Political change - the role of information and popular waves

There is a very strong, if not dominant, belief among development researchers that lack of adequate information and awareness is responsible for holding back reforms that could have improved development outcomes. 

Accordingly, they believe that if the poor quality of student learning outcomes or care delivered by government doctors are appropriately highlighted it could trigger the reforms required to address these deficiencies. Similarly, a credible demonstration (say, empirically or through rigorous field experiments) of the effectiveness of cash transfers or technical solutions to eliminating an inefficiency in a public service delivery system would lead to its adoption. Even the more prudent among them believe that it would go a long way towards achieving the reforms.

This betrays an inadequate understanding of the dynamics of political change. Political change is and has always been about ideological or populist waves anchored around a problem or felt-need that galvanize the public (or stakeholders) mood into demanding action. In fact, as Lant Pritchett has argued, development itself is a faith-based movement. Knowing about a problem is not the same thing as having the urge to address the problem. Change happens not when stakeholders become aware of some problem but when they are triggered into action. And there is some distance to travel between knowing and acting.

Consider the two examples of poor quality of education and health care delivered by public institutions across India and many developing countries. It is now exhaustively documented, by both public audits and third party assessments, that student learning levels in government schools across India are shockingly low. Every year, for nearly a decade, the annual ASER reports, through quantified metrics on learning achievements, tell us that less than a half of Class V children have achieved even Class II competencies. Furthermore, learning levels have been worsening. The same reports have also consistently shown that private schools achieve better results at a fraction of the cost of public schools. It is also well documented that teacher truancy is a major problem in government schools. Conventional wisdom would have it that learning outcomes should occupy the center of the education agenda. 

Similarly, a number of studies have exposed the poor quality of care in primary health centers (PHCs). In fact, the Planning Commission itself estimates that PHCs account for less than one-fifth of all first contact in the referral chain. The remaining are with private care providers, mainly the unqualified rural medical practitioners (RMPs). Numerous studies have shown widespread unauthorized absenteeism among nurses and doctors. Recent studies have also shown that compared to even RMPs, PHC doctors spend less time per patient and mis-diagnose more frequently. Again conventional wisdom would have it that primary health care reforms, including integration of RMPs, should be a no-brainer. 

Many of these findings come from rigorous studies like randomized control trials conducted by very reputed agencies and researchers. In any case, none of them have been disputed by any of the stakeholders. Further, most of them have cognitively striking headline numbers, which presumably should unsettle any rational audience. However, in reality, the impact of such research findings has been remarkably marginal. Researchers blame governments and express incredulousness at its unwillingness to take action to change the order.

India is not alone in being afflicted by this trend. One only needs to look at public debates in the United States to understand the persistence and hold of ideological and other prejudices on the face of overwhelming evidence. Arguments in favor of lowering the marginal income tax rate, despite unambiguous evidence of dramatic concentration of wealth and declining returns to labor income, dominate conservative thinking. Climate change deniers and opponents of gun control are not amenable to conclusive evidence and well-reasoned arguments that contradict their views.

But I am not one bit surprised by this. Paradigm re-defining reforms rarely happen because someone comes up with striking figures that reveal something completely new and deeply unsettling, forcing governments into action. Almost always those insights are widely known and have been deeply internalized by most stakeholders, though not necessarily quantitatively. It is just that the changes - in terms of re-orienting values as well as accommodating losses of various stakeholders - required are much more daunting than could be achieved with mere revelation of facts, however unsettling. They require upending of well-established political and administrative orders and social values, which would cause loss to powerful and entrenched vested interests and destabilize the passive tolerance (for whatever reasons) of poor quality service by its intended beneficiaries (or now losers!). 

The debates on these issues have a dynamic of their own, and needs to accumulate the importance and urgency that generates the demand for immediate and decisive action. They need some long enough period of deep personal engagement by those immediately affected with the problem. But unfortunately a mere dissemination of information about ground realities is unlikely to, by itself, result in the deep engagement required. It would need careful strategic communication to get the stakeholders to face up to the reality and demand change. People are too cognitively ensconced, despite the obvious failings of the existing arrangement and their resultant losses, to come out and fight for change.

This is not to say that such research has no role in addressing such issues. But research findings, while undoubtedly important to the public debate on these issues, are just one of the contributors to change. The most important trigger for action on such issues is the realization and internalization of the need for change among atleast the most important stakeholders.

It is one thing to legislate rules that promise good quality education or health care, but entirely another thing to actually create the conditions that will enable its realization. In fact, in areas like education and health care, we may already have enough information and insights to stop worrying about them and get down to the business of actually creating the conditions required for change. Advocates of change need to realize this and work to create the conditions for change. Merely providing more information or insights alone may already be into the phase of diminishing returns.

On China's shadow banking risks

Quartz has two graphics that explain the much discussed Chinese shadow banks. Briefly, the Chinese government caps the interest payable on savings accounts to 3% and impose a very high 20% cash reserve ratio on bank deposits. The former, coupled with capital controls and the lack of alternative investment opportunities for a nation of ultra-high savers, encourages the search for higher yields among savers. The latter, coupled with the search for capital for riskier investments among various market participants, incentivizes the creation of channels to funnel savings that can bypass the formal banking sector.

