Tuesday, September 29, 2015

A housing market for the super-rich?

A few weeks back I had blogged about how property prices in Mumbai had exploded over the last decade, pricing all but a handful of those at the very highest level of the income ladder out of the market. As Michael Skapinker writes, this is true of London too,
Tiny apartments for £750,000. Family homes in the millions. This is in areas that, in recent memory, were poor and rundown. You can venture into neighbourhoods that still are, but you won’t do much better. The average London home cost £493,000 in February, according to the Office for National Statistics. And renting is no easier, taking a large chunk out of all but the highest salaries. Average London rents grew by 3.2 per cent in 2014-15, compared with 1.5 per cent in the rest of England... Many middle-class professionals are struggling to live in London: teachers, university lecturers, doctors, journalists. Look at the job ads. A senior house doctor in the urology department at University College Hospital: annual salary £30,002 to £47,175, plus a small London supplement. Assistant professor in international political economy at the London School of Economics: £51,908.

It was not always this way. Twenty-four years ago, when we bought a house in one of London’s loveliest neighbourhoods, our neighbours were, and still are, people who do the jobs described in these ads. None of us could afford to move into the area now.It is difficult to see how the successful candidates will find somewhere to live in a city where house prices are many multiples of their salaries... London boasts some of the world’s leading research hospitals and scientific institutes. Who will staff them? And if well-qualified professionals cannot afford to live in London, what of all those essential workers on even lower salaries: nurses, ambulance drivers, firefighters?

So, we live in an age where housing is unaffordable not only to the foot-soldiers of urban growth (janitors, small-service providers, small traders, lower-level public officials, and informal sector workers), but also to the knowledge workers and higher-level service professionals (senior public officials, academicians and researchers, professionals, and managers). In all these cases, a house of a standard that their parents (or the earlier generation) with similar relative incomes would afford, is simply out of reach, even if they use all their life-savings for the house. 

In the bigger cities on average, a Rs 10 million house (itself, a fast increasing lower limit), with a 30% upfront payment, would require an EMI of nearly Rs 75000, on a 25 year loan at an average of 12% interest rate. Assuming a third of income goes for housing, only families with annual income of around Rs 2.5 million can afford this. On the demand-side, in 2011-12, just 1.3% of all tax payers, or 3.9 lakh people in a country of 1.1 billion, had income above Rs 2 million! Multiply the number four fold, 1.6 million, and you realize that the affordability gap is staggering by several orders of magnitude. 

At the risk of repetition, it is abundantly clear that all urban housing, but for a marginal proportion at the top of the income ladder, has become unaffordable. Given the acute scarcity of vacant land within the city, the only answer to the problem is to go up vertically. Policies that promote addition of stock - higher FAR and lower property taxes (for vertical units), especially along transit corridors, coupled with release of large land banks locked up with various public entities - should take the center-stage of government's urban housing policy. This should complement the traditional affordable housing policies for the poor, like public housing programs, infrastructure grants, and mortgage interest subsidies. 

In fact, public policy should be tailored towards increasing the stock of housing, of any kind, without being unduly concerned with the details of means-testing and other regulation. For sure, this would result in some diversion to "ineligible" beneficiaries. But the demand is too huge at every level (except at the top-most tier), affordability heavily skewed, and the supply too limited for us to be micro-managing the housing market through unenforceable regulation. 

Further, as cities like London, Paris, and New York are finding out, it is also necessary to ensure that housing units and trophy properties do not become pure and highly remunerative investment avenues, which end up squeezing the housing supply itself. Underlining this, it is estimated that 28% of the wealth held by ultra-high net-worth Asian individuals (wealth above $30 mn) was in real estate, to 8% by Europeans and 6% by Americans. A telescopic property taxation system, with very high property tax rates for larger houses, and prohibitive enough vacant land tax on large land parcels, may be necessary to deter such rent-seeking. 

Monday, September 28, 2015

Is there no "missing middle" in India's industry?

Livemint recently had a graph which pointed to research which questions the hypothesis of "missing middle" in India's manufacturing. It shows that mid-sized firms (employing 100-1000 people) are the country's biggest employers.
Economists Chang-Tai Hsieh and Peter Klenow have this graphic which too does not reveal any missing middle.
The claim of "missing middle" comes from the work of Anne Krueger and others and is reflected in the graphic below taken from this IFC report.
Economists Chang-Tai Hsieh and Benjamin Olken question the "missing middle" hypothesis and claim that the "missing middle" came due to transformation of data (a bimodal distribution emerges when firms are categorized into three groups of less than 10, 10-49, and 50 and more employees) and using the distribution of employment share by firm size and not the (more relevant) distribution of the number of firms by size.
Their analysis leads to the following conclusions,
First, while there are fewer middle-sized firms in developing countries than developed countries, there is no missing middle in the sense of a bimodal distribution. Second, the average product of labor and capital is significantly lower in small firms when compared to larger firms. This is important because some theories say that small firms do not grow because they face high marginal costs of capital; if so, the marginal product of the capital that they do have should be higher. While we do not directly observe the marginal product of capital, it appears that the average product of labor and capital is significantly lower in small firms when compared to larger firms. To the extent that marginal and average costs move together, this fact suggests that large firms rather than small firms are the ones suffering the large fixed costs or shortage of capital that could stifle their growth.

Third, we consider the possibility that regulatory obstacles generate a missing middle, but find no evidence of meaningful discontinuities in the firm size distribution. We focus on regulations that kick in at a certain size threshold and test whether there are an unusually large number of firms right under the threshold and an unusually small number of firms right above the threshold: specifically, we focus on a size threshold of 100 employees in India where various labor regulations kick in; a revenue threshold in Indonesia above which firms are required to pay value-added tax; and a revenue threshold in Mexico above which firms face higher tax rates. However, we find no economically meaningful bunching of firms around these thresholds, which suggests that stories based on thresholds due to formality or regulations are unlikely to be causing major distortions in the economy.
The last point and the graphic above assumes significance in light of the conventional wisdom in India that restrictions on labor retrenchment for firms with more than 100 workers has been responsible for keeping firms small and unproductive. As can be seen, there is no statistically significant discontinuity as the firm size approaches 100 (the small kink seen for informal firms would amount to just 418 firms for all of India!). The authors also do not see any discontinuity that is claimed by conventional wisdom around tax notches in Indonesia and Mexico. While the restriction imposed by the Industrial Disputes Act is undoubtedly distortionary, there is little empirical evidence to suggest that it is an important constraint, leave aside being a binding one.

