Thursday, May 23, 2013

Observations on the "Amma" canteens

Tamil Nadu has been a leader in pioneering populist policies. The latest example is the "Amma" canteens, which have apparently become a major hit with the residents of Chennai. So much so that the government has now announced expansion of the canteen to nine more cities, besides the offering of a greater variety of dishes. The 200 canteens are run by the Chennai Municipal Corporation by involving self help group (SHG) women in cooking, serving, and managing it, and currently supply breakfast and lunch. A few observations

1. Arguably its biggest contribution would be in freeing up time for women-folk in those households who eat at these canteens. A typical Indian woman spends a major share of her time in the kitchen,   preparing food for the family. Unwittingly, the "Amma" canteen may therefore have become a powerful gender empowerment intervention, especially if it sustains and expands as envisioned. Given the fact that women in most urban households work full-time, such canteens can have a potentially transformational impact in redressing the gender imbalance in a typical household.

2. While the low price are undoubtedly important, the success of these canteens cannot be exclusively attributed to it. The quality of food, the cleanliness of the canteen, and its operational effectiveness have all contributed to its success. This raises the question of why the market did not address the felt need. At a time when the retail chain business model has become pervasive, and affordable fast-food chains are among the largest business in many countries, it is surprising that this has not taken hold in India. By any logical reasoning, given the size of any Indian city market, a restaurant chain, which supplies clean and consistent quality food at affordable prices, and whose profitability is driven by volumes, should be an excellent commercial proposition. Now, the success of these canteens can be the trigger for private entrepreneurs to enter this market.

3. Now that the canteen is up and running successfully, it is important to look at its long-term management challenges. The problem with public systems is that while it may be do well in managing an on-going enterprise, it is less likely to be effective in responding to emergent dynamics. In particular, there are two risks. One, given the public financing of these canteens and the resultant incentive mis-alignment, there is the strong likelihood that the management systems will degenerate over time and the canteens will join the long list of public "white elephants". Two, for the same reasons, there will be less pressure to be responsive to changing market signals and being dynamic with its business model.

4. An effective strategy to address these twin problems would be to develop public private partnerships (PPPs). In fact, this offers an excellent example for a potentially successful PPP collaboration. The most ideal PPP would be to let these canteens become fully owned and operated by SHGs. The local governments should provide technical assistance in standardization, quality management, and expedite licenses and approvals. Since it is neither desirable nor practical for governments to support such canteens over a longer period of time and in large scale, such PPPs offer the best strategy for the Corporation to gradually disengage. If the Tamil Nadu government managed to achieve this, the "Amma" canteen will surely be held up as an excellent example of how public policy can  facilitate the development of a missing market.

Wednesday, May 22, 2013

"Forward guidance" as an instrument of monetary policy

I blogged earlier on why the extraordinary monetary accommodation by way of quantitative easing was like pushing on strings. Clearly the dramatically increased monetary base is inducing neither consumption nor investment. Heck, it is not even leaving the bank vaults!

Furthermore, the QE policies may be creating distortions across the world economy. Fundamentally, the co-ordinated monetary accommodation in US, Europe, and now Japan, has created a world awash with liquidity. This has resulted in massive resource mis-allocation problems. There are signatures of froth in bond markets in general and US government securities in particular. For the past year-and-half, in an apparent decoupling from their recessionary real economies, equity markets in US and Europe have been booming. The biggest beneficiaries have been the large financial institutions who have leveraged the plentiful cheap capital and gotten even bigger and ever more profitable.

Worse still, the ripples from these distortions have adversely affected the developing countries. Faced with low returns, volatile portfolio capital from developed markets has been flowing into the emerging economies. These capital inflows have driven up currencies and imported inflationary pressures. It has increased the risks associated with macroeconomic management for all these economies. And not to say anything about the possibility that the excess liquidity may have played its role in inflating the commodities market bubble which has adversely affected many developing countries.

