Germany opts for free tuition

Continental Europe can often surprise us in a big way. Most countries are going the way of increasing fees for university students. The model is market-based fee financed by loans (which may or not be subsidised by the state). Not so in Germany, according to a report in the Economist.

Many German states are opting for free university education. Fees in Germany generate revenues of only € 1.2 bn compared to total expenditure of € 36 bn. Private sources account for only 15% of revenues in German universities compared to two-thirds in the US. It could well be that not getting students to pay may be affecting the quality of universities- it's difficult to finance research and other activities of top quality without better funding. But education is inclusive.

Which model is better - the American model which imposes an enormous loan burden students but can produce very high quality or the German model which results in universities of lower quality but provides the widest access? The German economy is doing fine. Even though research in Germany may not be cutting edge, German manufacturing is known for quality. I leave it to you to judge.

India's services-led growth

Two aspects of India's services-led growth are striking. One, modern services, comprising IT, financial services and communications have taken off at lower per capita levels than in the OECD economies. Two, there has been rapid growth in traditional services, most of which have been untouched by reforms.

Modern services in India should continue to grow thanks to tradability of these service: India's great good fortune that these services started developing in India precisely at a time when many of them became exportable. Traditional services, such as railways, hotels, trade too have plenty of potential. Hence, services can continue to be an engine of growth in India.

Can they absorb enough of India's labour force? Quite possibly, yes. When you say 'services', most people think IT and programming. They believe services require high levels of training. This is not entirely true. There are plenty of jobs opening up at call centres and data entry centres, jobs that don't require very high levels of training. Financial services and communications also are throwing up jobs in large numbers (on the sales side, for instance) where training required is not very high. So services-led growth can boost employment as well, although it cannot completely substitute jobs created by manufacturing.

More in my ET column, Can services-led growth continue?

IIM Indore five year programme

IIM-I's five year programme in management has drawn a response from the AICTE. The regulator believes that IIM-I can't offer a degree at the end of the third year, as promised, because it does not have the power to grant degrees. IIM I has clarified that it will grant a diploma as all the IIMs do with their post-graduate programme. (The IIMs are not covered by any Act of parliament, unlike the IITs, and hence do not have the power to grant degrees).

IIM-I's 3+2 offering (undergrad courses plus MBA), after the 12th standard, will be watched with interest. It is the first ever attempt by an IIM to move into the undergrad space. It also offers students an entry into the MBA programme without facing the huge odds of CAT. The undergrad courses will cover, not just business management, but several elements of liberal arts, history, literature etc, as also IT.

There has long been talk, endorsed by the Yash Pal committee, of the IIMs becoming full-fledged universities. The issue has been one of scale as well as scope. If IIM-I can show that it can deliver quality in a broad-based undergrad programme, it will be a feather in its cap and it could be the forerunner of similar programmes from others, including the IIMs.

Regulatory overkill in banking?

That's the title of my last ET column.

At least some bankers think so. They see the proposed capital requirements for banks as too onerous. They are against any restrictions on investment banking or on size. Alan Greenspan takes a different tack. He thinks policy-makers and regulators simply do not enough to intervene, that the international financial system is far too complex for the sort of regulation proposed under the Dodd-Frank Act.

Greenspan is in a minority today at least among policy-makers. Both in the US and in Europe (and especially in UK), the tide is firmly in favour of tighter regulation. It's difficult to resist the proposition that inadequate regulation was a factor in the sub-prime crisis, if not the most important factor. My biggest concern is that regulatory reform will be late in coming. The biggest nightmare facing us is a macroeconomic crisis triggered by the problems in the Eurozone hitting the world before banks are shored up with more capital.

Bankers and psycopaths

The characteristics that make for good traders and investment bankers are pretty much the same as those that define psychopaths, according to Michael Price, co-director of the Centre for Culture and Evolutionary Psychology at Brunel University in London. Indeed, Wall Street’s Gordon Gekko has clear psychopathic tendencies, he says.

“The banking industry is an ideal target for psychopaths,” Prof Hare (a specialist on psycopaths) told me recently. The ructions of the past few years will only have helped their rise. “These areas are tailor-made for the psychopath. Where things become chaotic and the normal rules don’t apply, enter stage right the psychopath.”

