Beyond Phishing

Faisal Bari

Phishing for Phools: The Economics of Manipulation and Deception: depicts how markets and people will always be open to manipulation and deception
We have known, for a fairly long time, that we can get swayed by short-term considerations and act against our long-term interests. We know we need to eat healthy and exercise to ensure a healthy future but many of us overeat and indulge in foods we should not consume and either do not exercise or not exercise enough. Many of us smoke and/or drink excessively even though we know, and there is no ambiguity about the evidence here, that smoking and excessive drinking are injurious for us.

Behavioural psychologists have also shown that there are significant biases and limitations in the way we process information in our decision-making. The order in which information is provided, salience of certain facts, how we process probabilistic events and how much information can we process at any point in time are all factors in how we decide.

Literature from advertising and marketing provides ample evidence that our wants and desires can be and are shaped by many factors. Consumer sovereignty is all fine and dandy as a concept, and there is hardly a time when, in more developed societies at least, we force a consumer to buy something he/she does not want to, but consumer tastes are very open to manipulation by advertisers and marketing people. They can create wants where none exist and shape existing wants in directions that consumers might not have thought of themselves.

Information is a crucial variable in the success of markets functioning efficiently. But, information is usually asymmetric and markets are, especially in many developing countries, not always complete. Using information revelation strategically, to one’s advantage, is also quite common where asymmetries exist.

If you are trying to buy a second hand car, the seller is likely to know more about the car and its faults than you. She might not reveal faults and over-emphasise good qualities. But, since she is an interested party, you cannot trust anything she says. This effects how the market for second hand cars can be organised: you need third parties to credibly reveal car quality.

Akerlof and Shiller do not go beyond what we have known in these areas, and for quite some time, in any way. Nor do they set out to do so. The contribution of their book, Phishing for Phools: The Economics of Manipulation and Deception, is that rather than seeing the above issues as special cases that in some ways make markets deviate from ideal forms once in a while, Akerlof and Shiller argue that the mentioned issues are an integral part of markets and how market economies are organised. This is the way we are and the way markets are.

Given the above, markets and people will always be open to manipulation and deception. We can set up regulatory regimes and we can make these regimes as dynamic and responsive as possible but the opportunities for phishing, given dynamic markets, will always be there. A new drug, a new financial instrument, a new idea or even old ideas and fads in new situations will create new and unforeseen openings for phishing. We can be vigilant and forestall more obvious forms of phishing and learn from the past but we will not be able to foresee all possibilities that the future will bring. In the same way as all contracts have to be contingent as we cannot foresee all future possibilities, regulation is contingent too: the regulator can also only forestall what she can anticipate. She can respond to new situations as quickly as possible, but that does allow phishing to be lucrative.

Food and Drug Administration (FDA) in the US has stringent requirements before they allow drugs to be available to people. Still there have been many cases where ineffective drugs or drugs with strong but hidden side-effects have been passed. Pharmaceuticals have found ways of working with and around all FDA regulations. FDA keeps regulations dynamic, but it is far easier for companies to find ways of phishing than for FDA to close or foreclose these opportunities.

Things are much worse in Pakistan. In many areas we do not even have functional regulators. What do private schools teach? Does anyone keep an eye on them? What percentage of medicines available in Pakistan is fake and/or spurious? Who can tell us that?

In others areas, where regulators are present, they have significant capacity issues. In some cases regulators have been captured by specific interests. Do NEPRA/OGRA safeguard consumers’ interests? Whose interests does PEMRA look out for? Did PTA, SECP and Competition Commission do their job when they approved the merger of Warid and Mobilink?

We are much more open to phishing activity than citizens of developed countries. As we continue to privatise, deregulate and liberalise without creating an efficient and effective regulatory structure, we become more open to such activity. In some countries even if the regulatory structures are weak, the judicial system offers effective checks and balances. But this is not the case in Pakistan: litigation is too costly and slow to respond in most cases.

Akerlof and Shiller, both winners of the Nobel Prize in economics, make the case for showing how phishing activity is an integral part of the market system very well. This book should be read and its insights internalised by all who are trying to understand the dynamics of markets, especially those who are living in the developing countries.

