Thursday, March 23, 2017

Oil industry automation fact of the day

From the Times on the new labor market normal in oil drilling in the US, 
Roughly 163,000 oil jobs were lost nationally from the 2014 peak, or about 30 percent of the total, while oil prices plummeted, at one point by as much as 70 percent. The job losses just in Texas, the most productive oil-producing state, totaled 98,000. Several thousand workers have come back to work in recent months as the price of oil has begun to rise again, but energy experts say that between a third and a half of the workers who lost their jobs are not returning. Many have migrated to construction or even jobs in renewable energy, like wind power... 
Indeed, computers now direct drill bits that were once directed manually. The wireless technology taking hold across the oil patch allows a handful of geoscientists and engineers to monitor the drilling and completion of multiple wells at a time — onshore or miles out to sea — and supervise immediate fixes when something goes wrong, all without leaving their desks. It is a world where rigs walk on their own legs and sensors on wells alert headquarters to a leak or loss of pressure, reducing the need for a technician to check. And despite all the lost workers, United States oil production is galloping upward, to nine million barrels a day from 8.6 million in September. Nationwide, with a bit more than one-third as many rigs operating as in 2014, production is not even down 10 percent from record levels. Some of the best wells here in the Permian Basin that three years ago required an oil price of over $60 a barrel for an operator to break even now need about $35, well below the current price of about $53...
Pioneer Natural Resources, one of the most productive West Texas producers, has slashed the number of days to drill and complete wells so drastically that it has been able to cut costs by 25 percent in wells completed since early 2015. The typical rig that drilled eight to 12 wells a year just a few years ago now drills up to 16. Last year, the company added nearly 240 wells to its Permian Basin inventory without adding new employees.

Wednesday, March 22, 2017

The start-up story clarification

This is in continuation to this earlier post. Let me clarify. No body can have a problem with start-ups. After all business creation has been a feature of economic life much before Amazon and Uber.

I see three narratives around the start-up story. One, start-ups allow the expression of entrepreneurial talents and energies of the youth. Two, start-ups create jobs. Three, start-ups innovate to create new products and services that enable more efficient utilisation of resources and solve development challenges.

The problem with the first is one of glorification of entrepreneurship, almost to the marginalisation of all else. This trend overlooks the fact that India needs not more entrepreneurship, but more productive jobs. Just as human resource misallocation towards the financial sector has been a problem in the US, it cannot be denied that the best and the brightest could end up being seduced by the hype and glitz of the get-rich-quick narrative associated with the world of IT start-ups. The best and the brightest find even the most high quality jobs unattractive and lose out on the invaluable experience of acquiring the skills and expertise that come with starting a career in good organisations. 

The second and third are even more complicated, with potentially adverse secondary effects. In case of the second, there is the strong likelihood that start-up activity may be crowding-out other activities. Are scarce savings being misallocated towards specific sectors, those which run on IT platforms, at the cost of other more important ones? Would the median entrepreneur have been better served by seeking a job employment? Would the economy have benefited more in the aggregate with a less exuberant start-up environment by channeling top class talent into medium sized firms engaged with making stuff? Would the aggregate job creation been greater with a greater share of wage employment? It is difficult to answer these questions either ways with any degree of certainty.

It is on the third issue that I am least convinced. I will say no more than what has been written here.

Sunday, March 19, 2017

The need for regulation in e-commerce

In an earlier post I had raised the issue of how internet firms benefit from regulatory arbitrage. The competitive advantage of the sharing economy firms over their brick and mortar counterparts can be traced to their very low regulatory compliance costs, in terms of entry standards, labor protections and different categories of taxes. 

It was not that any of the externalities from such activities disappeared. But instead of being internalised, as with the case of brick and mortar enterprises, they were socialised away from the internet firm and borne by the tax payers. 

