, over-developed and people have begun to place undue reliance on politics and the state to achieve all their goals, including economic ones. This news item is just another example.

    Comment by Sanjay — October 7, 2006 @ 5:45 pm

  31. Edward, what I mean by equal rights is quite simple, at least in the American context. The rights guaranteed under the U.S. Constitution, including the fundamental rights are applicable uniformly across it citizenry, irespective of their gender, race, religion, etc. Nothing more, nothing less. I am not knowldegeable enough about the constitutions of the other democracies that you mention, to comment on them. Affirmative action is designed to ensure that these rights are not violated. Aggregate statistics apart, I have first hand experience of affirmative action programs for several years, and I am less sanguine about their efficacy than you are. Let’s leave it at that.

    Nandan’s definition of social justice, which I reproduce here,

    …a levelled starting point (in terms of health, education, job availability, access to resources/property/credit) for EVERY SINGLE CITIZEN of a polity, regardless of caste, sex, family income, etc…

    is a far taller order than equal rights. Literally it calls for equal starting levels of health, education, job availability, etc. for all the citizenry. I believe this is an impossible state to reach, even with the drastic expropriation and wealth redistribution that occurred after the Bolshevik Revolution. Surely, you don’t believe that adjusting the discount rates 17 times or even 100 times would achieve this levelling, do you? Nandan later clarified his definition by dropping the adjective “level” in favor of “decent”. Well, it’s not that everybody concurs that economics could be a rigorus discipline, and I’ve accepted his clarification.

    I don’t know about you, but I have lived through the creeping government control that led to the License-Permit Raj that prevailed in the 20th century India. If I had mistaken the slippery slope for a precipice, I hope you’d understand.

    Comment by The Rational Fool — October 7, 2006 @ 5:49 pm

  32. I got a bit carried away in my earlier comment. Correction, equal rights are not guranteed to women under the U.S. Constitution, not quite.

    Comment by The Rational Fool — October 7, 2006 @ 5:59 pm

  33. Hi again RF,

    “Nandan’s definition of social justice”

    OK, look, I never used the expression social justice, since I am not really sure what it means. I mean I think I understand what Nandan may want to mean by it, and I fully accept his right to use it, but it ends up being very vague afaiac. And it isn’t just a question of finding a good definition. I suppose in the end I prefer extensive to intensive definitions, that is I prefer working from concrete examples to derive general prnciples rather than the other way round.

    I suppose something nice and loose like a ‘level playing field’ fits in better with how I see things. Again a completely level playing surface is just another idealised abstraction, there will always be bumps and gradients, but the regulatory authority is there to try and see that is it is as level as possible.

    I really do think that you, and me, and Nandan would all agree that government should be as ‘hands-of’ as possible, where we would probably disagree would be over the meaning of ‘as possible’.

    Anyway, when it comes to terms like “health, education, job availability, access to resources/property/credit” the first two of these are already to some significant extent determined by those of your parents, and the latter ones are pretty conditioned by the former, so here significant inequality will always exist.

    Essentially the central regulatory authority needs to try and reduce some of these inequalities in initial conditions, but against this it has to balance the negative impact on growth of diverting too much in the way of resources to address this problem. Somewhere along the line there is a social maximum or optimum, but the levels of uncertainty are such that no-one really has the faintest idea of where this is, hence the interminable arguments.

    I suppose on all this I’m pretty close to John Rawls.

    So…

    “Surely, you don’t believe that adjusting the discount rates 17 times or even 100 times would achieve this levelling, do you?”

    I don’t think this is really a fair (as in ‘level playing field’ like) way to argue, since you are refering to an argument of Nandan’s which I never advanced (and for the reasons I have just explained wouldn’t really endorse in this way) to try and refute an argument that I made about something else, which is namely that 17 quarter point interest rate rises could not be considered ‘fine tuning’. I repeat: market economies are tighly regulated, and they have to be. That was my point. Simply that.

