No, I do not despise him!

No, I do not despise him!

This guy, Dr. Naqvi, I hung out with him for years. He was my colleague, but I also befriended him on my own. The more I knew about him over time,   more of his despicable traits were revealed. In the end, like right now, I have no open animosity with him, but I regret ever meeting him, in spite of his charisma, eloquence and scholarly qualities.

Let me describe his life story to the readers, reconstructed from published sources,  common knowledge among friends, Naqvi’s own recollections, and my observations about his behavior and lifestyle. There will be some rumors which will be clearly specified as such. I will vouch for the veracity of the main narrative, which will span about five decades.

You have heard of people being born with a silver spoon in their mouths, spending their childhood surrounded by lavish excesses, all their material needs being taken care of by a retinue of retainers and relatives. Imagine  a child born with a silver spoon in an environment steeped with economics! Yes, that will be our Nadeem, born in the late fifties. His father was the venerable Dr. Khaled Naqvi, Director of Research in the Delhi School of Economics. His mother was also an economist, and a socially active person. Both parents were officially  members of the Communist Party of India.  Famous economists frequented his house, from Delhi School and from other places in India. Delhi School was then one of the  hubs for discussions about economic theory  and India’s planning strategies. Nadeem will sit next to Amartya Sen and listen to his conversations with his father and others. Sometimes Mrs. Naqvi will prepare snacks for the guests and put them on a tray, and a ten year old Nadeem will serve these  snacks to Sukhamoy Chakrabarty, Mrinal Datta Choudhury and such.  I guess even the walls of the Naqvi residence were qualified enough to get an advanced degree in economics!

Sometime in the sixties, Senior Naqvi went to Cambridge on a research scholarship for a semester. Auntie Joan (The Joan Robinson – remember her? !) was his thesis supervisor from before and his current  co-author.  Nadeem remembers watching Auntie Joan riding her bicycle to her office, sometimes she would stop and chat with him.

Indeed, Nadeem was naturally primed to be  an economist and he did not disappoint.  After a stint at St. Stevens college, he enrolled in Delhi School of Economics for his Masters. He studied under giants – Sukhamoy  taught them theory and economics of planning, Naqvi saab Macroeconomics, the famous Nagar saab lectured on Econometrics. There were other famous economists also whose names I can not recall at the moment. Overall, Delhi School was a premier educational institution at that time.

He went to Southern Methodist university for his Ph.D. and wrote under Ravi Batra, who was really a prolific publisher of international economics articles at that time. Indeed, Batra taught him  trade theory and all the tools required  to come up with new angles and find solutions to new problems. Unlike us, who struggled mightily to find a research topic and solve our own  research problems, his transition from a student to a published author was rather smooth.  He published in very good journals with Batra, with other co-authors and independently as well.

His first job was as an Assistant professor at University of Goergia. Within six years of finishing his thesis, Nadeem got married to an Indian woman he met at Delhi, had a daughter and most importantly was granted tenure. With tenure came a promotion to Associate professor and a lifetime of job security.

 A university can not fire a tenured professor regardless of his activities and views and research topics, as long as he meets his academic responsibilities of teaching, research and departmental service. Dismissal proceedings could be initiated for academic dishonesty,  moral turpitude or criminal activities , but the onus of proof is very high and there are multiple levels of appeal, including appeals at  the university level followed by the  state High court and Supreme court at the end. The tenure system was established to preserve academic freedom of faculty in American Universities. A professor with heretic views that are hugely unpopular can not be ousted from the University. On the other hand, a professor who becomes lazy and incompetent after tenure will nevertheless continue to work as long as he satisfies the bare minimum responsibilities. Of course, in practice, things may work a little differently. A heretic  may be forced to leave if his views are politically incorrect . Sexual harassment  of females by a  heretic can be grounds for dismissal but sexual harassment by a productive and popular faculty member might be ignored or covered up for a long time. On the other hand, a lazy professor may get the most unpleasant assignments and receive minimum salary and the department may try to oust him at the earliest opportunity. Around 2010, when I taught at the University of Kansas  the salary range of tenured faculty was from 70000 annually ((about 52 lakhs) to a whopping 250000 annually (187 lakhs ) although keep in mind that even the lowest salary was adequate to maintain a decent standard of living.  The deadwood got 70000 while most other normal faculty received between 90000 to 130000 per year, only the distinguished faculty were in the 200 K range.  If you are a deadwood faculty, your salary would be stuck at 70000, while others will get a decent salary increase every year.