That's from an article in the FT. Even more interesting is this tidbit on high flyers in the corporate world in general:

A small-sample study by Prof Babiak, Prof Hare and a colleague found that while the average result in a common psychopathy test was the same for executive high-flyers and the wider population, 3 per cent of high-flyers scored highly enough to be classed as psychopaths.

Maybe it's time ask: how come these lunatics are making big bucks and calling the shots?

Launch of book on Ravi Matthai-IIMA

We had a launch function for my book on Ravi Matthai-IIMA (Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad;Rupa Publications) on June 20. Dr C Rangarajan, Chairman, Economic Advisory Council to the PM, released the book.

Dr Rangarajan was a professor at IIMA in Matthai's time. He had been recruited from the US by Matthai and became a close associate of his here. Among those present were IIMA director Samir Barua, faculty and staff of the Institute, former faculty members of IIMA, people from the corporate world and the government of Gujarat and members of the media. The event was well covered in the Ahmedabad editions.

Zhou Enlai was misquoted?

Talk about revisionism. This bit on Zhou Enlai, the former Chinese PM, is going to cause a bit of history to be rewritten. Zhou is famous for having said of the French Revolution and its impact, 'Too early to say'.

This has been famously interpreted as a sign of the far-sightedness of the Chinese, their ability to do serious long-term thinking. A news item in the FT now says that Zhou was misquoted. He was talking of the 1968 student riots in Paris, which had happened three years earlier, not of the storming of the Bastille.

At a seminar in Washington to mark the publication of Henry Kissinger’s book, On China, Chas Freeman, a retired foreign service officer, sought to correct the long-standing error.

“I distinctly remember the exchange. There was a mis­understanding that was too delicious to invite correction,” said Mr Freeman.

He said Zhou had been confused when asked about the French Revolution and the Paris Commune. “But these were exactly the kinds of terms used by the students to describe what they were up to in 1968 and that is how Zhou understood them.”

Apparently, this is not the lone instance of a Chinese leader being misquoted. Deng Xiaoping's, 'To get rich is glorious' is said to be fictional.

Are margins too high in Indian banking?

The RBI seems to think so; one RBI official was even quoted as saying that Indian banks' margins are 'usurious'. It's hard to draw conclusions from the aggregate level of NIM because a bank's NIM is a function of a number of factors; for the same reason, comparing with other countries may not be useful.

The regulator must simply ensure that there is adequate competition- and live with the margin that results. There is a case for tolerating higher NIMs given that banks' capital requirements are poised to rise due to Basel 3 and stiffer regulation in the years to come. That will put banks' return on equity under pressure and make it a little difficult for Indian banks to finance their huge requirements of capital from abroad.

More in my ET column, RBI mustn't dicate bank margins.

How much equity does a bank need?

15-20%, says Sebastian Mallaby in an article in the FT. The Basel 3 norm of 7% core equity is not enough, he says. His argument is as follows:

Three factors drive this estimate. First, recall how much equity can be destroyed in a crisis. The International Monetary Fund calculates that credit losses at US banks between 2007 and 2010 amounted to 7 per cent of assets, so banks must be in a position to lose that much again and survive. Second, consider how much residual equity banks must have left after a large hit. Here the answer is about 8 per cent of assets – that is the amount that the top four US banks felt it necessary to hold in early 2010 in order to retain market confidence. Third, remember that capital is held against risk-weighted assets, and that the calculation of risk weights is notoriously treacherous, so banks should hold a further buffer against “model error”, aka geeks who screw up. Adding these factors together, a 20 per cent equity capital ratio seems reasonable, even if some of this may take the form of “coco” bonds that convert to equity in a crisis.

Mallaby dismisses the argument that more equity will mean a higher cost of capital for banks. He says as more equity is raised, the cost will fall because banks will be perceived as becoming safer. Swiss regulators have already imposed a requirement of around 20% on UBS and Credit Suisse if one includes convertible debt. Mallaby argues that, in order to prevent regulatory arbitrage, shadow banks too must be subject to minimum capital and other requirements.