Apart from the bi-modal distribution, another interpretation of the "missing middle" is the absence of sufficient number of intermediate sized firms. This assumes significance since firms generally start small and only a small proportion of them grow into large enterprises, leaving a significant share of intermediate sized firms. Given that the greatest marginal job creation and value addition happens when small firms grow into intermediate size ones, the deficiency of such firms is a matter of undoubted concern for India.

Anyways, missing middle or not, the bigger problem for India's economy is the small size of its overwhelmingly vast majority of firms and their very low productivity, which does not increase with time. Neither do plants grow as they age...
... nor does their productivity rise with age.

This is the nature of the beast that the country needs to overcome. Improved ease of doing business, better infrastructure, access to affordable credit, steady supply of skilled man power, and less of corruption are all essential ingredients in this pursuit. In any case, the works of economists like Chang-Tai Hsieh exploring the reasons for the wide income differentials across nations draw attention to the role of resource misallocation across sectors, across firms within a sector (small Vs big), and within firms (negligence on management practices) as possible contributors to the dominance of such dwarfs and unproductive firms. 

Sunday, September 27, 2015

Weekend reading links

1. Livemint reports that thermal plant capacity utilization levels have touched lows last seen 15 years back. It points out that while capacity addition grew at 13.7 annually in the three years to 2015, consumption grew at just 6%.
The weakness of the consumption may actually be grossly understated by the growth figures, which in 2014-15, was an apparently healthy 8%. In the Indian electricity context, where demand is heavily suppressed by load-shedding and diesel and other high cost generation, any increase in demand is a mixture of both reduction in suppressed demand and actual increase due to new economic activity. In fact, contrary to the CEA figure of 4%, the rating agency ICRA estimates the true power deficit to be about 15%. Therefore, the headline figures are likely to be an over-estimate of the actual demand growth.

2. The boom in engineering college seats, which increased by over 250% in the 2006-07 to 2012-13 period, has burst. The AICTE estimates that nearly 600,000 of the 1.67 million engineering college seats in the country's 3470 engineering colleges may have to be shut down. More on the carnage in technical education,
Educational institutions have sought the AICTE’s permission to close down around 1,973 courses in technical subjects, citing a poor employment scenario and flagging student interest in 2015. The regulator has allowed the discontinuation of 757 such courses this year... Of the 757 technical and professional courses or departments that have been allowed to shut, the overwhelming majority of 556 were engineering courses, followed by 89 in pharmacy, 57 in computer application and 54 management, according to the regulator. In addition, some 83 colleges, including 46 management and 31 engineering colleges, have closed down so far this year. As much as 45% or 345 of the technical education courses closed so far this year are in Telangana and Tamil Nadu alone.
This is a timely reminder about what can happen when things grow faster than the system can support.

3. Livemint points to this research report by brokerage Nirmal Bang which finds India's Gross Financial Savings (GFS) to have touched a 25 year low in 2014-15 and is declining further,
According to the Reserve Bank of India (RBI) data, NFS of Indian households increased from 7.4% of GDP in FY14 to 7.7% last year. Although it is the highest level in the past four years, it remains way below the average of ~10% in the post-liberalisation period. The increase in NFS was primarily driven by the collapse in financial liabilities, as GFS fell to 9.8% of GDP, marking its lowest level in the past 25 years. A detailed look at GFS shows that households increased their exposure to risky assets (up 76% YoY) and long-term safe assets (up 25%), while their savings in deposits (on incremental basis) declined 25% in FY15. As risky assets account for only 4% of GFS, increased exposure to shares and debentures failed of offset the negative impact of deposits (which account for ~50%), as a result of which GFS fell last year. While NFS was up in FY15, the collapse in financial liabilities indicates lower physical savings, which forms a larger portion of total household savings. Consequently, the latter may have been lower in FY15. Not only this, a look at leading indicators reveals that GFS may have declined further in FY16.Incremental bank deposits are down ~22% YoY in the first five months of FY16, while currency holdings slipped by ~25%. Moreover, addition to assets under management of mutual funds was also down ~8% YoY in April-August 2015. Overall, households’ (gross) financial savings are most likely to have declined further this year.
4. Revealing Larry Summers quote as told by Elizabeth Warren,
After dinner, “Larry leaned back in his chair and offered me some advice,” Ms. Warren writes. “I had a choice. I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don’t listen to them. Insiders, however, get lots of access and a chance to push their ideas. People — powerful people — listen to what they have to say. But insiders also understand one unbreakable rule: They don’t criticize other insiders.
5. Fascinating article on the heavily subsidized Japanese rice farming sector and the JA-Zenchu rice farmers union, which has campaigned to limit imports, and keep out corporate farming,
Since the 1970s, Japan has effectively paid farmers not to grow rice, the so-called “set-aside” programme that has used hefty subsidies to encourage an ever greater proportion of Japan’s 2.5m hectares of rice paddy to lie fallow. In 1971, some 541,000 hectares were out of use. Today, the total stands at just over 1m hectares. “Even at that level of paddy fields out of use, JA is finding that it is still too small to maintain the desired price because demand is continuously declining. Also, rice farmers are reaching the limit of how much area they want to set aside: for emotional reasons, they want to keep on farming rice and are too old to learn the completely different skills of growing barley or wheat.
6. Doesn't this cartoon reliably caricature the hyper-sensationalistic, night-time news television in India?
7. The latest MGI report on gender disparity and economic growth shows that India can raise its incremental output by about 16%  or $ 0.7 trillion by 2025 if it merely matches the increase in female labor force participation rate of the fastest growing country in the region.  

India sits with Middle East and North Africa in its gender disparities. But increasing women's workforce participation would, more than enabling public policies, require large-scale social transformation on a scale equivalent to that which led to the weakening of caste barriers in Indian society over the later part of nineteenth century and early part of the twentieth century.

Thursday, September 24, 2015

Why do we gloss over state capability deficiencies?

Why do we consistently under-estimate state capability deficit and see technology and other innovations as the solution to public policy problems?

Consider three examples. One, using GIS to improve property tax collection. Two, technology interventions (GIS mapping, SCADA, smart meters and smart grids, etc) or financial engineering of state balance sheets to reduce distribution losses in their electricity distribution companies. Three, state-of-the-art regulation and processes to improve the effectiveness of regulatory institutions. All have been tried ad-infinitum not just in India, but across the world, with minimal success. 

It is not to say that these are not useful, but just that the underlying problems are fundamentally about weak state capability (at local government, public sector unit, and state/central government levels respectively above), and without atleast partially addressing them, the fixes suggested will hardly make a dent on the problem. In all these cases, policy makers over-estimate the contributions of technology interventions and process re-engineering in delivering the desired policy objectives. In fact, there are atleast six distinct biases that nudge us into an unqualified embrace of such interventions.

