Saturday, October 15, 2016

Public policy in establishing markets

Samir Saran and Vivan Saran argue that Government of India's role in certain markets may be impeding its own Make in India initiative. The example of BSNL is instructive and I am inclined to agree. BSNL's greatest negative externality may well be that its presence crowds out other far more efficient private operators in public procurements of telecom services (by government entities), which forms a very significant share of the country's high value telecom services market.  

But I am not sure about whether the argument that government intervention to create the RuPay card through the National Payment Corporation of India (NPCI) belongs to the same category. In fact, the RuPay is already shaking up the market for payment transaction gateways which is currently under the vice-like oligopolist grip of "market" players like Master and Visa. A RuPay disruption may well be the difference between the widespread adoption of digital payments in a highly margin and price sensitive market like India. 

If the government can calibrate its arms-length role and gradually exit, then this should count as one of the great global examples of a public intervention to address a market failure. In any case, even with the heavy guidance by Reserve Bank of India, this is one of those market interventions that was long over-due. 

Amidst all this, one should not forget that the biggest disruption of them all, Aadhaar, was a government intervention. So is now the NPCI and its catalysing the roll out of the Unified Payment Interface (UPI) for mobile payments. The eco-system of digital payments is being created, maybe unwittingly, through direct government interventions. And, interestingly, this has involved not just enabling regulations but also the establishment of service providers and even products. 

Thursday, October 13, 2016

Italy represents the breakdown of bond market price discovery!

David Stockman highlights how quantitative easing has broken down the standard price discovery dynamics in the sovereign bond markets. 

The case of Italy is striking illustration. It has a clearly unsustainable sovereign debt of 133% ($2.4 trillion), the second largest in Europe after Greece. Its over-sized $4.4 trillion banking sector (double the GDP), with over $400 bn non performing loans, is technically insolvent. But the country's 10 year bond yields have been constantly declining. At 1.18%, it is lower than even comparable US Treasury Bond! 

Stockman is spot on,
The notion that today’s yield of 1.15% on the Italian 10-year bond even remotely compensates for the risk embedded in Italy’s fiscal and economic chamber of horrors is just plain laughable. And that’s to say nothing of the risk the Brexit is just stage one, and that the EU itself will ultimately succumb to a wave of populist insurgency, including a Five Star led move to take Italy out of the euro. Indeed, Italy is truly a case of the blind leading the blind... Needless to say, these (government bonds) securities are vastly over-valued owing to the Draghi bond-buying spree, and they would plummet in price were the speculators who have been front-running Draghi’s QE campaign ever to loose confidence in the ECB or the ability and willingness of an Italian government to continue the giant fiscal charade now in place... with public debt already at 133% of GDP, why would anyone except Mario Draghi’s printing press be buying 10-year bonds at a 1.15% yield? Once upon a time, price discovery by the bond vigilantes kept governments quasi-sober and functionally solvent. No more. The Italian Job now underway is just the opening round in a world of failed states and broken markets.

Tuesday, October 11, 2016

The scale validity challenge

Teaching at Right Level (TaRL) is the flavour of the season. I am favourably disposed. But, unlike this much discussed study, I am not sure about what should be the right design for remedial instruction - the grouping, duration of remediation, resource support necessary etc. I am not even sure whether there is any one "right model" that should be replicated across widely varying contexts. But this is for another post.

This post reiterates a constant puzzle for me about the scale validity dimension of the efficacy of evaluations like Randomized Control Trials (RCTs). This assumes significance in the context of drawing scalability conclusions from RCTs like the aforementioned. The discussion about efficacy of any RCT revolves around its internal (evaluation design) and external (generalizability across other environments) validity. But scale validity is critically important, especially if the results are to be replicated by a weak public system. I have written about the scale validity problem earlier,
One, there is a big difference between implementing a program on a pilot basis for an experimental study and implementing the same on scale. In the former, the concentrated effort and scrutiny of the research team, the unwitting greater over-sight by the official bureaucracy, and the assured expectation, among its audience, that it would be only a temporary diversion, contributes to increasing the effectiveness of implementation. Two, is the administrative system capable of implementing the program so designed, on scale? Finally, there is the strong possibility that we will end up implementing a program or intervention that is qualitatively different from that conceived experimentally.