Consider two features of the ride-on-demand (RoD) market in India as against developed markets. One, unlike the US and developed countries where Uber drivers complement their incomes, those in India are largely full-time workers. Second, instead of enabling a more optimal utilisation of an already owned vehicle, Uber drivers here either lease or purchase vehicles or are doing part time with (mostly) informal taxi operators. 

Both these features mean that RoD market in India is not the classic "sharing" economy. In fact, they are often indistinguishable from a regular business with employees and a management. The only difference between a registered taxi operator and Uber is that the former pays all the taxes and adheres to all regulatory compliances. Uber, Ola and Co manage to shift the entire burden away to the tax payers. By using drivers who work for informal taxi operators, likely to be one of the largest categories of drivers, RoD firms are formally leveraging an informal economy platform. 

And the regulatory vacuum encourages perverse incentives,
In India, Uber leases vehicles to drivers through Xchange Leasing — a challenging proposition in a country with no centralised credit score system. “To us, creditworthiness is not a criteria, our goal is to give out leases and give out cars to as many people as possible,” says Amit Jain, president of Uber India. Several thousand cars have been leased through the programme, he said, which uses background checks rather than traditional credit checks. “If somebody cannot pay the monthly amount, they can simply return the car,” he added.
Don't be surprised if a significant portion of those "subsidised" Mudra loans, which the government is promoting to encourage entrepreneurship, is ending up financing Uber and Ola's expansion. And the risk is that when the powder runs short, as it should, and the price sensitive Indian customers inevitably retreat when prices rise to reflect commercial considerations and likely forthcoming regulatory burdens, these loans could end up adding to the already big pile of non-performing assets. 

What is happening in large parts of the e-commerce market is resource misallocation on a fairly significant scale. This is true as much of the so-called "sharing" firms like Uber/Ola and Oyo, as of the broader e-commerce market itself. Amidst this euphoria over start-ups and me-too firms, with their undoubted entrepreneurship (starting and doing a business of any kind in India requires some entrepreneurship!), I struggle to spot the fundamental rationale, innovation.

In this context, greater regulation assume significance. The problem when governments do regulation is that they tend to be excessive. But the problem with no regulation may be worse still!

Friday, March 17, 2017

China update

China's alarming obsession with debt is arguably the biggest concern regarding the country's economic growth prospects. Morgan Stanley's Chetan Ahya puts the scale of the problem in perspective,
China’s debt has risen from 147 per cent of GDP in 2007 to 279 per cent of GDP in 2016. Last year, China added 21 percentage points to its debt-to-GDP ratio, or the equivalent of $4.5tn. In effect, China needed almost six renminbi of new debt to grow its nominal GDP by one renminbi... only two economies which have a population of above 20m have been able to escape the middle income trap, in which rapidly growing economies stagnate at middle-income levels, over the past 30 years. Those were South Korea and Poland.
But, despite this, there is a rising tide of opinion that China may have done enough to overcome the worst fears. A recent Morgan Stanley China report clearly came out bullish on China. Its arguments for macroeconomic stability focus on Chinese debt being funded domestically, its very big external balance sheet with net international investment position of 16% of GDP, low inflation effect due to credit allocation being used to fund investment, political acceptance of lower growth going forward, potential for rebalancing towards consumption, reforms to transition away from low value manufacturing, and the sure signs of moving towards high value added manufacturing. 
This blog has been inclined to the view that China's growth momentum was built on strong enough foundations and, coupled with its unique size and fairly enlightened government unencumbered by the troubles of democratic politics, meant that the country could potentially tide over these problems without a hard landing. It has built everything that India does not have - human, physical, financial, and institutional capital - to sustain a high (relative to its income levels) growth trajectory. 

However, there are two concerns. The size of debt is massive and these numbers do not accurately reflect the non-bank sector debts. For corporates and local government entities, an orderly deleveraging cannot be taken for granted. Apart from the economic contagion from lurking potential too-big-to-fail dangers, there is also the likelihood of social disruptions from job losses and so on.  