1. The desire for the tangible and conclusive. It has become part of the social internalization that everyone now views a policy intervention in terms of norms and components, clearly defined processes, time-lines, and a list of outcomes, all of which should form the basis for scaling up. Even when operational flexibility is afforded, the overall architecture is generally self-enclosed.

Unfortunately, most such policy interventions are transactional, requiring continuous engagement by officials at the cutting-edge with other human stakeholders. Such engagements, the quality of which is critical, cannot be prescriptive and decreed into implementation. They require capable and engaged individuals, who are sufficiently empowered (with resources and operational freedom), to discharge their responsibilities in an environment which allows them the freedom to do so.

Given that all these assumptions are questionable in the median case, the scaling-up challenge becomes simply humongous. We need less prescriptive and uniform approaches to dealing with the problem. But such approaches involve providing considerable program design and implementation autonomy with attendant delegation of responsibilities, which would make monitoring far more difficult (in fact, the current type of monitoring pretty much impossible) and outcomes less certain. In other words, this is an altogether different program design, implementation and monitoring paradigm. It would need greater tolerance for failures and turmoil and adoption of more dynamic program management approaches.

2. The partial equilibrium bias. In our problem solving moments, even when we are most logical, we rarely go beyond the first order problems. Accordingly, once we can do a GIS mapping of all the properties, the tax administration is reduced to a simple process of tagging and matching. This assumes that it is easier (than doing the same manually) to do GIS mapping and generate analytics, and then act on them to expand tax base and improve collection efficiency.

What if the implementation process of GIS mapping itself can be interminable (how many cities have completed even one iteration of city-wide GIS property mapping)? What if the process of constant updation of the GIS database can be a challenge (this assumes that the Town Planning guys have all the information available on the changes made to houses and new construction)? What if getting the tax collectors to act on the analytics may prove insurmountable (do we seriously believe that the bill collectors in their area or the Commissioner for the city as a whole already does not know about who are the big defaulters)? These, and many more, second and third order issues remain far from out thoughts when we support such interventions.

The neatness and simplicity of the partial equilibrium of the interventions, and the false sense of comfort that it provides, blinds us to the general equilibrium dynamics that are invariably generated and should necessarily be overcome for any such intervention to succeed.

3. Convenience bias. All of us are primed towards embracing something that appeals as neat and simple, and one which increases our convenience. For sure, GIS mapping and regulatory reforms appear very neat and simple, and are better than the existing systems to tackle the problem being addressed. It has always been the case that we demand "more and better, even when less is enough".

4. Optimism bias. It is always the danger that project teams under-estimate the magnitude of the task entrusted and see the road ahead with more optimism than it should merit. Accordingly, officials who champion a technology or process intervention are instinctively likely to under-estimate the problems and over-estimate their chances of success. 

5. Doing-something-new (or innovation) bias. When something is persistently wrong or a failure, we tend to over-react and assume that the existing design and processes have failed and we need to adopt something new. We have deeply internalized that failures are due to lack of innovation with design, process, and technology. Very rarely do we step-back to see whether the original design and processes themselves were rigorously implemented or not. It is very comforting to rationalize away failures by blaming it on the design and other extraneous factors, rather than questioning our implementation capability.

6. Best-practice bias. Occasionally, amidst the gloom surrounding the implementation canvas, we see bright-spots and embrace them as best-practice models to be transplanted across the world. Accordingly, the best-practice regulatory architecture is transplanted into a system which neither has the resources nor the pre-requisite environmental conditions for the effective implementation of the best-practice model. Little do we try to examine whether the bright spot was due to the extraordinary personal initiative of a committed individual or group of individuals or due to some systemically built (and therefore replicable) capacity. 

7. Finally, the illusion of control bias. No policy maker or political leader wants to face up to the reality that their primary implementation instrument, the bureaucracy, in its present condition, is just not capable enough to implement the proposed intervention, leave aside achieve the desired outcomes. Once this assumption is shaken, it can be a very unsettling process for bureaucrats and politicians to craft a policy intervention and its implementation plan. In fact, unlike earlier, when you only had to design a policy intervention (a best-practice model), now you have to also craft an implementation plan. Worse-still, you need to tailor the policy intervention, conditional on your implementation capability. Apart from being personally unsettling, the challenge associated is, in any case, now far more complex than before.

It is more likely that all of them bind in varying degrees nudging policy makers and political leaders to under-estimate state capability problems.

Wednesday, September 23, 2015

The trade-offs between networks and mega-cities

Edward Glaeser and Co have a new paper which examines the trade-off between mega-cities (densified cities) and network of smaller cities linked together (by, say transportation and other networks) that enable exchange of goods, people, and ideas. In particular, they examine whether it is good public policy to pursue merging cities to form mega-cities (densification) or form large networks of smaller cities (consolidation)? The paper examines the trade-offs that happen at three levels - returns to scale in ideas creation, connection between urban size and amenities, and elasticities of housing supply - and which may vary across time horizons (short vs long-term), stage of economic development etc. It finds,
Even if there are global increasing returns, the returns to local scale in innovation may be decreasing, and that makes networks more appealing than mega-cities. Inelastic housing supply makes it harder to supply more space in dense confines, which perhaps explains why networks are more popular in regulated Europe than in the American Sunbelt. Larger cities can dominate networks because of amenities, as long as the benefits of scale overwhelm the downsides of density. In our framework, the skilled are more likely to prefer mega-cities than the less skilled, and the long-run benefits of either mega-cities or networks may be quite different from the short-run benefits.
In the authors view, mega-cities score over networks in terms of amenity spill-overs, idea creation (skilled workers prefer densified environments), mobility of less-skilled workers across employers, new enterprises prefer larger markets etc. However, networks have advantages of having more land (eg. the space between network nodes) and more elastic housing supply.  

It will be interesting to empirically validate the model in the context of urban development in India. But till then, a few observations

1. It is arguable that more than anything else, supply of affordable housing and large enough public transportation networks are central to the growth prospects of any large metropolitan area. 

2. The mega-cities in India are clearly facing a crisis in affordable housing. In the absence of policies that promote vertical development and greater densification, supplemented with investments to improve carrying capacity, cities like Mumbai may be better off pursuing a model involving network of one large core connected to smaller nodes with excellent transportation lines. 