Book on Ravi Matthai - IIM Ahmedabad

My book on Ravi Matthai- IIM Ahmedabad, published by Rupa Publications, is out (Brick by Red Brick: Ravi Matthai and the Making of IIM Ahmedabad). ET carried a story on it a couple of weeks ago.

The book is timed to coincide with IIMA's golden jubilee and is meant to celebrate the remarkable effort at institution-building in the Institute's formative years. IIMA stands out in the Indian education landscape for one reason: it is that rare institution that has been at the top for most of the five decades for which it has been around. There is an Iron Law that operates in Indian education and that dictates that institutions of higher education, started with great fanfare, must go to seed in about thirty or forty years' time. IIMA is a noteworthy exception.

My book attempts to explain IIMA's success and to answer the questions: what sets IIMA apart in the IIM fraternity? why does it enjoy a premium rating? I also devote a chapter to the governance issues in the IIM system today and make suggestions on how to inject greater accountability into the system.

The answer to the above questions, which I came to grasp only after I had spent some five years at IIMA, lies in the culture and processes that Vikram Sarabhai, its founder, and Ravi Matthai, its first full-time director, put in place. That something, which is intangible but which makes all the difference to an academic institution, has been solid enough to sustain IIMA for five decades now.

When IIMA was founded, Ahmedabad was a small town. The infrastructure at the Institute was very basic, they did not have today's IT and the connectivity it provides, communications were poor. And yet IIMA quickly made an impact on the nation as a centre of excellence. Can you imagine an IIT or IIM being set up in Tirunelveli or Patiala making a similar impact today? That is a measure of the achievement of IIMA's founding fathers.

Matthai was all of 38 years old when Sarabhai and others chose him as the first full-time director. He was not an academic by training, he had been a corporate executive. He achieved what he did in just seven years' time. His appointment as director was not a contractual appointment, and yet at the age of 45, he chose to step down. He spurned numerous lucrative offers and turned his energies towards a novel experiment in rural education in Jawaja, a small block in Rajasthan. It was a story waiting to be told. I am privileged to have had the opportunity to tell it.

PS: The book is expected to reach the market in about a week's time but it can be ordered from flipkart. com or from Rupa's website.

America's moon mission and the public sector

John F Kennedy's moon mission was meant to make a point about US supremacy in science after the jolt delivered by the Soviet Union's putting a man in orbit. It cost an enormous sum- $150 bn in 2010 dollars, according to an article in the Economist, "five times as much as the Manhattan Project and 18 times the cost of digging the Panama Canal." The Economist points to an irony at the heart of the moon mission:

The Apollo programme, which was summoned into being in order to demonstrate the superiority of the free-market system, succeeded by mobilising vast public resources within a centralised bureaucracy under government direction. In other words, it mimicked aspects of the very command economy it was designed to repudiate.

However, attempts to mobilise the public sector for other large projects failed, for example, Lyndon Johnson's attempt at social engineering on a huge scale. The Economist believes that Obama's calls for a leap in technology and infrastructure will fail for the same reason.

The Economist oversimplifies, methinks. The Apollo mission succeeded, not just because it invoked national pride. It was a case where expense was no consideration because a matter of national prestige was involved. Other giant public sector projects do not come with a blank cheque, expenditures are subjected to scrutiny and are pruned at the first opportunity.

Here in India, we have seen that several projects in the public sector have delivered for the same reason- ISRO, BARC, DRDO, IITs and IIMs. It is only when people start demanding results commensurate with expenditure that we have a problem- and indeed that is what is happening today. No longer are people willing to back the pursuit of excellence with an open purse.

In short, it is not the nature of the project that matters or the fact that is in the public sector, it is a matter of the resources with which it is backed.

IITs say no to greater autonomy!

Going by a report carried by BS, the IITs don't really want greater autonomy, at least as envisaged by the Anil Kakodkar committee report on IITs.

The Kakodkar committee has favoured devolving greater powers to the IIT boards, with decisions on salaries, recruitment etc being largely left to them. Towards giving IITs greater operational freedom, it has suggested a substantial increase in fee from Rs 50,000 to Rs 2-2.5 lakh per annum. The IIT directors that BS spoke to had a different point of view from that expressed by the Kakodkar committee.