Further, despite its net positive external investment position and foreign exchange surpluses, that channel may not be as secure as we believe. In a couple of years, a trillion has been wiped off from the reserves, and a significant proportion is not liquid enough to be drawn for use. In case of external and, more critically, internal events, if the renminbi becomes a one-way downward bet, then the flight of domestic savings capital from China itself and efforts to prop up the currency could end up rapidly eating up the reserves buffer. And then we could have a different scenario.

I am therefore not surprised that Michael Pettis holds the view of a "gradual decline in GDP growth to below 3 percent by the end of this decade, or shortly thereafter". 

Wednesday, March 15, 2017

India's digital opportunity to overtake China

The Economist has an excellent story about the spectacular growth of China's online financial intermediation market,
By just about any measure of size, China is the world’s leader in fintech. It is far and away the biggest market for digital payments, accounting for nearly half of the global total. It is dominant in online lending, occupying three-quarters of the global market. A ranking of the world’s most innovative fintech firms gave Chinese companies four of the top five slots last year. The largest Chinese fintech company, Ant Financial, has been valued at about $60bn, on a par with UBS, Switzerland’s biggest bank... Its fintech giants have shown what can be done. For emerging markets, the lesson is that with the right technology, it is possible to leapfrog to new forms of banking. For developed markets, China offers a vision of the grand consolidation—apps that combine payments, lending and investment—that the future should hold... For about 425m Chinese, or 65% of all mobile users, phones act as wallets, the world’s highest penetration rate, according to China’s ministry of industry and information technology. Mobile payments hit 38trn yuan ($5.5trn) last year, up from next to nothing five years earlier—and more than 50 times the size of the American market.
This carries the greatest relevance for India, where digital transactions market may be just about to explode. And it carries one advantage which even China cannot boast of, Aadhaar, the biometric identity which already covers more than a billion Indians.

I can foresee the potential of five disruptions in the retail payments market from the initiatives already underway. 

1. The RuPay payment gateway has, as I blogged earlier, the potential to break the oligopolistic stranglehold of Visa, MasterCard, and Amex on the payment gateways market. 

2. The Unified Payment Interface (UPI) supports immediate transfer of money between different bank accounts. It addresses the challenge of inter-operability among different banks and merges several banking features, seamless fund routing and merchant payments into one interface. It also dispenses with smart card based validation and provides competition for payment wallet services like PayTm. Users can download the respective bank UPI app. 

3. The BHIM app is a digital payments app based on UPI that is promoted by the National Payment Corporation of India (NPCI), and has the potential to disrupt the market for e-wallet services. It uses the Aadhaar number for transacting over the UPI, it also has the potential of becoming the go-to immediate payment interface, eliminating the need to have individual bank UPI apps. It overcomes the limitation of existing e-wallet providers who require transferring money into the wallet and closed loop nature of transactions (transfers only from one wallet account to another), and offers the same set of services by directly intermediating with your existing bank account.  

4. The Aadhaar Enabled Payment System (AEPS) potentially dispenses with the the need for intermediaries like wallet service providers by using Aadhaar to achieve single-click two factor authentication. 

5. The BharatQR Code is the world's only interoperable payment system across merchant outlets. It creates a single national standard for all QRCode based transactions. This interoperability means that it can potentially dispense with Point of Sales terminals. The BHIM app supports BharatQR code based transactions, thereby raising the possibility of all kinds of immediate payment transactions with Aadhaar validation, without any intermediary service providers between the bank and the user.   

In countries where trust in online payment mechanisms and private financial intermediaries is a major constraint, government intervention may be useful to catalyse the market. A rural user is far more likely to trust a government sponsored financial intermediation than a similar service offered by a private provider. The challenge for the government is to understand when and where to step back and let the market take-over. 