But beyond talking a little about individual vigilance and regulatory institutions/structures, Akerlof and Shiller do not talk of remedies. If phishing is an integral part of markets, the only option is that we should be prepared to live with it and just try to minimise its impact through individual awareness and what we can do through regulatory institutions? Given how long and deep Akerlof and Shiller have thought about these issues, it would have been wonderful if they had given us their thoughts on response aspect as well. Maybe that is for the future.

This book is a must read for not only students of social sciences, it should be read by bureaucrats, politicians and public policy enthusiasts. More importantly, it should be read by citizens: they need to know how they are open to phishing based on cognitive and psychological factors as well as due to information issues. And these issues are integral to how markets work. This awareness will help us design and develop better coping mechanisms individually, collectively and institutionally.

Phishing for Phools: The Economics of Manipulation and Deception
Authors: George A. Akerlof and Robert J. Shiller
Publisher: Princeton University Press, September 2015
Price: Hardcover $25
Pages: 288

From The News on Sunday, Political Economy pages, Pakistan, published Sunday 21st August, 2016

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Regulation Under Threat

FAISAL BARI
THE energy minister accused the Planning Commission of holding back energy projects. The Planning Commission countered by arguing that ministries did not like the accountability and scrutiny that it provided. There was a similar exchange between the planning and petroleum ministries as well.

There have been news items, over the last few months, regarding the executive’s unhappiness with electric power regulator Nepra and Ogra, the oil and gas regulatory authority. It has been suggested that the government at times has even contemplated doing away with some of the regulators or, at the very least, clipping their more troublesome powers.

Is there an assault on regulatory bodies and structures in Pakistan? Is the executive feeling the heat to show performance and is it finding it hard to cope with the regulatory structure that has been created over the last couple of decades?

There is no doubt that there are significant problems with regulatory structures and bodies here. It has become harder to navigate the regulatory environment, and a more active National Accountability Bureau and judiciary have made things even more difficult and unwieldy: look at the continuing saga concerning the appointment/removal of the chairperson of Pemra, the electronic media regulator.

Regulatory bodies have problems too. Many do not have the competence and capacity to deal with the areas they are supposed to oversee. The inept and ineffective handling of media issues by Pemra, and repeatedly, is again a good example. Most regulatory bodies are staffed with retired bureaucrats, police officers, generals and judges who have little or no experience of industry issues and little or no training in economics and other relevant areas. They know little, if anything, about the private sector. To suppose these people can create ‘conducive environments’ for business and not act as rigid mandarins is too much to expect.

Even the majority of the technical staff in many of these regulatory bodies does not have the capacity, the requisite training or experience of regulation. Having read a number of judgements that the Competition Commission of Pakistan has given on issues of fair practices, cartels and pricing, and seeing how these decisions come about and having studied the problems, I can confidently say that the concerned authorities need a lot more training in industrial economics and game theory.

I cannot comment on the legal issues, including legal expertise, but even with other regulators such as Nepra, the Pakistan Telecommunication Authority and Ogra, I can safely say on the subject of competence on economic issues that similar problems of lack of knowledge and expertise persist here as well.

At the same time, it is also clear that we do need regulators and very competent ones at that. The executive will always want to avoid accountability. They usually want to do things in a hurry — see how quickly and without due process some of the transport projects have been undertaken.

The same is true of big business and players in the private sector. We have to have bodies that look after the interest of the people and ensure that the playing field is ‘fair’ for all sides. This is especially the case for areas that are and are likely to remain oligopolistic ie dominated by few larger players. The energy sector, banking/finance, media, large-scale manufacturing and the communication sector are all examples. In each case, there are significant degrees of economies of scale and scope, so the average player is going to be fairly large and there will only be space for a few such players in the market.

If a regulator is not there to protect the interests of the people as well as those of smaller players and/or new or potential entrants, the sector will have a tendency to become monopolistic and exploitative.