IIT Madras director MS Ananth is quoted as saying, "“In my personal opinion IITs have adequate autonomy. As an institution funded by tax-payers, I do not expect to be handed more on a platter." The IIT directors and also some faculty see any government withdrawal as coming in the way of the IITs' future growth:

“While the whole idea of the Kakodkar Panel is rooted in providing us more autonomy, I am not so sure that this will provide us with the prospects of growth that we need in the immediate future and in the long run,” said an IIT-Kharagpur professor on the condition of anonymity.

Gautam Barua, director, IIT Guwahati, expresses the view that key decisions should be taken by the IIT Council, which includes all IIT directors, rather than being left to the individual boards; leaving it to the boards would mean the absence of uniformity across IITs and the dilution of the IIM brand.

The attitude of the IIT directors is in refreshing contrast to that of some IIMs. The IITs have less autonomy on paper than the IIMs as the former are governed by an Act of Parliament whereas the latter are not. And yet the IITs believe they have all the autonomy they need while some of the IIMs keep bleating about lack of autonomy.

The older IIMs have been saying just the opposite of what the IITs are saying. They say they need to be financially independent of the government; they want more power be given to the boards; they have resisted moves to evolve a common policy across the IIMs through a pan-IIM board and other means; and they would rather have individual IIMs promoting their own brand.

So who has got it right on autonomy? The IITs, whose brand is better known worldwide than the IIMs, or the IIMs? I leave it to you to judge.

Barca reigns supreme

Barcelona's majestic win over Manchester United in the Champions League underlined its status as the best team in the game today and, arguably, the best in the history of the game. Schumpeter, writing in the Economist, believes that Barca's success contains the answers to important questions of management. What is the right balance between stars and the rest of mankind? Should you buy talent or grow your own? How can you harness the enthusiasm of consumers to promote your own brand? He sees the answers as follows:

Barça puts more emphasis than any other major team on growing its own players. Other football teams often resemble the United Nations—the Arsenal first eleven, for example, frequently includes just two native-born Britons. Barça, by contrast, is still dominated by local players, and Catalan is often spoken in the dressing room....It is a boarding school that puts as much emphasis on character-training as on footballing skills. The students are relentlessly instructed in the importance of team spirit, self-sacrifice and perseverance. ...It is owned by its members (socis in Catalan), who now number 150,000, rather than by shareholders or foreign tycoons. ...so far nobody has gone as far as Barça in giving customers a direct say in big decisions.

I have great regard for Schumpeter but, as readers of this blog would know, I am wary of drawing management lessons from anecdotal evidence. True, it's unwise to depend too much on stars and there is much to be said for home-grown talent. But would you say 'never' to stars? There are surely instances of other clubs that have done the opposite of what Barca has done and been at the top in their own time. If home-grown talent were all that mattered, the teams in the IPL would not bidding for foreign players and having them.

Moreover, what applies in football or some other sport may not be applicable to firms. As firms globalise, there is merit in hiring talent from overseas, at all levels, indeed in internationalising top management as well as the board. In sports, the nationality of the player does not matter- football is football, whether one is playing at home or abroad. Not so with firms, where knowledgeable of the local culture and the local economy and the ability to deal with policy-makers and regulators in the host country are important requirements for success.

Star CEOs do deliver dramatic improvements in performance, although there is an issue of whether these improvements are always sustainable. You can't deny that Lou Gerstner produced a lasting transformation at IBM.

Perhaps what is required is combination of home-grown values and diversity of talent. The values must be so deep-rooted that foreign talent also comes to imbibe it. But this is, perhaps, asking for the impossible. If Barca continues its reign for a longer period than anybody else, we may be able to draw conclusions. Until then, we must reserve judgement on what Barca represents- and its managerial implications.

Greece can derail the world economy

Last May, after the IMF-EU rescue of Greece, I confidently forecast that the rescue would not work. There was no way Greece could service its then level of debt. A year later, it's being generally accepted that restructuring is necessary although the EU appears to favour 'soft restructuring', which is extending the maturities of debt instead of debt forgiveness or lowering of interest rates. This, of course, merely postpones the day of reckoning.

