How the IAS contributes to the 'flailing state'

The Indian Administrative Service (IAS) receives a lot of flak for everything that is dysfunctional about public systems in India. Much of it can be traced back to a psychological urge of opinion makers and critics to identify a specific cause (and therefore solution) and absolve oneself of any responsibility. For several reasons, the IAS is a very convenient punching bag.

But some of the blame is rightly deserved. From reflection, there is perhaps nothing more debilitating than its role as a banyan tree stifling leadership and initiative within line departments. Remember Lant Pritchett famously described India as a "flailing state" - a strong "head" (the IAS) which is very loosely connected to its very weak "limbs" (the field officials). 

Young IAS officers posted in various field positions - Sub Collectors, Project Officials of various agencies, Municipal Commissioners, CEOs of Zilla Panchayats, District Collectors etc - possess unparalleled authority. In a global perspective, there is perhaps no example of such across-the-board power. 

For sure, given the extremely weak state capacity, things work reasonably well on the average due to the enormous energy and commitment of young officers working in these posts. But this is like band-aid on gangrene. 

In the process, these officers centralise authority and exercise them aggressively. Most often they function effectively as the head of the department and directly exercises line departmental authority. It is a very rare officer who steps back and empowers the line department heads or who respects their views. Rarer still are those who allow departmental heads to take critical decisions and stand by them in goods times and bad. Public upbraiding of departmental heads, often in front of their own subordinates, and those below them is common place. The result is an enfeebling of important line department bureaucracies. Taking cue from the Collector, political representatives too follow suit. This, is not to gloss over the self-inflicted apathy, ineptitude, and corruption among departmental officials themselves.

It does not help that there is some crises or the other all too often within each department and the Collector's active engagement becomes critical to defuse the situation. The campaign mode of program delivery of both central and state governments centralises authority even more in the hands of the District Collector. Realising the enormous convening power of the District Collector, departments at state level prefer to engage with them rather than their own line department heads on important issues. 

Consider a District Education Officer or District Health Officer. Each have the responsibility of managing a geography with population ranging from 1-10 million and thousands of teachers and health personnel. They are the equivalent of Permanent Secretary of Education of a small country. How many of them are empowered to act independently? After a career of subservience and taking orders, how many of them still retain the initiative to act independently even if empowered?

And we are not even talking about the Block Education and Health Officers, not to mention the field inspectors or supervisors in either departments. 

This is not to blame young officers for their initiative. Their immense energies and intent to do good cannot be doubted. The challenge is to channel this appropriately to realise the government's objectives.

This practice is not confined to the young officers or for field departments. It applies as much to state level and central Ministries and agencies. 

So what can be done?

To the extent that any meaningful attempt to address our chronic state capacity problems have to start with strengthening frontline functionaries within various departments, it is critical that its leadership be nurtured to find their feet, become empowered, and lead and not follow (the IAS officer). The young IAS officers posted in the field should be made to realise the importance of this. It is for training institutions like the LBSNAA and the State Administrative Training Institutes (ITIs) to help officers internalise this insight.

Collectors, for example, should refrain from becoming de-facto heads of line departments. They have to realise their role should be to support heads of departments perform their functions. They should be leaders of a team, stepping in as required to guide, capacitate, co-ordinate, and monitor. This requires a very different mindset from the current direct execution approach.

The Sears bankruptcy and asset stripping

I have blogged several times in the recent past about asset stripping and corporate conflicts of interest. Sample this, this, this and this. 

The latest is Sears, the original big retailer, mail-order catalogs to brick-and-mortar chain, which has today filed for bankruptcy under Chapter 11 in the US. 

The company, formed in 1886, and was most recently purchased by hedge fund  owner Edward Lampert in a $11 bn deal in 2005 and merged with Kmart, which he already owned, has since seen its market capitalisation fall from nearly $30 bn to around $40 million. The bankruptcy trigger was a default on a $134 million debt repayment. If liquidated, the company will end up laying-off its 68,000 workers.