The result has been the growth of intermediaries called trust companies that are not allowed to accept deposits or make loans, but can manage money. These firms have established Wealth Management Products (WMP), which yield higher returns and are marketed by formal banks for a commission. The money raised through WMPs are invested in higher risk projects. Real estate firms, local government entities, and commodity companies have relied heavily on these trusts to raise relatively short-term (2-3 years) capital to finance their aggressive investments. This capital circulation is in the "shadow" in so far as it does not sit on the balance sheets of banks that market them. Neither does it show up on the balance sheets of the end-borrowers too, as they invariably invest in high-risk projects through special purpose vehicles.

The lending cycle of a typical WMP looks like this.

The circulation of capital in the shadow banking system, as highlighted below, generates a much higher money multiplier than with bank lending, leading to excessive credit growth.

The problem with such exuberant lending cycles (the value of WMPs have doubled to nearly 10 trillion yuan in two years since Q4 2011) is that they are invariably associated with excessive risk taking. The lending cycle was sustained by the prolonged period of investment driven economic growth, especially fueled by government investments in massive infrastructure projects, which inflated both real estate and commodity bubbles. This naturally exposes the lending counter-parties to the risks posed by declining investments - fall in the underlying real estate and commodity prices. 

Two issues here. 

1. While one could rationally argue, with numbers showing that the share of risk exposure is within manageable limits, nobody can be certain about how things will pan out once a cycle of defaults get triggered. It is almost certain that not even the Chinese government has any idea about the degree of riskiness associated with all the massive investments undertaken by its local governments and real estate firms. 

2. Two, till now the Chinese government's ability to impressively manage various emergent challenges has been, in large part, due to the momentum created from rapid economic growth. Rapid growth not only papers over the adverse effects of distortions, but also creates the space for calibrated reforms. And some of the challenges are truly formidable - eg, the transition from the current investment spending of 48% of GDP to a lower path, and the increase of private consumption from an ultra-low 36% of GDP to something more normal like 55-65%. Most importantly, and especially important in an authoritarian polity, growth is often a pre-requisite to contain social and political tensions.    

The top 0.01 percent

Amidst all talk about the 1%, we overlook the fact that there exists considerable variation in the trends among them. While incomes shares of the 1-0.1% have been relatively stable, the real surge has been in the share of the top 0.1%, in particular the top 0.01%.

The near quadrupling of the wealth share of the top 0.01% has come mainly from ownership of equity and fixed income security assets, or in other words from returns on capital. 

But for the bottom 90%, the share of equities and fixed income securities is virtually zero.  

Expectedly, this trend has paralleled a near doubling of corporate profits as a share of GDP over just the last decade. 

Even as the share of income going to labor has been declining, not just in US, but across the world. In America, labor's share of income has fallen 3.9 percentage points over the last quarter century. Trade, globalization, technology, and labor market deregulation have all contributed to this trend. 

 

Irrational Exuberance, Tesla Edition!

Fledgling electric car maker Tesla's outrageous stock market valuation is clearly driven by irrational exuberance. Quartz has two graphics that highlight this. Surely, nothing in the world merits a spurt in valuation as spectacular as this. Did we invent tele-portation?

Especially when the fundamentals behind the valuation is so clearly off-sync from that of anyone else, including the best competitors in the market.

So what drives such valuations? Even assuming the firm being at the cutting edge of innovation in electric vehicles and would therefore be the target of inflated take-over bids as the technology's commercial prospects increase, there are too many uncertainties in the market to warrant anything remotely close to such valuations. Clearly Tesla occupies the echo chamber among stock market investors. 

India's "bloated" bureaucracy?

Critics reflexively blame India's "bloated bureaucracy" for governance failures. So how "bloated" is it?

As on 2011, India had 18.5 million governments employees - 3.4 million with central government, 7.2 million with state governments, 5.8 million with PSUs, and 2.1 million with local governments. As a share of total employment (around 400 million) it was just 4.6%. However, as a share of organized sector employment, it stood at 62.2% in 2010. In contrast, in the US, governments now employed 15.9% of all Americans with jobs. The relevant statistical comparisons are 4.6% and 15.9%, which is itself a deceptively favorable comparison and with wide variations across states and departments. Consider this excellent analysis reported in Hindu, 

Data compiled from multiple sources, including a 2008 official survey, Right to Information applications, media reports and the 2011 census show, India has 1,622.8 government servants for every 100,000 residents. In stark contrast, the U.S. has 7,681. The Central government, with 3.1 million employees, thus has 257 serving every 100,000 population, against the U.S. federal government's 840. This figure dips further if the 1,394,418 people working for the Railways, accounting for 44.81 per cent of the entire Central government workforce, are removed. Then, there are only about 125 central employees serving every 100,000 people. Information technology and communications services account for another 7.25 per cent of the Central government's staff...