It is one thing to find considerable increases in teacher attendance due to the use of time-stamped photographs or rise in safe water consumption from the use of water chlorination ampules when both are implemented over a short time horizon, in microscopic scale, and under the careful guidance and monitoring of smart, dispassionate, and committed research assistants. I am inclined to believe that it may be an altogether different experience when the same is scaled up over an entire region or country over long periods of time and with the “business as usual” minimal administrative guidance and monitoring. And all this is leaving aside its unanticipated secondary effects. In fact, far from implementing an intervention which is tailored based on rigorous scientific evidence, we may actually end up implementing a mutilated version which may bear little resemblance to the original plan when rolled out at the last mile.
So, how do we discount for the fact that, for example, the TaRL study was done in a small number of schools under the watchful eyes of smart and committed RAs, which undeniably contributes to maintaining some rigour in the implementation. In its absence, as would be the case in business as usual scale up, how can we be confident about being able to replicate the results? This assumes even greater significance when the interpretation of most positive results are complicated by very low baseline and overall marginal (yet statistically significant) effects. 

Monday, October 10, 2016

India's first MPC meeting takeaways

India's newly minted Monetary Policy Committee (MPC) had its first meeting last week. The interest rate cut was surprising. I'll not delve into the technical merits of the decision. Instead I have three observations. 

1. The unanimity of the vote (6-0) at a time when the case for a cut is at least debatable and was definitely not unanimously expected is disturbing. Prima facie, it gives rise to the feeling that the MPC's objective function is skewed more towards growth, with attendant risks of being behind the curve. 

2. It may have been prudent tactically to refrain from a rate cut now, especially in the immediate aftermath of the exit of a hawkish Governor and the recent history of constant tussle with the Government on easing. In fact, just to stay the course would have been a good signal to reinforce perceptions about the central bank's autonomy, leave aside inflation fighting credentials.  

3. A rate cut now reduces the RBI's room to manoeuvre as the Budget quarter approaches. The pressure from the Government to oblige with another cut closer to the Budget will be intense. In response, another rate cut, following this one, will be viewed by the market participants as further proof of the ascendancy of North Block. 

In conclusion, as a statement of intent from a brand new institution to an audience who live on reading the tea leaves, this decision may have the potential of adversely unhinging a few expectations. 

Sunday, October 9, 2016

Weekend reading links

1. Richard Florida points to the work of Paul Jargowsky that documents the rise of concentrated poverty in the US,
Concentrated poverty is defined as neighborhoods or tracts where 40 percent or more of residents fall below the federal poverty threshold (currently $24,000 for a family of four). The study looks at this change across the nation as a whole and within its major metropolitan areas. The number of people living in concentrated poverty has grown staggeringly since 2000, nearly doubling from 7.2 million in 2000 to 13.8 million people by 2013—the highest figure ever recorded. This is a troubling reversal of previous trends, particularly of the previous decade of 1990 to 2000, where Jargowsky’s own research found that concentrated poverty declinedConcentrated poverty also overlaps with race in deeply distressing ways. One in four black Americans and one in six Hispanic Americans live in high-poverty neighborhoods, compared to just one in thirteen of their white counterparts.
There is nothing surprising about this. This may be the evolution of a Schelling sorting equilibrium which highlights the inexorable logic of segregation, even in systems marked by small differences in preferences. Even small increases in aggregate inequality, over time, leads to such segregated equilibriums. School education and housing are well known examples of such forces at work. 