To cap it all, there are serious and entrenched issues of corruption and nepotism that need to be challenged and tackled in Pakistan. Has there ever been a sizable project or an initiative undertaken by the public sector in Pakistan that has been transparent and has not been found to have some element of corruption or nepotism? From the privatisations carried out over the last 20 years to land acquisition deals by the Defence Housing Authorities, from the award of infrastructure development projects to favourites to rental and independent power producer investments in energy, we have seen plenty of scandals and many still remain to be investigated. Effective regulators are needed to provide at least a semblance of checks on the executive as well as large-scale private players.

It should be borne in mind that regulation is not just for accountability and ensuring fair competition; it is important for ensuring optimal functioning of markets and for setting the appropriate incentives for economic growth. If potential investors cannot be certain that their investments will be protected, copyrights or contracts enforced, the competition will be fair and there will be no re-negotiation of contracts post investment, only then will they be confident enough to invest.

We have to have an efficient and competent regulatory framework in place. This is necessary to provide due checks and balances in the system. It is also important for ensuring that we are able to shape the competitive environment for the future. Currently, the regulatory framework, weak and incompetent that it is, is under attack from the executive. This is largely short-term interest trying to trump the long-term one.

But the weaknesses of the current system should not mean doing away with the regulatory framework; on the contrary, it should be an argument for building their capacity and providing them with the resources that are needed to make them more competent and efficient. Without a functional and competent regulatory framework and capacitated regulatory bodies, we will not be able to integrate into the global economy and compete in relevant goods exports and services markets.

From the Dawn, Pakistan, Friday 23rd October 2015.

It’s Time for Introspection

By Faisal Bari
A small village only about 1.5 kilometres outside of Sheikupura is connected to the city by a good road, and the 1.5 kilometre distance is not a significant barrier to movement. Or so one would think. When I talked to the young women of the village it was amazing how much of an effect this 1.5 kilometre had had on their lives. Most of the girls had to leave their education post-matric as there was no college in the village and only a few of them could afford a secure, mechanised means of transport to be able to go to college in Sheikupura. None of the girls in the village could enter the workforce for the same reason.

Talking to a bunch of young boys and men there, I found that most of these young men dropped out of schools and colleges before doing their bachelors, though most of them had complete d their matric. Most were unemployed and were waiting for an employment opportunity to come their way. Their choice for employment was a government job `good salary, job security and almost no work` is how one young man described a government job. Most of them knew they had no hope of securing a government job of any sort. They felt they did not have the connections or the money to be able to pay the bribes needed to get such a job.

The area around Sheikhupura is known for the quality of its guavas and there are quite a few guava orchards there. All of these young men seemed to have a lot of knowledge about guavas, their varieties and qualities, and about managing guava orchards. A number of them were involved in the business as well, but none of them saw that as a career choice, and none of them wanted to develop any expertise in the area. They preferred waiting for a government job rather than to develop self-employment options. They also mentioned that eventually if a government job did not work out, they would try going to the Middle East for a few years to earn a better living. They did not see a future for themselves in Pakistan unless they could get a government job.

This is not an atypical situation. Labour force data does show some intriguing trends that confirm and complicate the story.

We are not creating enough jobs in our economy to absorb all the youth that are entering working age. Our manufacturing sector has collapsed and is not creating enough new jobs. Most of the jobs that are being created are in the service sector. A bulk of these jobs are low-skill, low-salary ones, and they are not the ones that can offer lucrative and satisfying career prospects for our youth. We also have evidence, from labour force surveys, that there is increasing casualisation in the job market: casual labour is usually daily-wage, low-skill and with no career development opportunities. A lot of the service sector jobs that we are creatingare ofthe casualnature.

Our data also shows that young men, who have a bachelors or higher degree, tend to enter the job market late. The peak is around 29 years of age. Most people graduate around 24-25 years of age even when they do a masters degree. What then is the reason of 4-5 years` gap between graduation and entry into the job market? The data does not allow us to look into this in more detail but we do have a few hypotheses. Graduates, after finishing their bachelors or masters, have high expectations of good jobs. When their expectations are not met, they choose to sit out and/or wait for the right job to come along. This is in line with the already given factoid that there is increasing casualisation of labour and most new jobs are in the service sector.