Interestingly, all these are focussed on the payments side. Unlike the Chinese market, none of these innovations cover the lending and investing parts of the intermediation market. That may be the next frontier. And this again from China assumes significance for India's financial inclusion campaign,
Until recently, Chinese savers faced two extreme options for managing their money: stash it in bank accounts, where interest rates were artificially low, but it was as safe as the Communist Party; or punt on the stockmarket, about as safe as playing baccarat in a casino in Macau. In the middle there was nothing... The biggest breakthrough was the launch of an online fund, Yu'e Bao, by Alibaba in 2013... promoted as a way for people to earn interest on the cash in their e-commerce accounts... Invested through a money-market fund... this meant that savers could get rates that were more than three percentage points higher than those banks offered. And risk was minimal, because their cash was still ultimately in the hands of banks. Yu’e Bao attracted 185m customers within 18 months, giving it 600bn yuan of assets under management... In 2014 Tencent launched Licaitong, an online fund platform linked to WeChat. Within a year, it had 100bn yuan under management... In the West people generally need deep pockets before they can afford to buy into products such as money-market funds. In China all it takes is a smartphone and an initial buy-in of as little as 1 yuan. WeChat, with 800m active accounts, and Ant, with 400m, can afford to be generous.

Sunday, March 12, 2017

Weekend reading links

1. Livemint raises the important question of the negative network externalities that are likely to be engendered if the e-commerce firms go bust,
If Ola and Uber reduce their incentives further, what will be the impact on drivers who purchased cars using bank loans? How will banks deal with a high inventory of repossessed cars of similar make? What will be the effect on the public transport system when there is a sudden increase in passenger load? How smoothly will retailers navigate the journey from the brick-and-mortar channel to the online channel and back? How will retrenched employees convince prospective employers that they will remain committed and satisfied at a much lower salary? Will the concurrent failure of multiple businesses taint India’s reputation as an investment destination?
This draws attention to a less discussed fact about the e-commerce and a significant share of internet business - they have benefited enormously from regulatory arbitrage. The examples of a regular taxi business and Uber or a hotel and an AirBnB clearly highlight the regulatory advantages enjoyed by internet companies that help them maintain very clear competitive advantages over their brick and mortar counterparts. There is little doubt that this advantage is unsustainable and should go.

2. From a fascinating story in the Times about Dubai and its weak adherence to the rule of law in contracting and the treatment meted out to migrant workers,
Some eight million migrants reside in the United Arab Emirates, according to the United Nations, or roughly 84 percent of the population — the largest concentration on earth... “There is a huge dependence on migrant workers who have employment terms that are no different than indentured servitude,” said Sarah Leah Whitson, director of the Middle East and North Africa division of Human Rights Watch, an advocacy group that has documented abuses of migrant workers in the neighboring emirate of Abu Dhabi. “This is a system that’s put in place to entrap workers.”
3. The marginal corporate tax rate is a very misleading indicator of actual tax incidence. Times points to this study which examined data on federal income taxes paid by those 258 Fortune 500 companies that did not suffer a loss for any year during the 2008-15 period,
Although the statutory corporate tax rate is 35 percent, collectively, these companies paid an average effective rate of 21.2 percent... 100 companies enjoyed at least one year in which their federal income tax was zero or less. 24 companies paid zero taxes in four out of eight years. 18 companies (including General Electric, International Paper, and PG&E) paid no federal income tax over the eight-year period. Collectively, the 258 corporations enjoyed $513 billion in tax breaks over the last eight years. More than half of those tax breaks, $277 billion, went to just 25 of the most profitable corporations.
Tax avoidance among multinationals by shifting revenues to off-shore entities in low tax havens and complex holding patterns make tax avoidance the most sought after part of tax advisory services of big consulting firms. Senator Bernie Sanders has this stunning factoid,
“The truth is that we have a rigged tax code that has essentially legalized tax dodging for large corporations. Offshore tax haven abuse has become so absurd that one five-story office building in the Cayman Islands is now the ‘home’ to more than 18,000 corporations.”
Apart from this companies benefit from accelerated depreciations and selling stock options to executives (Facebook saved $5.78 bn in taxes through this from 2010-15). 

