Sunday, December 2, 2018

Winners Take All - philanthrocapitalism at work

Anand Giridharadas's new book, Winners Take All - The Elite Charade of Changing the World, is   an excellent read. 

It is essentially about how a reductionist view of important public issues and problems, which suits the interests of the global cosmopolitan elites (or MarketWorlders, as he calls them), has helped sweep under the carpet deep-rooted structural issues, shrunk the space for political debates and actions, and engendered the feel-good-do-good world of non-government and philanthropic activities. 

This is more like a manifesto which describes symptoms and offers diagnosis. But thankfully, it stops short of offering prescriptions. 

Sample this description of Sean Hinton, late of McKinsey, Goldman Sachs, and Rio Tinto, then the Chief Executive of Soros’ Economic Advancement Program in 2016. Early in his youth, Hinton had moved to Mongolia to study traditional music and lived there for nearly a decade.
In Mongolia, Hinton’s approach was to learn from the people he was studying by hanging back, observing, realising all he didn’t know. Success required letting other people lead him, as he remembers it: “The tools that I used to bringing were largely to do with perceiving and sensing; they were largely to do with intuition; they were largely to do with creativity and looking for connections; and they were very much to do with the people”. For years on end, Hinton had had the experience of resisting easy assumptions, avoiding the certitude, hunting for cues, letting others lead. “You turn up in a tent where you put your legs, when you give the gift that you’ve brought with you – I just became so attuned to all of those things. The body language – am I doing right? What are other people doing? You become just absolutely, completely attuned to reading those signals from people around you”. This approach to an alien environment was what he called humility. “If you think about the skills of living in a tent, in a foreign culture, in a foreign language, in a certainly foreign environment, you don’t have a choice but to get taught humility every day,” he said. “You’re surviving on that, and your very survival is based on recognising that you don’t know, and being absolutely open to everything – being absorptive of every influence around you and listening.”

At McKinsey, he realised, he was expected to operate very differently… Instead of listening, absorbing, trying to decipher slowly and respectfully the dynamics of the space one had entered, the high-flying, high-priced consultant was expected to jump in and know things... They offered a powerful way of stepping into a world you didn’t know and reconstituting its reality so that the solution became more obvious to you than it was to the client’s native executives. The protocols allowed for a strange kind of earned presumptuousness. Equipped with a special way of chopping up problems, parsing data, and arriving at answers, the consultant constructed authority. His job was, as Hinton put it, “the bringing to bear and the championing of the religion of facts – incontrovertible, scientific, unemotional, unencumbered-by-people facts.”

The protocols that allowed for this certitude were, as Latin once was, a mother language that had birthed many vernaculars. These vernaculars shared a common purpose: Having arisen not so much within industry as among the insider-outsiders of the business world – consultants, financiers, management scholars – they offered a way to get smart on other people’s situations. The banker trying to come up with the initial share price of a soon-to-be-listed chemical company wasn’t necessarily an expert in fertiliser. The hired-gun corporate strategist for a pharmaceutical company wasn’t necessarily an expert on drug-delivery vehicles. The protocols some specific to domains like finance or consulting, some more cross-cutting – allowed such figures to sweep in and break down a problem in a way that surfaced new realities, produced insight, sidelined other solvers, and made themselves essential.

Hinton learned the McKinsey vernacular of the protocols. In the book, The McKinsey Mind, by Ethan Rasiel, the firm’s protocols are distilled: Consultants first find the “business need”, or the basic problem, based one evaluating the company and its industry. Then they “analyse”. This step requires “framing the problem: defining the boundaries of the problem and breaking it down into its component elements to allow the problem-solving team to come up with an initial hypothesis as to the solution”. This is the insta-certitude at work – hypothesis-making comes early. Then the consultants must “design the analysis” and “gather the data” to prove the hypothesis, and must decide, based on the results, whether their theory of the solution is right. If it is, the next step is “presenting” in a crisp, clear, convincing way that can win over clients understandably wary of fancy outsiders’ big ideas. At last, the solution comes to the ‘implementation’ phase, through “iteration that leads to continual improvement”…

It (this approach to problem-solving) was not about drawing on knowledge, and often sneered at doing so; it was, rather, about being able to analyse a situation despite ignorance, to transcend unfamiliarity… It was to demonstrate how you reason, based on the assumptions you make. The idea was “if you break the problem down into small enough pieces that are logically related and make educated guesses combined with facts where they’re available, or at least you join the dots from the facts that you’re able to put together, you can construct a logical and compelling answer to pretty much any problem.” In other words, Hinton’s initiation into McKinsey and the protocols more generally was being urged to spit out a preternaturally confident answer to something he knew nothing about…