In this context, I recently got to read Michael Woodford's compelling case laid out at Jackson Hole last year that favors monetary policy communication through "forward guidance" over QE. He advocated that the Fed scrap QE and communicate that it will do everything it can to keep nominal interest rates low till a certain economic (say, potential output gap is closed) or financial (say, inflation crosses a certain limit) outcome is breached. This will remove all uncertainties about abrupt policy reversals and reassure investors and consumers that the real interest rates will remain ultra-low for an extended period of time. In this way it will, unlike the QE, directly address the uncertainties that currently clog the investment-consumption channel.

He argues that the most effective strategy to frame expectations in a positive manner would be through a nominal GDP targeting regime. A signal that the Fed will persist with low rates till the economy recovers back to its trend output level removes all transitionary uncertainties and could credible commitment, without compromising its anti-inflationary bias, that would reassure and thereby restore the animal spirits in investors and consumers alike. He writes,
Standard New Keynesian models imply that a higher level of expected real income or inflation in the future creates incentives for greater real expenditure and larger price increases now; but in the case of a conventional interest-rate reaction function for the central bank, short-term interest rates should increase, and the disincentive that this provides to current expenditure will attenuate (without completely eliminating) the sensitivity of current conditions to expectations. If nominal interest rates instead remain unchanged, the degree to which higher expected real income and inflation later produce higher real income and inflation now is amplified. If the situation is expected to persist for a period of time, the degree of amplification should increase exponentially. Hence it is precisely when the interest-rate lower bound is expected to be a binding constraint for some time to come that expectations about the conduct of policy after the constraint ceases to bind should have a particularly large effect on current economic conditions — to the extent, that is, that it is possible to shift expectations about conditions that far in the future.
See this and this for excellent commentaries on the Woodford paper.

I have blogged earlier, here and here, examining both sides of the argument on the issue of NGDP level as a monetary policy anchor. On further reflection, the monetary policy framework can be made even more robust by communicating a two-level target. The Fed should clearly put forward its commitment to reach the desired NGDP level (recovery to the potential output level) over a 2-3 year time frame, while also seeking to signal its commitment to a medium-term (say, 3-4 years) inflation target of 2-2.5%. This should achieve the level targeting objective without compromising on the inflation fighting credibility.

Update 1 (7/8/2013)

The new Governor of Bank of England Mark Carney becomes the latest to embrace forward guidance strategy to increase the effectiveness of monetary policy. It announced (pdf here) that it intends to keep interest rates at 0.5% (where it has stood since March 2009) till unemployment rate, currently at 7.8%, falls to atleast 7%. This comes with three provisosone, if the MPC judges that inflation in around two years’ time will be half a percentage point or more above the 2% inflation target; two if medium-term inflation expectations “no longer remain sufficiently well anchored”; three, if the bank’s financial-policy committee judges that the monetary stance poses a significant threat to financial stability that cannot be contained by other measures that the bank can take. See analysis here

Update 2 (9/9/2013)

QE and other unconventional monetary accommodation can only get you so far. The more important thing is expectations management. Christina Romer has an excellent speech where she argues that dramatic change in expectations can come only from "regime shifts", of the sort that Shinzo Abe has been trying to do in Japan. 

Update 3 (9/9/2013)

Narayan Kocherlakota, President of the Minneapolis Fed, makes a strong case for forward guidance,
Over six years after the national unemployment rate first began its ascent, the labor market remains disturbingly weak. The good news is that, with low inflation, the FOMC has considerable monetary policy capacity at its disposal with which to address this problem. The FOMC’s test today is to figure out how best to deploy this capacity. The answer lies in taking two steps. The first step is to communicate that our goal is to accomplish a fast return to maximal employment while keeping inflation close to, although possibly temporarily above, the target of 2 percent. The second step is to do whatever it takes, on an ongoing basis, to achieve that goal. A goal-oriented approach to monetary policy greatly reduced inflation in the early 1980s. Adopting such an approach in our own time would improve labor market outcomes. 
Update 4 (11/9/2013)

Very nice article by Marcel Fratzscher who cautions against excessive reliance on the use of central bank communications to shape market expectations. He finds three drawbacks with the current dominance of central bank communication - it crowds-out other private sources of information, thereby thereby depriving the monetary authorities themselves of an invaluable, independent view of trends that they need for sound policymakingprice movements have come to reflect responses to their statements and actions rather than to changing economic and financial realities; when central banks are seen to give misleading assurances and to over-commit to certain outcomes, they risk losing their most important asset, their credibility. 

