The descent into a Banana Republic?

The quality of debate surrounding the Supreme Court's decision to cancel 122 2G spectrum licenses with the "stroke of a pen" is a reflection of the standards that prevail in public issue discourses in mainstream media in India.

Stripped off all its sensationalism, the 2G spectrum issue essentially boils down to this. The Government of the day, in its wisdom (or lack of it) and well within its rights, put in place (or inherited) a discretionary telecommunications spectrum allotment policy. However, in its implementation (during the 2008 allotments), there were clear discrepancies and irregularities, atleast in case of some of the bidders, that leave no doubts about malafide intent.

So the Supreme Court - three years after the allotments are made, operators have stabilized their full commercial operations, and a web of contractual obligations involving different market stakeholders have emerged - steps in and examines the evidence on corruption in the allotment process and puts a full-stop by cancelling all the spectrum allotments made during that period. What's more, it goes beyond the malafide intent and questions the government's use of a discretionary allotment policy and effectively seeks to "legislate" an "auction-based" allotment process. A nascent mobile telecommunications market-space, the equivalent of a mid-size European country, is decreed to be wiped out in four months.

Now consider this. A newly elected democratic government of Banana Republic, a war torn and military-ruled country in the continent of Timbuktu, decides to encourage foreign investments to boost its economy. It offers attractive concessions like free land, tax holidays, and so on in mineral exploration and manufacturing sector. Investors flock to Banana Republic, enter into sovereign contracts with its government, and start exploration and manufacuting activities. The economy booms, tax revenues increase, and the country starts its recovery from its war-era devastation. There are the inevitable tales of cronyism and corruption in some of the contracts awarded, all of which have aroused some national indignation. Then disaster strikes and the military takes power. Its first act is one of deep populism. It plays on the national resentment at the corruption in contracts signed with foreign investors and cancels all sovereign commitments of the previous government and expropriate the foreign investments. Banana Republic slips into its normal state of turmoil.

Apart from the different exterior trappings (the cancellation was at the "stroke of a pen" in the former, while it was at the "boom of a gun" in the latter), on substantive terms, is there any difference between the two scenarios? In both cases, sovereign policy commitments made by the respective democratically-elected governments of the day (whatever its flaws) and implemented deficiently (as is the case with any implementation in such societies) are, without any of the legal requirements of fairness and justice, cancelled over-night at the arbitrary discretion of a few individuals. In both cases, apart from moral hazard arising from defaulting on sovereign commitments and the long-term economic damage caused, the decision-makers have clearly over-looked the fact that much water has flowed under the bridge subsequent to the "original sin". The decisions extinguished the multiple economic transactions and contractual commitments - many of them without any malafide intent, based on legally valid legislative and executive decisions, and a consequence of the natural flow of economic activity - that have emerged after the original decisions/allotments.

Not for a moment am I holding any brief for those who violated their constitutional responsibilities or who benefited fraudulently. All of them should be brought to book for their criminal liabilities. The political masters, bureaucrats, and the businessmen who colluded to defraud the exchequer should all be throughly investigated, their criminal intent established and punishment imposed. For example, the public servants who took part in the conspiracy should be punished under the prevailing rules, while the businessmen who benefited from it should be punished under the relevant rules and the amounts defrauded quantified and collected from them and their partners. This should be done in a manner that least disrupts the competitive marketplace (and even its critics would admit that the economic outcomes - technology, business models, consumer surplus etc - of India's telecommunications reforms has been one of its economic and policy success stories) that has emerged from the original decisions.

In any case, the sovereign policy commitments of democratically elected governments, however flawed, should always prevail and not be left at the mercy of flippant individual discretion, howsoever mighty, provided the allotment process is in conformity with the broad constitutional principles. This becomes all the more important if subsequent transactions, in good faith and based on the sanctity of a sovereign commitment, have been executed on the original decision. However, law should take its course and severely punish those who displayed any malafide intent, discrepancies, and wilful omissions in the implementation of the allotment process.

The term "banana republic" is characterized by two features - a country operated as a commercial enterprise for private profit and one where the sanctity of long-term policy commitments of any of its governments is of questionable value. On these grounds, does India qualify to be a "banana republic"?

Real American Unemployment Rate

Via MR, FT Alphaville points to the work of economists at Nomura who have constructed an excellent graphic that highlights the real US unemployment rate. It stands at 10.3% compared to the official rate of 8.5%.

Much is being made out of the fact that the US unemployment rate has been falling in recent months. However, this conceals the fact that the declining rate is a statistical illusion. It excludes the large numbers who have stopped actively looking for work and have theoretically "left the labour force and therefore count as unemployed".