My forecast may have come true but I am not celebrating. The Greek debt problem is a lot worse than thought earlier. It appears now that even restructuring will not return Greece to insolvency. That leaves only two options: a fiscal union for the EU (with fiscal transfers from a 'centre' to the states, as in India) or the exit of Greece from the currency union. The first is politically distasteful; the second will create turmoil all round. Greece will be quite a nut for the new head of the IMF to crack.

More in my ET column, Greek jolt to world economy.

World class or not?

One of the pleasures of writing this blog is the high quality of responses it evokes. One anonymous reader talks of lack of ethical standards and even corruption at the IIMs. I cannot, for obvious reasons, comment on that. Most comments fault me for not addressing the core issue of whether the IITs and IIMs produce world-class research or not. They are right- I did not address this issue because it's difficult to deal with in a short post. Let me take a stab at it.

Perhaps, I should begin by posing some counter-questions. Is Infosys in the same league as Microsoft? Is ISRO equivalent to NASA? Are the IB and RAW comparable to MI5 and Mossad? Are our business dailies as good as Financial Times and Wall Street Journal?

There's no end to these comparisons and they will take us nowhere. No non-commercial institution in India needs to justify itself by comparing itself with somebody else who is regarded as best in class and then coming to conclusions as to its worth or utility. If that is the yard-stick, we will see mass hara-kiri.

The key issue is the impact the institution makes on its environment. Is it adding substantial value in the environment in which it operates? When the question is posed in these terms, the dimensions on which performance is measured change. You would not judge an IIT or IIM only on one dimension, namely, publication in international journals but on several dimensions: quality of students, interface with industry, impact on important sectors of the economy, inputs for policy-making, etc. The founding fathers of IIMA never talked about becoming 'world-class'. They spoke about two things: striving for excellence and striving for relevance. I guess I am talking about the same things.

The top American university is a marvel that has evolved over some three hundred years. It is supported by enormous private funding and it has put in place culture and processes that are not easy to replicate. Not just India but the rest of the world lags behind considerably: even the top European universities cannot hope to rival Stanford, Harvard, MIT and Princeton. In higher education, as in defence, the US stands alone.

The quest for improvement and reform must be eternal and the IITs and IIMs must be held to account for higher and higher levels of performance. But to condemn them by comparison with the icons of American education, which is what "world class" is all about, can only demoralise faculty and undermine whatever good can come out of our system.

Do IITs, IIMs add value ?

When it is said that the IITs, IIMs owe their eminence entirely to students, not to faculty, it is implied that they do not add value. True or false?

Well, an IIMB director answered this effectively a few years ago when some in the corporate world had made similar statements. He made an offer: he would make public the admissions list the moment it was finalised. Corporates could come and recruit anybody on the list right away. If the IIMs did not add value, neither the students nor the corporates should have a problem doing this. There were no takers. The companies' bluff had been called.

There is another way of responding to the contention that faculty do not contribute. The IITs and the IIMs admit a small fraction of applicants. An IIM would call for interview around 1000 students. Anybody familiar with the admissions process would know that there is very little difference in terms of the CAT score between a student ranked 800 and a student ranked 2500 in CAT. The former may make it to an IIM; the latter is left out and goes to some other B-School. If the difference in student quality, that is, the input is negligible, how come there is such a huge difference in output or outcome? How is it that the IIM student is hugely sought after while the non-IIM student is not? Ditto for the IITs. QED.

Jairam Ramesh on IITs and IIMs

The astonishing part of Jairam Ramesh's criticism of IITs and IIMs is his contention that a governmental research set-up can never attract young people. Ramesh presumably said this in order to justify his decision to set up a Maritime Research Centre in collaboration with the Mukesh Ambani group. The statement flies in the face of facts.

If a private institution in higher education were inherently more attractive, how is it that there are no private engineering colleges comparable to the IITs, no private B-schools comparable to the IIMs (with the exception of ISB), no medical college of the stature of AIIMS? A private institution in education can achieve quality only if it is private and non-profit. We know that is emphatically not the case in India, that the whole point about private institutions coming up in education is to make money, whether over the table or under it.