The dominant narrative in the post-mortems that will invariably follow will be that of a company which was slow to innovate and which was among those disrupted by the Amazon juggernaut. While these were undoubted contributory factors, a potentially equally important contributor appears to have been the financial engineering asset stripping practices employed by its billionaire owner. Sample this,

He has spun numerous assets off from the retailer into separate companies that his hedge fund invests in. As many of these spinoffs flourished, Sears slid toward insolvency. Over the past five years, the company lost about $5.8 billion; over the past decade, it shut more than 1,000 stores. Many of the 700 stores that remain have frequent clearance sales, empty shelves and handwritten signs... Its total bank and bond debt stood at about $5.6 billion in late September... Sears remains a publicly traded company, but Mr. Lampert exerts an enormous amount of control. He orchestrated a series of deals that generated cash for Sears in the near term, but sold off many of the company’s most valuable assets — creating entities that he also has a stake in. Sears’ shares, which topped $120 as recently as 2007, closed on Friday at 40.7 cents. Sears spun off Lands’ End, the preppy clothing brand, into a separate company, which Mr. Lampert’s hedge fund took a large stake in. The market value of Lands’ End now dwarfs that of Sears. In 2015, Sears sold off stores worth $2.7 billion to a real estate company called Seritage. Mr. Lampert is a big investor in that company as well as its chairman. Seritage is converting many of the best locations into luxury offices, restaurants and apartments. Mr. Lampert is also seeking to buy the Kenmore brand from Sears for $400 million. Even in bankruptcy, Mr. Lampert will have great sway over the company’s fate. His hedge fund owns about 40 percent of the company’s debt, including about $1.1 billion in loans secured by Sears and Kmart properties. As a result, he could force Sears to sell the stores or transfer them to him to repay that debt. “Lampert will make out,” said Mr. Olbrysh, the retired Sears worker. “There is no question about that.”

These practices are perfect examples of asset-tripping. I struggle to understand why this is not criminal misconduct. In any case, given the pervasive nature of such practices, especially in the private market, it is imperative that some very strong prohibitive action be initiated to rein in such stigmatised capitalism before the whole house is brought down by one of such failures. But how can we shape expectations given that the regulators chickened-out when faced with indicting Goldman Sachs for its infamous Abacus engineering.  

In simple terms, as Sears slid down the bankruptcy path, Lampert was busy enriching himself! And one of Lampert's partners in this process and one-time Yale-roommate was one Mr Steven Mnuchin, the current US Treasury Secretary!

Update 1 (17.10.2018)

An FT columnist writes,

Mr Lampert’s commitment to Sears seems genuine.

Wow!

Thoughts on innovation

John Cassidy credits the Nobel Prizes in Economics to William Nordhaus and Paul Romer as an acknowledgement of market failures (it is deeply disturbing that it required Nobel Prize worthy works for economists to realise this!).

He writes,

Take the development of transistors. Scientific researchers at Bell Labs invented them in the late nineteen-forties, and Western Electric started manufacturing them for commercial use in 1951. The customers who purchased the products that incorporated these early transistors, such as hearing aids and radios, presumably got their money’s worth. But that was only the beginning: once the basic knowledge of how to create a transistor existed, other businesses could use it to make different and better products, a process that Romer likened to creating new recipes. “By now, private firms have developed improved recipes that have brought the cost of a transistor down by a factor of 1 million,” he noted in a 1993 essay. “Yet most of the benefits from those discoveries have been reaped not by the innovating firms, but by the users of the transistors. Just a few years ago, I paid a thousand dollars per million transistors for memory in my computer. Now I pay less than a hundred per million, and yet I have done nothing to deserve or help pay for this windfall.”

Implicit in this line of reasoning is at least the following assumptions

1. It is private firms and markets which drive innovations,

2. therefore innovators deserve the high mark-ups they charge, 

3. innovators also deserve to appropriate all (or at least the major share of) the benefits from an innovation,

4. but innovators cannot appropriate benefits since it is relatively easy to copy innovations and commercialise them,

5. those who follow reap most of the benefits from those discoveries and the innovators reap disproportionately lower benefits, 

6. in the absence of such incentives businesses would not innovate, whereas presented with them they would do so, and 

7. consumers deserve nothing for the lower prices.

It is indeed striking that none of the seven assumptions would hold in many, if not the vast majority, of the cases involving commercial innovations. Marianna Mazzucato has documented it here and here. 