For the most part though, India's relatively backward States have low numbers of public servants... Bihar has just 457.60 per 100,000, Madhya Pradesh 826.47, Uttar Pradesh has 801.67, Orissa 1,191.97 and Chhattisgarh 1,174.62. This is not to suggest there is a causal link between poverty and low levels of public servants: Gujarat has just 826.47 per 100,000 and Punjab 1,263.34. The data could explain, though, why even well-off States like these have found it tough to ensure universal primary education and eradicating poverty.

I have always considered this alarming deficiency as an important contributor to our state capability deficit. An illustration of this deficit is that New York with 3500 eateries has 180 food inspectors whereas Hyderabad with atleast a few times more eateries has just 4! Much the same is common across cutting edge activities - school inspectors, outreach nurses, agriculture extension officers, town planning inspectors, engineering supervisors, and so on. It is impossible to systemically deliver effective outcomes when the jurisdiction of the official is massively stretched functionally, geographically, and population-wise. Even a cursory matching of time and task to responsibilities would reveal that we would need to have a few times more functionaries.

And, as the report highlights, these deficiencies span across all levels. It is as much incorrect to say that Indian bureaucracy is top heavy as it is to say it bottom heavy. Or overstaffed at the center and understaffed at the states. It is understaffed at all levels. 

None of this should be taken to presume that once we have them in place, state capability will improve. Far from it. Personnel deployments have to be complemented with other administrative reforms that increase transparency and local accountability, improve supervision and monitoring capacity, build capacity, and prevent the politicization of bureaucratic functioning. None of these are easy. But to mindlessly blame "bloated" bureaucracy for our governance failures will not get us anywhere. 

China graphs of the day

From among an excellent collection of graphs about China's extraordinary quarter century of growth available here, a few stood out.

For some time now it has been well known that China was the engine of global economic growth. Whole countries have been transformed by its insatiable appetite for commodities. This has become more pronounced since the Great Recession.

What makes the Chinese economic growth truly amazing is its contribution to the spectacular decline in poverty. The contrast with South Asia is stunning.

The scorching pace of growth though has had its negatives, with a steep increase in carbon-di-oxide emissions. 

Stockholm's music cluster

MR points to this fascinating article highlighting Sweden's remarkable success in the field of pop music. Since the seventies, starting with ABBA, Swedes have dominated pop music scene with music bands, singers, song-writers, and producers. Song writers and producers from Stockholm have been behind the success of a long line of singers that include Katy Perry, Lady Gaga, Madonna, Usher, Avril Lavigne, Britney Spears, The Backstreet Boys, Pitbull, Taylor Swift, One Direction, Maroon 5, Kelly Clarkson, and many others. It writes,

Sweden, and in particular Stockholm, is home to what business scholars and economic geographers call an “industry cluster”—an agglomeration of talent, business infrastructure, and competing firms all swirling around one industry, in one place. What Hollywood is to movies, what Nashville is to country music, and what Silicon Valley is to computing, Stockholm is to the production of pop. In fact, Sweden is the largest exporter of pop music, per capita, in the world, and the third largest exporter of pop overall. And in recent years, the country has seized not just the message, but the medium as well: As the industry moves toward a distribution model that relies on streaming music services, the Stockholm-born Spotify is a dominant player, with 24 million users per month.

The article highlights that this success was the unintended result of a concerted arts-education campaign by Swedish authorities, supported by Church and Conservatives, initiated in 1940s to stamp out the growing influence of degenerate music from America and encourage more uplifting classical music. It writes,

Municipal schools of music spread across the country... Many of the schools, which were often free to attend, allowed students to borrow instruments, as if from a public library, for a nominal fee... municipal music schools increased the odds that Swedes would discover their talents, while also giving the country an unusually music-literate domestic audience. Other knock-on effects were less obvious. The municipal schools provided an indirect subsidy to the music industry itself, for instance, by offering a steady supply of flexible teaching jobs to musicians... Outside the classroom, the government also encouraged young musicians with subsidies for practice space and even practice itself... 

And perhaps most importantly, Sweden’s municipal schools gave rise to social networks of musically inclined youth—networks that ultimately formed the basis for the Swedish capital’s music industry cluster. So much information is transferred in bars, informal institutional settings, in social networks, and in the movement of people between firms... Sweden’s capital city was especially conducive to this kind of transfer. The size of Stockholm is probably perfect... Everyone knows everyone. If you go into a music store to buy strings, you know the clerk because you played with him when you were little. If you go to a record label, you know the people there.

This is yet another addition to the literature on the emergence of talent cluster and regional comparative advantage. The larger message I carry from this are two-fold.

1. Such outcomes are largely serendipitous. Post-facto one can point to the series of government interventions as elements of a consciously designed plan. However, as is evident from this story (and from all others), the emergent dynamics of such processes are unpredictable. Even when they produce the intended result, its takes a long period of incubation, with several ebbs and flows.

2. Agglomeration advantages are as important to knowledge-based industries as to traditional brick and mortar ones. The bits and bytes of pop music industry reside in the brains of human beings and is therefore, theoretically atleast, amenable to diffused and dis-aggregated growth. But, as the example of Stockholm highlights, direct human interaction plays a central role in the process of creation and transfer of ideas that drive even this industry.