Mallus = Bongs

May 29, 2006

I have a longstanding hypothesis that Mallus are not actually South Indians, but Bongs who have migrated to South India.

Consider the similarities. Both communities make delicious fish. Both have a tendency to elect communists with mind numbing regularity. Both are soccer fanatics.

Still not convinced? Both of them speak languages which are completely unintelligible to other people. They both make and appreciate art films that nobody else understands. And both refuse to work while in their home states, but turn into exemplars of hard work and productivity when they migrate.

I’m not saying it has to be true, but some testing for genetic markers could help settle the question.

Why should it be sacrifice?

May 25, 2006

A few months ago, a Tehelka reporter was interviewing some of us at IIM Bangalore for a special feature on the perception of leftism on Indian campuses. The interview drifted from perception of the left parties, to the question of who would speak for the poor, and then to the Narmada Bachao Andolan. Someone- I can’t remember if it was the reporter who asked if we believed in it or one of us who stated that he did- brought up the concept of ‘sacrifice’ – that the displaced people should be willing to sacrifice something for the good of the entire nation.

It’s sad. As managers, we’re supposed to look for win-win solutions. But we’re conditioned so badly by the national discourse on the Narmada dam that everything turns into a sacrifice: either the displaced people should sacrifice their land for the benefit of farmers and agriculturists, or urban residents should sacrifice their comfort to maintain traditional tribal lifestyles.

But why must either side sacrifice anything?

The transaction looks like a sacrifice because it’s terribly onesided. The victims of displacement get only land- if the incompetent administration gives it to them in the first place- while the beneficiaries of the dam get water and benefit from increasing real estate prices.

Is there any way to ensure that the people who lose their land benefit to the same extent that the people who get the water do? Yes, there is- and it relies upon the concept I introduced in the previous post– financial options.

If the development- whether it’s building a dam, or building a township on agricultural land- does what it’s supposed to, land prices will rise significantly in the area that is being developed. If the development is a dam, the acquired land will not see a price rise, but the land that does get access to irrigation thanks to the dam will see a rise in value. For a real estate development, things are even more straightforward- the acquired land is developed, and sees a rise in value.

What if you compensate the people whose land you are acquiring with call options on the land which benefits? The option can have an exercise price equal to the current price- or perhaps with a modest premium- and it can be exercised on a date after the development is expected to be complete.

(Of course, I am not suggesting that compensation should be purely in options- just that options should form part of a compensation basket that also includes land and cash.)

As you’ll recall, a call option means the option holder can buy the asset at a fixed price (which we’re assuming is the current price). Let’s say that prior to the construction of the Narmada dam, Ahmedabad residential property is trading at Rs. 300 a square foot. Displaced people are given call options to buy say, five hundred square feet of Ahmedabad residential property at exactly this price: Rs. 300. After the construction of the dam, and diversion of water to Ahmedabad, residential property rises in value thanks to improved availability of water. It’s now worth 500 rupees a square foot. Multiply the difference- two hundred rupees a square foot with the number of options: five hundred square feet- and that’s one lakh rupees. (Of course, these figures were just to illustrate the concept.) And with some neat usage of financial derivatives, we’ve solved the problem of unequal gains.
There are some problems associated with this idea that I can think of off the top of my head. I’ll discuss how to solve these in another upcoming post.

Options 101

May 23, 2006

I have been thinking about a particular topic, and I have an idea about it. This idea involves financial options. As not everyone will be familiar with these, I’ll first have a post up on the basics of options, and then write the main posts.

Let’s start.

An option is a contract to buy or sell something at a fixed price. Stock options are the best known sort of options, thanks to things like Employee Stock Option Programs. An option is not the thing itself- just the right to trade in that thing.

Let’s illustrate this. Suppose I run a company called Maajorly Shadymax Arbit Fundaes Public Limited, which employs lots of people to post arbit fundaes on blogs all over the internet (we can debate the profitability of this business model elsewhere). MSAF Ltd. currently has a share price of Rs. 100.