But the hegemony exercised by this narrative is striking. How about the following alternative narrative?

1. Private firms and markets drive commercial innovations which are built on decades of fundamental research financed largely by governments. Innovations are generally built sequentially on each other.

2. It is therefore only appropriate that the benefits of the commercial innovations that emerge from the foundations of public financed R&D be distributed proportionately and not allowed to be privately appropriated by just the last innovator. 

3. Very few innovations are truly path-breaking in so far as they emerge from first principles - general purpose technology innovations. It would be a mischaracterisation to claim that Facebook or Google or Amazon or Uber or AirBnB would not have emerged without those respective entrepreneurs. In each of these cases, a correct characterisation would be that each of those enterprising entrepreneurs and their respective companies were lucky enough to be at the right place at the right time in the path of technological evolution to be able to seize the breaks that came their way. 

4. Innovators are incentivised by a patent regime which is increasingly skewed in their favour. This allows them a monopoly market power which translates invariably, even in the hands of the best intentioned people, into high mark-ups and even price gouging. 

5. There are considerable entry barriers into copying - not only do you need to copy the innovation itself, it also necessary to copy/develop a business model. In case of knowledge innovations, barriers like network effects can be almost insurmountable. And now with the political capture of the institutions that makes the rules of the game, the entry barriers are institutionally entrenched. 

6. There is now a growing pile of evidence that businesses, despite sitting on massive cash surpluses, prefer not to invest in R&D and spend money on share buy backs and the like. 

7. Consumers are also taxpayers who underwrote the overwhelming share of the ultimate cost of bringing these innovations to them.

The case of agriculture crop insurance

Consider the challenges faced by a weather index insurance agency. It has to cover for an episode which has a high frequency but is completely uncertain, ensure the data is credible and minimises basis risks (affected farmer not eligible for claim because the index trigger was not hit), and pay out an amount which is commensurate to the damage suffered. It also has to keep the premiums affordable for the poor farmers, ensure that pay outs are done within a reasonable time, and genuine victims are not excluded. And it has to do all this with poor quality of index data and very patchy actuarial data, not to mention very unreliable crop damage models built on the index data.

A viable insurance model assumes reasonable premiums, diversified risk pool, and low frequency of insured episode incidence. But in case of crop insurance for the poor, the actuarial model has to support ultra-low premiums even with the constraints of high (and increasing) frequency of index triggers being hit, highly correlated insured pool (weather is the same over reasonably large areas or regions), and significant enough reimbursements required to make this meaningful enough for the farmers.

If we try doing the math, we will soon realise in no time that self-financed micro-insurance for the poor is an impossible proposition. In fact, it is no surprise that even the most efficient and largest crop-insurance scheme in the developing world enjoy over 80% premium subsidy support. India’s new massive nation-wide crop insurance program, Pradhan Mantri Fasal Bima Yojana (PMFBY), has premium subsidy of a whopping 97%! Even by squeezing out all the efficiency gains from financial engineering and technology, the commercial viability frontier will still remain very distant. In any case, whatever the insurer will pay out has to come from what is remaining after covering their costs – a claim ratio above 100% is not sustainable.

In simple terms, index insurance tries to do both financial engineering and weather modelling to address a complex development challenge. This is a double challenge. One, the actuarial models have to support affordable premiums. Two, the index data model that underpins the premium calculation is robust enough to minimise basis risks and ensure that the development objectives are met. The first suffers historical data deficiencies and the second is an emerging area of research fraught with deep uncertainties. 

In contrast, a direct payment to identified victims does not involve any of the risk mitigation and transaction costs associated with managing an insurance. However, it does involve the challenge of assessing damages and their validation, whereas an index insurance only requires more easily verifiable (though less directly linked to the desired outcome) index triggers. But it eliminates the significant basis risk faced by farmers and ensures that the desired development objectives are realised. Besides, it also captures the true cost of crop damage mitigation in a clean, direct, and efficient manner. 

In light of the above, the most efficient crop risk mitigation strategy would be direct income payments and not heavily subsidised insurance.