After tenure, faculty members breathe a sigh of relief and usually go. through some important lifestyle changes. Of course, the real nerds may decide that they are going to spend only  seventy hours per week on research rather than the ninety hours that they were used to.  Others , though,  make more meaningful changes in lifestyle. Some start playing sports and participating in outdoor activities, some spend a lot of time with their families, some pursue meaningful hobbies seriously, some pursue women (or men) hoping to catch up on missed fun in college.

Drug use is not uncommon in America, so it is not surprising that Naqvi started delving in cocaine and marijuana and drinking heavily after tenure. What I find disturbing is that he got involved in selling cocaine. For about nine long years he was selling cocaine from his house in Atlanta, hopefully he did not sell to his students who would have given his name to the police and the university. As I indicated before, he had adequate income, so why was he doing this?

 I asked him , many years later, in Kazakhstan, why he indulged in this high risk activity where he could have gotten killed or assaulted by angry customers or other drug dealers. Even twenty years after he quit, he still was not sure why he did it. He had a secure job with an above average salary. So why? From his muffled answers, I figured out he had multiple aims:

To achieve a high rate of return on his investment on drugs

To wield power over strong black men and beautiful white women who were his buyers

In Kazakhstan, many years later, he told me while high on marijuana , alcohol and pain pills, how much satisfaction he got seeing his investment in cocaine business achieve 300, 400, or even 500% returns.

He did not seem to have an iota of conscience for wasting so many lives by selling them drugs. To him, this was only collateral damage for his profitable, albeit dangerous investment.

Most people from India, myself included, marvel at the physique and the strength of the big black men we see in the USA.  Granted, there are Caucasian men with large builds as well,  we are fascinated by them also because Indians generally are small-statured (the great Khali excepted). Nadeem is specially skinny, taller than most Indians, but basically skin and bones, not a single muscle  in his body! He certainly needed a couple of goons around him to run his drug business. He said he always had a steady supply of large men on drugs who will protect him in exchange for drugs and a little money. He was never in danger in spite of his frail body which could be twisted and taken apart by most American men if they wanted to.

Female companionship was Nadeem’s major interest all his life. His ability to procure drugs helped him to wield control over many beautiful women – we will talk a lot more about this later.

By 1999 or so, Nadeem’s tenure was revoked by the University of Georgia. As I said before , this is a very serious matter, some documents are available on the web but most documents and newspaper reports that I have seen in 2014 are not available any longer. So you have to rely on my memory for the most plausible explanation of a complex event.

By 1996/7, Nadeem was hooked on drugs, marijauana,  cocaine, alcohol, anti-depression pills, he did it all. This severely affected his job performance. His colleagues would notice his absence from important department meetings or his disruptive behavior in the meetings when he did show up. The students complained that he did not show up for lectures, sometimes for several days. He also frequently canceled homework that he had assigned earlier, I guess he did not want to spend time correcting them. He also rescheduled exams often, I guess because of the same reason. In North American colleges, faculty has  a lot of freedom regarding assignments and exams, they can do whatever they want. But the University demands consistency. Once the schedule is announced at the beginning of the semester, everyone is supposed to follow it.  Nadeem was breaking this rule left and right , annoying his colleagues and students. He would also target one or two of the university administrators that have been critical of him in the past and viciously attack them for small or perhaps trivial infractions. As happens in a bureaucratic environment,   the university would be forced to investigate these accusations formally, lot of manpower would be wasted and a lot of angry words will be exchanged between Nadeem and his nemeses. This was all induced by his drug-fueled paranoia, people were getting tired of it.

In spite of his erratic and irrational behavior, there was no direct evidence of his drug addiction which could be used to start a dismissal procedure against him. The powers that be, then, decided to frame him using his other weaknesses.

The whole scenario unfolded one evening in the little town of Athens in the state of Georgia, in  a bar popular with the students of the University of Georgia. Nadeem arrived already half-drunk and buzzed on cocaine, he started drinking some more and talking loudly to the students present. By prior arrangement , a large number of attractive economics major students were around that night. By prior arrangement, they continuously flirted with Nadeem and encouraged him to drink more. Finally, as expected, Professor Naqvi got seriously drunk and started asking these women for sexual favors. Some alleged boyfriends of these females and other spectators objected to Naqvi’s shenanigans. A lot of verbal abuse were hurled back and forth during  that evening.  There were a lot of neutral spectators who witnessed Naqvi’s predatory behavior. Although cell phones did not have cameras then, some spectators recorded the abusive language of Naqvi on their phones.

A few weeks later, the University started dismissal procedure against Nadeem for sexual harassment. His drug addiction was mentioned as an additional offense. The whole case was built on one evening’s incident although many other female students testified about Naqvi’s harassing behavior that they experienced on campus earlier.

It was unfair to Nadeem, but the whole incident  was well-documented  and he was fired. He countersued and appealed, and I am not sure where all that ended, but apparently the dismissal decision stands till today.