I now issue options on MSAF Ltd. to all my employees. This option allows them to buy a share of MSAF Ltd. at Rs. 120 on June 1, 2007.

What happens on June 1, 2007? Two possible things:

  1. The share price is below Rs. 120- Rs. 110, say. The option is worthless. Buying the share at Rs. 120 makes no sense when you could buy it on the market for Rs. 110
  2. The share price is Rs. 120 or more. Now, the option is worth something. In fact, it is worth exactly the difference between the market price and Rs. 120. If the market price is Rs. 125, then the option is worth Rs. 5. If it’s Rs. 130, the option is worth Rs. 10. How do we get this? Simple, you use the option to buy a share at Rs. 120, and then immediately sell the share at the market price. The profit you make is what the option is worth.

What we’ve just discussed is called a call option, since we’re talking about the right to buy an asset. What if the option had not been to buy a share at Rs. 120, but to sell it? The same thing, but in reverse. If the market price had been above Rs. 120, then the option would have been worthless- why sell at Rs. 120 when you can sell at a higher price in the market? If the market price had been Rs. 110, the option would have been worth Rs. 10- you could have bought a share at Rs. 110 and sold it at Rs. 120 thanks to the option. An option like this which gives you the right to sell an asset is called a put option.

I’ve talked about the special case of what the option is worth when you have to use it, but it’ll be worth something even before June 1, 2007- what it will be worth will depend on people’s estimate of what the stock price is actually going to be on June 1, but it will have a value- and you can sell the option itself for that value.

One final thing before this little primer is complete. My example used shares, but it could have been anything else. I could have an option to buy a barrel of oil for seventy five dollars on August 1, 2006. Or I could have an option to sell a million dollars at 45.5 rupees a dollar on July 1, 2006. It’s easiest to explain with shares, but you can have an option on virtually any kind of asset.

That’s all you need to know about options in the context of the post I’m going to make. For a more detailed discussion, do read the Wikipedia entry, which also has some very user-friendly diagrams.

The More Things Change

May 18, 2006

What do you call a group of nations that squabble with each other, have a terrible rate of economic growth, and nothing much in common except a desire to band together to provide a counterweight to existing global superpowers? And that despite this utter lack of common ground between existing members, they actually want to add new members.

Depends. In the 1960s you’d have called it the Non-Aligned Movement. These days, you’d call it the European Union.

The Deepak Chopra School of Thought

May 18, 2006

It runs like this:

  1. Quantum particles are conscious.
  2. Human beings are conscious.
  3. Thus, human beings can be treated like quantum particles.
  4. No statement of a quantum particle’s position is ever accurate, it it only a probabilistic guess.
  5. Therefore, no view held by a human being is ever right or wrong. Everyone is correct to some extent.

You don’t even need to marvel at the jump from Statement 4 to Statement 5. The process breaks down at Statement 3 itself. Just because all A is C, and all B is C, does not mean that all B is A.

Incidentally, even Statement 1 is a metaphor and does not imply that an electron has the sort of emergent consciousness that a human being has. If an electron is conscious, than so is a rubber band.

How to get linked by India Uncut

May 18, 2006

Writing quality stuff won’t cut it. There’s already so much good stuff around, there’s no guarantee your stuff will be the one linked too. No, to get an Uncutlanche you must appeal to Amit Varma’s baser instincts. As I do below.

Read the rest of this entry »


May 18, 2006

This, dear readers, is where the travel journal ends. As some of you may already know or have realised, I have actually been posting the journal entries from Delhi. Internet access in China was too unreliable to post anything of consequence there, and of course there was the haunting terror that I might post something that would run afoul of Chinese censors, and be thrown into a concentration camp.

I wrote the journal out in longhand in a notebook while I was in China, and have been copying the entries into WordPress since I returned. Here’s a photograph of the journal page that eventually became this post:

Travel Journal

And that is all where China is concerned. Maajorly Shadymax Arbit Fundaes will return to its regular programming shortly.