If we are engaging on a truly evidence-based policy making mode, the focus of innovation should be on helping governments make accurate assessments of crop damages in quick time. The one area where significant efficiency gains can be realised is from optimising the process of data collection and its validation. And this could be outsourced to a competent agency. But is anyone even talking about this?

Lessons from the IL&FS case

The post-mortem in the aftermath of the IL&FS crisis has unsurprisingly thrown up several suggestions. The IL&FS model, which assumed both the financing and execution risks, was inherently flawed. The time has come to discard the idea of development/infrastructure finance entity. And so on. 

I will disagree with all such unqualified conclusions. After all Macquarie and their infrastructure funds and asset management model is regarded as one of the most successful infrastructure financing and management models. Successful exclusively infrastructure finance focused institutions and going strong in countries ranging from Brazil to the US and Europe. 

It has to be said that IL&FS went beyond the Macquarie model and ventured into activities undertaken by the likes of Carillion with disastrous consequences.

Shaji Vikraman hits the nail on the head. The real problem is with corporate governance. 

As the government stakeholders and regulators go about trying to work out a resolution plan and contain the damage, they should also take a closer look at what appears to be the weakness in the Indian model of what were seen as professionally managed or run firms without a dominant promoter or diversified shareholding. Over the past year, there has been a serious dent to this model purely because of governance and leadership flaws, subservient boards and integrity issues... In the post reforms period, with delicensing and deregulation and with the state exiting many businesses, successive governments and regulators encouraged the diversified shareholding model and professionally run, board-managed firms. But over a period of time, as the original promoters in some of these listed firms — mostly government-owned banks or investment institutions — started diluting their holdings, with no dominant shareholder, the CEOs of some of these companies acquired a larger-than-life role helped by so-called independent boards meekly acquiescing to the decisions. Rather than the democratisation of wealth which is what was celebrated in the glory days of India’s top software services and other firms including some private banks, this was over the last few years limited to a small club of senior management professionals with little or no relation to the performance of their companies, thus widening the divide.

There is a strong path dependency associated with the trends in areas like private participation in infrastructure finance and management. The first phase was about simple long-term post-construction (with public finance) concessions, especially in countries like Latin America. Then countries like Australia, Canada, and England led with PPPs involving bundling of construction and O&M to initially construction contractors, then construction-cum-O&M consortiums, and finally finance-construction-O&M consortiums. The area of project finance and public bond issuances emerged to support PPPs. Then the likes of Macquarie created exit opportunities for construction contractors and a secondary market for infrastructure assets using privately raised infrastructure funds. Gradually, the private equity players found infrastructure assets a source of stable and reasonably attractive income stream, with ample opportunities for asset-stripping and pass-the-parcel game over the asset's long life-cycle. Now, there is a growing realisation in the developed economies, especially in Europe and the US that private participation is not only not cost-effective but also fraught with problems, and much greater public participation and strict regulation may be necessary in infrastructure projects. The full circle has been completed. 

As we can see, each stage of this evolution created the conditions for the next stage. We, in India, are perhaps just entering the Macquarie-like secondary market stage. We still have to travel the PE journey. The present problems are about NPAs and bankrupt construction contractors. The next phase will see asset-stripped utilities, over-burdened consumers, and bond market defaults. 

The political economy, market dynamics, and herd mentality mean that it will be very difficult for India to learn from the developed economies, short-circuit the journey, and avoid such pain. In fact, just the challenge of meeting the vast infrastructure financing requirements without the public fiscal space required to meet that demand is itself enough to make the reliance on any kind of private capital, even with all its long-term distortions, inevitable. 

Take the latest episode of infrastructure creation. It is true that we are today grappling with NPAs and bankrupt infrastructure promoters, both of which threaten to derail the economy itself. But on the other side of the balance sheet, the economy has added nearly 10 GW of power generation capacity, nearly 100,000 km of highways, 30-40 mt of steel capacity, about 100 mt of cement capacity, country-wide roll-outs of 2G, 3G, and 4G telecommunications within a decade? Would carefully calibrated and gradual policy actions have realised this? Without irrational exuberance, would contractors and developers have taken the plunge, lenders opened the credit taps, and government agencies lowered diligence standards? Maybe this is the creative destruction pathway in infrastructure sector. And such a creative destruction with a generation of infrastructure funds and PE money, even with all attendant costs and pain, is perhaps worth it. 