Eventually life catches up with these graduates and they have to take up whatever jobs are available. Joint family systems might also lend some support to young people and facilitate their unemployment for longer. It could also be that employers do not find young graduates to have the skills they should have and prefer to hire graduates who are a little older, and/or have had some formal/informal work experience. Whatever the explanation, the late job market entry of young educated people causes a significant loss to the economy/society of the country.

Few women enter the workforce in Pakistan. The percentage of women in our workforce is much lower than even our neigh-bours like Bangladesh and India. Most women work in Pakistan but most of them work at home, in agriculture and/or in areas where their contribution is not documented. We are making a distinction between work and being in the workforce. The low participation is regarding workforce participation. But it is not clear what the reasons for the low participation are. People talk of culture/traditions and/or social practices being a barrier to women`s entry into the workforce, but it is also the case that issues like non-availability of affordable and safe transport, lack of implementation of labour laws and other such issues also discourage women from entering the workforce.

The education gap between boys and girls still continues. At secondary level, especially in urban areas, the gap between boys and girls has all but disappeared. Number of girls in secondary schools has increased and at the same time a lot more boys drop out of education post-primary, making secondary school numbers look more even. But when it comes to entering the job market, very few women enter it compared to boys. And the trends have not changed a lot over the last few decades. For a developing country, allowing almost half of their population to not be economically active has a significant cost.In 2001, the renowned economist William Easterly wrote a paper titled `The Political Economy of Growth Without Development: A Case Study of Pakistan`. In the paper, Easterly argued that Pakistan presented a case in which a country had been able to maintain a high to decent growth rate for sustained periods but had failed to improve its social indicators correspondingly. `Pakistan has had respectable per capita growth over 1950-99, …and has a well-educated and high-achieving elite and diaspora. Yet Pakistan systematically underperforms on most social and political indicators…for its level of income. It systematically underperforms on improvements in these (social and political) indicators for its rate of GDP per capita growth over time.` Easterly called this pattern `growth without development`.

For the 1960s our GDP growth was 5.2 percent per annum, it was about 5.1 percent per annum over the 1970s despite the shocks that we had to bear in the early years of the decade, GDP growth rate increased to 6.4 percent per annum over the 1980s and even over the 1990s and 2000s GDP growth rate, per annum was 4.5 percent and about 4.7 percent per annum respectively. There has been a decline since the 1980s and in 2010 our growth rate was only 0.36 percent. In 2014, our GDP growth rate was 3.7 percent according to government claims.

Throughout the same period our expenditure on education has never touched even three percent of GDP in any given year when the minimum recommended internationally, is four percent of GDP. And we have, only recently, started spending about one percent of GDP on health. In 2014, we ranked 146th out of 187 countries on the Human Development Index (HDI).

HDI is a weighted average of variables that track health, wealth and education outcomes. We ranked 127th out of 162 countries in 2001. We are now 146th in the league of nations.

The argument that Easterly made in 2001, holds today as well.

We continue to perform very poorly on social and political indicators even in years when we have had decent growth.

There is an additional twist to the story. It seems that we have also been slowing down and thus it has been harder for us to have high growth and even harder for us to sustain high levels of growth. Easterly had, in 2001, pointed out the possibility that despite high growth if we were not investing in our social and political areas, one day the low human capital mightcatch up with us and constrain our growth going forward. It seems that that time has come.

Sixty-eight years after gaining independence, almost half of our population is still illiterate. An estimated 20-25 million children between the ages of 5-16 years are out of school. Out of 100 children who enrol in schools, only 6-7 percent or less make it to college-level education. For those who are lucky enough to survive within the education system, the quality of education we provide to almost all of our children is generally quite poor. Annual Status of Education (ASER) data, collected every year for the last few years, has consistently shown that most of our children have very low levels of numeracy and literacy skills: the gap between where a student`s learning should be going by her grade to where she actually is, is quite large. Children going to elite private or public schools have better learning outcomes but they only constitute 3-4 percent of all school-going children in the country. Similar problems continue to plague the entire education system. Quality problems at university level have been very ably documented and commented on by scholars like Dr Hoodbhoy and Dr Daudpota.