Hinton picked up the little rules and figures of speech of… consulting… For example he learned it was best to speak in lists of three, based on research about how people absorb information. If you have two important points to make, you add a third; if you have four, you combine two or just lose one. Hinton also learned the commandment against taking on excessively large problems. Do not “boil the ocean”, one versed in the protocols might tell another. The protocols tell you to reduce the scope of what is considered, limit the amount of data you drink in, to avoid becoming overwhelmed by the volume of reality you confront. And lest you worry that this shrinking of your purview will harm your ability to solve the problem, the protocols offer the eighty-twenty rule… the business maxim that 20% of many systems generates 80% of the results – one-fifth of one’s customers providing most of one’s revenue, to cite the most common example. The protocols told the problem-solving swashbuckler that it was possible to swoop in, find the 20%, turn some dials in that zone, and unleash great results. These tricks were not about looking at a problem holistically, comprehensively, from various human perspectives; they were about getting results without needing to do such things.

At McKinsey, Hinton learned to make so-called issue trees – visual maps to help you break down a nicely scoped, eighty-twentied, pond-sized problem into its elements. It starts with a challenge such as making a bank more profitable. That increases in profitability can come through raising revenues of lowering costs, the first layer of subcategories. Each rung of subcategories must be, in firm parlance, ‘MECE’ – mutually exclusive and collectively exhaustive. In other words, raising revenues must be entirely different from lowering costs, and all routes to the ultimate goal should passthrough them. Now each subcategory can be broken down into sub-subcategories – the increase in revenue, for instance, can either come from existing businesses or new ones. And so on, until there are sub-sub-sub-subcategories. To be fair, this kind of exercise can allow one to see, with a clarity that is impossible when looking at the whole, the dials that might be turned relatively easily and yet have outsize effects – for example, closing those three high-rent bank branches in Manhattan might generate 80% of the savings required. Yet this schematising, whether in the McKinsey vernacular or others, can at times be limited by its arbitrariness. Categories are made that may or may not correspond with reality. Divisions are carved between things that might be connected rather than mutually exclusive. Things are broken down in the way that happens to be most obvious or useful for the parachute, and sometimes this smashing of reality into hundreds of little pieces makes a solution seem apparent while in fact obscuring the true problem. Those who could set the parachuter right, those with valuable traditional and local knowledge, cannot speak the new language of the problem, illiterates in their own land…

The protocols had grown out of corporate problem-solving, but increasingly MarketWorlders were employing them to elbow into the solution of social problems traditionally considered in other ways, by more public-spirited actors. And the more people accepted the ideal of the protocols as essential to public problem-solving, the more MarketWorld was elevated over government and civil society as the best engine of change and progress… They have evolved from being a specialised way of solving particular business problems to being, in the view of many, the essential toolkit for solving anything. The protocols are increasingly seen as vital training for working in charity, education, social justice, politics, health care, the arts newsrooms, and any number of arenas that used to be more comfortable with their own in-house apprenticeship. Organisations like the Gates Foundation hire the protocol bearers to solve the problem of education for poor children in America. Civil rights organisations put protocol bearers on their Boards, taking not only their money also their advice… young people… are persuaded by the surrounding culture that only by learning the protocols can they help millions of people.

Wednesday, November 28, 2018

Mid-week reading links

Anand Giridharadas's twitter feed points to several very powerful pieces

1. From the man himself on the dubious Amazon HQ2 saga,
When combined with existing incentives, Amazon might receive three billion dollars in breaks in New York alone, the equivalent of every city resident Venmoing $348 to Bezos... It was the game-show quality of this bidding, the spectre of cash-starved governments begging to give money to a billionaire, that left some critics fuming. Richard Florida, the urban-studies theorist, told me that Amazon’s HQ2 competition “captures the zeitgeist of early 21st century American late capitalism.” He added, “The very idea that a trillion-dollar company run by the world’s richest man could run an American Idol auction on more than two hundred thirty cities across the United States (and Canada and Mexico) to extract data on sites and on incentives, and pick up a handy three billion dollars of taxpayer money in the process, is a sad statement of extreme corporate power in our time.”

