In today's newsletter, we talk about interdependencies, boycotts, and incentive programs.

A must-read folks!!!

The Story

Imagine you are a deer. You have essentially only four things to do during the day: sleep, eat, avoid being eaten and socialise (by which I mean mark a territory, pursue a member of the opposite sex, nurse a fawn, whatever). There is no real need to do much else. Now imagine you are a human being. Even if you only count the basic things, you have rather more than four things to do: sleep, eat, cook, dress, keep house, travel, wash, shop, work … the list is virtually endless. Deer should, therefore, have more free time than human beings, yet it is people, not deer, who find the time to read, write, invent, sing, and surf the net. Where does all this free time come from? It comes from exchange and specialisation and from the resulting division of labour. A deer must gather its own food. A human being gets somebody else to do it for him, while he or she is doing something for them — and both win time that way. Self-sufficiency is therefore not the route to prosperity.

These are excerpts from the popular science book — The Rational Optimist, from Matt Ridley. And he makes some very compelling arguments. Counterintuitive and antithetical to the concept of self-sufficiency, but one that drives home a simple point.

For all the lofty ideals that we espouse, we are remarkably reliant on each other. Most of us specialise in only one thing. A writer writes. A sales agent sells. A teacher teaches and a web developer makes websites. And despite our limited skill set and unique specialisations, we can still access a wide array of resources and live a fulfilling life thanks to the principle of exchange. Money and trade bridge the gap between what we can produce and what we can consume. Imagine having to fetch and source your own food, drill your own oil, make your own television, and teach yourself economics. These are tedious tasks almost impossible to execute. In summary, we are dependant on each other and these dependencies are not just restricted to national borders.

You are probably reading this story on a smartphone manufactured in Vietnam, with transistors shipped in from Taiwan enclosed in a plastic case from China. The plastics were probably made using oil imported from Oman and drilled by a labour face dominated by Indians. And sure, you could try and eliminate these dependencies, but it comes at a cost.

Kelly Cobb of Drexel University set out to make a man’s suit entirely from materials produced within 100 miles of her home. It took twenty artisans a total of 500 manhours to achieve it and even then they had to get 8% of the materials from outside the 100-mile radius. If they worked for another year, they could get it all from within the limit, argued Cobb. To put it plainly, local sourcing multiplied the cost of a cheap suit roughly a hundred-fold. — Excerpts from the Rational Optimist

And people simply don’t like paying a premium. Consider India.

Cheap smartphones from Chinese companies have dominated the Indian market because consumers have often prioritised “price+quality” above all else. Last year, it only took fifteen minutes for Xiaomi’s smartphone, Redmi Note 8, to sell out once it went on a “flash sale”. And competition from Chinese phone makers has forced incumbents to cut prices as well, in effect boosting smartphone penetration in India. In 2015 we had close to 200 million smartphone users. By 2019, this number had almost doubled.

And the fruits of affordability have largely accrued to the end consumer.

A farmer in Ganganagar can now watch videos of Madhubala, thanks to bigger screens and higher resolutions. A pensioner in JP Nagar can stream Pankaj Udas songs thanks to her 4G enabled smartphone. A construction worker from Mulund can wire money to his parents back in U.P using BHIM because his phone finally supports Android. In summary, the interdependencies that we loathe so much has made entertainment and digital transactions ubiquitous. It is a testament to the “prosperity gospel” free trade preaches.

In fact, foregoing these interdependencies can sometimes entail some very real consequences. For instance, India imports close to $8 Billion worth of chemicals from the Red Dragon. But China has only been able to carve an edge in the production and distribution of organic chemicals by incurring steep social costs.

Chemical factories are notorious for emitting high amounts of pollutants. And China’s lax environmental laws enabled manufacturers to run coal plants in full steam with the ultimate objective of minimising costs. And so, toxic factories mushroomed across the country burning dirty fuel; turning the blue skies of northern China into a dark cesspool of carbon and sulphur dioxide. Pollution masks became a staple among Chinese citizens and by some estimates, over a million people were expected to die prematurely.

So in effect, China was able to offer dyes, chemicals, and surfactants at affordable prices by polluting their skies. And reducing these interdependencies would also entail bearing the same burden. We would have to minimize compliance costs by diluting environmental norms and putting human lives at stake — Indian lives at stake. And it’s a price that we’ve refused to pay.

But that doesn’t mean we shouldn’t reduce interdependencies at all. In fact, if reducing interdependencies can provide the necessary fillip for local manufacturing to compete with foreign imports, then it’s something we should pursue vigorously. However, the approach we adopt to pursue this end goal ought to be meaningful. For the last few weeks, there’s been a concerted effect to boycott Chinese products. And truth be told, I share these sentiments. On the face of Chinese aggression, people feel the need to act. To revolt. But this is a suboptimal approach since it doesn’t achieve the stated objective and can often lead to excessive collateral damage.

18 of the 30 Indian unicorns (startups worth over $1Bn) have Chinese investors on board. Local MSMEs who sell quintessentially desi products often have ties to suppliers from China. Your local toy store is probably shipping all its products from China. In fact, India carries a trade deficit of $58 billion with the country and we can’t wipe away this deficit overnight.

But there is an economically sustainable approach to promote local manufacturing and it’s not driven by boycotts.

Instead, it's driven by incentives.

It's a catchphrase that I’ve been using for quite some time now and I’ll say it again. Offer the right incentives and you can get people to do the most amazing things.

The Indian government set aside ₹50,000 crores, to incentivize local and global electronic manufacturers to Make in India only yesterday. They also set aside another ₹10,000 crores to incentivize manufacturers to source and produce raw materials for pharmaceutical drugs. This is how you reduce dependencies with China. Not boycotts.

The tragedy here is that news media has dedicated very little time to discuss the incentive programs. Instead, we’ve had endless shows on Chinese boycotts and mindless posturing. This feedback loop is dangerous. Because it gives people the impression that we are left with no recourse. But that isn’t true. Effective policymaking and incentive programs can help us reduce interdependencies. It’s a time tested principle and it is economically sound. So if we really want to hurt China, let’s get behind policymakers and scrutinize the incentive programs. That’s how you contribute to nation-building. And on that note, might I also ask you to share this article with your family, friends, uncles and that annoying sibling who keeps telling you to boycott Chinese products. They need Finshots. We need them. It’s a match made in heaven. Let’s get it done. Share on WhatsApp, Twitter, or LinkedIn.