Such concentration of poverty, apart from their socially corrosive effects, also makes it easy to aggregate political discontent. It is no surprise that populist demagogues like Donald Trump find fertile ground for their political ambitions. 

2. Margot Sanger-Katz has a fascinating article in Upshot about political ideology among medical practitioners. She points that while about two-thirds of politically affiliated surgeons, anaesthetists, and urologists are Republicans, a similar share of those from infectious disease medicine, psychiatry and paediatrics are Democrats. In general, higher paying specialties are dominated by Republicans, reflecting their preference to pay lower taxes. 
But such sorting goes beyond political preferences and influences treatment recommendations, as this study of over 20000 primary care physicians in 29 US states by Eitan Hersh and Mathew Goldenberg found out,
They asked the doctors to consider a group of hypothetical patients: one who smoked, one who drank, one who was overweight, and so on. They found that doctors viewed most of their patients’ health with similar seriousness and would advise similar responses. But for three of the hypothetical patients, they found differences. Those patients were devised to have health problems closely tied to hot-button political issues: One used marijuana, one owned guns, and one had a history of abortions. For those patients, Republican and Democratic doctors registered different levels of concern and said they would respond differently. When it came to the patient with a history of abortions, doctors who were Republican said they would be more likely to encourage the patient to seek counseling and express concern about mental health consequences; they also said they would be more likely to discourage the patient from seeking future abortions. For the patient who used marijuana, Republican doctors said they’d be more likely to ask the patient to cut back and to discuss legal risks of using the drug, which is banned under federal and most state laws. For the patient with guns, doctors who were Democrats indicated they’d be more likely to tell the patient not to keep guns at home. Republican doctors, on the other hand, would be more likely to discuss safe storage options.
3. Atul Gawande has more, this time with a brilliant essay on why certain medical practices spread rapidly whereas some others take an inordinate time. Take the example of hypothermia among new-borns,
Newborns have a high body-surface area and lose heat rapidly. Even in warm weather, hypothermia is common, and it makes newborns weak and less responsive, less able to breast-feed adequately and more prone to infection. I noticed that the boy was swaddled separately from his mother. Voluminous evidence shows that it is far better to place the child on the mother’s chest or belly, skin to skin, so that the mother’s body can regulate the baby’s until it is ready to take over. Among small or premature babies, kangaroo care (as it is known) cuts mortality rates by a third... But even in high-income countries we do not consistently use it. In the United States... more than half of newborns needing intensive care arrive hypothermic. Preventing hypothermia is a perfect example of an unsexy task: it demands painstaking effort without immediate reward.
In order to combat this, Gawande is involved with an initiative to provide mentoring support for nurses on precisely such "unsexy" tasks,
With the BetterBirth Project, we wondered, in particular, what would happen if we hired a cadre of childbirth-improvement workers to visit birth attendants and hospital leaders, show them why and how to follow a checklist of essential practices, understand their difficulties and objections, and help them practice doing things differently. In essence, we’d give them mentors... The project has recruited only the first few of a hundred or so workers whom we are sending out to hospitals across six regions of Uttar Pradesh in a trial that will involve almost two hundred thousand births over two years... 
If the intervention saves as many mothers and newborns as we’re hoping—about a thousand lives in the course of a year at the target hospitals—then all that need be done is to hire and develop similar cadres of childbirth-improvement workers for other places around the country and potentially the world. To many people, that doesn’t sound like much of a solution. It would require broad mobilization, substantial expense, and perhaps even the development of a new profession. But, to combat the many antisepsis-like problems in the world, that’s exactly what has worked. Think about the creation of anesthesiology: it meant doubling the number of doctors in every operation, and we went ahead and did so. To reduce illiteracy, countries, starting with our own, built schools, trained professional teachers, and made education free and compulsory for all children. To improve farming, governments have sent hundreds of thousands of agriculture extension agents to visit farmers across America and every corner of the world and teach them up-to-date methods for increasing their crop yields. Such programs have been extraordinarily effective. They have cut the global illiteracy rate from one in three adults in 1970 to one in six today, and helped give us a Green Revolution that saved more than a billion people from starvation.
This is very similar to the role of coaches, something on which Gawande himself has written earlier.

