The Crane-Mongoose Theory of Public Policy

I have several favourite stories from the Panchatantra (which perhaps explains my lack of appreciation of modern children’s fiction). One of them involves a crane and a mongoose. And I think it is a good lesson on when and where to call for regulation, and government or legal intervention.

So the story goes like this. A snake lives at the bottom of the tree where a crane has built its nest. Each time the crane lays eggs, the snake slithers up the tree and devours them. And the crane doesn’t know what to do. Ultimately it receives some “brilliant advice”.

There is a mongoose living somewhere nearby, and the crane lays out a Hansel-and-Gretel like path of fish from the mongoose’s house to the snake’s house. The mongoose duly follows the trail of fish and finishes off the snake. The next day, the mongoose is hungry again, and it climbs up the tree and devours the crane’s eggs.

It is common political discourse nowadays to call for the government’s or court’s intervention to solve what seems to be private problems. The governments and courts are of course happy to oblige – any new source for intervention and rent-seeking are good news for the people involved. And then you get a solution that temporarily solves the problem (slaughtering the snake). And then in the long term, what you get is a bigger problem (mongoose eating the crane’s eggs). The only difference is that in real life it is not just the crane that gets negatively affected – the regulations hurt everyone.

The examples that come to my mind at this point in time are all “local”. Some residents in Indiranagar in Bangalore weren’t happy about the noise from nearby pubs. They asked the government to “do something”. And the government “did something” – it banned the playing of live music in restaurants, killing off what was then a budding industry in Bangalore.

Some other residents somewhere else in Bangalore were unhappy that their neighbours had dogs that barked. They asked the government to do something. The government did something – coming up with an elaborate document to regulate dogs that people can own.

And there are more involved (and dangerous) examples of this as well.

Don’t be like the crane.

Correlation in defence purchases

Nitin Pai has a nice piece on defence procurement in Business Standard today. He writes:

Even if the planning process works as intended, it still means that the defence ministry merely adds up the individual requirements and goes about buying them. This is sub-optimal: consider a particular emerging threat that everyone agrees India needs to be prepared for. The army, navy and air force then prepare their own strategies and operational plans, for which they draw up a list of requirements. At the back of their minds, they know that the defence budget is more-or-less divided in a fixed ratio among them.

What he is saying, in other words, is that the defence ministry simply takes the arithmetic sum of demands from various components of the military, rather than taking correlation into account.

Let me explain using a toy example.

Let’s say that the Western wing of the Indian army (I’m making this up), the one that guards the border with Pakistan, wants 100 widgets that will come useful in case of a war. Let’s say that the Eastern wing of the Indian army, which guards the China border, wants 150 such widgets for the same purpose. The question is how many you should purchase.

According to Nitin, the defence ministry now doesn’t think. It simply adds up and buys 250. The question is if we actually need 250.

Let’s assume that these widgets are easily transportable, and let’s assume that the probability of a simultaneous conventional conflict with Pakistan and China is zero (given all three are nuclear states, this is a fair assumption). Do we still need 250 widgets? The answer is no, we only need 150, since we can quickly swing them over to where they are most required, and at the maximum, we need 150!

This is a case of negative correlation. There could be a case of positive correlation also – perhaps the chance of an India-China conventional conflict actually goes up when an India-Pakistan conventional conflict is on, and this might lead to more prolonged battles, meaning we might need more than 250 widgets! Or we have positive correlation.

The most famous example of ignoring correlation was the 2008 financial crisis, when ignored positive correlation led to mortgage backed securities and their derivatives blowing up. The Indian defence ministry can’t afford such a mistake.

In which I thulp the RBI

I’m still so pissed off with the Reserve Bank of India doing a Ramanamurthy that I’ve written a serious editorial in Pragati – the Indian National Interest Review (published by the Takshashila Institution). In this piece I take on measures by the RBI to limit ATM transactions and the thing on two factor authorization.

I claim that both these decisions are economically unsound and there is only possibly a farcical explanation for them:

There is perhaps only one idea (more a conspiracy theory) that possibly explains the above decisions from the RBI. Both these decisions, it might be noticed, help push up the usage of hard currency and decrease the levels of bank deposits. Less bank deposits means less money available for banks to lend out, which means that the cost of borrowing from a bank implicitly goes up. Could it be that the above regulations are a move by the RBI to curtail money supply without necessarily doing the politically tricky task of raising interest rates?

If it is (and it is a very remote possibility), we should commend the RBI for what will then amount to be a sneaky decision