China uses technology in judicial reforms

Among all the arms of the government in India, perhaps the one most antiquated, both in terms of use of technology and application of process re-engineering, is the judiciary. In fact, very little of the "information revolution" that has touched all other aspects of life has influenced the country's legal system. And the result is an almost antediluvian system which fails to deliver on its objectives. And very little discussion about serious reforms.

For lessons, it needs to look no far than what neighbour China has done. 

China has livestreamed more than 2.4m trials since introducing the technology in 2016. It also has three online courts, in Hangzhou and Beijing, which have opened in the past two years, while another court in Shanghai has an online mediation platform to resolve disputes before they go to trial. There is also a “central” online mediation platform, with more than 1,400 Chinese courts listed... “You [can] just turn on a computer to complete an entire legal procedure,” he said. “You don’t have to have internet-based evidence notarised any more ... for example, if you find a pirated copy of a movie online, you only need to [screenshot] the page.” On the other hand, livestreamed hearings and trials were intended as a way of educating the public, he added. “By showing how [judges] rule on one case, it tells the public what the court’s attitude is towards those types of case.”... China is forging ahead with applications that are replacing lawyers’ functions and even assisting judges. “Many courts are using smart ruling systems [that] categorise and analyse previous cases to help judges draft their verdicts,” said Mr Zhang. For similar, repetitive types of case, some of those systems can be “very reliable”.

And it seems to have done this by channeling private enterprise,

According to new figures from Thomson Reuters, the number of patents related to legal technology, or “lawtech”, filed globally has risen more than fourfold over the past five years, from 202 in 2013 to 933 last year. More than half — 51 per cent — were filed in China last year, while 23 per cent were filed in the US and 11 per cent in South Korea. Western law firms and other legal service providers tend to concentrate on how to automate their operations in the name of efficiency and cost savings, not least because their biggest clients — corporate legal departments — are insisting on lower bills. By contrast, Chinese innovators are more focused on ordinary citizens, with courts now livestreaming trials — from traffic incidents and small financial disputes to drug offences and theft — and enabling claimants to file cases, submit evidence and resolve disputes online. More sensitive issues, including anything deemed to involve national security, are kept away from public scrutiny.

Clearly this is a very impressive achievement. Like with other areas, the impressive achievement is with figuring out solutions, their effective execution within a finite time, and with channeling private entrepreneurship. 

There are perhaps two ways of engaging on this. One is public production of solutions - government agencies make the solutions and implement them. The other option is publicly co-ordinated private production - co-ordinate the market to engage with them problem and develop a solution eco-system.  

The exemplar of the former was the erstwhile Soviet Union. Most developed countries of today addressed many of their basic plumbing challenges largely through public production. China is clearly an example of the latter. It appears to have perfected the use of industrial policy to co-ordinate private enterprise even into some of the most difficult areas for private engagement. This is the case of industrial policy to both address a critical plumbing issue as well as catalysing a market. And this is what makes its achievement exceptional.

Weekend reading

1. Talk about likely Cheshire cats and Uber edition, as the company prepares for its IPO,

Excluding certain one-time items, including the sale of some of its businesses, Uber’s losses for the quarter rose 88 percent from the previous year, to $842 million. The losses were a result of Uber’s increasing its spending as it tries to outmuscle competitors, many of which have intensified their efforts to add riders and drivers. Uber has responded by offering bigger incentives and more promotions to fend off rivals like DoorDash, Lyft and other ride-hailing and food-delivery services... Some of the company’s losses have been overshadowed by its explosive growth. In 2018, Uber increased its total bookings — what it charges customers for rides and food delivery — to $50 billion, up 45 percent from 2017. Net revenue was $11.3 billion, a 43 percent increase... But Uber’s profit margins have declined as it cut prices to match competitors and spent money on expanding its food-delivery business, Uber Eats. The margins are also smaller on Uber Eats orders because the company pays commissions to restaurants as well as delivery drivers.

Despite this the company is valued at $70 bn, with investment bankers suggesting even $120 bn.

More likely this is a pricing of Uber than its valuation. When asked about Uber's astronomical 'valuation', valuation guru Aswath Damodaran had this to say,

Pricing. It’s a pricing issue. The reason people pay $60 Billion for Uber is because they think that when it goes public it will be worth $100 Billion. There doesn’t need to be a fundamental rationale for value. All you need in the pricing game is someone else willing to pay a higher price for the company. As long as momentum is on their side, it’ll keep pushing the pricing up. It’s got very little to do with fundamentals, and everything to do with “is there somebody else out there who will pay me a higher price for this company”.

