The Hindu Business Line : End the `Dollar Auction' approach

Rather than beggar other departments, it would be best to experiment and innovate so that the country can have 10 per cent growth and its farmers can enjoy "inclusive growth". Outlining a plan, P. V. INDIRESAN says that a shortcoming of the Eleventh Plan Approach Paper is that it makes no provision for experiments with untried ideas. The Eleventh Plan Approach Paper must check how good new ideas are and correct teething problems that inevitably accompany these ideas.

The Dollar Auction is a game that induces people to compete irrationally. Poundstone in his book on the Prisoners' Dilemma describes several real-life instances of that game.

The rules are simple: The auctioneer auctions a dollar and the highest bidder gets it. In addition, the second-highest bidder also pays what he has bid. Up to 99 cents, the highest bidder makes a profit but the second highest one always makes a loss.

If he can top the highest bidder, the second-highest bidder will recover some of his losses and inflict a larger loss on the erstwhile top bidder.

For that reason, beggar-thy-neighbour syndrome takes over. Bidders do not count their own losses but concentrate on how much pain they can inflict on the competitor.

In this game, it is common for people to raise their bid well above the dollar knowing full well they will lose more and more as they increase their bid.

The situation is similar to the way President Lyndon Johnson continued with the Vietnam war and what the President, Mr George Bush, is doing in Iraq.

They justify such irrational behaviour on the grounds "so that all the effort already put in should not go vain," or "there is no way to quit and save face," or "too much has been invested to quit."

Land to tiller

Some critics of the government and of the Eleventh Plan Approach Paper are in a similar predicament. Years ago, they invested in the idea of "giving land to the tiller".

In early years, when farming was as profitable as industry or services, that was perfectly rational — the same way the Dollar Auction is when the first bid is made at a fraction of a dollar. Unfortunately, as the economy progresses, the competitors of farming — those in industry and services — grow faster.

For instance, the share of agriculture in the Indian economy has shrunk below 20 per cent but the number of tillers is three times larger. That has made "giving land to the tiller" no different from bidding three dollars for a dollar bill — a sure loss.

Nevertheless, proponents of "land to the tiller" policy will not give up. They have invested far too much of their intellectual/political capital to withdraw without losing face.

For them, giving up their pet idea is like President Johnson conceding the war in Vietnam.

To paraphrase a former American President, "it is the arithmetic, stupid". But once the Dollar Auction syndrome takes over, neither logic nor arithmetic will count.

Different land

In sharp contrast to the fate of farmers, real-estate speculators are having a whale of a time. Only last week, an acre plot of land in New Delhi was sold for Rs 187 crore.

That is food for thought: Why should owners of one type of land, in spite of backbreaking work, languish in increasing poverty and those with a different kind of land get unearned income of astronomical proportions?

The first reaction to this kind of disparity is to prohibit such sales. Unfortunately, the market is like a river: It may be diverted but the flow itself cannot be stopped. Bitter experience has shown that prohibition, even excessive restriction, breeds criminals and black money.

At the same time, we may ask: Just as flood waters can be diverted to drought-prone areas, can speculative profits of urban property be diverted into the hands of poor villagers?

In a way, that is happening already: Wherever farmland has been taken over by real-estate speculators, farmers have become wealthy beyond their wildest dreams.

Unfortunately, such windfall gains are few; they are confined to the environs of large cities. We need a wider distribution of windfall profits of urban property, a more equitable distribution.

A way out

Consider the following scheme. The ceiling on agricultural property is abolished on one condition: Those who expand their landholdings should offer as payment not cash, but urban property.

To make that restriction palatable, the state treats income from this urban property on a par with agricultural income: No income tax, no wealth tax, definitely no rent control. If the state were wise, it will go further; it will not even query where the money came from.

Then, the person who sells farmland remains a landlord but with a difference. His income will not shrink - relative to others - the way it will if he remains a farmer.

Instead, it will almost certainly grow as fast as (if not faster than) income from industry and services. By selling the land under these conditions, the farmer will not become steadily relatively poorer the way he does now.

The buyer also benefits: With larger land to cultivate, his income too grows. The state too benefits: It can cut down on farm subsidies and increase investment in rural infrastructure.

Above all, it will have less trouble from the land mafia that thrives only where there are taxes to evade and these transactions have no taxes to evade. With less transaction costs, both monetary and otherwise, prices will be lower; customers will benefit. Truly, this is a win-win-win-win game.

A new Life

What I have given here is a bare outline of an alternative to classical agrarian reform. Provided three-four million farmers are induced to quit every year, and provided we find for those who quit equal number and equal value of urban assets — three-four million houses, shops and so on — incomes of both of those who continue or discontinue to farm will grow as fast as those in industry and services. We may even encourage Property Management Companies to handle the new assets and ensure that rents will grow as fast as the economy does. If the government prepares the ground on these lines and leaves the rest to the market, a new life will dawn on all farmers.

However, there is a catch: This untried idea leads to "who will bell the cat" problem. Who in the government, which Minister or Secretary, can initiate the innovation? Further, the land mafia, its friends in politics and bureaucracy, may see in this innovation a threat to illegal earnings. On the other hand, faster growth will provide them more legitimate profits, which incidentally they can enjoy openly, and which pleasure they do not now have.

There is yet another difficulty: Administrative experiments are taboo in our system of governance; no official can say, `I will try this idea as an experiment and check where it will work and where it will not, or even whether it will work at all'. In our system, every change should be applied universally or not at all; everyone should jump all in unison or none should. That maximises risk, creates fear.

No Experimentation

That is my complaint against the Eleventh Plan Approach Paper: It makes no provision for experiments with untried ideas. It should allocate (to the Department of Administrative Reforms?) an "Innovation Fund" that can be used to check systematically how good new ideas are, and how to correct teething problems that inevitably accompany new ideas.

As matters stand, government departments are caught in a Dollar Auction: They will rather beggar other departments than give up a disastrous course. The best response for a Dollar Auction is for the first bidder to bid 99 cents. Then, there will be no second bidder, no unhealthy, no self-destructing behaviour. Once new ideas are researched, some department or other will learn to bid the equivalent of 99 cents, and that will halt Dollar Auction with all its attendant evils.

We can have ten per cent growth; farmers can enjoy "inclusive growth" but only after we learn to give up obsolete ideas, and test new ones systematically.

(To be concluded)

(This is 181st in the Vision 2020 series. The previous article was published on July 24.)

(The author is a former Director of IIT Madras. Response may be sent to: indiresan@gmail.com)

More Stories on : Agriculture | Insight | Economy | Vision 2020

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Field levelled for deposits

End the `Dollar Auction' approach

Welcome, the old world order

A fairytale wedding

The changing face of Indian banking

Of rising rates and shaky foundations

Theatre in the corporate world

Cleansing by stings

Corporate social conscience