The essay draws parallels with BRAC's success in disseminating the use of oral rehydration therapy to address diarrhoea, largely through a massive door-to-door campaign involving women. Gawande and BetterBirth are trying to do a BRAC in India to address hypothermia and adoption of other post-natal practices. Good Luck to them!

4. As the extraordinary monetary accommodation across developed economies continues unabated, it threatens to upend the prevailing business models. Active managers, with their exorbitant fees, are facing the heat from passive funds,
According to Morningstar, a data provider, since December 2007 passive assets under management have tripled to $5.7 trillion, while assets in active funds have increased by only 54%, to $23.2 trillion. In the first eight months of this year, investors drew down $166.2 billion from actively managed funds specialising in American equities alone. In contrast, passive unds attracted almost $110 billion in new investment.
In the world of low yields, the prevailing model of fund managers is clearly untenable. It is no surprise that a number of the largest pension funds and endowments have been gradually in-sourcing more of their fund management responsibilities.

5. Finally, as the US Presidential election descends into a farce, watch Robert Di Niro here take on Donald Trump. He says he would like to punch Trump on his face!

Saturday, October 8, 2016

The return of micro-lending

The Economist has a feature on the return of micro lending,
In 2015, after examining the results of randomised controlled trials in Bosnia, Ethiopia, India, Mexico, Morocco and Mongolia, American researchers questioned whether microlending worked at all. As expected, offering small loans increased business investment. But it had a negligible effect on poor people’s fortunes. Borrowers seemed to cut back on wage work in order to spend more time bent over their sewing machines or running their small, not terribly profitable shops. These days international donors and charities are much more excited about other approaches, including mobile money and “graduation” programmes, which give livestock to indigent people and teach them how to take care of them. As the development caravan rolls away, though, microlending is booming. MIX, which collects data on the industry, estimates that the number of borrowers worldwide grew by 16% between 2014 and 2015, to 130m. The total loan portfolio is now worth about $96 billion. In India, which has more microborrowers than any other country, lending was 64% higher in the second quarter of this year than a year earlier, according to MFIN, a national industry body.
This is worth pausing,
If capturing new clients is essential to success in microlending, creating new loan products is not. “There is zero innovation,” says Ratna Vishwanathan, the head of MFIN. “It’s a vanilla product”. That is a shame because, although small loans are plainly popular and do no economic harm to the average borrower, they could equally plainly do a much better job of helping people become less poor. Like many tiny businesses, Mr Iqbal’s shop swings up and down. He can be extremely busy around Hindu festivals, when people like to shop, but is idle at other times (when your correspondent arrives at his shop, he is napping). In the slowest months, he cuts back spending on himself and his family until he can scrape together enough for the monthly payment. And he knows to take on only as much debt as he can service in the lean season. At this rate, he is no more likely to prosper than he is to default on his loan.
This applies not just for micro-finance, but regular banking itself. As I have blogged earlier, the focus of financial inclusion has so far been confined to enabling access to institutional finance. But, as India's Jan Dhan Yojana program shows, access still leaves us with critical last mile gaps. It may be that poor people, farmers, and small businesses need products that cater to their unique requirements