Btw, Aswath Damodaran values Uber at between $25 bn and $35 bn. 

Ahem!

2. So Amazon has pulled the plug on its Queens second head quarters which promised 25000 new jobs and $3bn in local tax concessions. What does it say about modern capitalism that its favourite corporate brand is forced to abandon its plans to establish its second headquarters in a city which is perhaps the capital of modern capitalism?

Now what happens to the vast trove of data that Amazon has accumulated about cities during the bidding process?

3. Special economic zones (SEZs) come in several forms, and there is little to suggest that, in general, they offer value for money. Consider this about 'opportunity zones' in the US, 

Based on recommendations from state governments, the United States Treasury has designated more than 8,700 eligible census tracts in urban, suburban and rural areas across the country. The opportunity funds are the vehicles for investing in these zones. The idea is that investors get federal tax breaks, while the neighborhoods get new businesses and upgraded properties, like apartment buildings, retail shops and hotels... Opportunity funds let investors postpone federal taxes on recent capital gains until the end of 2026; they can also reduce the taxable portion of those gains by as much as 15 percent, after seven years. Further, investors can eliminate taxes on additional gains from investing in the fund itself, if they hold the investment for 10 years. So, if you have investments that have appreciated, you can defer capital gains taxes by selling the investment and reinvesting the money into an opportunity fund within six months. Almost any sort of capital gain qualifies, whether from the sale of stocks or mutual funds, or other investments, including the sale of real estate or a business. Just the gains on an investment — rather than the entire proceeds of a sale — must be reinvested in the opportunity fund.

But the zones, notified last year, are already there are serious question marks about whether many of the notified zones deserved to get any fiscal concessions since they were already gentrifying. 

4. Leveraged loans, borrowings by those with relatively high debt, which has more than doubled to over $1 trillion since 2010, have for some time been signalling red. 

Highly leveraged loan deals (when debt is more than five times earnings before interest, tax, depreciation and amortisation) account for about half of new US corporate debt. That growth is partly a result of securitisation. Roughly half of investor demand today comes from packaging loans into collateralised loan obligations, or CLOs, and slicing them into different tranches of risk. Rising demand has shifted the balance of power from investors to borrowers, and contributed to a watering down of covenants embedded in loan agreements that traditionally protect investors. According to Moody’s, about 25 per cent of the leveraged loan market was considered “covenant-lite” before the global financial crisis. Now that figure is 80 per cent. The implications in a downturn could be severe. Covenant-lite lending is like swimming without the ability to spot seals (where there are seals, there are sharks looking to feed). Stricter covenants improve transparency and help investors identify underlying problems with borrowers; now some covenants are so weak that nothing short of insolvency will trigger a default. If problems finally show up, investors will stampede out of the asset class, creating a systemic liquidity crunch... Leveraged loans probably won’t spark the next recession, but they will almost certainly deepen it, because they are an important source of corporate funding for deals and share buybacks.

5. The debate about the merits and distortions associated with universal basic income (UBI) is likely an endless one. And it is also an activity that is likely to keep academics busy for generations. The present stage of evidence generation is focused on its efficacy, and given the need to tease out general equilibrium effects, this is the likely agenda for at least the coming decade. The evidence is likely, as is mostly the case with such problems, to be mixed. The next stage of debate will move to what is the right amount, then what is the right amount for a particular context, and so on.

Echoing this, a new paper for UBI in advanced countries finds,

A UBI would direct much larger shares of transfers to childless, non-elderly, non-disabled households than existing programs, and much more to middle-income rather than poor households. A UBI large enough to increase transfers to low-income families would be enormously expensive. We review the labor supply literature for evidence on the likely impacts of a UBI. We argue that the ongoing UBI pilot studies will do little to resolve the major outstanding questions.

6. It is a well-known fact that infrastructure contractors bid aggressively to bag the contract since they are confident that they can come back and renegotiate the contract. There is a massive body of literature on this. The latest addition is on the renegotiations in power generation contracts in India. 

7. What if users of Facebook were shut off from accessing the social media site? An RCT evaluation of the welfare effects of US Facebook users show,

Using a suite of outcomes from both surveys and direct measurement, we show that Facebook deactivation (i) reduced online activity, including other social media, while increasing offline activities such as watching TV alone and socializing with family and friends; (ii) reduced both factual news knowledge and political polarization; (iii) increased subjective well-being; and (iv) caused a large persistent reduction in Facebook use after the experiment.