On the health side, with only about one percent of GDP going to health from the public sector, how can we provide even a basic healthcare system to all the citizens of the country? The state`s inability to eradicate polio, which almost all countries across the world have been able to do, is not only a comment on the abilities of the state, it is a very telling comment on the viability and functioning of our health system.

Are our low levels of human capital constraining our ability to grow, amongst other things? It would seem to be the case.

Low human capital does not allow high-tech manufacturing as well as advanced level research and/or development.

Employers cannot find potential employees that have the requisite educational quality or slcills (skills mismatch) while job seel
Our economy is not producing the number of jobs that we need to absorb the number of young people who are entering the job market. As we go through the youth bulge, the problem is going to get exacerbated. Most of the young people entering the job market have few or no skills and a relatively poor quality of education. Though they might have highexpectations, they cannot take up technical or high-skill jobs. On the job side, the bulk of the jobs that are being created in our economy are low-skill, service-sector jobs. These do not, usually, offer lucrative or attractive returns and/or career paths. Labour force data does show an increasing casualisation of the labour market reflecting the increasing number of service sector jobs and even in the service sector, increasing number of low-skill, daily-wage based jobs.

Over the same period, our economy has seen significant structural change as well. Manufacturing, especially largescale manufacturing has, at best, been stagnant or declining.

Service sector has been expanding rapidly. Employment growth has mostly happened in the service sector, but manufacturing is the sector that offers the best prospect for highskill, long-term and secure employment opportunities. The collapse of manufacturing has not only restricted growth directly, it has contributed significantly to the move towards casualisation of labour as well.

Entrepreneurship and self-employment are not considered as an active option by most youth entering working-age population. Given economic inequalities, lack of access to finance is also a significant barrier against self-employment. The average enterprise size in Pakistan is close to one. This means that the average firm employs one person (the entrepreneur). The overwhelming bulk of our organisations are microenterprises (not even small or medium enterprises). With increasing focus on service industry and poor quality of human resource coming through, it is not easy to see how the average enterprise size could be increased even if we tried addressing access to finance issues for micro and small enterprises.

Many experts and especially policymakers have been talking of a `demographic dividend` for Pakistan. We are a very young nation and our youth bulge is going to peak by 2035-2040. After which our population will slowly start aging. We do have a lot of young people growing up and entering the workforce. Given that a large proportion of them can barely read and write and the bulk of those who are considered to be educated have had a poor quality education, we should worry about the demographic `dividend` turning out to be a nightmare.

Traditionally, Pakistan has relied on investments in physical assets to get to a higher GDP growth rate and to try and remain there. This was the argument made by growth theorists in the 1960s (see writings of Dr Mahbub ul Haq on the issue) and it is still the same lens that the government is viewing the world through today. New growth theories and the experience of many countries has changed the debate completely in the literature. Amartya Sen has argued that the growth miracle of China is partially at least attributable to the significant investments that China made in human capital in the 1960-80s era. He argues that the same is true of India`s excellent performance over the last three decades. Human resource investments explain a significant portion of the East Asian miracle story too. But in Pakistan, we continue to under invest in human capital and see investments in physical capital and infrastructure as the means of development and sustainable growth.

The most recent and continuing episode is the enthusiasm about the economic corridor and the growth expectations associated with it. But, if the human development story detailed above has any explanatory power, it is likely that even if investments in physical infrastructure and assets provide us a healthy GDP growth rate, the poor human capital of the country will not allow us to take full advantage from the opportunity and it will also not allow us to sustain the high growth rate that we might be able to reach for any appreciable length of time. It will be déjà vu all over again. What is needed is a much stronger focus on investments in quality education, skills and other human development areas. But, for the moment, this does not seem to be where the growth debate of the country is.

From the Independence Day Supplement, Dawn, Pakistan, Friday 14th August, 2015.

Anti-competitive practices

FAISAL BARI
A friend had her son, in grade two, admitted to a private school in Islamabad. She had to pay Rs75,000 upfront. This included tuition fee for three months, admission fee and a number of other charges, including costs for books and notebooks.

This is not the most expensive of private schools that she could send her child to. Another one had asked for Rs90,000. And a more expensive one had estimated the initial cost to be around Rs150,000. All this money is non-refundable and the next bill, for tuition fees, is due in three months.