...there is an opportunity cost to luring the world’s richest man by letting him free-ride on the public services that other New Yorkers must pay for—whether it’s the failing subway system, the troubled and segregated school system, or... critical renovations at public-housing complexes like Queensbridge, the largest in the United States, which will soon be down the street from Amazon’s New York headquarters... There is also the particular question of why Bezos, of all people, needs to play this way. After the announcement, David Heinemeier Hansson, the founder of the software firm Basecamp, published an open letter to Bezos, who is one of his investors... He urged Bezos to consider shaping his legacy “into something more than the man who killed retail, extracted the greatest loot from its HQ cities, and who expanded the most monopoly holdings the fastest.”
This captures the essence of it all, especially given Bezos's recent decision to become a philanthropist, 
Build a company from the ground up. Do whatever it takes to survive and grow, regardless of the consequences for your customers and workers. Consolidate a monopoly if you can, first in one arena, then in multiple. Use that power, that leverage, to exact concessions from governments, so that you pay even fewer taxes and grow even faster, even bigger. And then, with the wealth that was accumulated by underpaying workers, by avoiding taxes, by lobbying against regulations, by amassing uncompetitive levels of market power—then, with that wealth, you give back. You make a difference. You become a philanthropist, a lover of mankind. You salve by philanthropic moonlight the wounds you may have cut by operational daylight. You solve the very problems you have helped to cause.
2. Almost exemplifying this trend among America's richest is this Washington Post investigation on Carlyle Group, which has spawned some of the largest philanthropists and donors like David Rubenstein,
Under the ownership of the Carlyle Group, one of the richest private-equity firms in the world, the ManorCare nursing-home chain struggled financially until it filed for bankruptcy in March. During the five years preceding the bankruptcy, the second-largest nursing-home chain in the United States exposed its roughly 25,000 patients to increasing health risks... The number of health-code violations found at the chain each year rose 26 percent between 2013 and 2017, according to a Post review of 230 of the chain’s retirement homes. Over that period, the yearly number of health-code violations at company nursing homes rose from 1,584 to almost 2,000. The number of citations increased for, among other things, neither preventing nor treating bed sores; medication errors; not providing proper care for people who need special services such as injections, colostomies and prostheses; and not assisting patients with eating and personal hygiene.

Counting only the more serious violations, those categorized as “potential for more than minimal harm,” “immediate jeopardy” and “actual harm,”... the number of HCR ManorCare violations rose 29 percent in the years before the bankruptcy filing. The rise in health-code violations at the chain began after Carlyle and investors completed a 2011 financial deal that extracted $1.3 billion from the company for investors but also saddled the chain with what proved to be untenable financial obligations, according to interviews and financial documents. Under the terms of the deal, HCR ManorCare sold nearly all of the real estate in its nursing-home empire and then agreed to pay rent to the new owners. Taking the money out of ManorCare constrained company finances. Shortly after the maneuver, the company announced hundreds of layoffs. In a little over a year, some nursing homes were not making enough to pay rent. Over the next several years, cost-cutting programs followed... the number of violations at HCR ManorCare homes rose about three times faster than at other U.S. nursing homes.
On the business model and trends,
The firms profit by pooling money from investors, borrowing even more, and then using that money to buy, revamp and sell off companies. Their methods are geared toward generating returns for investors within a matter of years, and this has led to criticism that they merely plunder company assets while neglecting employees and customers. During and after the recession, as returns became scarce, private-equity investors began to explore industries they had once overlooked, and some invested in businesses that largely cater to the poor: payday lenders, nursing homes, bail bond providers, low-income homes for rental and prison phone services...
In December 2007, it bought HCR ManorCare for $6.1 billion plus fees and expenses. Most of the purchase price was borrowed money — about $4.8 billion — and Carlyle put up $1.3 billion... From the start, Carlyle’s acquisition of HCR ManorCare made the company’s finances more risky because the purchase burdened it with billions in long-term debt. But in April 2011, Carlyle made another critical move at HCR ManorCare, one that would enrich investors and imperil the financial footing of the chain.

Carlyle took HCR ManorCare’s vast real estate empire — the hundreds of nursing homes and assisted living facilities as well as the land underneath — and sold it to HCP, a real estate investment company. HCR ManorCare then had to pay rent to HCP for the use of the nursing homes. This kind of deal, known as a sale-leaseback, is a common tactic of private-equity firms, and it generated financial benefits for Carlyle and its investors. Carlyle got $6.1 billion from the sale, an amount that roughly matched the price that the private-equity firm had paid to buy the company just four years prior. With that money, Carlyle paid off billions in debt that it racked up buying HCR ManorCare... Crucially for Carlyle and its investors, the deal allowed them to recover the $1.3 billion in equity they put into the deal.
Carlyle made money from its investment in other ways, too. It took at least $80 million from the HCR ManorCare venture in the form of various fees, according to interviews and financial documents. Most of that was a “transaction fee,” which is money Carlyle receives when it buys a company, typically 1 percent of the purchase. The $6.1 billion ManorCare purchase yielded Carlyle $61 million, Carlyle officials confirmed. That money was distributed to Carlyle and its investors. In addition, Carlyle receives annual “advisory fees” from the companies that it purchases — essentially, Carlyle pays itself to manage the companies it owns. At ManorCare, those fees averaged about $3 million a year from 2007 to 2015, or about $27 million, according to documents and interviews. That money was also distributed to Carlyle and its investors. Finally, there was one other person who made a lot of money despite the company’s financial woes. After the bankruptcy, longtime chief executive Paul Ormond was awarded $117 million under a deferred compensation agreement...
The real estate deal... meant that HCR ManorCare had to make massive rent payments to its new landlord, and these, according to the company’s accounting, raised the company’s long-term financial obligations to $6 billion. The rent HCR ManorCare was obliged to pay — to occupy the nursing homes it had once owned — amounted to $472 million annually, according to legal filings. The rent was set to escalate at 3.5 percent a year, and according to the lease, HCR ManorCare also had to pay for property taxes, insurance and upkeep at the homes.
3. David Leonhardt lays bare the case for revival of an anti-trust movement in the US. 
This consolidation of business concentration data by Open Markets Institute is awesome!