In India too, corporate tax exemptions distort the tax incidence data. For example, in the 2016-17 assessment year, of the 5,97,884 tax returns filed, 43.17% reported losses, 3.01% nil profit, and just 53.82% reported profits of Rs 12.67 trillion. The effective tax rate was at a very high 28.24 per cent, among the highest in the world. The revenues foregone from all direct tax exemptions in 2015-16 was Rs 1.63 trillion. 

4. Even as India's cities expand placing ever increasing burden on municipal governments, their own source revenues have been declining.
5. The Economist captures the woes of the global shipping industry swimming on the back of over-capacity,
the Baltic Dry Index—a measure of bulk freight rates—has fallen by 93%. Prices for transporting containers have plunged by the same amount on some routes. In 2008 it cost $2,000 to send a 20-foot box from China to Brazil; now it costs $50.
The FT points to the scale of excess capacity,
VesselsValue, a company that monitors the value of the world’s ships, says 2,028 container vessels are currently valued at or below their value as scrap metal, with the other 3,242 vessels in the world valued at more than scrap. In volume terms, 7.3m teus (20ft-equivalent units), or nearly a third of the global fleet, is at or below scrap, with 16.2m teus above. The situation may be about to get worse. Alphaliner, a company that monitors ship construction, says total shipping capacity will grow by an average of 4 per cent a year in 2017 and 2018, on top of existing idle capacity of 7 per cent. The biggest problem is in mega-ships: more than 150 new ships with the ability to carry more than 10,000 teus at a time will be delivered by the end of next year.
6. India appears to have experienced the fastest increase in housing prices since 2010 as per the Economist house price index.

Saturday, March 11, 2017

The reasons for the obsession with "evidence"

I had blogged earlier about the contrasting views of evidence in development. While the academia and funders in developed world are obsessed with evidence, their implementing counter-parties in the developing world, even the most perceptive ones, show far less interest. What explains this divergence?

I can think of three immediate concerns. 

1. One is a reaction to a long history of frustration in trying and failing to make development happen in these countries. The likes of William Easterly channel this as the latest version of the colonial conceit. The logical response to this frustration was to rationalise that we do not know the context and   therefore need to allow the primary stakeholders to experiment and figure out what is best for them. And an objective evidence dimension to that process of discovery, and a part in it, is possibly the only direct role for outsiders. In fact, given the priors, it can be the best "risk mitigation" instrument to avoid wasteful spending. 

2. The field of academic research in development economics today, for whatever reasons, is excessively aligned in the direction of field experiments. The logical neatness of the associated theory of change and the amenability to statistical rigour (with its aura of scientificity), makes field experiments and evidence generation very attractive. The requirements of paper publication contribute to and amplify this trend.  

3. Donors, private and public, are faced the same procurement challenge that governments have always grappled with. What is the baseline basis for their investment? Government procurements address this by establishing a price discovery mechanism. For donors, evidence has become the very convenient baseline. So, if there is a rigorous enough evidence, then other things being equal and given conformity with the broad investment criterion, the investment passes the most fundamental due-diligence test. It is therefore no surprise that like with governments trying to refine their bid parameters, donors try to hone their evidence base. 

I have no response to the second and third explanations since they are essentially structural incentive problems. They have nothing to do with the field challenges of making development happen in developing countries. The first one demands a response and I have tried to make a case here and here.

As a very strong disclaimer, lest this be misconstrued, this is no argument against evidence. Readers of this blog would doubtless appreciate my strong advocacy of the use of evidence and support for the iterative approach to program scale up. 

It is just that the obsession with evidence, bordering on developing first principles every time, is a frustrating digression. Unfortunately, it ends up detracting significantly from the likelihood of achieving the objective and is no less bad than the earlier version of micro-managed aid.