    In a way we are always back to the same issue, since if India had the Federal Reserve System, and the system of government which the United States has then no-one (or next to no-one) would be complaining about the use of the word ‘regulation’. But she doesn’t, and the important area of debate is really how to get from here to there.

    Sanjay

    “There is little doubt that state intervention has been instrumental in significantly reducing poverty in Kerala since the mid-1970s.”

    How the hell did they get fertility down so quickly, that’s what I would like to know. In Brazil there is a fair amount of evidence of without-consent tying of the fallopian tubes, is there any evidence of this kind of thing in Kerala, does anyone know?

    “Equally true however is the fact that this model of state intervention and politics seems to have reached its limits and has now become become disruptive of Kerala’s economic and social development.”

    I think virtually every commentator here would agree with this, this is the interesting point, but it also puts the range of our disagreements in some kind of perspective.

    “the so-called “Kerala Model of Development” – so heavily praised in the First World as a model for the developing world – is at the crisis stage.”

    Again, this is the case, and as a sort of representative of the ‘First World’ here I would like to say that I am finding these debates tremendously useful, I am learning something about India virtually every day now.

    Comment by Edward — October 7, 2006 @ 7:12 pm

  34. “as it always is when the state assumes jurisdiction over what other people do with their property”

    I suppose what I am saying Amit is that this is precisely what the state exists for, to exercise jurisdiction over what people do with their property, from guns to cigarettes, to credit cards, to stem cells. This is how it has always been, and how it always will be. The issue really is just how much jurisdiction is healthy in a free and democratic society.

    Of course none of this has got anything to do with defending silly populist speeches about luxury weddings.

    Comment by Edward — October 7, 2006 @ 8:53 pm

  35. Edward,

    The usual reasons – high literacy, family planning, social support programs etc – are cited for the fertility decline. All explanations appear to be at least weakly valid but, as you correctly note, the steep decline from 3.6-1.8 between 1979-1992, essentially in a single generation, remains largely unexplained. Some newer theories that relate population growth to Production may add to a more complete explanation.

    In the United States and other first world countries, the place of work (Production) and the place of consumption are spatially separated. By contrast in India, numerous households are both units of production and and of consumption. In the former case, children are rarely, if ever, seen at the place of Production whereas children are considered to be an integral part of the production unit in the latter. Here children contribute to household income in a very substantial way & the more labor intensive the activities, the more helping hands are required.

    Every small farm in India (and there are 116 million of these), is a Production site where children are seen as units of production. Studies have shown how children’s labor is essential for running the household and the farms. Among the activities that children do are fetching water, gathering fuel wood, tending to crops and animals, protecting crops from animals, carrying messages in the villages for the family and so on.

    In urban areas, things are not very different with the millions of small mom & pop retail outlets that have occupied every inch of available space in cities. Typically, you have your shop facing the street and the living space is just behind/ beside/ below it. Essentially, your household is a Production site and children are units.

    There are, of course, other factors. Studies have shown that societies that do not have social security, that engage in , that have high child and infant mortality rates etc. typically have higher birth rates. Societies that have no pension plans and retirement incomes, parents see children as their only sources of economic security. A 1984 World Bank study showed that over 80% of the surveyed couples in India and Thailand expected to be supported in their old age by children.

    Long story short. There needs to a deeper study that looks at how many of these factors intersected between 1979-1992, contributing to the steep decline in Kerala.

    Comment by Sanjay — October 7, 2006 @ 11:46 pm

  36. ‘The state should actually welcome lavish weddings, for they pump money back into the economy, and provide employment to people in associated industries, from catering to decor to entertainment to transport.’

    weddings apart, are there any other such occasions/avenues that help pump large amounts of money back into the economy? very few i think – that means all that money can only be used at weddings. what was the point, originally, of earning it anyway?

    Comment by kuffir — October 8, 2006 @ 12:49 am

  37. Here is another “great” idea i heard. Some minister or other (housing minister?) in the Kerala Cabinet was saying that the government was considering a tax on people buying high end apartments/houses. Justification? – According to him, lots of people who buy these “big” houses hardly use all the rooms. quote “Some of these rooms are used only for 10 to 15 days in a year” un-quote.