But the risk with this is that the larger node generally gentrifies, displacing all but the richest and highest-level government employees to live in the nodes and commute for work. Even for those working in the ideas creating enterprises, housing may have become unaffordable for the vast majority of employees, enough to possibly offset the benefits from densification. Without massive investments in good public transit networks with large carrying capacity, this trend can potentially stifle the economic prospects of such regions. 

Of course, one could say that markets would respond by moving out some of the economic activities, especially those requiring larger land and more workers, out from the city center to the suburbs. And it surely is happening. But the value of land, even in the nodes of the largest cities may have become prohibitive enough to more than off-set the possible gains from relocation. Therefore, in any case, the current urban planning models may require radical makeover. 

3. In this context, the examples of Paris and Tokyo are instructive. Paris has a small and less dense central core, with the major part of the population located in the banlieue, whereas Tokyo has a very dense core, surrounded by a massive metropolitan area, extending finger-like around the core in all directions with high-density nodes along them. In both cases, the nodes are connected to the core area through excellent public transportation networks that mitigate the typical problems of daily commutes. 

In contrast, the largest Indian (and many developing country) cities, have a much larger core and with much higher density than these cities. But given the sheer size of the populations involved and the attraction of economic opportunities in these cities, the suburbs of these cities are rapidly becoming as big as the core itself and with increasing density. Further, these suburbs are emerging more as a continuum to the city and not so much as distinct nodes.  

4. A 2014 report by the MGI identified 49 metropolitan growth clusters covering 183 districts across India. It estimates that these clusters would contribute 77% of India's incremental GDP, 72% of consuming-class households, and 73% of its incremental income pool in the 2012-25 period. In terms of economic growth policy making, states should prioritize the long-term development of these areas, with the Government of India stepping in wherever they overlap across states. In terms of the long-term future of the state itself, leadership and policies in these clusters assume far greater significance than the remaining parts of the state. 

Outside of the largest metros, the vast majority of these clusters are still a constellation of nodes around a larger (but not mega) city. The potential here are immense. It is still possible to carefully guide the development of these areas through progressive and far-sighted urban planning policies. Strict enforcement of master plans, with limited tolerance for land-use conversions (especially in the smaller nodes), and policies to promotes densification (higher FAR etc) are non-negotiable imperatives. This should be supported with investments in public transportation systems that link the nodes. These systems could be financed through innovative value capture and land monetization strategies. 

Tuesday, September 22, 2015

Indian Economy - The way forward?

As the debate rages on what should be the most prudent strategy for the Indian economy, as it faces adverse global and structural headwinds, consider the following three views. First Dani Rodrik,
Compare China and India. China grew by building factories and filling them with peasants who had little education, which generated an instant boost in productivity. India’s comparative advantage lies in relatively skill-intensive services – such as information technology – which can absorb no more than a tiny slice of the country’s largely unskilled labor force. It will take many decades for the average skill level in India to rise to the point that it can pull the economy’s overall productivity significantly higher. So India’s medium-term growth potential lies well below that of China in recent decades. A significant boost in infrastructure spending and policy reforms can make a difference, but it cannot close the gap. On the other hand, being the tortoise rather than the hare in the growth race can be an advantage. Countries that rely on steady, economy-wide accumulation of skills and improved governance may not grow as fast, but they may be more stable, less prone to crises, and more likely to converge with advanced countries eventually.
So what should policymakers do in such uncertain times? The prudent course would be to hunker down and preserve stability, awaiting greater clarity. rather than turn to policy adventurism. With the sharp decline in India’s inflation, the pressure is on for interest rates to be cut further. The argument is that this would boost both consumption and investment. But money is fungible. The government can easily deliver the equivalent of several percentage points of rate cuts by passing on the decline in global crude to retail pump prices rather than taxing most of it away, as it has so far. This would be the safer option. Cutting domestic rates in the face of Fed tightening unnecessarily raises India’s external vulnerability. More importantly, if the already outsized decline in inflation and input costs hasn’t induced either households or corporations to raise consumption or investment, would a few more basis points of interest rate reduction or its equivalent change anything much?
And, finally, Raghuram Rajan,
Growth has to be obtained in the right way. It is possible to grow too fast with substantial stimulus, as we did in 2010 and 2011, only to pay the price in higher inflation, higher deficits, and lower growth in 2013 and 2014. Of course, India is not in the same situation today. But with the world being an inhospitable place, we have to work hard to strengthen our current recovery and put it on a more sustainable footing. And while monetary policy will accommodate to the extent there is room, we will expand sustainable growth potential only by continuing to implement reforms the government and regulators have announced. These are intended to strengthen the environment for doing business and to expand access to financing, and these will then in turn allow our companies to find and exploit their core competencies...

While we understand the difficulties industry has and will work as hard as we can on improving the environment, India must resist special interest pleas for targeted stimulus, additional tax breaks and protections, directed credit, subventions and subsidies, all of which have historically rendered industry uncompetitive, government over-extended, and the country incapable of regaining its rightful position amongst nations... Jugaad or “working around” difficulties by hook or by crook is a thoroughly Indian way of coping but it is predicated on a difficult or impossible business environment. And it encourages an attitude of short cuts and evasions, none of which help final product quality or sustainable economic growth... The current difficulties of emerging markets stem from a complicated set of reasons, but an important one is impatience to regain growth by overemphasizing old and ineffective methods of stimulus.
So here is my two-pence worth synthesis,

1. India today faces several internal and external structural headwinds and some of the traditional paths to sustainable high growth rates may no longer be open. Our structural transformation may not pan out as expected and may prove quite tortuous.

2. The prevailing global market conditions are adverse and compounds the challenge.

3. India's economy is simply not broad-based enough - consumer spending power, firm capacity, retail and other transactional chains, breadth and depth of credit markets, skilled labor supply, and infrastructure capacity - to sustain high growth rates for longer durations. The weak state capacity and various land, capital, and labor market distortions only exacerbate the problem.

4. So a more prudent strategy may be, as Dani Rodrik says, to be the "tortoise", or as Jahangir Aziz says, to "hunker down", and brace for 5-7% medium-term growth rates and expedite important long-term reforms in health, education, labor, credit markets, taxation, and most importantly, in improving state capability. Simultaneously keep investing in infrastructure so that the stock builds up and deficiency shrinks. If done as planned, hopefully, over 4-6 years, we can reach where China was in 2001 and then take-off in a more sustainable manner.

As a strategy, policy makers and political leaders may need to acknowledge this reality, while pursuing the strategy of talking up the markets. The latter is necessary not just to win elections, but also to signal to the financial market participants. But the former is where substantive action should take place. The "island of relative calm in an ocean of turmoil", as the RBI Governor described the relative state of Indian economy, and the window of opportunity that it presents may not last for too long. 

