Philip Bowring argues that high oil subsidies in Asian countries have helped increased the demand for oil by shielding consumers from real prices,

All this is widely known. What is not talked about is the impact that these subsidies are having on demand for oil. As it is, developing Asia accounts for only about 20 percent of global oil consumption. But the more important statistic is that Asian countries account for about two thirds of the annual increase in global oil demand and an even higher percentage of the increase in imports. Most of the rest of the increase comes from oil exporters like Russia and the Middle East, where prices are low and economies booming. Oil consumption in the developed world is declining slowly.

With developing Asia now consuming about 17 million barrels a day – and that figure rising by about 1 million ever year – the key question is: How much additional demand has been created by these oil subsidies?

There is no accurate way to measure how sensitive demand is to rising oil prices across this diverse group of countries. But the difference between oil at $65 a barrel and oil at $130 a barrel could well limit demand by at least 1.5 million barrels a day.

As far as India is concerned, two points would be in order: a) It is only in the least couple of years or so that government is subsidizing petrol. Otherwise, high petrol prices had helped subsidize kerosene and Diesel in the name of helping the poor. Second, in direct comparison–forget purchasing parity–petrol is still expensive in India compared to United States. (On average $1.50 a liter compared to roughly $1 in United States.) Indian government may subsidize oil but it imposes a host of taxes too. 

On a side note, how to beat the high oil prices…

In a hard-hitting article, Devesh Kapoor argues that the World Bank should stop bankrolling countries like India which consistently perform low on education and public health,

In India’s case, the state’s inability to discharge this most basic obligation to its citizens in education and health, even as it seeks to be a global power, is a troubling portent of the country’s future. While India is not a failing state, it is, to evoke economist Lant Pritchett, a “flailing” state. While the implementation capacity of the Indian state has always been its Achilles heel, these weaknesses become more glaring as the private-sector economy powers ahead. Malnutrition in India is higher than in Sub-Saharan Africa. More than half of children aged 7 to 14 in rural India cannot read a simple paragraph of second-grade difficulty. Infant and maternal-mortality rates are awful even as the nation proudly exports more doctors abroad than any other country and promotes a thriving medical-tourism industry.

The reasons for these failures are manifold, but ultimately have to do with the troubling condition of the Indian state at all levels. The failures are not just due to poor incentives but to weak abilities in the quality of the human capital of public officials. Compared to the past, fewer people with talent join state institutions, and there’s no sign that the state can or will do much about it.[link]

It’s a fair argument but it begets the question: What will the World Bank do then?

By any yardstick, primary education is a fundamental right while higher education is a privilege. While a case could be made that higher education is beneficial to the society at large, primary education must be a greater priority. It is an illustration of India’s governance failure that exactly the opposite is true in India. As UNESCO’s new Global education digest says,

Families in India have to spend more on primary school education of their children, making the fundamental right to basic education for the Indian poor a distant dream, according to a recent UNESCO report.

In contrast, university education, which typically helps the better off students, remains subsidised and costs just the half of the primary school spending.

“Households pay for more than one-quarter, 28 per cent, of the costs to send their children to primary and secondary school. These fees pose a very real barrier for the children of poor families,” the report ‘Global Education Digest 2007′, released by UNESCO Institute for Statistics (UIS), said.

“Yet at the same time, households assume just 14 per cent of the costs for university education, which typically benefits better off students,” it added.[link]

The U.G.C has lately talked of ensuring at least 20% of the total cost of higher education is recovered from the students. Even that modest goal has faced resistance from the university authorities. Perhaps, it is just another manifestation of the culture of entitlement.

Full UNESCO report is available here. (PDF)

In a very interesting article, Joel Waldfogel discusses how markets can fail for the same reason democracy often does: tyranny of numbers.

John Stuart Mill pointed out that voting gives rise to a tyranny of the majority. If we vote on what color shirts to make—or whether to make wide or narrow shoes—then the majority gets what it prefers, and the minority does not. The market, on the other hand, is supposed to work differently. As Milton Friedman eloquently put it in 1962, “the characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market is that it permits wide diversity. Each man can vote, as it were, for the color of tie he wants and get it; he does not have to see what color the majority wants and then, if he is in the minority, submit.” This is a wonderful argument. Except that for many products and for many people, it’s wrong.

Two simple conditions that prevail in many markets mean that individual taste alone doesn’t determine individual satisfaction. These conditions are 1) big setup costs and 2) preferences that differ across groups; when they’re present, an individual’s satisfaction is a function of how many people share his or her tastes. In other words, in these cases, markets share some of the objectionable features of government. They give bigger groups more and better options.[link]

Waldfogel’s arguments are fairly persuasive. In case of marginalized groups, it is indeed true that the nature of the market with profit as its guiding tool won’t allow it to offer viable solutions. Here a case could be made for state intervention by incentivizing solutions for smaller groups via provision of subsidies e.t.c

(via)

Finally, a sensible decision.

The Centre is planning to set up Higher Education Loan Guarantee Authority (HELGA) to help needy students meet university and college education expenses.

The proposal to set up a HELGA was discussed at the recent meeting of full Planning Commission headed by Prime Minister Manmohan Singh.

According to Commission sources, the proposal aimed at making higher education affordable through scholarships, fellowships to students and educational loans.[link]

But it would make sense only if fees is increased in state schools. Prime Minister proposal to increase the fees by 20% is indeed welcome but it doesn’t go far enough. There is little reason why higher education–as opposed to research–should be subsidized.