    Regards,

    Prasanth
    Prasanth

    Comment by Prasanth — October 8, 2006 @ 12:51 am

  38. A question for you economists. Is there any economic theory that allows for a cultural or social modification of free market principles or is free market theory absolute? It seems a lot of tinkering with the tried and true free market principles goes on here because, you know, well, after all this is India, not the US.

    I personally find myself vacillating on the issue quite a bit. Of course, consumption, no matter how conspicuous, has been proven to be good for any economy. But I also have poor relatives in India who are going broke and getting physically ill from the immense cost of marrying off their daughters. The answer is not the government. Asking the government to jump in to correct the social problem of extravagant weddings will be as futile as asking the government to resurrect prohibition in the US because alcohol is ruining so many lives and families. We know how successful Prohibition was.

    Without finding refuge under the government umbrella, are there economic theories that say that unrestrained free market principles do not always work, and there needs to be pockets of artificially introduced disincentives in even the freest economy?

    Comment by Floridian — October 8, 2006 @ 4:24 am

  39. “Social Justice”
    The reason I invoked the term social justice was simply to highlight the obvious observation that, in India there is human suffering on a massive scale; and that the market alone is not capable of solving it. I have a hard time accepting that self-professed ‘reformers’ could succeed in their task if they were to leave these problems be, and still try to build a flexible and well-functioning economy and financial market in spite of it. In certain areas (ITES, infrastructure, manufacturing, capital markets), moving towards deregulation is the best possible direction. However, a parallel responsibility exists as well to try to help those who are rendered incapable—by virtue of centuries of social and cultural traditions—of joining in the market and sharing in its fruits. In my opinion, this is a moral responsibility of the government; but more importantly, it’s also a dire necessity. History, as well as our own experience, has taught us that free markets thrive best in cohesive political climates. Large and widening inequalities in the standard of living always give rise to anti-market forces. Three contemporary examples:
    - The trade protectionists in the US have gained a larger political voice because there has been miserable real wage growth at the same time that productivity, corporate profits, and CEO compensation were soaring
    - In China, the anti-government protests (these are largely not allowed to get to the press, but the government does keep some basic statistics on them) have been increasing inland because of the vast and increasing difference in the standard of living between there and the coastal cities, as well as a perceived lack of political freedom
    - In India, the Naxalite movement spread from 55 to 155 districts in less than 1.5 years largely in areas where government services were very poor and inequality high and/or increasing

    “I really do think that you, and me, and Nandan would all agree that government should be as ‘hands-of’ as possible, where we would probably disagree would be over the meaning of ‘as possible’.”
    The problem in India, as I see it, is that the government is too involved in areas it shouldn’t be; and completely apathetic in areas where its efforts ought to be directed. However, these are democratically-elected people, so in some measure, their faults are our faults. To the extent that the reformers are making an effort to get this policy mix right, their efforts are stymied by the pro-market forces who denounce increasing regulation in areas where it could lead to social progress; and anti-market forces who denounce deregulation even when it is sorely needed. In the areas where some form of social progress is clearly needed, I don’t think government intervention is invariably good. However, in its ideal form, tweaking the framework does have the ability to tilt the field towards a desired social outcome. To be even clearer, government intervention cannot bring about perfect equality in the standard of living, but it can limit the increases in inequality. In the short run, this implies that growth needs to be balanced with equity because some regulations (like luxury taxes for example) will invariably reduce top-line growth. But in the long-run, they can create a more robust and competitive labor force, and more cohesive and flexible economy.

    “Without finding refuge under the government umbrella, are there economic theories that say that unrestrained free market principles do not always work, and there needs to be pockets of artificially introduced disincentives in even the freest economy?”
    Raghuram Rajan and Luigi Zingales, the IMF’s chief economist and a University of Chicago Business School professor respectively, wrote a book not too long ago called “Saving Capitalism from the Capitalists”. They argue exactly what you have stated above.