Sunday, September 20, 2015

The problems with a public investment-led growth strategy for India

Srinivas Thiruvadanthai makes a good case for a public spending driven economic growth restoration strategy for India. I agree with the broader thrust, though I am not persuaded that many of the assumptions will hold as readily as envisaged. Consider the following,

1. The assumption that the rising corporate free-cash flows would lead to investment spending once the public spending kicks-off may not prove right. What if the free-cash flow is being used to deleverage, as is the case in many sectors? Does the government have the requisite fiscal fire-power (in size and time) that would enable the deleveraging to play out enough to ignite the investment cycle? Even assuming this fiscal space is available, is it just a deleveraging problem or are there other factors involved? What if many of the corporate investments are simply commercially unviable and insolvent (it would not be a stretch to assume that a large proportion of the infra projects are simply insolvent, and in some like steel, significant parts of the sector itself may be under water)? By itself, market is unlikely to force such projects/corporates to liquidate. We may need more aggressive actions by creditors, which in turn runs into institutional challenges like bankruptcy code etc?

2. The assumption about current account deficit moderating may not play out. It may be that oil stays low for some time, but gold, especially with the return to normalcy in US (and potential uptick in inflation), may start to recover, though not to the same previous levels. In any case, the last four months, gold imports have been rising. And once public investment cycle starts, the imports of equipments (even mineral ore commodities etc) etc will rise forcing up the imports. And, with no prospect of exports rising, the pressure on CAD may not be as benign as is being thought of. 

3. The assumption about inflation remaining under control too may not be correct. From everything we have seen, the Indian economy simply does not have the capacity to sustain very high growth rates for more than 3-4 years. From cement to pulses, once the supply and demand side expands, constraints will start to bind, driving up inflationary pressures. This is a constant theme in the speeches of the RBI Governor himself. 

4. Finally, the flow Vs stock juxtaposition of the public debt, while logically unexceptionable, may be less so in the real world. Given the impending return to normalcy in US credit markets, the continuing global economic weakness and uncertainty in the global financial markets which are unlikely to disappear anytime soon, the professed desire of India to attract patient foreign capital in infrastructure, and its recent history of macroeconomic imbalances, the global credit markets (rightly or wrongly, a fact beyond anyone's control) may not view a return to higher fiscal and current account deficits as good signal. And we all know that these things impose significant costs on open economies, however good the fundamentals, once the volatility strikes and sudden stop ensues. As to our comfortable debt stock, the high inflation has undoubtedly been the key player in keeping it low. Now that inflation is low, the trajectory of the stock remains to be seen.

However, having said this in provocation, public spending in infrastructure should go up considerably, even at the risk of slightly bumping up the twin deficits. In its absence, with exports not an option, corporate balance sheets weak, banks under stress, and household spending not broad-based enough, there is simply no engine to restore growth and the economy may remain entrapped in the gridlock for long enough to do irreparable damage.

A more broader case to be cautious about a public investment led growth strategy is made out in an earlier post here

Weekend reading links

1. Scott Sumner on the critical role played by revenues from land sales and leases in financing infrastructure and other investments in East Asian economies,
The bigger story in China (and elsewhere in East Asia) is the government ownership of land, which provides an important share of government revenue. The Singapore government, for instance, has a monopoly on the right to "mine" (i.e. create) new land. As a result, Singapore's land area has grown rapidly, and this has generated a lot of revenue. Local governments in China rely on land sales to pay for infrastructure projects.
2. Countries scaled to the size of their respective stock markets
3. Martin Wolf points to the possibility of a "Made in China" global recession, one triggered by a shrinking of the country's unsustainable investment spending (46% of GDP), and its interaction with the dynamics of financial markets as the Fed tapers and credit flow reversals begin,
One channel would be a decline in imports of capital goods. Since about a third of global investment (at market prices) occurs inside China, the impact could be large. Japan, South Korea and Germany would be adversely affected. A more important channel is commodity trade. Commodity prices have fallen, but are still far from low by historical standards (see chart). Even with prices where they are, commodity exporters are suffering.

4. On the resource misallocation in US engendered by the quantitative easing policies,
But companies have been following the central bankers in rigging the market, pushing equity prices up to heady levels that may not be validated by economic growth. The “evidence” of putative value creation is short-term noise. The reality is that companies are buying shares expensively at the cost of increased leverage, which amounts to a misallocation of capital. Then there is the resurgence in mergers and acquisitions, which are now running at levels reminiscent of 2007. If we know anything about M&A it is that managers are too easily carried away by the thrill of the chase, resulting in the notorious winner’s curse. When you bear in mind that $3tn of deals have been agreed across the world since January, much of it in the US, the scope for capital misallocation is once again large.
5. After this fantastic Indian Express essay on the workload endured by ecommerce"last mile boys" in India, another in FT from China on their kuaidi is eerily similar,
Ecommerce relies on these super-cheap delivery services. Delivering a package overnight in most locations costs Rmb10-13 ($1.50-$2), about a tenth of the cost in the US, thanks to the 12-hour days worked by Mr He’s couriers. The main beneficiaries are the rising middle class, which consumes the trappings of a much richer society at a fraction of the cost... By Chinese standards the jobs pay well — Rmb5,000 a month including bonuses — but it is back-breaking. “During peak time, work starts at 7am, and doesn’t end until midnight” says Mr He. “It’s very stressful, they have to deliver 300 to 400 [packages], and have to pick up between 100 and 200, in some neighbourhoods 700 or 800 items. The entire day they are on the move, climbing stairs, when they get back they are too exhausted to move.. 

Bigger companies like ZTO have built good reputations in the industry for providing decent work conditions, but there are thousands of courier companies in China and most do not even bother to sign contracts with couriers and are only lightly regulated. Yang Zhanlu, a courier who asked for his company name to be withheld, says of his Rmb4,000 monthly salary that 25 per cent is often deducted in fines. He has been punished for knocking too loudly, or delivering too early, and has no recourse.