This from Louis Brandeis, the US Supreme Court Justice, is very apt,
“We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”
4. Finally, FT has an article which sums up the problems with modern financialisation-based capitalism with the illustrative example of GE, the 126 year-old company, whose share price is back to its 1994 level,
There are five key lessons. The first is that debt always catches up with you. While GE has long had strategic problems, its immediate troubles are around a credit crunch. In the boom days, GE used a top credit rating to raise debt to fund its global manufacturing operations and GE Capital arm. This year, when its credit rating was downgraded, borrowing costs went up and a negative spiral began, with investors selling off both the company’s stock and its bonds... GE would not have these problems today if it had not done so many share buybacks in the good times. This is the second lesson. Companies have carried out record amounts of share buybacks in recent years, frequently at the top of the market — moves that are often much more about getting another quarter or two of share price increases to enrich top executives than changing any real business story on the ground. Lesson three is to be careful of growth through acquisition. Over several decades, GE became so large and complex that it could not manage its own business model — witness the company becoming a “too big to fail” bank in the Welch era, a problem his successor Jeff Immelt had to deal with by spinning off the Capital division. Too many companies today, including big tech groups, are growing by acquiring, not innovating. Streamlining is not a bad idea, but the sale of GE’s lending division also exposed lesson four: financial engineering is not the same as real engineering. Once GE Capital, which could be used to hide myriad accounting high jinks, was spun off, the depth of trouble at the company became clearer. After a decade of easy money, it is a fair bet that there are corporate numbers games waiting to be discovered at many companies. The final lesson is that the nature of the economy has fundamentally changed in recent decades from industrial to digital... Companies that cannot make the transition from an economy based on tangibles to one based on intangibles are likely to face the same fate as the once-mighty GE.

Tuesday, November 27, 2018

Infrastructure financing market graphics

This blog has written on numerous occasions in support of financing infrastructure construction with bank loans and then re-financing operation and maintenance of commissioned assets using capital markets.

Construction risks are idiosyncratic, its financing draw down schedule is over the construction period, and the asset will generate cashflow to pay off debts only after construction is completed. Bank loans, which are far more easier to restructure, stagger, and back-load repayments, therefore becomes more appropriate compared to bonds.

In the context of bond market issuances in Asia, this paper points to some interesting insights.

The graphic shows that infrastructure bonds form a very tiny share of the total non-financial corporate bond market.
And syndicated loans dominate bonds themselves in financing infrastructure projects
The default rates of infrastructure bonds come out very favourably compared to non-financial corporate bonds.
And the same applies to relative recovery rates too.

On the average coupons and maturities of bond offerings across different regions.

Saturday, November 24, 2018

Weekend reading links

1. Interest rates may be inching upwards, but the rate at which it is happening appears not to be having much impact on leveraging. Ananth points to this FT Alphaville article on the unabated rise in the share of Covenant-lite loans, or loans with weak lending protections, among loans given to riskier borrowers (leverage loans).
The robust economic growth in the US makes everyone lower their guard and borrow more and lend less prudently.  

2. Oil prices are declining again reflecting good and bad signs for the Indian economy. Good in terms of likely lowering the twin deficits and bad in terms of its portends for weaknesses in the global economy. 

One of the features of the oil market in recent times has been the rise and rise of US oil production. Sometime between May and June this year, US became the largest crude producer at 11.65 m barrels per day, the first time since 1973.

3. The cost of US sanctions on China, at least for now, appears to being borne by the Chinese exporters than US consumers. Bloomberg points to a new paper by Benedikt Zoller-Rydzek and Gabriel Felbermayr appears to point out that US companies and consumers will only pay 4.5 percent more due to the 25% tariffs on $250 bn Chinese imports and the other 20.5% will fall on Chinese exporters.  
The reason being the smart choice of goods for the first round of tariffs, those with the highest "price elasticity" or availability of substitutes which can replace the Chinese imports. This in turn prevents importers from passing through the tariffs to consumers in the US. They find that total welfare gain to US consumers to be $18.4 bn. Further, they show that this would cut US imports of affected Chinese goods by more than a third and lower the bilateral deficient by 17%.