Indeed, when you look other places- France, Germany, Russia, China- the premier educational institutions are all in the public sector. The lone exception to state domination of quality institutions of education is the US. That is because of the tradition of private philanthropy supporting higher education, a tradition that is almost unique to the US. No other culture has it or has it in the same measure. That is why it is futile to expect private institutions elsewhere to produce anything comparable.

Even in the US, it is not as if quality education is the monopoly of the private sector. There are several distinguished universities that are part of government - the magnificent institutions of California university, University of Texas (Austin), Ohio State University, to name a few. Government presence in higher education need not be inimical to the pursuit of excellence and can indeed conduce to it- provided the governance structures are right. Several countries in the world have shown that it is possible to achieve this, and here in India, the success of the IITs and IIMs illustrates the same principle.

Criminality or stupidity?

The question that is being asked for Pakistan's security agencies in the wake of the Osama bin Laden killing could also be asked of bankers and investment bankers in the sub-prime crisis. Hedge fund manager Raj Rajaratnam, has been convicted on charges of insider trading but no banker of stature has even faced charges for the turmoil caused by banks in the crisis.

It's plausible that poor judgement, rather than mala fide intent, underlay most of the problems at the banks, combined with such factors as poor regulation, lax monetary policy and current account imbalances. But can the bankers entirely escape blame, including the ones at the top at Bear Stearns and Lehman Brothers? John Gapper, writing in the FT, feels that investigations must continue in the hope of pinning blame on at least some people:

What is clear is that, both on the way up and in the panic on the way down, many banks valued and traded such assets for their own purposes and did their best to hunt out gullible buyers. The Senate inquiry report quotes a Goldman executive exulting that “I think I found a white elephant, flying pig and unicorn all at once” on finding an investor that would buy one of its collateralised debt obligations.

It beggars belief that somewhere on Wall Street, in the last days of the mortgage bubble, crimes were not committed. They are still worth finding.

Sure they are, but it's gonna be tough. Not only are some of these crimes difficult to prove but one has to reckon with the clout of Wall Street in these matters and the old boy's network among finance honchos that extends to the highest levels of goernment.

Curbing inflation in India

The RBI signalled last week that it would tackle inflation head-on. The 50 bps hike in the repo rate was meant to send a strong signal to the market.

When inflation has been in the double digit range for two years running, the central bank has little choice. But, then, we need to be clear that high inflation in the recent past has been driven primarily by supply-side factors, fuel and food prices. Both these will stay at elevated levels in the coming months. Further, there is evidence that variations in demand in the period 2006-10 had little bearing on the inflation rate, particularly variations in non-agricultural GDP.

What role can demand management by the RBI play in such a scenario? It may not be able to influence demand but it can still influence the inflation rate by anchoring inflation expectations. That is what the RBI is seeking to do. If that is so, what expectations of inflation should the RBI target? In other words, what rate of inflation should we tolerate in the present scenario? It cannot be the previous comfort rate of 3-4%. It has to be something higher. The RBI needs to indicate what that is. Compressing demand to reduce the growth rate can otherwise end up inflicting costs on the economy that are greater than the costs imposed by high inflation.

More in my ET column, A 'new normal' for inflation?

Comment from the Dawn newspaper

One of the most forthright and hard-hitting comments on the death of Osama bin Laden I have seen comes from a column in the Dawn newspaper of Pakistan. Cyril Almeida writes:

Did the 1965 war make any sense? It was hard to find any sense to it then, even less so today.

Did Kargil make any sense? Not then, not today.

Did hawking nuclear paraphernalia on the international market make any sense? Buying did perhaps, but selling? And now we
have the world’s most-wanted terrorist recovered from the bosom of the Pakistani security establishment.

So maybe it does make sense after all. The establishment has flirted with irrationality in the past. Now it appears to have
perfected it.

Where do we go from here as a country?

As long as national security and foreign policy remain in the hands of a cabal of generals — unaccountable and untouchable, a lay unto themselves, and in thrall to their own irrational logic — what future can this country have? Surely, not much of a future.

You cannot help admiring the courage and objectivity of the writer. This is why I find it difficult to buy the idea of Pakistan as a failed state. There must be something very right about a country where a leading newspaper can produce such a column.