After Georgia, Nadeem moved from one temporary job to another, United Nations consultant, post-doc in a German University and then a job at American University of Bulgaria. There , he met Gerald Pech, another economist and a very stable and conscientious German guy, and a young woman with a doctorate in political science that he married after a couple of years.  Around 2011, Gerald got an offer from KIMEP (Kazakhstan Institute of Management, Economics and Public Policy) University in Almaty, Kazakhstan and in 2013, Nadeem was offered a job in KIMEP as well.

Nadeem actually recruited me. I applied for the KIMEP job in 2013 online and Nadeem picked up my application, my CV and all and called me on Skype. We Skyped for a long time. I was glad to find a normal Indian guy on a thoroughly foreign campus, in fact I was delighted to find that his qualifications and background matched mine. We had many common interests. The next Skype interview was with the Department Chair, Dr. Gerald Pech, and about four or five people on the faculty, including Nadeem.

My first year, August 2014 onwards, I was kind of freaked out. New students, new courses, new colleagues, a language that everyone speaks all around me and I do not understand (Russian) and the  brutal cold that started from November – all these did not help.  People who live in their own countries do not understand how not speaking and not reading a language can be stressful. Suppose, you are in your own apartment  on a Sunday afternoon and the power suddenly goes out. In USA or India, you would call the electric company or a mechanic. Here, you will just panic and pray that power will come back before it gets dark because you will not know what to say to the electric company or the mechanic!  Or, at the supermarket, you want to ask for something that you do not find. Of course,  Google Translate will give you the Russian name for it. You ask somebody, he will tell you to go down five aisles and then turn left in Russian, and you are clueless and embarrassed!!

Anyway, over time,  things got easier, I found a workable solution for most problems. During the first academic year, I did not see Nadeem much. During Spring 2015 , my first  year, his wife came with his daughter and his newborn baby and lived with him in Almaty, so I just saw him at the office. The next semester,  his family had gone back to Germany by then , and he visited them in Germany too many times, so he was often absent form campus. We really hung out from Fall 2016 to Spring 2019, three years, both professionally and personally.

Our lives were inevitably intertwined, we had the same background, same profession, same employer, same interests and some of the same  vices. However , please remember that what follows is a review of his life and activities at Almaty. Although my life happens right next to his, please do not judge me here, I will write a separate diatribe on my Kazakh life later, where you will get ample chances to judge me and/or hate my guts.

Some of Nadeem’s activities and attitudes  I found strange, some I found very weird , almost disgusting, yet others I found nauseating and absolutely unacceptable,  in spite of my own rather unconventional approach to morality and sexuality. Apart from relationships and sexual matters, I also worked with him as a fellow professor, researcher and university administrator, and for a while, I was his neighbor. Again, his actions sometimes were merely strange, but sometimes thoroughly corrupt and hypocritical, and occasionally absolutely atrocious and despicable.

I went to Almaty during August 2014. Nadeem was living in a very large apartment, very beautiful, fully furnished, because he expected his wife, his daughter and his new baby boy to come from Germany and live with him later in the year , like in late November.

We talked about having a party at his place a few times, his wife was not there yet and I was still freaked out from my new job and new country and all that. Finally, he invited me over to his house for a “fuckfest”!

Apart from Nadeem, there were three Kazakh men who were  Nadeem’s ex-students and two Kazakh girls. One girl had a nice body , but had a  hard face like a pro, the other girl was very attractive but looked very young, possibly underage (and hence illegal). Every so often a guy will get up, take one of the girls and go to the bedroom next door. After fifteen minutes or so, the guy will come back to the living room and light up a cigarette or a joint.  The girl will go to the bathroom, freshen up her make up and come back to the living room and light up also. The next person will pair up then. All of the four men had sex with each of the two girls and were comparing notes about the girls’ techniques!

I did not want to participate in this. They were surprised but  I left after I watched the proceedings and talked to the people in the living room for a while.

Over the next few years,  I discovered a few traits about Nadeem that were disturbing. His drug use, which I thought were limited to Cigarettes and alcohol, actually were much more extensive. He would go to Germany to visit his wife and bring back the hard stuff, like cocaine and opioids with him, although he will deny this,  saying that if the cops at the Kazakh airport catch him , the penalty was  severe – many years in  a harsh Kazakh prison. But he would bring them anyways, notwithstanding the risk. I would see him often popping Xanax with whiskey (which can cause death!). His speech would immediately become blurred and his whole body will kind of shut down. I would also see the classic paranoid shouting and the excessive, energetic talking about nothing, and getting into vicious arguments with people about trivialities,  which is a  typical sign of  cocaine use.