    Comment by Nandan Desai — October 8, 2006 @ 5:54 am

  40. I like the way write, have serious disagreements with you ideas, especially these kinds of little freaky, very progressive economic lesson you have just provided above. A detailed comment, or rather a reaction, could be found at http://me-too-a-blogger.blogspot.com/2006/10/of-reason-why-i-cant-afford-marriage.html#links

    Comment by Jubin George — October 8, 2006 @ 4:56 pm

  41. This is what we call solving the problem in incorrect strange ways…

    If people are spending money – no problem with that. THAT is not the problem.

    The Problem is: People being FORCED to spend Money.

    This is A Sociological problem – cannot be solved by enacting irrelevant laws.

    Just like the one that came into effect from today: Govt. has Miserably failed in providing Primary Education to children, and Employment Opportunities to their parents. SO – HOW DO THEY SOLVE this problem – by making it illegal for children to work.

    Comment by Apun Ka Desh — October 10, 2006 @ 4:20 pm

  42. Keralites have a penchant for letting the government rule their minds and shape their habits. This recent proposed legislation to curb wedding expenditures is another example of the “ma-baap” mentality.

    Wedding expenditure is indeed a problem for Kerala. The local traditions dictate that the bride’s family pays the costs of conducting wedding almost exclusively. Our cinema is replete with notions of the “girl’s plight” and the associated “burden” as a result. So, you can’t be faulted for hoping that curbing seemingly excessive expenditure on weddings would resolve that issue. But, the fact is that you can’t rely on the government to change social
    attitudes through such frivolous rules. If you want to initiate real social change you have to tackle the root cause of such an imbalance and the excessive nature of this expenditure.

    Wedding expenditures seem excessive because every other aspect of a Keralite’s life is massively subsidized. A recent study by the Kerala Sastra Sahitya Parishad (KSSP) showed that Keralites spend Rs.68 billion annually on weddings. Compare this to the annual expenditure on healthcare – Rs.28 billion. When you don’t have to earn to take care of your body, you lose another incentive to work productively.

    The proposed luxury tax and curbs are just populist detours from the real problems that plague Kerala. The state is dirt poor and lacking in infrastructure, investment and private initiative. Almost every business, cooperative or agency in the state is controlled by the government. The private sector’s voice is almost non-existent.

    Kerala has always seemed at the forefront of social reforms, but the truth is that most of these reformsremain incomplete.

    Although the state experimented with the earliest landreforms in the country, it never followed up with investment-friendly reforms. Result: most land is tied up in the agricultural sector and people wonder why 10% of the population generates 40% of the state income and the bottom 10% control just under 2%. (See KSSP study)

    Kerala has always enjoyed a strong literate population with free basic primary education. But the government has always been hostile to self-financing, private and foreign investment in secondary and tertiary education. Not to mention the absolute lack of any politic will to let people conduct their own business. Result: the youth either find jobs outside the state, stay and remain underemployed or indulge in the stagnant politics at home. In a nutshell, a positive feedback mechanism remains in place to ensure that no significant productivity occurs in Kerala.

    Wedding taxes- Who gives a damn? The real reforms concern our roads, drainage systems, virology centers, healthcare systems and businesses languishing in economic xenophobia. Change people’s priorities, force them to invest in the adding value to their lives and then you will see them engaging in more productive activities.

    Comment by Abhishek Nair — October 10, 2006 @ 7:20 pm

  43. Abhishek, very well said. But am just curious where Kerala stands on human development indicators. It is common perception that though Kerala lags behind the Southern states in industrialization or business, Kerala outshines where others had failed – like in literacy, health, and percapita incomes. Do you have something to say on corruption or widening gap between rich and poor in Kerala – both of which commonly associated to the liberalisation and inductrial growth.

    To Edward/Admins: It would be great if someone can throw light and initiate a discussion (by starting a new column) on the socio-economic effects of rapid growth and investments in Indian cities as is happening today. Mega real estate scams that are surfacing everyday in Hyderabad and Bangalore are a classic case in point where ruling political class and hand in glove bureaucrats have collided to amass public and private lands in response to the boom in land prices. In Andhra Pradesh, the ruling Congress government has ordered for a CBI inquiry into the land scams that involved top leaders in face of heat from the opposition and vernacular media.