8. Finally nice article by Pilita Clark bemoaning the disappearance of (now politically incorrect) bluntness in offices, and the mistaking of bluntness for unacceptable behaviour. 

Tax avoidance fact of the day

This about Alphabet is reflection of the extent of tax avoidance,

Google’s parent company Alphabet paid $5.1bn in EU fines in 2018 compared with $4.2bn in worldwide tax, or 11 per cent of pre-tax income.

The company's 2018 revenues stood at $136.8 bn. 

The Japanese model in Railways

FT has a nice article on the Japanese Shinkansen railway network. Since its privatisation starting in the mid-eighties, Japanese railway network has come to be managed as a super-efficient system and with no subsidy for the bulk of the network.

1. And despite the lack of subsidy, prices have rarely been increased over the past three decades.

2. The big difference in the models of privatisation,

In Britain, the tracks were split from the trains, and the rolling stock was split from railway operations. Today, the tracks are publicly owned by Network Rail. Companies regularly compete for franchise areas such as the West Midlands, leasing their rolling stock from another company. In Japan, however, the former Japan National Railways was split up along regional lines and then everything was sold together. JR East, centred on the city of Tokyo, owns its tracks, its trains and its stations outright. A private JR Central operates from Nagoya and JR West from Osaka, but the unprofitable JR Hokkaido, which operates many rural lines on Japan’s northernmost island, is still 100 per cent publicly owned... 

Perhaps even more important than the difficulty of managing operations, however, are the effects this system has on investment. Network Rail, as a publicly-owned infrastructure company, does not gain directly if passenger revenue goes up. Nor does it face direct commercial pressure to keep down costs. The rail franchises, meanwhile, have a declining incentive to invest as the period of their 10-year franchise runs out... Japan’s famous shinkansen high-speed railways actually operate on something close to the UK system: the tracks are built and owned by a government fund. However, the government hands them over to the JR companies to operate on fixed-price, 30-year leases, so the companies treat them as their own. However, Britain split up its system for a reason, and that reason was competition.

3. The ideological underpinnings are important,

“The basis of railway companies in Japan is they think they will contribute forever. They feel they have a responsibility to local societies,” says Hironori Kato, a professor of civil engineering at the University of Tokyo. “This kind of mindset is quite important to make a successful railway business.”... One... feature of Japan’s railways is noteworthy: the ability of rivals to co-operate. Touch-and-go payment cards work interchangeably across the country. In Tokyo, suburban trains now run straight into subway tunnels and out the other side of the city; a single journey may use the tracks of five different railway companies. Even then, the companies do not run rival trains, but share rolling stock and run a fully integrated service. The motivation for each company is adding value to its own stretch of railway, helped by some robust pressure from the transport ministry... Britain, meanwhile, had an ideological goal in mind: competition. The vision of those who privatised the service was not just to introduce a profit motive, but for different companies to run trains on the same tracks, competing for customers. It was hoped that the regular fight for franchises would drive down costs. 

A powerful reminder to those who view profit maximising self-interest and competition as the driving force behind effective markets.

4. As also the importance of strong regulation, especially important given the monopoly status of each rail operator in their areas,

The ministry collects detailed information on costs from all of Japan’s private railways. Based on that information, the ministry sets an upper limit on fares. “How do we determine the upper limit? It’s set based on an appropriate profit and appropriate costs under efficient management,” he says. If a company can cut costs and run itself more efficiently than rivals it can earn greater profits: this is known as yardstick competition. One important consequence is ruling out the complicated fare structures found in the UK. Since prices cannot go above the cap, even for last minute booking or at the height of the rush hour, companies instead operate a simple, distance-based fare.

5. And competition,

Japan’s railways may be organised along geographical lines, but they are not a series of regional monopolies. Rather, many companies run lines in the same area, interlaced with each other, which sometimes offers a choice. For example, between Tokyo and Yokohama there are three competing routes, as there are between Osaka and Kobe. For an individual traveller, one operator is usually more convenient, but higher prices are noticed. There is a third, more abstract, but still crucial form of competition. Every line radiating out of a city such as Tokyo serves a particular slice of suburbs — and those suburbs compete. Since new construction is much easier in Japan than in the UK, the rivalry is fierce, especially as the population starts to drop. Overprice or underinvest in your railway and passengers will ultimately move elsewhere.