He messed up several economics department end of semester parties because of his excessive drug use. These parties were hosted by the department, usually in one of the few good Chinese restaurants in Almaty. Faculty and Teaching Assistants showed up, ate and drank to celebrate the end of the semester. Nadeem would show up late, already high on cocaine. He would stumble into his seat and start speaking loudly, forcing everyone to listen to his meaningless gibberish. Sometimes he will dislike a remark made by someone and start ranting against him, almost coming to blows. Sometimes he will start yelling at the amenities of the restaurant (“Why is the damn window closed? We are suffocating here”) or the quality of the food. One time, I remember, he insisted that a few women employees of KIMEP (that were at our party) have dessert after their dinner – the slender females refused and he became mad as hell. Finally the desserts came and everyone in  the room was forced to eat a big piece of cake whether they wanted it or not. The Kazakhs are respectful people, so he never got beaten up, but by the end of the evening everyone was disgusted at  his behavior.

To be fair, both Nadeem and I were interested in having sex, lots of sex. While I was single since I got divorced in 1990, Nadeem had a wife  who lived in Germany for most of the time,  except for six months of 2015 that she was in Almaty. Typically, I refrained from sex with others during the periods when I did have a steady girlfriend, while Nadeem had no such principles. For him,  an evening of massive drug consumption was followed by or accompanied by the company of  one or more women. He will get high, fuck, get high again, fuck again until he passed out. I never joined him during the fuckfest or drugfests, but he talked about it, usually the next day, while complaining of a hangover.  He was pushing sixty, so I always wondered how his body could handle all these drugs. Yes, he was a glutton for both sex and drugs. For me, sexual pleasure  was something I sought, while for Nadeem, happiness came when he passed out in exhaustion after too much drugs and sex.

This sex was procured from the internet where females contacted men. Sometimes one of Nadeem’s students will help him for a fee (I found disgusting that he was using his own students, there were a million other Russian speakers in Almaty that he could have hired)). The students will go to Russian language websites where a lot more females advertised for their services. The young women, for the most part, were very attractive, some actually very beautiful. Most females in Almaty did not have any problems seeking “sponsored relationships” since Kazakh  men did not usually have the means to take care of a beautiful woman, and these women were not looking for love with men that are not affluent.

But wait! Nadeem had this charm, this charisma that made women attracted to him all over Almaty. Employees of the University, other female professors, students, waitresses and even  women he would meet casually at the stores or banks will soon speak of professor Nadeem in glowing terms and go to lunch with him, often followed by acts of intimacy. It was almost like a fairy tale! He would facilitate these “friendships” by offering them free drugs if he realized that they would fall for it.

I know for  a fact he had sex with an Associate Dean, the Dean of English Language programs and a Journalism Professor (this last one was hot AF!). Apart from offering drugs, he also volunteered to write their English presentations (since their native language was not English) or reports or petitions to the university administration which required use of precise legal terms. Friendship had its benefits, indeed!

All these females and drugs would make his life very complicated. Sometimes he would not be able to conduct normal professional activities like teaching his classes. His solution to simplify his life: scream, yell and verbally abuse all his current female companions – most of them will leave him alone in a hurry! He will be left with his wife in Germany and no female companions in Almaty. He will start from scratch again and in a couple of days get his new crop of girls.

This abusive behavior benefitted me a lot!  One of his girlfriends was Tsarina (Gulbanu), an absolute wet dream. Fortunately, around the time he started abusing her verbally, I also broke up with my Kazakh girlfriend. Tsarina became my consort for the next three years-  I was very happy with her.  She was by far the most beautiful girl I ever dated!

Everywhere I went, there was glowing praise for Nadeem’s scholarship and his student evaluations were off the charts. While he was articulate and spoke freely about various topics, his teaching was seriously hindered by his lifestyle.

He usually had no textbooks that he followed! No class notes or study plans were posted on the website for the courses! No sample questions or homework were posted online! Exam dates were either not posted or moved around at will! (in North American Colleges, the professor decides on the number of exams and the dates for the exams for his courses at the beginning of the semester, and these are not changed later).  

Yet, student evaluations were very good! As I was the Department Chair for two years , I did a little detective work on my own. Apparently, given Kazakhstan’s social structure, there will be dominant students in every class, usually children of the powerful people. Nadeem will befriend them and party with them and scratch their backs, and they will return the favor. The dominant group will intimidate others to write good reviews for Professor Naqvi. In return everyone in the dominant group got good grades!