    Clearly political will or mechanism to tackle underdevelopment deriving from the resources of new growth is completely lacking is a different story. I am puzzled at how the land prices are allowed to appreciate – several hundred times as seen in Indian cities in recent times – in the name of “market value” and making a few super-rich overnight.

    Comment by Sridhar — October 11, 2006 @ 2:24 am

  44. Hopefully I will be made a Guest Contributor at some point, because I have a lot to say on Kerala’s economic development and issues. :)

    @Sridhar
    Will try to address your question on growing income inequality as briefly as possible. The reason I brought this up is that Kerala has long been assumed to be a very egalitarian society. However, egalitarian societies cannot remain closed societies, because closed societies survive only because they subjugate certain basic freedoms. In Kerala, the freedom to run a business and hire labour has been severely hampered. Instead of running legitimate businesses, people with strong political links have resorted to shady, illicit forms of business including spirit production. As a result, you have a long hidden illegitimate industrial-political nexus. In open economies, on the other hand, such nexus do not remain secretive for long as such deals are open to media and public scrutiny.

    You noted that Kerala has succeeded in getting rid of illiteracy and improving on health indicators. But, Kerala is just average when it comes to per capita income. Kerala was the fourth richest state (per capita basis) from 1970-74 and has fallen three rungs since then. Meanwhile, its southern neighbours have either risen or stayed the same in their rankings during that same period. (See IMF Data source at bottom) The reason is a long history of subsidizing primary education and basic health care has spilled over into subsidies in the second and tertiary (read high school and college) education level. Moreover, subsidies in primary health care are not matched by investments in public civic utilities, including garbage collection.

    The current viral epidimic vindicates what many public health experts have been warning about non-existent Kerala urban and rural drainage facilities. The government’s response to this is to go on a cleanliness drive! No one is taken in by such populist moves, because cleanliness is a habit for life, not for a week. In a week’s time, everyone will forget about this, but only until the next health crisis hits the state. Why does no one care? Because if you don’t have to pay about the cure (medicines and mosquito nets), you don’t have to worry about prevention. Prevention is a cheaper investment in the long run, but when do people think about the long run?

    This health epidimic is even more ironic when I remember Vandana Shiva’s famous remarks on the cleanliness of the Kerala people, and how they don’t need to be taught about the necessity of washing their hands with soap. This comment was in response to a hand-soap awareness campaign by Lifebuoy. Granted, Lifebuoy’s campaign was financially motivated, but I wonder what help Vandana did to raise the image of Kerala artificially and how much damage she’s done to raising personal hygiene awareness.

    In many other parts of India, secondary health and education services have been privatized. While one can question the possibility of monopolies in these situations, I ask which is more detrimental: government subsidies that encourage public inaction and short-sighted measures or expensive medicines and education that encourage the public to invest in themselves. When you let others take care of you, you will never take care of yourself.

    Sorry, that was not as brief as I thought it would be :).

    Sources:
    IMF Study -
    http://www.imf.org/external/pubs/ft/wp/2006/wp06103.pdf#search=%22india%20states%20income%20ranking%22

    Comment by Abhishek Nair — October 11, 2006 @ 4:19 am

  45. Ahh, I learned something new about Kerala. The high literacy rate of the state had somehow glossed over all the other metrics by which any society must be judged. Isn’t Kerala run by a socialist or communist government? Doesn’t it proven once again that highly managed and subsidized societies can be forced to excel in certain areas – USSR in science and technology as Kerala in primary education, for example – but fail across the board?

    Comment by Sarat — October 11, 2006 @ 4:32 am

  46. [...] Amit Varma at The Indian Economy Blog critisizes the Kerala assembly’s proposed move to restrict lavish weddings. Read the comments for an interesting discussion. [...]