A colleague in Lahore wanted to change his son’s school. But he could not as the minimum amount of money required for that, even at the relatively ‘low-fee’ private schools, was turning out to be approximately Rs30,000. This was roughly equivalent to the monthly salary of my colleague.

Are all these fees and other charges justified? Is it fair to charge fees in quarterly chunks, and demand advance payment? Can schools set the charges at any level they like?

Almost 40pc of enrolled children now go to private schools. In cities such as Lahore, Karachi, Islamabad and Rawalpindi, the percentage of children going to private schools is much higher than at other places.

Private schools with some reputation are in high demand for a place in their classrooms. They clearly have market power. But the question is, should these players be allowed to exploit this power in the education ‘market’? In one case, even though the student was going to graduate in April, the school insisted on getting payment for the April-June quarter.

Are schools justified in charging fees in quarterly chunks and demanding advance payment?

Competition can lead to efficiency and quality improvements. As firms compete, they cannot charge more than their competitors for the same, or a similar, product or service as customers can switch to the cheaper provider.

Firms also need to provide better service than their competitors to woo customers. But competition only works if a) products and services are comparable, b) customers have quality and price information about the goods and services that competitors offer, and c) customers are able to switch providers. If the costs of switching, known as entry/exit costs, are high, the threat of customers leaving an inefficient and/or costly provider does not become fully effective and hence the pressure that competition is supposed to create gets dissipated.

Before number portability, switching from one mobile phone provider to another was not an effective threat. People wanted to keep the same number but also wanted to be able to get services from any of the providers in the market. It is no wonder that the largest service provider at that time was not too fond of introducing number portability.

Once number portability was introduced, the threat of switching became more effective.

The mobile industry, as a whole, has seen rapid and significant reductions in prices that are still continuing, and we have also seen services become better over time. The threat of a switch has played a part in this story.

If it costs Rs30,000-odd for a child to move from one low-fee school to another, or Rs100,000-odd for an elite school, how can the threat of a switch be effective? And cost is not the only variable in the decision to move schools.

Education, unlike a lot of other goods and services, has many dimensions that parents and students care about.

Distance to school, curriculum issues and medium of instruction are some of these. All of them make switching harder to use as a threat. The high cost of switching makes it even more difficult to use ‘exit’ as a threat. To the extent that the threat of an ‘exit’ becomes ineffective, competitive pressures on schools become less effective.

There is a regulatory angle to all this. If schools are using these charges as ways of reducing the effects of competition, should the Competition Commission of Pakistan not be looking at some of these ‘fees’ and charges in more detail? Keeping an eye on the use of anti-competitive measures to the detriment of developing markets, competitors, or consumer welfare, in any area, falls within the purview of the CCP.

There is also the issue of bundling (coupling two services or goods), again a practice frowned upon in competition literature in economics, that schools are clearly indulging in.

Why should schools insist on students getting books, notebooks and other supplies from the school? This not only allows them the opportunity of exploiting their monopoly power, it works against the interest of the retailers of books and stationery.

There is already a CCP decision where a university that had insisted on selling computers to its incoming MBA class was asked to reimburse the students and to not indulge in such bundling activities in the future.

Many schools seem to be getting away with a number of bundling practices. Children are asked to buy books and stationery from schools, some schools also provide uniforms, and some have tried to create transport arrangements too.

All these are practices that can be abused to charge customers more or to foreclose competition in a particular market.

Again, a priori, all such practices are suspect and are usually not allowed in most markets. If there is a particular benefit to consumers or competition in any such practice, it is up to the provider to demonstrate that before the practice is allowed. The CCP is, again, mandated to look into such issues.

The private sector is a major player in education. But the sector, to date, continues to work in a relatively less regulated environment. This creates issues that need to be looked at from the perspective of the optimal development of markets. We have mentioned two issues above, there are others too that need attention. We will come back to others in the weeks to follow.

From the Dawn, Pakistan, published Friday 24th April 2015.