People to People Contacts

May 17, 2006

This travel journal is coming to an end. I have described almost everything I have seen and done, and it now remains only to pontificate upon The Meaning Of It All.

I have emerged out of China with the realization that the Chinese are not very different from Indians. They too buy fairness creams, watch bad movies, and have an unhealthy link between celebrating and eating. On a more serious note, they have the same motivations we do: to get rich, to make the most of the freedom they do have, and to enjoy the company of their friends and family (more friends than family thanks to population control strictures).

To put it plainly, the Chinese are as human as us. They don’t have a superhuman sense of discipline. The sales director of a Chinese factory isn’t trying to help China conquer the world, he’s just trying to make his sale. The same way the Indian one is.

About two years ago, I had written rude and mocking things about Track II diplomacy andĀ  people-to-people contacts. At that time, it was about a Youth Initiative for Peace thingummy being organised in Pune, with twenty students from Pakistan and twenty from India being invited to meet each other. Back then I had called it naive and idealistic (though admittedly I was doing so mostly to irritate my brother).

Now that I’ve returned from China, have I changed my mind? Am I now convinced that people-to-people contacts are important and useful ways to bring countries whose relations have deteriorated closer together?

Hell no. In fact, the realisation that people are the same actually makes me more convinced of the utter uselessness of people-to-people contacts.

Don’t get me wrong. People-to-people contacts are great for people. They’ll make new friends, get insights into a new culture, and generally feel good about it. The relationship between the people will improve.

But what about the relationship between the countries? You still need old-fashioned diplomacy for that, I’m afraid. In fact, given that people are the same, strained relations between countries must be the result of fundamental differences in culture, or the nature of the respective states or governments. That sort of thing needs to be addressed at the level of the governments and states, not at the level of individual citizens. In fact, for countries like India and Pakistan where the vast majority of citizens have little or no influence on their governments, expecting people contacts to result in diplomatic benefits is especially futile.

So, if you want to go and meet someone from another country, more power to you. But don’t expect it to magically yield diplomatic dividends.

An Indian Puzzle

May 17, 2006

There was an another phenomenon that I almost put into the post about Chinese puzzles: that people were making out all over Shanghai (and Singapore too, but I got used to that in December). You could hardly move without seeing someone or the other being affectionate in an emphatic way.
I formed hypotheses about that as well. Was it caused by communism breaking down traditional taboos? Or by market liberalization breaking down a puritanical communist society?

But people making out is not a puzzle at all. There is no point asking why people make out and forming hypotheses to explain it. Public displays of affection are almost universal. The important question to ask is: why don’t people make out in India?

The culture shock is still there. But in this case, the deviating culture is not China but India. It is as unnatural for a society to frown on being affectionate in public as it is unnatural for small cars to be missing despite the presence of millions of motorcyclists who would be anxious to upgrade.

What does it say about us as a society when the other countries which have similar taboos on PDA areĀ  ones like Saudi Arabia and Iran?

Four Chinese Puzzles

May 16, 2006

Update: Welcome DesiPundit readers! Do visit my other China travel posts: Home Improvement, Shook Lee Ya, 30 April: A Travelogue, and The Joy of Literal Translations.

There were some things in China which were particularly weird or inexplicable. Here are four of the prominent ones.

The Mystery of the Missing Jewellery

Very few Chinese women wear jewellery, or even have their ears pierced. The proportion of women with pierced ears was a lot higher in Shanghai than in places like Qingdao and Dalian, but it was far from being as universal as it is in India or (what little I have seen of) the West.

Interestingly, in the smaller cities like Jinan and Qingdao, the few women who did have earrings were machine operators or airline ground crew, while engineers, air hostesses and office executives had unpierced ears. Twenty to twenty-five women is admittedly a small sample size, but there seemed to be some sort of inverse correlation between jewellery and income.

Hair colouring was much more prevalent, though- and women of all income groups seemed to be colouring their hair- from teenage punks to the lady selling loquats from pole baskets.