    Pingback by DesiPundit » Archives » Lavish Weddings Are Good For The Economy — October 11, 2006 @ 5:15 am

  47. @Sridhar

    Your comment on real estate prices is also interesting. I think there is heavy speculation in the Indian real estate market. This may be legitimate in some cases and unfounded in others. Take for example, Cochin. Property prices in Cochin have doubled and tripled in the last three years. However, most of it has been attributed to expected investments including “Smart City”, expansion of the port terminal and a supposed investment in LNG processing. However, prices have stagnated over the last couple of months as the political parties in power changed and reversed decisions by the previous government. Now, as the current LDF government seems to be warming up to the idea of “Smart City”, I expect land prices to inch up again.

    As for real estate scams, I am hard pressed to come up with an example as I haven’t followed the real estate market that closely. While I think that real estate scams may be out there, I think that by and large, real estate is accurately reflecting the pent-up demand by the middle and high class. Sadly, the real estate market will completely side step the poorer sections of society. And this is where the real possibility for social conflict lies, because in many parts of the country, the poor and the middle and high classes live right next to each other. That’s why rehabilitating slums in Mumbai has become such a convoluted issue. On the one hand, you have the poor living in slums who can’t afford to move out and on the other hand, you have booming commercial property prices. Ultimately, this is because Mumbai has always been an disorganized city. Its city planners and government authorities have completely turned a blind eye to immigrant needs over the years. And they completely shut their minds to the explosive growth in investments in the city. But, is it too late? I don’t think so. Growth is not geography-specific, it is tied to more intangible factors such as education, health and economic freedom. If you clear the inequities in these areas across Mumbai, many of its problems will work themselves out. But you have to level the playing field in all three fields. Any single indicator, education, health or economic freedom, if neglected will neutralize investment in the other areas. Kerala is a case study in point.

    @Sarat
    I agree with your point. I think subsidies work to bring a society from point A to point B. Point A meaning an illiterate and unhygienic society and point B a literate society with a stronger sense of personal hygiene. After that point, the function of the government has to shift from an investor to more of an enforcer of laws. Citizens have to take on the responsibility of investing in civic utilites. Subsidies, if enforced incorrectly, will only pull people from one vicious cycle into another.

    The lowest common denominator in all our social problems is our civic responsibility. Every society with a high level of civic responsibility flourishes and reaches an equilibrium between its opposing influences. The lack of civic responsibility on the other hand, encourages corrupt governments and businesses to fill the gap imperfectly.

    I am trying to personally rectify my long history of political and civic inactivity. I think before I preach, I should practise. Right now, I am trying to increase people’s awareness of the health issues in Kerala and network with the Kerala diaspora to find like-minded people who would be interested in finding solutions to Kerala’s problems. Ultimately, my interests are tied to this place, because I hope to settle in Kerala. That’s the logic I’ve worked out for myself.

    Comment by Abhishek Nair — October 11, 2006 @ 5:31 am

  48. Really alarming to see how much Indians love to intervene in other peoples’ lives. Truly our green monster is a Godzilla.

    If people want to spend what they have on what they want, WTF do these people have to do with that? Exactly who the f are these people to go vote on how somebody else spends their own money?

    The maturity in a society is best demonstrated by the extent to which people leave others alone, and deal with their own crap instead of meddling in others’ lives.

    Comment by Abhi — October 12, 2006 @ 7:24 pm

  49. Just another example of stupidity by Indian politicians. There is cream and then there is the shit. This particular belongs to later.

    Comment by Dhaval Shrimankar — October 12, 2006 @ 7:27 pm

  50. Politicians are always interested in handling not-that-much-important issues to fill their vote bank. They always love to peep into such issues that has nothig to do with state development. I believe that it is entirely a personal issue and it should be left to the individuals how much they spend their white money on the marriages of their offsprings.

    Amrita

    Comment by desidirectory.com — November 10, 2006 @ 2:38 pm

RSS feed for comments on this post. TrackBack URL

Leave a comment

Powered by WP Hashcash

Powered by WordPress