Saturday, May 11, 2013

Price variations in US healthcare market and the power of data visualization

Competitive markets deliver cost-effective health care? No, if evidence presented in the graphic from New Jersey on treatment of chronic obstructive pulmonary disease is to be believed.

In the same New York city area, a joint replacement surgery costs anywhere between $15000 and $155000! The variation in prices, over such a small area, is truly stunning. This variation is equally stark when procedure rates in the US are compared with those in other countries. A few weeks back Time carried a well researched story on the high health care costs in the US, which had this graphic.

The data on the variations in prices for the 100 commonest diagnosis related groups (DRGs), spanning 163,065 patients, charged by 3337 hospitals in 306 metropolitan areas in 2011 was recently released by the US Government's Centers for Medicare and Medicaid. The data is available here. Is there any more compelling evidence of a market failure? Health care is clearly not broccoli.

The Times has rendered the database in a superbly informative interactive infographic. Its cognitive appeal and user-friendliness is striking. It is also an excellent example of how appropriate rendition of "big data" can be transformational in bridging the "last mile gap" in awareness creation efforts. Such graphics present critical decision-support information (here, a very good representative metric, fee charged by the hospital for each DRG for both Medicare and non-Medicare patients, both compared with respective national averages) in a manner that resonates cognitively (it is mentally easier to compare hospitals when information is so presented, on a geographical plane) with its audience.

In this context, considerable academic research has been done in recent years on the impact of information dissemination on increasing the responsiveness of elected representatives, quality of learning outcomes in primary schools, girl child literacy, prices of farm products, and so on. In many respects, all these studies are merely regurgitating conventional wisdom. At a conceptual level, even before any such research, people at the cutting edge in each of these areas already knew that bridging information asymmetry can be transformative. But the challenge, and they also knew it all along, is in presenting it in a manner that would facilitate easy use by its targeted audience. The academic research, beyond validating conventional wisdom, does nothing to address that challenge.

Imagine having similar visualization in developing countries to help people shop for school admissions or buy insurance policies and savings instruments, parents know the learning trajectory of their child, farmers know the optimal farm-gate price for their produce, and so on. And also if this information can be made available on a mobile phone interface.

I strongly believe that the search for such solutions require a smart intersection of statistical analysis, data visualization techniques, communication technologies, and behavioral psychology. Given the inherently complex nature of these issues and co-ordination problems, the market is not likely to resolve this challenge. It requires a partnership between governments, large private foundations, non-government organizations, and private service providers. But governments have to take the lead in facilitating this partnership.

PS: In the US, even with the available information, in the absence of some form of regulation, the local market power of hospitals, the presence of an insurance intermediary, and the very nature of demand for health care services, will conspire to maintain the diverse price distribution. 

Friday, May 3, 2013

Designing effective development program implementation

A collaborative approach to development program implementation that marries the consultant's problem solving skills with the academician's experimental research skills is the subject of my latest Governance Agenda column.

Wednesday, May 1, 2013

The "inflation dog" is locked up in bank vaults!

The IMF recently described inflation as the "dog that did not bark". It pointed to structural unemployment  (which lowers competition in labor market and thereby attenuates deflation) and anchored inflation expectations (due to the high perceived inflation fighting credibility of central banks) as being responsible for muting both deflation and inflation.

There will obviously be disputes about how accurately this reflects the underlying reality - Alok Sheel has a good analysis of other equally compelling factors. Amidst all this speculation we forget that the extraordinary quantitative easing has left no signatures of inflation. This FRED graphic shows that in the US an exploding monetary base has been accompanied by relatively stagnant stock and velocity of M2 money.
FRED Graph
And if we add consumer lending, commercial and industrial loans, and commercial paper to the M2 stock and monetary base, the underlying lack of demand becomes painfully obvious.
FRED Graph
Atleast for the time being, the "inflation dog" appears safely locked up in the vaults of banks! But do I see the M2 stock inching up or is it just a squiggle?