6. The revenue streams from integrated rail and property development,

This competition between railway areas is linked to another vital part of the business model for Japanese railways: real estate. “The railway is about one-third of our total sales,” says Mr Shiroishi. “By name we’re a railway company but that’s just one of our functions.” Another one-third of revenues comes from real estate development along the Tokyu lines, especially at its Shibuya terminus. The final third comes from services to passengers such as supermarkets, convenience stores and hotels. These other arms allow the railways to capture some of the land value that their passengers create. Every station in Japan is a real estate opportunity and many have a shopping mall built above or below them.

7. Finally, the equivalence with road transport,

Another economic strength of Japan’s railways, particularly the shinkansen, is a level playing field with roads. A one-way shinkansen ticket from Tokyo to Osaka costs ¥13,620 ($124) but the motorway toll is similar. It is unlikely Japan could run profitable high-speed rail if the state provided free roads as an alternative. There are no urban congestion charges but parking is all off-street and formidably expensive. Added to the sheer density of Japan’s population, the result is ample demand for railways, letting them run frequent trains and cover their costs at reasonable prices.

Poverty graphics of the day

I had been thinking about how to get a graphic that captures the underlying point being made here - poor people have multiple livelihoods. This CGD essay has the graphic on the median number of livelihoods of poor people in different countries.

And its variability across the year is very high.

The article itself, like with a lot of CGD stuff (apart from a few affiliated scholars) which tries to straddle the divide between academia and practice, is off-the mark on several counts.

The case for business development services

Forget tax incentives and input subsidies, supporting business development services is perhaps the most effective jobs-creation and productivity enhancing intervention that governments can do. I have blogged earlier making the case here. 

Dani Rodrik points to a recent analysis of private-sector jobs growth by Timothy J Bartik of the 105 manufacturing-intensive labour markets in the US with a population of over 200,000 for the 2000-15 period makes for interesting reading. 

It finds “no evidence that job growth in these areas is significantly spurred by cutting business taxes or increasing business tax incentives”. Instead, it finds significant boost to job growth from “customised job training programs” and “customised manufacturing extension services”. The latter delivered “small and medium-sized manufacturers with consulting advice on improving technology, product design, and marketing”. These manufacturing extension services were offered by public agencies through a mix of subsidies and client fees, in co-operation with university and private sector.

My analysis measures an area’s intensity of manufacturing extension services by the job creation or retention due to manufacturing extension, as reported in client surveys. Reported extension-induced job creation or retention is a significant predictor of an area’s overall job growth, holding constant other growth determinants.

In terms of cost-effectiveness too, such customised business development services trump conventional industrial policy interventions like fiscal concessions and input subsidies.

Clearly the time has come for governments to embrace business development support as a priority industrial policy lever. 

Weekend reading links

1. FT points to 'fauxtomation', coined by Canadian activist Astra Taylor, the gulf between the myth of workless future and reality,

Take McDonald’s. I can now order my burger using giant touch screens, pay for it on the contactless card reader and then saunter up to the counter to collect it. This could be thought of as automating the work of a waiter; in reality, though, the company has convinced me to become an unpaid member of staff. The tasks I do — inputting an order into the system, sorting payment and then collecting the food from the kitchen — are all jobs that would normally be done by someone earning at least minimum wage. It’s the same when I use a self-service checkout at the supermarket, or check myself in and print out my own ticket for a flight. Technology has facilitated a shift in who is working, not eradicated it... Technology, Taylor argues, contributes to an illusion that human effort can be simply substituted by machines — like the famous “ Mechanical Turk” machine that could supposedly play chess but in reality contained a hidden chess master, or the dumbwaiters in Thomas Jefferson’s mansion that relied on hidden slaves.

And its impact on measured productivity,

“Fauxtomation” fits into a tradition of unpaid work being overlooked — work such as caring for the elderly or children, often done by women, that does not appear in official measures of economic output. The economist Diane Coyle argues that some of the extraordinary economic growth in the middle of the past century was probably due to women doing more paid work and less unpaid; if the latter had been valued properly in the first place, the postwar boom would not have been as large as it appears in the official figures. Similarly, the recent slowdown in productivity growth may be due to a move the other way, as everyone starts producing more outside working hours, whether on laptops at home or at supermarket checkouts. And then there’s what Coyle calls “do-it-yourself digital intermediation” — online platforms acting as our bank tellers, estate agents and insurance brokers. The benefits of these services getting cheaper ought to be reflected in higher spending elsewhere. But, Coyle argues, official measures of economic output are missing the value of our unpaid work, meaning the slowdown in productivity growth may not be as bad as it appears.