Indeed, Nadeem picked up the trait of a successful official in a post-communist society. He oiled and buttered the powers that be in the University. The Dean, Gerald Pech, was his personal friend. Gerald was a very honest and conscientious German academic, but he had a major soft spot for Nadeem. He pardoned Nadeem’s infractions like absence from classes and meetings. One time Nadeem came to a meeting literally soaked in alcohol, the entire meeting room was reeking . Gerald quietly canceled the meeting. He would have taken disciplinary actions if anyone else did this.

I was the Department chair and I covered for him too. Usually after a short vacation, the classes will begin on Monday morning. Suppose Nadeem’s class begins at 11:00, he will send an email around 9:00 am from Germany, saying he would come back four days later. I will teach his class at 11:00 and arrange for others to teach his other classes. Some of these were advanced courses, faculty members did not want to teach these classes without prior preparation! Yes, I was chicken , I never yelled at him for messing up everyone’s schedule (including mine) on a short notice!

The President of the University, also its founder,  was an old man named Dr. Bang. He befriended the country’s president , Mr. Nazarbayev , in the nineties when he was visiting Kazakhstan from USA where he was a tenured economics professor. With the President’s blessing, he started KIMEP in the mid 1990’s as an American style Business school. By 2015 or so he was in his early eighties and was interested in all kinds of new projects. One of his pet projects was to write a definitive book about the economy of  North Korea, where he was originally from . Unfortunately, after all these years, his economics knowledge was inadequate, and his analytical ability was below par. Yet he set up a “ North Korea research Institute”  with KIMEP’s money,  and wrote a few articles. He asked most of us to review his work and we all refused politely rather than telling him that his research was garbage. Nadeem however, seriously read and commented positively on his papers!!

As a department chair, I had my own secretary, who sat in the adjoining office. I did most of my paperwork myself including writing memos and making copies, so these young females had very little to do. They answered the department landline and redirected students to faculty offices, dozed off, filed their nails and texted their boyfriends. Usually, these females were undergraduates. In the Fall of 2016, Dilobar, a Masters student, started working as my secretary . This itself was significant because we  had a small Masters program where almost all  the students had full time jobs – all classes were held in the evening. Dilobar was an exception. While other students struggled with coursework, jobs, family etc., Dilobar was keen on working on her Masters thesis as early as possible. She asked me for help, I told her to finish her coursework first so she has some knowledge that she can use to do research.

Professor Nadeem noticed this. He started “borrowing” Dilobar from my office. He took her to banks and financial institutions as  his Russian translator as  he was apparently  transferring large sums of money from India to Germany.  Because of the time difference,  Dilobar will leave with Nadeem around 4 pm and come back late around 10 pm after having dinner with him.

Nadeem had a research project ready for Dilobar. This project required her to be at Nadeem’s apartment during the middle of the day where they worked together. Soon I would not see my secretary in my office at all! Her absence did not bother me, because there was not much to  do in the office, but I was concerned that Nadeem was grooming her for sex.

I confronted Nadeem about it, but he cleverly said he has a new young girlfriend and he is busy with her. That’s why he was unable to hang out with me or go to lunch with me as we would  three or four times a week earlier.

By the end of academic year 2016, I knew what was going on. Dilobar and Nadeem were getting it on right under my nose. It was my duty to report him to Gerald, to the Vice-president and to Dr. Bang, but I did none of these things. Instead,  I told Gerald I would step down from my position as a Department Chair and will work part-time only from now on. I regret being a coward and violating workplace rules till this day.

The Dilobar saga played out for a while. The following semester, Nadeem hired Dilobar as his own secretary. I heard that she became very paranoid about other females and will interrupt frequently if Nadeem had female visitors!

During Summer of 2017, I visited Nadeem and his wife and kids in Magdeburg,  Germany. Nadeem will actually spend two months with his family every year. In the evening we gathered in a friend’s  house for dinner. After dinner, Nadeem described Katya’s (his wife) angry outburst  two nights ago. Apparently Katya had found out about Nadeem’s affair with Dilobar, she confronted him, and in her anger stomped on his feet with her shoes, breaking a couple of bones in his toes.  He lay down on the bed  in pain all night. In the morning she took pity on him and drove him to the hospital. Apparently, she was still pretty upset!

Katya’s anger was expected, but what I did not expect was Nadeems’ pride and joy when he was telling me about this. His whole body was swelling with pride. It was like : Look,  I am sixty-two years old, my wife is forty –three, and I have a twenty-two year old girlfriend and my wife is upset about it – how cool is that?

Like I said at the beginning , I do not despise him , but maybe I should!!

Clueless Economists

CLUELESS ECONOMISTS?

Gautam Bhattacharya

Professor of Economics

KIMEP University

Almaty, Kazakhstan

And

 Associate Professor of Economics (Retired)

University of Kansas,

Lawrence, Kansas, USA

  October 26, 2017

I am indebted to Dr. Nadeem Naqvi for some lively discussion which led to the first draft of our joint paper and  for graciously allowing me to use the material from our joint paper. I am also indebted to Dilobar Kassymova for providing research assistance.