Market Development

FAISAL BARI
IMAGINE entering a drug store and asking for a life-saving injection and being told that you could buy one for Rs500 or another with the same prescription for Rs800 — the more expensive one, apparently, manufactured by a better company. Which one would you buy? Even if you buy the one costing Rs800, would you feel comfortable that you are getting the requisite quality? Even if the seller swears that the article is genuine, would you feel confident?

In products where it is hard to tell the difference in quality, all other things being the same, sellers have an incentive to ‘shave’ quality but insist on selling at the highest price the market can bear. Say, there are two producers — the first is selling a low-quality item, the other one that is of better quality. If the buyer cannot distinguish the difference between them easily, the vendor with the lower-quality item has an incentive to sell it at or only slightly below the price of the better-quality product. But, given the incentive structure, the person producing the better-quality item has incentives to shave quality to increase profits.

If both firms, or all firms in an industry, start going down the incentives path, only the poorest-quality item will be produced in this market and selling will take place at the lowest possible price; the market will collapse because of the ‘lemons’. George Akerlof, who is a Nobel laureate in economics, was the first person to point this out very systematically and clearly.

Once such a low-level equilibrium sets in, there need not be any automatic tendency in the market to move away from it. If all manufacturers are producing a certain good that is of the lowest acceptable quality and then selling it at the lowest price, no manufacturer will have any incentive to move away from this if it cannot be credibly signalled to potential buyers that he or she is producing a good that is of better quality and therefore the need to charge a higher price for it.

To produce a better-quality injection a higher price needs to be charged. But if there is no way for the customer to know that a company is indeed producing an injection that is of better quality, why would he or she pay more, and hence, why would a manufacturer sell such an injection?

The market can be stable at this low-quality equilibrium. But suppose society does want a better-quality life-saving injection. Is there a way the market could, on its own and without help from state institutions, be able to change the equilibrium? The sellers will have to find a credible way of signalling that they are manufacturing a better product than those selling the same product but of poorer quality.

In some markets this is possible through warranties of various kinds. This is especially the case where durables are concerned. If your television is of a better quality than that of your competitors, you can offer a warranty, say a ‘money-back guarantee’ for three years that the seller of the lower-quality TV cannot. If the latter seller does offer a warranty, since his or her product is of a poorer quality, many more people will come to encash the warranty. Eventually, he or she will not be able to honour the warranty, or will incur losses on a sustained basis. This ability to distinguish your higher-quality product from others in the markets where possible is a way out of the low-quality equilibrium.

The solution through warranties does not directly involve the state. But clearly, we depend on contract and property rights laws for the enforcement of any promises such as warranties, and to that extent a working legal system is needed to ensure that the warranty is honoured by producers.

In many markets, warranties are not an option. Think of the market for edibles or for medicines. The producer will not tell you to use the injection or eat the bread and promise to replace it if you find fault with it. In such cases, other mechanisms are needed. Packaging and branding are options. A company with a ‘reputation’ for quality would be averse to losing it over one pack of injections, or a batch of bread. Companies with branded products can be taken to court if a good legal system exists.

For Pakistan, at least for now, branding is not a solution. Even if you get an injection that has the packaging of a reputable company, you can never be sure if that packaging is original or done by someone in a small illicit workshop. If the economy was a lot more documented, branding would be a solution, but not now, and not across a number of markets.

Stipulation of minimum quality standards by the relevant regulator could be a solution that even a relatively underdeveloped economy could resort to. But so far, historically speaking, though we have established a number of sector-specific and general regulators, we have not been able to set up any effective, independent and efficient regulator. State capacity, issues of corruption and interest group activity, corporate lobbying and the lack of relevant expertise have all conspired against the setting up and subsequent functioning of efficient regulators.

The current state of play is hurting industrial development significantly. Local light engineering cannot compete with the lower-quality products that are being imported or smuggled into Pakistan. This limits the size of their markets and the range of items they produce. Both hurt the development of the industry, their growth and export potential. The same is the case with many consumer products such as edibles, medicines, cigarettes and so on. If markets cannot resolve the issue — and it seems our markets are not at the stage that they can — the state has to step in with regulation. This is the new frontier for us in industrial development.