One of the things policy makers, market participants, and opinion makers can do is to keep this in mind while navigating the course. The more enlightened and perceptive among them do so. Unfortunately, they will be far and few. 

The intellectuals and consultants who peddle the narrative of PPPs and private equity have a vested interest in peddling these narratives. As Upton Sinclair said, "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" This is just the hard reality of development. 

More tangibly, it is critical to focus on corporate governance. The likelihood of malfeasance increases significantly with secondary market asset transfers and private equity ownership. It is hard to believe that we have the requisite state capacity, civic-spirited and vigilant opinion makers, and acceptable enough corporate governance standards to provide sufficient checks and balances against such malfeasance. In fact, our encounters with infrastructure funds, private equity and the likes could degenerate to a level of asset-stripping and debt-loading far worse than in US and UK. 

How do we guard against the different types of value extraction and asset-stripping? How do we guard against leveraging up? How do we guard against value subtracting pass-the-parcel games? How do we guard against equity dilution? They are the second generation issues in infrastructure contracts which are upon us. Unfortunately we are yet to realise their importance. Nor is there any public debate about them.

Ideally there should be detailed project preparation, rigorous value for money analysis on a life-cycle basis, private participation choice based on efficiency gains than financing requirements, unbundling of construction and O&M, public financing of construction through arms-length entities, long-term O&M concessions, safeguards against asset-stripping and leveraging up, strong regulatory oversight, recurrent re-evaluations or flexibility for renegotiations, and so on. Each easier said than done. 

In the circumstances, the prudent objective should be to choose the least bad and distortionary option and structuring from among public procurement and competing variants of private participation depending on the context. This has to be coupled with stringent focus on corporate governance, and safeguards against egregious malfeasance.

Update 1 (13.10.2018)

This and this are good chronicles of IL&FS.

The case for investing in roads and railroads - evidence from China

There has been some debate in recent times disputing the value of investing in rural roads and rural electrification. The discussion is summarised here.

This goes contrary to the mainstream literature on the value of transportation infrastructure. It has been held that roads and railways "lowers trade costs, thereby allowing cities to specialise in the production activities for which they have comparative advantages". Further returns from such investments are large in poor countries but are smaller for more developed countries with larger transport networks. 

The research work of Nathaniel Baum-Snow, Vernon Henderson, and others shine light on the impact of the Chinese road and railways building program of recent decades. China undertook a massive highway network construction program, which has seen the freight ton-miles share of roads increase from under 5% in 1990 to well over 30% in 2010. In fact, the country had almost no limited access highways in 1990 and inner-city roads had just two lanes and sometimes not even paved. In the corresponding period about 127 million people are estimated to have migrated into core central cities.

One study examines the effects of road infrastructure within a given radius (450km) of prefecture (or a metropolitan area with one core city and some smaller cities/towns) cities and access to international ports on GDP, population and GDP per capita in Chinese prefectures. They estimate the relative gains or losses to one city that result from a marginal change in its regional highway allocation, relative to other locations. They find two things,

The first is that expanding the regional highway networks drives economic activity towards regionally important ‘primate’ cities (largest city in the region). A 10% expansion in road length (within 450km of a prefecture city) reduces the population in an average non-primate city by an estimated 1.6% and increases the population in an average primate city by 2.5%... Better transport connections facilitate greater centralisation of production activities, shifting activity from hinterlands into regional centres. While primate prefectures are larger than average, many are not among the biggest cities in China. We show that the primacy effects are not due to city size, nor to potentially being a provincial capital or a nodal point in the highway system.

Our second striking result is that highways’ facilitation of easier access to international ports promotes growth in GDP, population and GDP per capita for all prefectures. A 10% reduction in travel time to an international port results in a 1.6% increase in GDP, a 1% increase in population and a 0.5% increase in GDP per capita. This suggests that better access to international markets has had a high return in China, where the policy environment has emphasised export-driven investments and growth.