The challenge will be when the basket of goods expands to those with lower elasticity. But for now, give Trump some credit!

4. The issues raised by Carlos Ghosn arrest in Japan on charges of fraud from an internal enquiry for having deceived Nissan by consistently under-reporting on his pay package and benefits claims and using company assets for personal purposes is symptomatic of executive culture in the corporate world. It is only a surprise that more such demeanours do not come out to the open. Perhaps the reason this came out in the open is because it happened in Japan, which, unlike in the US, has less cultural tolerance for such corporate excesses.  

The Nissan-Renault alliance, which was expanded in 2016 to include Mitsubishi, produces 10.6 million cars annually, making it the world's largest car maker. 

Rest assured that in the coming days, more stories will come out about the details of the power-struggle between the French and Japanese parts of the Nissan-Renault empire. Nissan's Japanese employees had long resented the dominance of Renault's French owners. For long, Ghosn's dominating presence had papered over differences. This FT article may only be the preview to what could come out in the open.

All this again raises questions about the alleged superiority of the "efficient" US business management style and culture over the "inefficient" Oriental one. The argument in favour of this comes from the market performance of US firms compared to their Japanese counterparts, especially the stock market performance and bottomline growth. The idea of cutting costs aggressively (Ghosn built his larger-than-life image on being the "Le cost killer") and promoting performance payments with eye only on the financial reporting bottomline imposes significant long-term costs besides corroding corporate culture. Ghosn compensation was a massive outlier in Japan - Takeshi Uchiyamada, chairman of Toyota, for example, was paid ¥181 million in 2017, compared to Mr. Ghosn’s reported ¥735 million.

But, as we all know now, these things come at considerable costs. Not just on the corporate governance and ethics, but even on business practices (sample Nissan's grow-at-all-cost discounting strategy in the US market which alienated stakeholders like its dealers) the claims of superiority appears questionable. On the net, and taking a long-term view, one cannot but not get the impression that the adoption of western management and business practices may have come at a net cost to Japanese companies.

5. Staying on the theme of corporate governance, there are growing signs that the 1MDB-Goldman Sachs scandal involved the topmost leadership of Goldman. It now emerges that Jha Low, a financier with close ties to the then Malaysian PM, Najib Razaq, and the alleged mastermind in the plot to siphon over $6 bn of Malaysian public funds, met one-on-one with Goldman Chairman and CEO, Lloyd Blankfein in December 2012. This seriously weakens Goldman's efforts to spin the scandal as the work of a few rogue employees.

Sample this,
In the three years before the 2012 meeting, the bank’s compliance staff had repeatedly rejected Mr. Low’s attempts to become a Goldman client because it was unclear how he had amassed his wealth... The compliance team also identified Mr. Low as someone Goldman should avoid working with on any 1MDB transactions...  But when Mr. Blankfein’s aides sought information about Mr. Low in preparation for the meeting, a senior investment banker in Asia praised Mr. Low and did not mention the compliance concerns, according to a person who has reviewed internal Goldman emails about the meeting. Nor did the compliance red flags stop the bank from doing extensive business with 1MDB, which Malaysia’s prime minister at the time had set up in 2009 ostensibly to invest in infrastructure and other projects to improve Malaysians’ daily lives. Goldman ultimately helped 1MDB sell more than $6 billion in bonds to investors, earning about $600 million in fees.
It is hard to believe that a deal like this, an that too one which was bagged without any competitive bidding and on nomination, and especially one which earned the firm $600 million in fees, did not involve not just the knowledge but the active support of the top leadership. Btw, if this were government, it would be impossible to not have loud public demands for resignations and the like.

6. Finally Paul Romer makes good suggestions about the role of governments in the promotion of innovation,
First, government needs to take a more active role in creating scientific infrastructure... Congress can help without any additional spending by letting recipients of research grants use those funds to support open-source projects, which make their blueprints publicly available... Take Python, the open-source programming language that has become the language of choice for software developers in the fields of artificial intelligence and data science. Programmers have used Python to power innovation in everything from the detection of gravity waves (resulting in last year’s Nobel Prize in Physics) to reducing the cost of developing new drugs... Second, Congress should look for opportunities to extend scientific transparency to the private sector. It could draw on the principles that guided the design of our patent system; the law protects a private right to charge for the use of a discovery, but mandates public disclosure of its details so others can learn from it. To see how this could work, consider hydraulic fracturing, or fracking, for oil and gas. Regulators in North Dakota forced firms to disclose how much water and sand they used to frack each well and how much oil it produced. This let a different firm drilling a well nearby select a better mixture for its well. Over time, the entire industry optimized the mix used in various geological conditions and substantially reduced costs.