In UP more than 23 lakh persons have applied against 368 posts of peon in the state secretariat. The number is almost half the population of Lucknow, which is 45 lakhs. What is even more shocking is that over two lakh applicants are at least graduate with BTech, BSc, MSc and MCom degrees. Applications also include 255 candidates with a PhD degree in hand. 
An interesting explanation for the explosion in applications,
In 2006, for about 260 jobs we received 100,000 applications. But in nine years the figure has gone up so much. One reason is perhaps the easy access, because the government had distributed 1.5m laptops and people sitting in remote areas can apply at the click of a mouse. In 2006, applications were made offline.
7. Amidst all the gloom surrounding the coverage on China, very little analysis has been done on the scenario that while its manufacturing output may be slowing, it is possible that the country can recalibrate towards consumption as a driver of economic growth and generate a greater share of growth from its services sector. Nicholas Lardy sings a contrarian tune,
The skeptics have taken insufficient notice of China’s progress in transitioning to its new model of economic growth, one less dependent on expanding industrial output, investment, and exports and more dependent on expanding private consumption expenditure. After a decade of relative stagnation, since the first half of 2012, China’s services sector has become the main driver of its economic growth. The services sector has grown continuously more rapidly than GDP, and its share of the economy now exceeds that of industry. Expanding demand for services such as health care, education, entertainment, and travel generates little or no demand for industrial goods, electric power, or freight transport. The demand for passenger transport, in contrast to freight, is soaring as domestic tourism booms.

The expanded role for the services sector reflects a continuous four-year rise in the private consumption share of GDP. The cumulative increase is not yet large, but it is a sharp change from the previous decade when the share fell continuously. China’s average level of per capita income is now at a sufficiently high level that a growing share of consumption is for services rather than goods such as food and clothing. The rising share of private consumption expenditure is feeding off increases in disposable income—which have exceeded the pace of GDP growth for several years—and a slightly reduced household savings rate. The relatively rapid growth of disposable income is in turn the result of the continued rapid growth of wages and an improved rate of job creation in sectors with higher incomes than agriculture. All of this growth—in consumption, disposable income, wages—is hard to square with the skeptics’ view that China is in an extreme slump.

In effect, China is in a virtuous circle. Since the services sector is much more labor intensive than industry, the rising demand for services feeds into more rapid growth of nonagricultural employment, helping to sustain rapid wage growth despite the slowdown in GDP growth since the 2000s. In turn, these lead the growth of disposable income to outstrip that of GDP, feeding back into rapidly rising private consumption expenditure, particularly for services.
It is debatable as to whether these trends have become sustainable, as is being claimed, or may reverse when the industrial production and infrastructure investments slow down. But with low baseline of domestic debt and consumption share, the re-calibration prospects should not at all be discounted.

8. On the much-discussed employability problem across Indian economy, this graphic from a report by EY on India's Higher Education shows that almost half the graduates are not employable in any sector.
9. Robert Reich points to concentration of market power in the digital market,
Google runs two-thirds of all searches in the United States. Amazon sells more than 40 percent of new books. Facebook has nearly 1.5 billion active monthly users worldwide. This is where the money is. Despite an explosion in the number of websites over the last decade, page views are becoming more concentrated. While in 2001, the top 10 websites accounted for 31 percent of all page views in America, by 2010 the top 10 accounted for 75 percent. Google and Facebook are now the first stops for many Americans seeking news — while Internet traffic to much of the nation’s newspapers, network television and other news gathering agencies has fallen well below 50 percent of all traffic. Meanwhile, Amazon is now the first stop for almost a third of all American consumers seeking to buy anything. Talk about power.
Supporters would point to the disruption that has been the characteristic of the information technology industry over the last two decades. But a counter-view, that appears not far-fetched,is that this churn was due to the initial stages of development of the IT sector and now that the industry has matured, the winners may be consolidating their positions.

10. Finally, nice graphic about the nationality of the largest group of migrants (outside Mexico) to each US state

Thursday, September 17, 2015

The 'asymmetric contracting' risk with auctions

The Economic Times reports that the just concluded FM radio auctions resulted in aggressive bidding in the metros and no bidders in 13 towns,
With bids in metro cities that far exceed what operators had expected, the auction has the broadcast industry wondering if it is subscribed to the winner's curse. The bid price for a station in Mumbai was Rs 122.8 crore, Delhi Rs 169.2 crore and Bangalore Rs 109.3 crore, while 38 stations in 13 cities had received no bids at all because of high reserve prices. Just these three metro circles account for 45% of the total bids received... For the major cities there is now a significant scarcity premium... this is a direct result of reducing the number of stations being auctioned in the "premium" locations — top cities into which all operators will rush, in order to preserve their businesses.

After the tumult surrounding sordid crony capitalism in the discretionary allocation of natural resources, India has embraced auctions with vengeance. Coal, telecom spectrum, mineral resources, and now petroleum reserves are being auctioned and notional receipts are being booked. Nobody doubts the intent behind these auctions and everybody applauds the efficiency with which they are being carried out. But the long-term sustainability of these auctions may not be as robust as it appears (more on this is in a later post). Is it therefore a case of the cliched 'operation successful, but patient dead'?

Most infrastructure projects in developing countries are characterized by several uncertainties. The commonest problem relates to site allocation and environmental and other clearances, which are par for the course for any project, and whose delays immediately translate into cost escalation. Then, there are the market risks, arising from lower than expected traffic forecasts or smaller market. Finally, there are the inevitable costs associated with rent-seeking, which no entrepreneur can escape. 

Under ideal conditions, market participants factor in all these elements when they make their bids, resulting in market-competitive price discovery. But in the real world, market participants suffer from cognitive biases (over-estimations of their ability to control the pace and trajectory of the development, in accordance with their laid out plans), and ex-ante overlook these factors when making their bids. Developers instinctively refuse to acknowledge errors in their business cases. Since these real factors generally always strike, the successful bidders are ex-post left with no option but to resile from their commitments. They skimp on their investments or renegotiate. The tortured fate of infrastructure projects, in the form of stalled projects, is for all to see. 

All this, coupled with winner's curse and moral hazard (from the inevitability of renegotiations), generates an asymmetric contracting, where efficiency in the price discovery process intersects with inefficiencies in the project development eco-system, amplified by human cognitive biases, resulting in a low-level equilibrium. But the politics associated with the auctions system, especially given the context in which it was embraced, may prove insurmountable to permit any tinkering with it, leave aside replacement. 

Tuesday, September 15, 2015

The growing pile of infrastructure debt 'dry powder'

Infrastructure projects, with their long-term revenue streams, are an attractive investment proposition for long-term capital providers like pension funds and insurers. The attraction is amplified when other long-term investment alternatives become scarce and the pipeline of less riskier infrastructure projects dries up. The long period of monetary accommodation has dramatically compressed asset yields and public debts and economic weakness has squeezed infrastructure investments. The FT writes,
Yields on the Dow Jones Brookfield global infrastructure corporate bond index have fallen steadily over the past seven years, from a high of 6.5 per cent in October 2008 to 3.3 per cent at the end of August... The pressure on infrastructure pricing is unlikely to subside in the near term, with 154 dedicated infrastructure funds currently fundraising for a combined sum of $99bn, according to Preqin... investors are not just looking for an illiquidity premium [better returns] from infrastructure assets but are seeking access to a diverse set of companies whose bonds offer better inflation protection than unsecured corporate bonds.