Another paper describes the state of infrastructure and cities in China and how infrastructure affected the development of its cities. At an aggregate level, as a description of the trends from China, the authors see three trends over the 1990-2010 period

First, we see a large increase in GDP. Second, we see a huge migration of people from the countryside to the major cities. Third, we see a dramatic decentralization of manufacturing (away from the urban core to the suburbs). That the decentralization of manufacturing GDP is so much larger than of total GDP suggests a countervailing centralization of services.

Examining city development in terms of population and economic activity, they find,

Our analysis suggests that transportation infrastructure networks had profound and long-lasting impacts on urban form in China. Both radial highways and ring roads promoted substantial population decentralization out of central cities. On the other hand, radial railroads and ring roads both promoted the decentralization of industrial production and its workforce... Each radial highway displaces about 4 percent of central city population to surrounding regions and ring roads displace about an additional 20 percent, with stronger effects in the richer coastal and central regions. Each radial railroad reduces central city industrial GDP by about 20 percent, with ring roads displacing an additional 50 percent. Similar estimates for the locations of manufacturing jobs and residential location of manufacturing workers is evidence that radial highways decentralize service sector activity, radial railroads decentralize industrial activity and ring roads decentralize both... However, radial railroads did not influence the allocation of population between central cities and suburban regions... we find no effect of radial highways on the location of industrial production.

These trends are representative of the mainstream literature on the trajectory of urban development,

Economists have recognized that denser cities provide richer information environments, which in turn improve productivity and increase innovation. However, central city environments have much higher land and somewhat higher labor costs than suburban and hinterland locations. As a result, in developed market economies, central cities typically specialize in business and financial services which benefit sufficiently from richer information environments to justify these higher factor costs. Standardized manufacturing is typically found on the lower cost urban periphery and in small cities and towns. The situation in developing countries more resembles the U.S. in the early 20th century when industry was concentrated in central cities, as in Chinese cities circa 1990. Manufacturing facilities in developing countries often start in central cities, perhaps in part because of localized externalities in learning and adaptation of technologies from abroad. However, as transferred technologies mature, central cities become expensive locations for standardized manufacturing; in a version of the product cycle, industrial firms decentralize to find lower land and labor costs.

A third paper examines the effects of construction national highways on the economic geography of China,

We investigate the effects of the recently constructed Chinese national highway system on local economic outcomes. On average, roads that improve access to local markets have small or negative effects on prefecture economic activity and population. However, these averages mask a distinct pattern of winners and losers. With better regional highways, economic output and population increase in regional primates at the expense of hinterland prefectures. Highways also affect patterns of specialization. With better regional highways, regional primates specialize more in manufacturing and services, while peripheral areas lose manufacturing but gain in agriculture. Better access to international ports promotes greater population, GDP, and private sector wages on average, effects that are probably larger in hinterland than primate prefectures. An important policy implication is that investing in local transport infrastructure to promote growth of hinterland prefectures has the opposite effect, causing them to specialize more in agriculture and lose economic activity... our findings suggest Chinese highways do allow regions to specialize and pursue their comparative advantages. In particular, prefectures where land is abundant, i.e., hinterland prefectures, become more specialized in agriculture, while more centrally located prefectures specialize in manufactured goods for regional consumption.

The Chinese experience carries relevance for India as it tries to draw policy inferences from its own transportation projects. For a start, the limited growth of railway networks in India, even in the upgradation of existing lines, may have had some effect in constraining the geographic diffusion of manufacturing. How much of this is responsible for India's failure to increase manufacturing's share of output?

If the same Chinese trends hold for India, the effects of the national highways would have been to centralise manufacturing activity in major regional cities to the exclusion of the smaller cities and towns. This coupled with the rural roads programs would have facilitated population shifts towards the major regional cities, though given the housing affordability and internal city transport constraints, the population shifts likely revolves around the suburbs of these cities. Further, in the absence of adequate investments in agriculture - irrigation, storage, etc - the rural areas are unlikely to have realised the gains similar to those experienced by such areas in China. 

The cash transfers non-debate

Two working papers on cash transfers released in recent weeks provides more fodder to critics and supporters alike.

First Chris Blattman tweeted,

Can cash grants lift the poor out of poverty? How I've started to change my mind.