My hypothesis: perhaps there is no long-standing tradition of Chinese jewellery for non-aristocrats, and the economic liberalization of the past few years has led to a Western concept of jewllery and ornamentation for everyone being adopted. Low-income women might in fact prefer jewellery, as it allows them to buy tradeable assets; higher-income women would buy financial assets instead (funda courtesy Prof. Vaidyanathan, my first year Investments professor).

The Mystery of the Missing Small Cars

There are some small (by which I mean Zen/ Alto/ Santro) sized cars in China, but they’re pretty rare. The entry level car is pretty much a midsize sedan- the Volkswagen Santana is one of the most popular.

And yet, there are a huge number of people on an entire range of two wheelers: bicycles, electric bicycles, mopeds, scooters and motorcycles. There’s a huge gap between the motorcycles and the Santanas, but Kia (the only make of small car I saw) seems unable to fill it. Even if Kia isn’t able to do it, you would expect some competing auto manufacturer to occupy the niche. But it remains empty.

My hypothesis: Chinese banks are not particularly customer focused, and are reluctant to give car loans to anybody whose income level is not high enough to make a midsize car affordable. Chinese banks would have little or no experience with consumer finance, and without competition from foreign banks, they would have no incentive to create consumer finance products either. That makes life difficult for anybody who wants to upgrade from a motorcycle to a small car.

The Mystery of Shanghai’s Zoning Laws

The mystery is not really about the zoning laws: there don’t seem to be any.

Like this: upscale apartments with little shops on the ground floor.

Ground Floor Shops

And a nice restaraunt that’s right next door to a machining shop:

No Zoning Laws in Shanghai?

And this three star hotel with factories behind it:

Hotel and Smokestacks

The mystery is not so much that there are no zoning laws, but that despite the lack of zoning laws, land prices remain so low that you can have things like machining workshops on the same road as three star hotels and upscale restaraunts.

Normally, the lack of zoning restrictions adds an option value to real estate. That is, real estate becomes more valuable for the simple reason that you can convert its use to whatever there is more demand for. When there is no restriction on what property is used for, real estate prices should shoot up.

If the guy who runs the workshop is renting the property, the owner would rather kick him out and lease it to someone willing to pay more- such as a three star hotel; and if the guy owns the place, then he’d sell it to the three star hotel himself. So why are all the workshops still around?

Hypothesis 1: The legendary cutting of Chinese red tape exists only for big ticket foreign investors. If you are only a machine shop owner on Zhoujiazui Road, you will find it much more difficult to shut down your workshop and set up a hotel. The option value of converting your land usage is thus very low.

Hypothesis 2: Property rights being what they are in China, the government could sieze your land- whether it is a machine shop or a hotel- for its own purposes at any time. This would not only wipe out the option value, it would also strongly discourage property owners from making capital intensive investments like putting up hotels or apartment blocks.

The Mystery of Condom Pricing

Our hotel in Qingdao provided condoms and sex gel (a sort of herbal preparation which you rub on your genitals prior to intercourse to prevent STDs- there are separate gels for males and females) in the toilet. It made an interesting addition to the usual complement of bathtub foam and shampoo bottles.

Price Elasticity of Sex Gel

What made it different was that the shampoo bottles were free, but the condom and the sex gel packets were 10 yuan each. This doesn’t (heh, pardon the pun) gel. If you aren’t charging anything for shampoo, why charge for condoms? The cost cannot be all that different.

Hypothesis: this is perhaps due to (heh, pardon the other pun) elasticity. (Incidentally, on the topic of bad puns about sexual aids, Durex has a brand in China called Jeans. Perhaps because it’s a comfort fit?) If you have to use a condom, you will probably use it anyway even if it does cost 10 yuan (and especially if you won’t see the charge until you check out). On the other hand, if shampoo were priced, you could just go a day without shampooing. The way in which condoms are used make them much more price inelastic than shampoo and soap, and the hotel simply takes advantage of it.