From the Dawn, Pakistan, Friday April 10th, 2015

Learning and experience

Faisal Bari

IN a recent undergraduate level class I taught, quite a few students did not know what rationing was. I asked them what they thought load-shedding was, or the closure of CNG pumps two to three days a week, or even the limit on each car getting Rs1,000 worth of petrol only during the oil supply crisis. They were flummoxed. So was I. Most of the students were, of course, aware of load-shedding and the petrol crisis, but they had not connected the word ‘rationing’ to load-shedding.

In another class, with graduate students of a social science and at a different university, I found that students, though working on political economy issues, were not at all comfortable with using notions like ‘externality’, ‘public good’, and ‘rent-seeking’ while analysing the political economy issues they were studying. In some cases students pursuing graduate-level theses on these issues had similar problems.

In another university and another class, students could not give me examples, from their world, of bundling (putting things together that could have been sold separately eg cars with fitted air-conditioners or stereos), price discrimination (charging different prices for the same good eg different tuition fees paid by students in universities, student discounts) or self-selection-based price discrimination (eg the various mobile phone connection packages on offer).

They were not able to think through what the consequences of inflation were on savers and borrowers. Most could provide nice definitions of economic concepts, but when they were asked to explain the concepts in their own words, the problems multiplied.

There seems to be a strong and significant break, in general, in the mind of students, between what they do in class and read in the books they are studying, and what they face ‘out there’ in the world. The teaching is bookish, definition-based, and focused on solving problems that come from the book, while the world presents, in their minds, very different issues and challenges. But, and I speak only about social sciences as I teach economics, this is clearly a false distinction. If, for the students, social sciences cannot make sense of the world they live in, clearly they are not doing their job, the teachers are not doing a good job of teaching social sciences, and the students are not doing a good job of learning the subject.

The problem is clearly not just at the university level. I have not taught in schools in recent years, but have interacted with a significant number of high-school students through informal meetings and guest lectures and have found the same thing at the school level as well. Students are brilliant at learning and reproducing definitions and solving certain types of problems, but they are not able to connect their ‘learning’ with the world they live in. They are not able to manipulate or ‘play’ with what they are learning.

They have become very good at taking examinations and have ‘cracked’ examination systems from the higher secondary level and Matriculation to ‘O’ and ‘A’ levels, and they have the grades to show for it. But the basic problem of turning what they learn into knowledge that is fully internalised and that is able to shape or mould them is not addressed.

In fact, the focus on examinations and grades works in the other direction. It encourages rote learning and regurgitation. For example, even the elite schools have monthly tests, mocks for major examinations, mocks for mock examinations, midterms and end-of-term tests. They over-examine their students and teach to examinations. It helps in cracking the exam. But it works against giving time to the students to internalise their learning.

In some cases I have even found that students are not even assigned textbooks (in the social sciences) or are not encouraged to read original (literature) texts and are asked to just work through lecture notes and guides.

This method of schooling is having other effects on the habits of children too. They do not get time to read anything beyond their course material. Most of them do not read the newspapers, fiction or any other areas they might have developed a liking for. Most of them do not even get time to play. They come home with lots of homework and have to prepare for all the tests that are regularly taken, and then many of them have tutors to coach them in specific subjects. These trends cannot be healthy for our children: for their physical or mental health or for their overall development. It creates narrow and shallow minds. It creates minds that are not able to understand issues, contextualise them, argue a position, and entertain counter-arguments with equanimity. But our children are the citizens, parents and decision-makers of tomorrow. If we do not equip them with the skills mentioned above, what kind of future are we hoping for?

A question in one of the examinations I had set for an undergraduate class a couple of years back asked students to work out the consequences for the local hamburger market of a major fast-food restaurant opening up in that locality. A number of students in the class did not know what a ‘hamburger’ was. And one of them wanted to know why we should be thinking of ‘ham’-based burgers in a country that did not allow trade in pork. Clearly, we are failing to teach.

It is hard to see how change can happen. The students, their teachers, and the parents are all embedded in a system that encourages teaching to examination, with the focus on results. Even if awareness is there, individual deviation from the above equilibrium would be hard. But collective action is even harder to organise and so we seem committed or condemned to continuing down this path.

From the Dawn, Pakistan, Friday 13th February, 2015