His latest research, with Nathan Fiala and Sebastian Martinez found,

In 2008, Uganda granted hundreds of small groups $400/person to help members start individual skilled trades. Four years on, an experimental evaluation found grants raised earnings by 38%. We return after 9 years to find these start-up grants acted more as a kick-start than a lift out of poverty. Grantees’ investment leveled off; controls eventually increased their incomes through business and casual labor; and so both groups converged in employment, earnings, and consumption. Grants had lasting impacts on assets, skilled work, and possibly child health, but had little effect on mortality, fertility, health or education.

Just a couple of days later, Craig McIntosh and Andrew Zeitlin compared the relative efficacies of cash transfers and an in-kind regular government program in Rwanda and found the following,

In Rwanda, an IPA research team rigorously evaluated the impact of unconditional cash transfers, compared to an integrated nutrition and WASH program, on the following main outcomes: household dietary diversity, child and maternal anemia, child growth (height-for-age, weight-for-age, mid-upper arm circumference), value of household wealth, and household consumption. After approximately one year, the nutrition and WASH program had a positive impact on savings, a secondary outcome, but did not impact any main outcomes. An equivalent amount of cash (a cost to USAID of $142 per household with $114 being transferred) allowed households to pay down debt and boosted productive and consumption asset investment, but had no impact on child health indicators. A much larger cash transfer—of more than $500 per household—had a wide range of benefits: it not only increased consumption, house values, savings, and assets, but improved household dietary diversity and height-for-age, and decreased child mortality.

Dylan Matthews has two excellent articles analysing each of the papers, here and here. 

In the context of the Ugandan program, this, by the World Bank economist and longtime sceptic of cash transfers Berk Ozler, struck me as being profoundly misleading,

Özler also raised the issue of spillovers. The point of the program was to get more people into skilled trades, like tailoring. But that doesn’t just affect the people getting the skills; it affects the other tailors already working in the area. “Creating 10 to 15 tailors at once in a parish of 10,000 people, it’s got to affect existing tailors,” he said. “Maybe some went out of business.” It’s hard to know whether the program is cost-effective without knowing what happened to those other tailors. If the program just made some people successful tailors at the expense of others, that’s not really a huge gain.

I struggle to understand what's all this fuss about. For a start, the scenario of 10-15 tailors in a population of 10,000 is just rhetoric. (Btw, this was exactly the case with the in-kind self-employment asset-transfer programs  that the likes of World Bank have financed for decades).

More substantively, every intervention that seeks to achieve significant improvements in human condition (assuming that moving out of extreme poverty is a significant improvement) over a short period (say, 3-5 years) requires significant external support. And such support invariably creates externalities, good and bad, beneficiaries and losers. The most likely immediate impact is on aggregate demand and price level, and an upward shock at that. But the village or parish is an open system, and such interventions set in motion dynamics that accommodates those shocks. The role of public policy should be to minimise the shock and to expedite the adjustment.

Any opening up to international trade has the immediate impact of benefiting some and impoverishing others. A large mall opening in a small town has the definite effect of shutting down or at the least significantly hurting small shop owners. Or a productivity enhancing farm mechanisation ends up lowering the demand for landless labour. The redevelopment of a blighted urban locality populated by low income residents causes gentrification and makes the area unaffordable for them. But do we apply the Ozlerian test to evaluate any of these? 

Readers of the blog will know that I am no fan of cash transfers. In fact, if anything, I am sceptical of cash transfers in many areas and in many countries, including India. But like horses for courses, they have a role where appropriate. 

Unfortunately, the ongoing debate on cash transfers is stuck in an unproductive equilibrium around quantitative indicators between critics and supporters. There are several meta studies, all of which distil quantitative research findings. Missing from the debate is the more sophisticated empirical studies (which goes beyond mere quantitative indicators) that look at issues of when (both context and use case) are cash transfers more likely to be effective based on considerations on state capacity, local market conditions or maturity, individual's agency, hold of vested interests, cultural and behavioural norms, and so on. Time for someone to distil all these together and write a paper, even a book. That would really be sophisticated and smart thinking about development and some practical guidance for policy makers.

A Poor Economics for cash transfers? Or is there something like, sophisticated enough, that already out there?