In my classes, I sometimes show off different categories of economists (boasting that economists are not all dull and/or socially awkward!). I show them handsome economists (yes, they do exist!) athletic economists,  superrich economists,  transgender economists and many others. The most fun I have is when I show them a “clueless economist”!

Let me explain !

In mid 1990’s, a young researcher from Princeton wanted to test whether competitive  markets in real life exhibit a uniform price (Graddy (1995)). She picked New York’s Fulton Fish market – a large wholesale fish market – selling mainly to restaurateurs and grocery stores, where a large number of independent stores operated from the same premises. Collecting a lot of data on sale prices and quantities and running several statistical tests, she found that the prices overall are the same for the same quality of fish. A little annoying item was that she found one ethnic group, Asians (and Koreans in particular),  who were systematically discriminated favorably, meaning they usually paid a lower price than others!

It was a competent piece of research. However, the FBI took a keen interest in her research , they were already investigating  Fulton Fish Market for  collusion and other organized crime related activities! A little later the FBI accused the sellers of collusion, and soon afterwards the entire fish market mysteriously burned down, with all their records totally charred! (NYtimes (1995))

The reality, as I see it now, was that all the wholesalers were tightly controlled by organized crime, prices were not competitive but reflected almost perfect collusion,  and the unfortunate Asians (Koreans) that bought cheaper fish were owners of inner city grocery stores in NYC area – they were paying protection money to the aforementioned organized crime group  – so they got a little break on the fish prices!

I am sure the reality became obvious after the market burned down in 1996. Indeed, she mentions the involvement of organized crime in her later writings. And of course, I would speculate that she was not totally unaware of this at the time the data were collected and the paper was written (circa. 1991-93). But only the Federal Bureau of Investigation had inside information on this, not an academic economist.

Indeed, even in a market economy, sometimes things appear to be very different from what they really are.  

When applying game theory to analyze equilibria in a more complex economy, the possibility of appearing to be clueless is a lot more serious. In a subgame perfect equilibrium, credible threats are usually not executed, so one might construct an incorrect hypothesis where credible threats are absent altogether.  In political economy, where complex social and economic interactions are studied,  one usually finds policy makers and academics who are blissfully naïve (and clueless)

My colleague, Nadeem Naqvi  and myself have been perplexed by the “Stans”  – we have been working in one of them for the last few years.  On the surface, these  “Stans” and other off-shoots of  the Soviet republic are doing fine. Some have more resources than others.  The BANK and the FUND periodically publish research monographs  about foreign investment, business environment,  GDP growth and other key economic indicators – assuming, erroneously, that these  are budding capitalist economies. There is a steady stream of econometric work trying to predict efficiency of different monetary policy instruments and fiscal stimuli to promote economic growth

 But the reality is, these are all “network” states, the “network” being a combination of government officials and others in power. Fiscal and monetary policies have superficial, at best marginal effectiveness in these countries.

The network state collects tributes legally by taxation and illegally by other means from business enterprises. They wield the   threat of  confiscation  or loss of services. In return they provide order which is a combination of infrastructure and protective services. These are the important instruments, not traditional economic policy!

However, the “Stans” are not collapsing en masse, like the Soviet Union did. Indeed, some “Stans”  are doing better than others.   Some  exhibit moderately high rates of growth and considerable  private investment and business activity, whereas others only have the basic retail and other non-traded goods provided by the private sectors !  Is it because of their resource base? Or is it an outcome of a more complex game?  Clueless we might be, but since we know some game theory,  we  tried to build a theory of “Stans”  to show why some of them are more vigorous than others.

A little background here:

In the 70-year lifetime of the Soviet Union (1922-91), (i) there were virtually no property rights by which individuals had to live, largely because there was extremely limited private ownership of property (beyond one’s own autonomous labor), (ii) other than sale of labor time (hours or days for which labor power was sold), all other sources of income for a household were effectively prohibited, (iii) there were no businesses that households could buy and sell, nor of course any stock markets in shares of private firms, and (iv) there was no developed real estate market.

This was radically different from the economic base (of the relations of production and the associated inter-household distribution of income) on which the capitalist economic systems of the world were organized at the time. Moreover, resting on this economic base in the Soviet Union, the entailed legal and political superstructures pertaining to individual rights over property were virtually nonexistent. This is a huge contrast with the successful capitalist countries, in which the legal structure dealing with property rights was firmly in place, and there were political institutions that collectively were in continuing support of such rights under the law.