An interesting new paper by Professor Charles Courtemanache argues just that,

A causal relationship between gasoline prices and obesity is possible through mechanisms of increased exercise and decreased eating in restaurants. I use a fixed effects model to explore whether this theory has empirical support, finding that an additional $1 in real gasoline prices would reduce obesity in the U.S. by 15% after five years, and that 13% of the rise in obesity between 1979 and 2004 can be attributed to falling real gas prices during this period. I also provide evidence that that the effects occurs both by increasing exercise and by lowering the frequency with which people at restaurants. [link]

In a very interesting piece, economists Gary Becker and Kevin M Murphy argue that inequality can have a positive effects if it can create an incentive to tackle its root cause: rising payoff of college education.

Why is the earnings gap widening? Because the demand for educated and other skilled persons is growing. That is hardly surprising, given developments in computers and the Internet, advances in biotechnology, and a general shift in economic activity to more edu­cation-intensive sectors, such as finance and professional services…

This brings us to our punch line. Should an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than an unfavor­able development? We think so. Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applica­ble to human capital as well as to physical capital. The initial impact of higher returns to human cap­ital is wider inequality in earnings (the same as the initial effect of higher returns on physical capital), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital.

We conclude that the forces raising earnings inequality in the United States are beneficial to the extent that they reflect higher returns to invest­ments in education and other human capital.(empahsis added) [link]

This is indeed a persuasive argument. Studies have demonstrated that the difference in income between college graduates and others has consistently risen. However, as the Economist blog points out, it also calls for policy measures including increased funding which would ensure that higher education is accessible to all and not just a tiny elite.

What lessons it may hold for India? One, rapid expansion of higher education by facilitating the entry of private sector. Currently, the government measures are designed to restrict higher education to a tiny elite. Second, provision of easy student loans e.t.c so the poor can easily pay for their education. For there can be no doubt: Higher education in a country as poor as India is still a privilege.

Or at least the American corporates. A very interesting report in The New York Times details how the largest American corporates are increasingly growing outside America–both through exports and off shore subsidies, and how it is changing the game fo American workers and investors.

The charge offshore seems certain to continue because chief executives want to invest where they expect growth to occur. The 10 companies with the largest foreign sales in 2006 were some of the biggest names in American business: Exxon Mobil, Ford Motor, General Motors, General Electric, Hewlett-Packard, the Altria Group, ConocoPhillips, I.B.M., the American International Group and Procter & Gamble, according to S.& P. Those figures include only the sales of their offshore subsidiaries, not goods or services exported from the United States. “Corporate profit growth is going to do better than it would have done if these companies had ignored the opportunities elsewhere,” says Nigel Gault, an economist at Global Insight, an economic consulting group in Lexington, Mass.[link]

More interesting is the effect on workers. While domestic workers have no doubt suffered, those who are engaged in managing offshore entities have gained. Maybe in future, potential employees would pay more attention to the division of the company they are to serve rather than just the company or their job profile.

Harvard economist Greg Mankiw has a very interesting take on whether the tax code is ”fair”

The C.B.O.?s most recent calculations of federal tax rates show a highly progressive system. (The numbers are based on 2004 data, but the tax code has not changed much since then.) The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent of its income in federal taxes. The middle fifth, with income of $56,200, pays 13.9 percent. And the top fifth, with income of $207,200, pays 25.1 percent.

At the very top of the income distribution, the C.B.O. reports even higher tax rates. The richest 1 percent has average income of $1,259,700 and forks over 31.1 percent of its income to the federal government.[link]

As Mankiw points out, while economists can tell us about the distribution and its effect, fairness is best left for the society to decide. Incidentally, Mankiw maintains this fine blog and you can follow the discussion on this particular post here.

I have wondered previously, in the context of global warming, about how energy efficiency and carbon cutting measures might be of economic benefit. This Economist article talks about an interesting study undertaken by Vattenfall, a Swedish power utility, to quantify the economic costs of various emission control measures. (via)

The measures below the horizontal line have a negative abatement cost—in other words, by carrying them out, people and companies could both cut emissions and save money. At a macroeconomic level they would boost, rather than reduce, economic growth.

Apparently, simple measures undertaken by the individual, such as better home insulation and replacing regular incandescent light bulbs with fluorescent ones are the best money saving bet. However, as the Economists notes, these are also the most difficult policies to enforce because the final decision rests with billions of people.

Economists trying to explain this apparent irrationality suggest that the savings are too small and the effort involved in change too large. People find their electricity bills too boring to think about; within companies, those responsible for keeping bills down may not have the authority to spend the necessary capital. Another explanation is the agency problem: that the developer who would have to pay higher capital costs up front will not be forking out for the electricity bills. Besides, people buy houses not because they have good insulation but because they have pretty views.

Compared with pursuing greater energy efficiency, the abatement measures into which so much money is now being poured look rather expensive. Carbon capture and storage and wind and solar power, for instance, all have positive, and relatively high, abatement costs.

But the cheapest sources of abatement are difficult for policymakers to get at. Billions of different actors are involved. They cannot be targeted in the way that a few hundred factories can. What is more, a moderate carbon price is not likely to be effective, since people clearly do not care enough about cost.

Read the whole article for potential policy directions based on these findings.

In this context, it is worthy to note Australia’s recent decision to phase out incandescent light bulbs by 2010.

Also, previous posts on Policy Wise related to the use of fluorescent bulbs.