2. The collapse of the tailing dam in southeastern Brazil owned by mining giant Vale which killed at least 157 people, with 182 missing, is a classic case of socialising costs and privatising the benefits and one where criminal culpability should be traced right up to the top of the mining behemoth.

Vale knows that it can contain its costs by avoiding the construction of strong tailing dams and relying on shoe-string mud structures. The costs can be externalised and the savings can be appropriated privately. And when you add up several such externalities, it all begins to assume significant proportions. In simple terms, Vale, and other multinationals know that it can get away with a mud-dam and its attendant risks. 

What can be easily predicted is what will follow. There will be righteous indignation everywhere for the coming few weeks. Some junior employees on government and Vale's side will be sacrificed. And then everyone will forget and go on with life till the next incident happens. Incidentally, a similar accident on a tailing dam co-owned by Vale killed 19 people in 2015!

3. Some snippets about unemployment trends in India,

Instead of dropping out at a very early age, the percentage of women in the education system is very high until the age of 23-24. Earlier, it used to be only up to 17 years. So, there is a five-year shift; these people are no more in the labour force because they are still in the colleges. So that will reduce the labour force to some extent because they are out of the labour force. And earlier, the unemployment used to start at 20 onwards, now basically it is 24 onwards, so 20-24 they are in colleges and all that. So there’s a shift in the employment pattern from the report. Once they come out from the colleges, they are no more prepared to work on their father’s farm or looking after something and then get married and become housewives... This immediately will pick up the unemployment ratio because they are not showing up in the unemployment-numerator.

4. Livemint graphic on the unemployment problem among the educated,

A recent report by the Centre for Sustainable Employment at Azim Premji University, State Of Working India 2018, noted that unemployment among the well-educated is thrice the national average. There are roughly 55 million people in the labour force who hold at least a graduate degree, and about 9 million of them are estimated to be unemployed, the report added.

5. Nice Economist article on the extra-territorial reach of American policies that seek to penalise global companies for violating American domestic rules. 

Since the turn of the century, America has ramped up judicial programmes whose reach is not restricted by its borders. Focused on enforcing its sanctions, reducing corruption in poor countries and fighting money-laundering and terrorism financing, it has found ways of prosecuting companies and their executives far beyond its shores... Most of the companies caught in its legal net are foreign, often European. Some come from countries in which doing business with Iran, for example, would be no problem were it not for America’s stance... There are instances where America’s long legal reach may have given an edge to its own firms over foreign rivals, as in the case of General Electric’s purchase of Alstom of France in 2014... 

Several elements tie together America’s various legal forays abroad. The first is their creeping extraterritoriality. American law starts with a presumption against application of its statutes beyond its borders. But prosecutors have wide authority over how the laws are interpreted. They have adopted an ever-more-expansive interpretation of who is subject to American law, lawyers say. A banking transaction that ultimately passes through New York—as many do, given the centrality of American dollars to global trade—can give prosecutors a toehold to inspect it. If two executives outside America use Google’s Gmail to communicate about a bribe, say, American prosecutors can claim that the Americanness of the email provider can make it their business. The global banking system also gives America an advantage. Lenders have been hit hard by American prosecutors, notably BNP Paribas, a French lender walloped in 2014 with an $8.9bn fine for facilitating trade with Sudan, Cuba and Iran. Deutsche Bank was fined $425m in 2017 for helping launder $10bn from Russia...

It seems plain to foreign critics that America disproportionately targets foreign companies. Over three-quarters of the $25bn it has exacted in fines for money-laundering, sanctions-busting and related offences has been against European banks, 15 of which have paid over $100m each, according to Fenergo, a consultancy. American banks have been fined less than $5bn over such misdeeds. Anti-corruption probes also fall disproportionately on foreign firms. Of the ten biggest FCPA fines, only two have fallen on American companies.

6. Finally, an article on the decline of bus commuters across UK,  

Since 2009 the number of bus journeys in Manchester has fallen by 14%. Austerity has played a role. Councils in England and Wales have slashed bus subsidies by 45% since 2010, resulting in 3,347 routes being cut back or closed... The average delay caused by congestion in Britain’s cities has increased by 14% in the past three decades... Manchester is badly affected: the 43 bus now takes nearly 80% longer to cover its route in rush hour than it did 30 years ago. The average speed of Stagecoach’s buses fell by 4.9% in 2014-16; one route which took just nine minutes seven years ago now takes 27, according to the company.