By 1991, there was rebirth of fifteen post-Soviet countries, and in these the corresponding collective consciousness of the people was nothing like that in the successful capitalist countries.

What kind of progress have the Group of 15 made towards the state’s provision of greater protection of property rights of individuals, especially to the businesses they give birth to and nurture into successful and profitable enterprises, simply because the greater such protection, the more fertile (profitable) will be the domain of the economy over which private business investment will be made in larger magnitudes, and in higher-return ventures? The larger the annual private business investment, the faster is the rate of growth of the economy’s capital stock, to which corresponds a faster rate of growth of real GDP. To avoid the fate of the late Soviet Union, these countries must adopt a path of economic growth supported by private investment. The data available in these countries are not entirely reliable, the data on private sector capital formation is  not available for some, in others it fluctuates wildly. Further, sometimes the network state embarks on a “prestige” project and private investment occurs as an ancillary to this project. Once the project is completed, private investment goes down substantially.

A snapshot of  the Group of fifteen, 2016
GDP Per CapitaGross fixed capital formation, private sector (% of GDP)
 
 
GFCF as % of GDP
Country NameGDP per capita 2016 ($)20122013
Lithuania29972Not availableNot available
Estonia29313Not availableNot available
Russian Federation2649017.618.5
Latvia25410Not availableNot available
Kazakhstan2514525.7 (in 2006)not available
Belarus1800030.132.6
Turkmenistan1748510.5not available
Azerbaijan1743911.8 (in 2007)Not available
Georgia1004417.516.9
Armenia862122.219.4
Ukraine830517.2 (in 2009)not available
Uzbekistan656317.518.0
Moldova532822.6 (in 2006)Not available
Kyrgyz Republic352124.122.9
Tajikistan30084.05.5
Data on GDP and GFCF from various UN publications

It is clear that in terms of GDP per capita,  some of these countries have performed a lot better than others. The data on Gross private capital formation is  not satisfactory, but again we can see a large difference in these numbers between the group of fifteen. Several other countries in East Europe, Asia and Africa, may also satisfy our criterion of network states.

Gross capital formation as a percentage of GDP varies wildly, ranging from 4% in Tajikistan to about 30% in Belaraus and 25% in Kazakhstan. (for comparison , GFCF is about 15% in USA which has a very large capital base, but it is about 40% in China and 25% in India) Why is it that some network states are more successful in promoting private investment than others. Is it only because they have more natural resources. Or is the reality more complex?

We applied a little bit of agency theory to look at a  game between the “network” state  and the agents who may be “qualified” or unqualified”

2. Model

The government (network) provides legal order S and collects revenue (tribute) T. Order includes infrastructure for enterprises plus a threat level for confiscation. This is essential for collection of tribute.

To sustain high return enterprises, the government must provide an order level sH while the level of order needed for a low-return enterprise is sL. There are two types of agents:

  1. “Qualified” –  who either possess human capital or resources or have enough “network” connections to operate high return enterprises. They earn more from high return enterprises

2. “Unqualified” who earn more from operating low-return enterprises.

An unqualified agent may not be interested in operating a high-return enterprise, whereas a qualified agent has a choice of operating either a high-return or a low-return enterprise.

The objective of my  exercise is to see under what conditions the equilibrium outcome will involve a situation where both high and low return enterprises are operated by the agents in the economy. This equilibrium is called a “productive” equilibrium.  The other equilibrium is called a “stagnant” equilibrium because only low-return enterprises exist here, operated by both qualified and unqualified agents.

The payoff (surplus) from operating a high return enterprise by a qualified individual is

V = max [U(θ, S ) – T]

Where θ is the agent type (θQ qualified, and θU unqualified), sL is the order provided to low-return enterprises and sH is the order provided to high-return enterprises, and T is the tribute that must be paid to the government (tL to operate a low-return business, and tH to operate a high-return business).

Thus, if a qualified agent participates in a high return enterprise, his return is

VQH = U(θQ  , sH) – tH

If he participates in a low return enterprise, his return is

VQL = U(θQ, sL) – tL,

Therefore he will choose to invest in H if VQH > VQL , and in L otherwise.

An unqualified agent, I assume,  has a very low (possibly  negative) return from investing in a high quality enterprise, so his return from investing in L is

 VUL=  U(θU, sL) – tL,

He will invest if VUL is non negative.

The main point of distinction between qualified and unqualified agents is

U(θQ, sH) – U(θQ, sL) > U(θU, sH) – U(θU, sL),

which implies that the qualified agents have a higher differential payoff between high return and low return enterprises.

The government maximizes a convex combination of the cost of providing order and the revenue earned,

G = – a[C(sL) + C (sH)] + (1- a)(tL + tH)

where a is the weight placed on the costs. Here G is the government’s objective function.