The biggest concern is this

But what is striking about the broken line above isn’t where it now ends — at 10.3% — but rather the lack of any meaningful, sustained improvement for more than two years. This alternative measure has remained above 10% since September 2009, and aside from a bit of skittishness (some of which is down to uncaptured seasonality) has mostly just moved sideways.

Football transfers and corporate M&As go out of fashion?

In football signings there is a mathematical rule: three out of five fail... Like corporate takeovers, football transfers create turbulence and uncertainty. Often a player who succeeds in one setting fails in another. Economist Stefan Szymanski has shown that what clubs spend on transfers bears little relation to their performance in the league. Net outlay on transfers explained only 16 per cent of their total variation in league position. By contrast, the correlation between a club’s wages and its league position was about 90 per cent, averaged over about 15 years. Wages buy victories; transfers don’t.

(HT: Simon Kuper in FT)

Job creation in China - the role of cities and services sector

Felix Salmon has a superb post which highlights the critical role played by urban areas in sustaining economic growth and job creation in China. He points to two less-discussed facts about the Chinese economy.

1. Services sector employs more people than the manufacturing sector. The graphic shows that manufacturing sector, in terms of total jobs in the sector, actually declined for some part of the nineties but recovered slowly in the last decade.



Examining China's jobs growth over the past twenty years, Felix Salmon writes,

But it is surprising to see that if you take out the services sector, total Chinese employment has been going nowhere, and basically falling... Meanwhile, the services industry — tertiary industry — has been on fire: it now employs 263 million people, more than are employed in secondary industry (218.4 million), and has doubled since 1992... Of course it’s hard to find work in the services industry if you’re a rural peasant: tertiary industry is a fundamentally urban thing.

2. The growth in jobs has been coming mainly from the urban areas though rural China provides more employment than its cities. Apparently 13.7 million urban jobs were created in China in 2010 alone.



Felix Salmon makes the important point that unlike the US, where the construction boom was confined to the real estate sector, the Chinese construction boom "is building cities and roads and crucial infrastructure, which allows the service economy to keep on growing at a torrid place".

Both these graphics highlight the important role played by the services sector and cities in boosting China's labour market. Felix Salmon points to the closely inter-twined nature of cities and services sector job creation,

How do you create service-industry jobs? By investing in cities and inter-city infrastructure like smart grids and high-speed rail. Services flourish where people are close together and can interact easily with the maximum number of people. If we want to create jobs in America, we should look to services, rather than the manufacturing sector. And while it’s hard to create those jobs directly, you can definitely try to do it indirectly, by building the platforms on which those jobs are built. They’re called cities.

Will policy makers in India, obsessed with a rural-centric public policy paradigm, take notice and emulate China?

India Vs China - Labour Productivity

Ejaz Ghani's graphic clearly illustrates the much higher service sector labour productivity of India compared to China's similar advantage in the manufacturing sector over the 1991-2005 period.



He draws attention to the challenge for both countries to catch up in their weaker sectors,

"Services are more skill intensive compared to manufacturing, and so it creates fewer jobs. India now needs to develop its manufacturing sector to create jobs for the millions of additional workers who will join the labour force every year for the next two decades. China, on the other hand, needs to develop services and go up the value chain, from less skill-intensive to more skill-intensive activities. Developing services will enable China to avoid the inevitable middle-income trap, which is more difficult to avoid if it just relies on manufacturing as a source of growth."

India fact of the day

FT echoes the plethora of reports in media recently on the state of the quality of primary school education in India,

India may be the world’s fastest-growing economy after China, but its primary education standards in the countryside rank alongside Papua New Guinea and crisis-torn Afghanistan and Yemen.

As I have blogged here, here, here, and here, this is arguably the country's biggest governance failure. In this era of knowledge-based growth, the foundations of the drivers of such growth - India's massive human resource pool - are extremely shaky. It is no wonder that scarcity of skilled and employable manpower is already one of the biggest problems facing businesses.

Energy consumption visualization

Superb interactive graphic visualization (click on the link) of total annual energy consumption at the block level and at the taxlot level of buildings in New York City.



The data, not based on private information but a mathematical model, estimates the annual energy consumption values (in kilowatt hours per square meter of land area) of buildings throughout the five boroughs. It also breaksdown the consumption into air conditioning, electricity and water heating.

Making such information available in public domain for any neighbourhood, while potentially the source of powerful peer-group nudges, would invite opposition on grounds of privacy concerns. However, the information made available in this format to utility officials can be excellent decision-support for them to more effectively manage the network, especially during peak times.