Friday, November 23, 2018

The return to 'tribalism'?

David Brooks points to an utterly fascinating study about how identities have come to shape core personal beliefs and value systems in the US. The report by More in Common breaks down Americans into seven groups, from left to right, with the most active groups being on the extremes - Progressive Activists (8%) and Devoted Conservatives (6%) - and the richest, whitest, most educated, and most secure. 

The cleavage in their respective views, driving what Brooks calls a "rich, white civil war" and a clash of "privilege", is just stunning. Sample this,
Ninety percent of Devoted Conservatives think immigration is bad, while 99 percent of Progressive Activists think it is good. Seventy-six percent of Devoted Conservatives think Islam is more violent than other religions; only 3 percent of Progressive Activists agree. Eighty-six percent of Devoted Conservatives think it’s more important for children to be well behaved than creative. Only 13 percent of Progressive Activists agree... Ninety-one percent of Progressive Activists say sexual harassment is common, while only 12 percent of Devoted Conservatives agree. Ninety-two percent of Progressive Activists say people don’t take racism seriously enough, compared with 6 percent of Devoted Conservatives. Eighty-six percent of Progressive Activists say life’s outcomes are outside people’s control; only 2 percent of Devoted Conservatives agree. Progressive Activists are nearly three times as likely to say they are ashamed to be American as the average voter... The researchers asked a wide variety of questions, on everything from child-rearing to national anthem protests. In many cases, 97 to 99 percent of Progressive Activists said one thing and 93 to 95 percent of Dedicated Conservatives said the opposite. There’s little evidence of individual thought, just cult conformity. The current situation really does begin to look like the religious wars that ripped through Europe after the invention of the printing press, except that our religions now wear pagan political garb.

Sample this
Our research concludes that we have become a set of tribes, with different codes, values, and even facts. In our public debates, it seems that we no longer just disagree. We reject each other’s premises and doubt each other’s motives. We question each other’s character. We block our ears to diverse perspectives. At home, polarization is souring personal relationships, ruining Thanksgiving dinners, and driving families apart. We are experiencing these divisions in our workplaces, neighborhood groups, even our places of worship. In the media, pundits score points, mock opponents, and talk over each other. On the Internet, social media has become a hotbed of outrage, takedowns, and cruelty—often targeting total strangers... Everyone appears to have a varying version of world events, and it feels harder than ever to sort fact from fiction. Our news feeds seem to just echo our own views, and when people post alternative opinions they are often attacked by angry mobs. We don't seem to disagree anymore without perceiving another person's views as stupid, wrong or even evil...
Often more than 90 percent of people in one of these groups holds the same view about a controversial issue, and typically, it will be the reverse of whatever the opposing wing believes. In contrast, the remaining two-thirds of Americans at the center show more diversity in their political views, express less certainty about them, and are more open to compromise and change—even on issues that we all tend to consider highly polarizing.
Immigration; racial justice and police brutality; sex, gender, and morality; and terrorism and Islam are at the forefront of what drives the cleavages. 

Views on feminism...
... and Donald Trump

A few thoughts

1. As Brooks writes, the power of narratives is immense and all-encompassing. Powerful narratives exercise their hegemony over the two extremist factions. And their conversations set the social and political agenda for everyone. The hegemony of such narratives is impervious to logical thinking and analytical reasoning. One only needs to look at the hegemony exercised by other dominant prevailing narratives.

Just as such narratives, and its hegemony, serves to create cohesion, its absence detracts from coherent thinking and action. Where will such a narrative emerge for those in between the two extremist factions?

2. The clash of these two narratives resembles the the classic Hegelian dialectic. In such dialectical inter-play of thesis and anti-thesis, the synthesis can emerge either from outside the two warring groups or from within them. The Marxian, Keynesian, and Communist counter-revolutions emerged from within the elites, in particular from the liberal sides in each case. 

Unfortunately, and this has been the biggest disappointment, the liberal elites uniformly appear so captivated by their current narrative and so hateful of the other narrative that there may have left very limited room for alternative thinking. 

For example, how many liberal intellectuals and opinion makers oppose excessive financialisation, trade liberalisation, globalisation, and migration and support (at least the core principles of) Trump's policies on China and forcing US MNCs to relocate back? How many of them are, what Daniel Bell described himself as "socialist in economics, a liberal in politics, and a conservative in culture"? 

3. It may be incorrect to view this trend as being an exception. Historically tribalism and factionalism have been the norm. Modernism and the dawn of the liberal era was supposed to have ended such divisive trends. In fact, we may actually be witnessing the return to the norm after a brief lull. Proclamations of "end of ideology" and "end of history" have turned out to be remarkably naive. Like with analysing other trends, we may have forgotten to take the "long view of history". 