Michael Wilkins, an infrastructure specialist at Standard & Poor’s says, “The pipeline of deals is very scarce and there is a lack of sufficient opportunities for institutional investors to deploy their capital. There is intense competition in brownfield [existing] projects, where anything decent just gets snapped up”... the record amount of “dry powder” [unallocated capital], which has risen 20 per cent so far this year, to a record $112bn, is a concern. Problems are emerging due to the sheer weight of capital chasing infrastructure assets. As a result some investors are now paying “top dollar” for assets that have a significantly higher risk profile, such as wind farms in Finland. Here equity yields have dropped from 10 per cent to 6 per cent over the past 12 months.

Towers Watson says some of the biggest opportunities for institutional investors are in funding government-supported projects in economies where financing from public budgets remains constrained... it is vital that governments provide sufficient incentives to encourage institutional investors to help address infrastructure funding gaps. But this will require fresh thinking about regulatory frameworks and how risks are transferred between the public and private sectors.
The infrastructure financing opportunity from such institutional foreign capital, for countries like India are undeniable. But as I have blogged earlier, the pool of investible 'dry powder' available for countries like India may not be as much as being made out. In a country with a history of high inflation and exchange rate volatility, and resultant high-equity risk premiums (and these are not going to change much with small cyclical downturns in inflation), the returns from infrastructure considered attractive enough for foreign debt funds remains very high, atleast 300-500 basis points higher than in developed economy markets. 

In the circumstances, large new projects, with the considerable (un-mitigatable!) uncertainty associated with greenfield projects, are unlikely to catch the attention of these funds. Only brownfield projects, with established and commercially viable enough cash-flows, are likely to be attractive enough for these investors. And, such projects are likely to be irresistibly attractive, and will continue to be for the foreseeable future. 

Unfortunately, there are too few such projects in the Indian market. It underlines the need for large scale public investment driven infrastructure push, where governments can, at arms-length, finance and construct public infrastructure projects, off-load construction risks, establish commercial viability, and then concession and/or exit its equity stake. At the least, public finance should be made available to ensure commercial viability of PPP projects. Roads, railways, urban mass transit, power transmission, upstream water and sewerage infrastructure, and even affordable low-income housing, are potential areas for such public investments followed by exiting to various categories of infrastructure funds.  

Sunday, September 13, 2015

Weekend reading links

1. Livemint points to one of the biggest structural concerns for India's economy and society, the skewed female workforce participation rate. At 27%, it is easily the lowest among all major developing economies, including neighbors. Further, if the female participation rate were the same as that for males, then India would have had an additional 217 million women in the workforce, or a 53% labor force participation gender gap.
The IMF chief Christine Lagarde recently said that India's output would be boosted by 27% if the female labor participation rate matched that for males.

2. John Thornhill points to the changing contours of international diplomacy, with the growing predominance of technology. In a reference to 'techno-geopolitics', he writes,
Craig Mundie, Microsoft’s former chief research and strategy officer, says: “People still talk about the geopolitics of oil. But now we have to talk about the geopolitics of technology. Technology is creating a new type of interaction of a geopolitical scale and importance.” It is significant, he notes, that cyber security, data protection and privacy concerns will top the list for discussion when China’s President Xi Jinping visits the US this month. Mr Mundie argues that government institutions around the world will need to be reconfigured to deal with techno-geopolitics. “We are trying to retrofit a governance structure which was derived from geographic borders. But we live in a borderless world,”
3. This graphic from Credit Suisse disaggregates the total stressed assets in the Indian banking system at 13.5%, into five categories - NPAs, restructured loans, security receipts of asset reconstruction companies, strategic debt restructuring (by taking equity ownership), and those refinanced under the 5:25 scheme.
4. A RBI study estimates that total corporate investment (based on the financing plans submitted to financial institutions) in India fell 27% in 2014-15 to Rs 1933 bn, precipitously from Rs 3680 bn in 2011-12. More disturbingly, based on the capital investment plans made so far for 2015-16, the total croporate capex for the entire year is estimated at just Rs 1114 bn. Further, the share of new projects fell in value from 84.2% in 2011-12 and 65.2% in 2012-13, to 39.7% in 2014-15. Envisaged capex financed by banks/FIs and ECBs decreased by 30.8% and 18.5% respectively. 

The case for public investments to stimulate growth grows ever more compelling with each such news.

5. One of the surprises with the prolonged monetary accommodation has been the inability of cheap capital to translate into investment spending. An FT article points to atleast three contributors to this reluctance to invest. One, the medium and long-term growth prospects are not considered attractive enough to generate the demand required to stimulate investment. Two, the financial market uncertainty has driven up the equity-risk premia, and thereby the returns demanded on equity. This, in turn, keeps the WACC for the project high. Three, despite the long-period of ultra-low rates, businesses have been reluctant to lower their investment 'hurdle rates' (which is generally above 10%, and often between 15-20%). It writes, 
“There is no stimulation from cheap money to invest more,” says Kurt Bock, chief executive of BASF, the German chemical group. “We orientate [our spending] towards growth prospects . . . and in Europe those growth prospects are modest"... “The influence of [low] interest rates is limited,” says Wolfgang Schaefer, chief financial officer at Continental, the German car parts supplier. “The equity risk premium has increased over the last three or four years . . . so the WACC has slightly increased for the automotive industry, which goes against people’s gut feeling"... 
“A low cost of debt doesn’t mean a low hurdle rate,” says Marc Zenner, co-head of corporate advisory at JPMorgan. “It’s a slow process from QE and cheap money to getting firms to invest more.” Indeed, corporate boards rarely adjust the hurdle rate, meaning the impact of lower borrowing costs is not immediately passed on. Richard Dobbs, director at the McKinsey Global Institute, the consultancy’s research arm, says he has “yet to come across a corporation that has adjusted their hurdle rate or WACC to reflect the fact that we’ve had QE. Executives seem to think something funny is going on in the bond market. They’re getting these very low rates, but don’t think their true cost of capital has changed. So we’re not seeing an uptick in investment because of QE.”
6. It is well-known that India chronically under-invests in urban infrastructure, almost a seventh of what China spends per-capita. There are several reasons. Apart from the lower per-capita incomes itself, there is little or no devolution of the major direct and indirect taxes, and property tax base and rates are very narrow and low respectively. The last is captured in this graphic from an Oxfam study,
This is a matter of great concern given that property tax (in the graphic, it includes stamp duty and registration fees and wealth tax) forms nearly half of all the revenues of urban local governments. All our efforts to be smart in technology and urban planning, would come to naught without resources. So how about being 'smart' with detecting under-assessed and un-assessed properties, and dramatically improving collection efficiency? Unfortunately, even when this is acknowledged, we stray in pursuit of technology-based solutions like GIS mapping of urban areas, instead of acknowledging these as simple administrative deficiencies which require plain good governance (which technology can complement).  