Unfortunately, we are busy tinkering at the margins,
An experiment in Kolkata by two American researchers, Erica Field and Rohini Pande, found that offering borrowers a grace period of just two months at the beginning of a microloan doubled the rate at which new businesses were created. Borrowers were able to take bigger risks, which brought bigger rewards on average. After three years business profits were 41% higher and household incomes were up by 19.5%. If microlending could routinely deliver results like that, it would still be the height of fashion. IFMR Lead, a research organisation based in India, is now testing an even more flexible loan. In conjunction with Sonata, it is offering a few hundred people microloans with two three-month “holidays”. Borrowers will still have to pay something each month, but much less than usual.
This is unlikely to get us far. In fact, it is more likely with such products that they fall prey to scale dynamics. As (or, If) such types of loans increase, the rigour of screening will necessarily (to keep transaction costs low and arising from the dynamics of a growing business line) come down so as to be commercially viable. Moral hazard can get baked in very quickly. The cost of capital for lenders can rocket upwards. It is one thing to do such loans in small pilots under the watchful eyes of high bandwidth research assistants, but an altogether different thing when scaled up. 

Thursday, October 6, 2016

Internalizing externalities in Solar Power

As the share of solar and renewable power, especially roof-top and other forms of captive generation, rises, one of the less discussed concerns revolves around its impact on the existing distribution utilities. Consider this story about the impact on the electricity distribution companies from the massive investments in solar and bargain hunting in power procurements by the large Las Vegas casinos,
While corporations are motivated to “go green,” their push to be more energy efficient leaves the utility with less revenue to maintain the grid and can lead to rate increases. This can cause what energy market observers call the “death spiral.” “If people are consuming less electricity, revenue for the company is going down, so they raise rates on others. That forces more of them to defect.” says Bill Ellard, an energy consultant and chair of economics for the American Solar Energy Society. “Soon, they won’t have enough money to keep gear, power lines, transmission stations working,” Ellard adds. “We have an old, ancient grid. A lot of power companies are just duct-taping and band-aiding things. Now monopolies like NV Energy are competing with free market innovation, and innovation is not their mantra. You don’t have to innovate when you’re a monopoly.” Meanwhile, corporations that have the wherewithal to move forward without the utility are doing so. This year, MGM expanded the solar array at Mandalay Bay Resort and Casino, making it one of the largest rooftop systems in the country. The 8.3 megawatt array can power the equivalent of 1,340 single-family homes, and can handle up to 25 percent of Mandalay Bay’s energy needs when fully active during the day... 
While MGM and Wynn will buy their electricity from a brokerage, they still need to use NV Energy’s transmission lines and other equipment, and will remain customers of the utility in that regard... NV Energy, the state-regulated energy monopoly, has to serve a diverse group of energy users and makes plans on how to meet demand years in advance. Confronted with increased use of solar power as the systems become more affordable, the company has moved to stabilize revenue. Earlier this year, NV Energy decreased the amount it pays residential owners of solar arrays for excess electricity they send into the grid, causing a public outcry. Eventually existing solar users were grandfathered into the original rate.
There are three problems here. One, consumers who use renewables during sometime of the day and rely on grid power during peak hours pose grid management problems for the utility. Furthermore, they also sell power back to the grid. Two, there is an investment management problem that distribution companies face with planning their future investments in distribution and transmission networks. Then there are also the investments required to support the unknown amounts of potential sales into the grid. Three, the power tariffs, both consumption and sales back to the grid, do not reflect these externalities imposed in grid and investment management. 

It is only a matter of time, as the scale of such transacted power rises, that the commercials of the current business models on roof-top solar and large-scale captive power become questionable. Give-aways like net metering will have to end and replaced with more tariffs that internalise the costs of fixed investments and grid management requirements. 

But distribution utilities cannot afford to relax. This could change with another disruption, that in storage. If it becomes possible to store power at commercially viable price points, as looks likely to happen in the medium-term, then the bargaining power of the utility's consumers increase enormously. 

Leaving aside all these details for a moment, an underlying subtle message that I draw from the churn that is happening in this market is that cost recovery in utility services essentially rests on cross-subsidy. The larger and richer consumers provide both the economies of scale and higher tariff increments that can support commercially viable network-wide distribution. In other words, cross-subsidy in inherent to universal supply of such services. So how will governments respond to this emerging scenario where the richer and larger consumers move away from utilities?