4. The near complete unanimity among members of the two extreme factions on important social issues and trends offers a stark contrast with the considerable heterogeneity in views among the other factions. Clearly, the more educated, more globally exposed, richer, and more comfortably ensconced populace suffer from groupthink and herd mentality. What makes this so - over-confidence, complacency, hubris, intolerance of alternative views?

It is ironical that liberals, who are supposed to be the most eclectic and hold the widest array of views, have become so parochial!

5. Finally, as Brooks writes, politics and politicking is the turf of privilege. Others struggle to live their lives and make ends meet.

As if to underline the deep roots of tribalism, even dietary preferences are not spared from the influence of politics and tribalism (or vice-versa).
All this is a package and who knows in which direction causality runs!

Tuesday, November 20, 2018

Transforming systems - the perception Vs reality

I blogged earlier outlining some pathways to bring about systemic transformations to address wicked problems. This post will make the distinction between such transformations brought about through strong personalities and leaders and those through genuine system-wide changes.

In India's development lore, we come across examples of District Collectors, Municipal Commissioners, Police Superintendents, and State Government Secretaries supposedly having achieved transformational change with their initiatives. But unfortunately, as outlined below, the whole literature on best practices and case studies that highlight the work of outstanding individuals may actually present very little by way of replicable learnings. 

When faced with wicked problems, apart from doing nothing, there are perhaps three possible reform responses that leaders can try out.

The commonest is to try out some or other technical fixes - privatise, outsource, digitise, restructure and so on. Examples of high-profile PPPs, use of Blockchains and Machine Learning, process reengineering etc abound, which have done much more damage than any benefit. This, while intuitively appealing (we are doing something new to an old problem which has elided satisfactory solutions) is like band-aid on gangrene. While there may be some 'form' of change, it is unlikely to be accompanied by any 'substance' of change.

The glibbest among such leaders propagate themselves through social media and manage to win awards. This approach has perhaps the most damaging influence in so far as it conveys an impression of success and incentivises peer emulation. A very distorted trend can get entrenched.

Sometimes outstanding individuals emerge to lead organisations. They use intense personal energies and commitment to instil fear, inspire teams, monitor intensely, micro-manage extensively etc that can paper over systemic decay and get stuff done to a satisfactory enough level. But the effect is rarely sustainable and success is transient. In fact, they make systems work effectively when they are at the helm, even deliver outcomes, by sheer force of their personality and intensity of their drive. But these are not system transformations. It is most likely kicking the can down the road for the successors to engage with.

The flip side of this approach is that such intensity of engagement by the leader typically, but not always, ends up undermining initiative and lowering the motivation of subordinates and concentrating authority and action at the top of the bureaucracy. I have written about the example of the Indian Administrative Service (IAS) here.

Finally there are the very rare genuine systemic transformation efforts. It involves some or all of these - cultivate champions at all levels; empower extensively, even at the risk of short-term failures; nurture positive deviances and encourage their diffusion; trigger conversations at all levels about the need for change; create the conditions for internal ruptures etc. This is very difficult to sustain. The toolkits are very different from what modern management teaches.

The most difficult (to comprehend) part of this approach is that it cannot be planned in any detail. You have to initiate the process with a few carefully thought out interventions or reforms which resonate with the felt-needs of all stakeholders, is important enough in the system's overall perspective, and which the system has the capacity to engage with meaningfully. Once initiated, the challenge is to watch and engage opportunistically based on emergent dynamics of the system and steer the course without letting things get off control. It is a long-drawn effort with uncertain pathway of change. This needs patience, tact, and an ability to continuously step back and in as required.

While the first two approaches present themselves as amenable to replication, only the first is, in theory at least, both replicable and scaleable. The second option runs straight into the constraint of committed leaders - there are only so many of them. It is difficult to reduce the third approach to even a plan much less a replication toolkit. 

For those looking at examples of system transformation, it is important to understand the underlying approach to figure out which category a particular system transformation attempt belongs to.

Sunday, November 18, 2018

Times feature on how China became a superpower

The NYT has a China feature with several articles. 