By assumption, it is more expensive to provide sH because it needs better infrastructure and possibly higher level of coercion so that greater revenue could be generated from the high return enterprises.

2. Equilibria

We look at three possible equilibria (scenarios). The proofs are in my joint paper with Professor Naqvi (Bhattacharya and Naqvi (2017))

1. The government provides only sL, enough to sustain low-return enterprise only. It is not profitable for the government here to provide sH, the revenue generated is the entire surplus of the agents (or the minimum surplus if the unqualified agents are diverse). This is the stagnant equilibrium. Here, the government does not find it optimal to provide sH because qualified agents will continue to choose low-return enterprises because for them the additional net return from operating higher return enterprises is negative.

2. The government provides both sL and sH, and collects different revenues tL and tH from different agents. Here, qualified agents choose high-return enterprises and unqualified agents choose low-return enterprises. The revenue earned tL is equal to the surplus of the unqualified agents – thus the unqualified agents are left with what we call only “normal profits”. The revenue earned tH from the high-return sector is less than the surplus of the qualified agents, because they self-select to operate high-return enterprises. So the qualified agents earn more than “normal profits”. This is the productive equilibrium.

3. The third scenario occurs where the government provides only sH and extracts all the surplus by collecting tH. Here, the low-return enterprises are not functional.  We call this a “Highly-productive” equilibrium. This type of equilibrium will not exist if there is a large number of unqualified agents in the economy, or if it is not expensive for the government to provide order level sH. Thus, this is the kind of equilibrium that a society should strive for under improved governance and availability of opportunities.

For the kind of economies we are considering here, this equilibrium is unlikely to exist because there is likely to be a large number of unqualified agents who will find operating a low-return enterprise profitable even if their surplus is close to zero.

3. Remarks

1. What exactly happens in “stagnant” equilibrium?

This equilibrium is achieved as an outcome of voluntary interaction between a government which provides order and infrastructure and agents who decide to operate enterprises that they find profitable. In this equilibrium, although there are many qualified agents, they self-select to operate low return enterprises because the return from doing so is higher than operating high return enterprises. The government provides only order level sL because provision of sH is redundant in this case.

2. What exactly happens in “productive equilibrium”?

When is the productive equilibrium likely to exist? In a productive equilibrium, qualified agents operate high-return enterprises and unqualified agents operate low-return enterprises. Naturally, the level of private investment will be higher in this equilibrium.

I have proved that this equilibrium will exist when the proportion of qualified agents is neither too small nor too large. As we mentioned before, it is unlikely to be too large, so “not too small” is the relevant criterion. This proportion depends on the level of human and natural resources at the disposal of the agents and size and strength of the “network” in the economy

The second result I prove is that the productive equilibrium will exist when going from low to high order level increases surplus proportionally more for qualified than for unqualified agents.

4. More Remarks

 We observe, in Central Asia, Eastern Europe, in south Asia and in Africa, different kinds or regimes where appropriation is the norm – both regimes with relatively vigorous economic activity and regimes with relative stagnation. This formulation might shed some light on why some regimes appear to be more stifling than others.

Did I just present you with a well-disguised tautology? Possibly!

So let me check again – what exactly is the implication of all this?

Basically, even in a network society, agents do not curl up and surrender all surplus to the network. Nor does the network brutally destroy the society.  The outcome depends on the proportion of agents who are educated, connected to the network, and willing to take the risk of eventual confiscation of appropriation of their entire investment. If enough of these agents exist, and the network finds it not too expensive to provide the right infrastructure for high return enterprises, then the economy will exhibit a productive equilibrium where substantial private investment may occur. On the other hand, if this proportion is small, the network state will only build an infrastructure to support low-return enterprises. In a country like Tajikistan, for instance, private investment and economic activity are on a much subdued level than the relatively successful “Stans”. Each of the countries in this group has a varying amount of natural resources that they can export. But for sustainable growth, they all need development of vigorous economic activity.  My model indicates that the proportion of qualified agents, and the “network’s” willingness to provide a higher level of infrastructure and property rights are some of the key elements for sustainable growth.

REFERENCES

  1. Bhattacharya, G. and N. Naqvi, (2017), “A Theory of Appropriation under Self-selection by Agents”   Mimeo. KIMEP University, Almaty, Kazakhstan.
  2. Graddy, Katherine (1995), “Testing for Imperfect Competition at the Fulton Fish Market”,  The RAND Journal of Economics, Vol. 26, No. 1 (Spring, 1995), pp. 75-92

3.Fire Sweeps Through Major Building at Fulton Fish Market

By JOE SEXTON

Published: March 30, 1995