Bureaucrats who were once obstacles to growth became engines of growth. Officials devoted to class warfare and price controls began chasing investment and promoting private enterprise. Every day now, the leader of a Chinese district, city or province makes a pitch like the one Yan Chaojun made at a business forum in September. “Sanya,” Mr. Yan said, referring to the southern resort town he leads, “must be a good butler, nanny, driver and cleaning person for businesses, and welcome investment from foreign companies.” It was a remarkable act of reinvention, one that eluded the Soviets. In both China and the Soviet Union, vast Stalinist bureaucracies had smothered economic growth, with officials who wielded unchecked power resisting change that threatened their privileges... Afraid to open up politically but unwilling to stand still, the party found another way. It moved gradually and followed the pattern of the compromise... which left the planned economy intact while allowing a market economy to flourish and outgrow it.
Examples of the now famous "crossing the river by feeling the stones" approach
Factories should meet state quotas but sell anything extra they made at any price they chose. It was a clever, quietly radical proposal to undercut the planned economy... allowing farmers to grow and sell their own crops, for example, while retaining state ownership of the land; lifting investment restrictions in “special economic zones,” while leaving them in place in the rest of the country; or introducing privatization by selling only minority stakes in state firms at first.
This approach has been followed on the political side too,
But in reality, the party made changes after Mao’s death that fell short of free elections or independent courts yet were nevertheless significant. The party introduced term limits and mandatory retirement ages, for example, making it easier to flush out incompetent officials. And it revamped the internal report cards it used to evaluate local leaders for promotions and bonuses, focusing them almost exclusively on concrete economic targets. These seemingly minor adjustments had an outsize impact, injecting a dose of accountability — and competition — into the political system, said Yuen Yuen Ang, a political scientist at the University of Michigan. “China created a unique hybrid,” she said, “an autocracy with democratic characteristics.”
Sample this on the growth of China's school tutoring market,
In cities like Shanghai, Chinese schoolchildren outperform peers around the world. For many parents, though, even that is not enough. Because of new wealth, a traditional emphasis on education as a path to social mobility and the state’s hypercompetitive college entrance exam, most students also enroll in after-school tutoring programs — a market worth $125 billion, according to one study, or as much as half the government’s annual military budget.
On the role of private sector,
The private sector now produces more than 60 percent of the nation’s economic output, employs over 80 percent of workers in cities and towns, and generates 90 percent of new jobs, a senior official said in a speech last year.
On China's role as the builder-in-chief with nearly 600 projects across, mainly, developing countries,
41 pipelines and other oil and gas infrastructure help China secure valuable resources. 203 bridges, roads and railways create new ways for China to move its goods around the world. 199 power plants — for nuclear, natural gas, coal and renewables — give China new markets for its construction and equipment companies... at least 63 power plants financed by China around the world, which collectively pollute more than Spain.
On its efforts to reshape the global narrative on China in popular media,
Of the top 100 highest-grossing films worldwide each year from 1997 to 2013, China helped finance only 12 Hollywood movies. But in the five years that followed, China co-financed 41 top-grossing Hollywood films... Perhaps most central to China’s soft power push is CGTN, the international arm of the state broadcaster CCTV. With employees from more than 70 countries and regions working on television channels broadcasting in English, Spanish, French, Arabic and Russian, CGTN’s mission is to report news for global audiences “from a Chinese perspective.”
On China's progress up the manufacturing value chain from 2000 to 2016,
On the evolution of the country's internet landscape,
It is years ahead of the United States in replacing paper money with smartphone payments, turning tech giants into vital gatekeepers of the consumer economy. And it is host to a supernova of creative expression — in short videos, podcasts, blogs and streaming TV — that ought to dispel any notions of Chinese culture as drearily conformist. All this, on a patch of cyberspace that is walled off from Facebook and Google, policed by tens of thousands of censors and subject to strict controls on how data is collected, stored and shared... In China, there is pretty much only one rule, and it is simple: Don’t undermine the state. So.. unwanted beliefs and ideologies are kept out. Beyond that, everything is fair game. Start-ups can achieve mammoth scale with astonishing speed; they can also crash brutally. Thanks to weak intellectual property protections, they can rip one another off with abandon — not great for rewarding innovation, but O.K. for consumers, who get lots of choices...
Little remains of daily life that has not been transformed. Shopping. Getting a loan. Renting a bike. Even going to the doctor. This level of clout hasn’t gone unnoticed by China’s leaders. Never in the Communist era have private entities wielded such influence over people’s lives. To keep tech in its place, the government is demanding stakes in companies and influence over management. Regulators have reprimanded online platforms for hosting content they deem distasteful — too raunchy, too flirty, too creepy or just too weird. That’s why the best way for tech companies to thrive in China is to make themselves useful to the state. Nearly everyone in China uses WeChat, making the social network a great way for the authorities to police what people say and do. SenseTime, whose facial recognition technology powers those fun filters in video apps, also sells software to law enforcement.
The results of all this have been truly impressive,
Eight hundred million people have risen out of poverty. That’s two and a half times the population of the United States... Chinese men born in 2013 are expected to live more than seven years longer than those born in 1990; women are expected to live nearly 10 years longer... China used to make up much of the world’s poor. Now it makes up much of the world’s middle class.