7. On a related note, the last municipal bond offering by an Indian city was for Rs 300 million by Visakhapatnam in 2010. Even more staggering is that this has been the only bond issuance by a city in the last ten years! Commentators who wax eloquent about bond and other alternative urban financing mechanisms would do well to keep this in mind. 

8. How about software writing software? A member of a University College London team pursuing the future of software programming has this to say,
I predict that the next computing language will not be computer language but natural language, human language. If you say to your computer ‘write me a computer game in which a shark chases a man’ the computer should know what you want and create the game before your eyes. Then maybe you say ‘make the shark fiercer and faster’ and the computer will revise the code... In such a world, most programmers would be more accurately described as “trainers”. You would teach a computer to write code and to understand your intent by chatting to it.
Queue Software, a firm at the frontier of the code-that-writes-code movement, is set to release its first automated code-writing platform, Dropsource, 
Dropsource writes applications based on the function and intent a user inputs. With this information, the system selects the optimum design and development approach from the same options a developer would normally consider when programming an application to, say, keep score, move between pages or gather account details. Whereas Dropsource will write the code in tenths of a second, the normal process requires a designer and/or project manager to work with a developer and write the code from scratch, even if almost identical work had been done many times over in the past.
Is repetitive, grunt-work software programming, the next frontier to fall to automation?

9. Finally, a MGI report points to a striking fact that 46% of the equity capital raised in India in the 2011-14 period came from private equity, ahead of IPOs and equity FIIs. It finds that a significant share of the more than $100 bn that has been raised in the past 13 years has flowed into small and medium enterprises and 43% of the $77 bn that flowed in the 2007-13 period went to infrastructure sector. 

Contrary to conventional wisdom about asset stripping fund managers, the report finds that private equity backed firms had higher revenues and profits growth, greater job creation (6% faster), higher exports (60% faster growth), and was a more stable source of financing. 
This graphic about the comparative opportunities in India and other BRICS, is reflective of our very narrow organized sector business base,
However, the report finds that the returns from Indian market has so far been disappointing. Not only have the returns been lower, very few have exited. The fact that nearly three-quarters of the PE investments in the last 15 years were made when the equity markets were trading above the period's media PE ratio, the sharp depreciation in rupee, and limited exit opportunities, and the economic weakness may have contributed to this. 

Wednesday, September 9, 2015

The external validity test of impact evaluations

External validity (or generalizability) of experimental research findings is arguably one of the most contentious areas in both natural sciences and development economics. Vox points to this meta-analysis of cancer risks (or benefits) by Jonathan Schoenfeld and John Ioannidis from various food items which finds the results inconclusive on pretty much everything. 
Eva Vivalt does a similar meta-analysis of nearly 600 impact evaluation studies that examined the results of 20 development interventions and finds similar inconclusiveness with most of these interventions.
Clearly, even after rigorous impact assessments in sanitized environments with strong (atleast, most likely, better than business-as-usual) monitoring, the results of many of these interventions are not definitive enough to be embraced as unqualified policy prescriptions. At least not significantly more compelling than they were ab-initio from logical analysis. Further, as I have blogged earlier, the outcomes are likely to be far less benign when these interventions are scaled up on a business-as-usual implementation environment. 

Tuesday, September 8, 2015

Scaling up 'transactional' reforms

The biggest challenge facing many of the Indian government’s marquee Swachh Bharat Mission (SBM) is its effective implementation. In fact, this challenge is true of many other public policy interventions.

The conventional scale-up strategy for any program involves uniform norms and components, implementation guidelines, and monitoring protocols. This one-size-fits-all approach, while appropriate for some activities, fails badly for many others.

Consider the two examples. One, construction of school buildings is largely a logistics based activity, to be implemented in scale by following guidelines and progress monitored by collecting quantifiable information. Much the same applies to building any other infrastructure, supplying goods, enrolling children, and so on. These activities are amenable to the conventional one-size-fits-all implementation. Two, ensuring that class-room instruction translates into student learning outcomes is more transaction, where outcomes are critically dependent on the quality of engagement that takes place in the classroom. It is difficult to reduce such quality-driven transactional interventions into a set of guidelines, much less monitor them using quantifiable parameters. The same holds true of the engagement between a physician and patient, an extension service officer and farmer, a nutritionist and mother, and so on. In fact, it is true of any intervention that demand behavioral changes like maintaining cleanliness, eschewing open defecation, conserving energy and water, encouraging savings habit, and so on. Such activities fail the test of top-down implementation.

The economist Lant Pritchett describes the former as “thin” activities, which are informational, and the latter as “thick” activities, which are transactional. The former are more logistics bound, whose scale up can be achieved through information based monitoring. In contrast, the latter are transactional, whose success is critically dependent on the quality of human interface at the cutting edge of implementation. Therefore, the achievement of learning outcomes is a function of the class teacher's ability and willingness to teach in a manner that enables student learning. Much the same applies to doctors treating patients, extension officers advising farmers, and nurses promoting the importance of nutrition among expectant mothers. They are also true of behavioral change campaigns like eliminating open-defecation, preventing littering, encouraging savings habits, or conserving water and energy. In all these cases, the repeated transactional nature of the activity makes it difficult to reliably capture its quality. They cannot therefore be decreed into implementation.

An examination of successful implementation of such interventions reveals a non-linear implementation trajectory. Far from universal, one-size-fits-all implementation, such interventions get scaled up in an organic manner. A much discussed recent example is Bangladesh’s impressive success with its campaign to rid the country off open-defecation.

Such interventions therefore require a more nuanced and gradual scale-up strategy. One approach would be to identify target groups where the program is likely to be more receptive and encourage them as internal champions of change. This could be done by supporting and building capacity in such positive deviances within the target group. Each positive deviance would act as a domino, with the potential to favorably influence those groups within its network or surroundings. Further, community mobilization is vital to the success of such interventions. This requires enlisting the support of local non-profits and people’s organizations. The intervention will take firm root over a period of time.

Given the constraint of time for leaders in electoral democracies, a two-pronged approach can be adopted. While a basic version of the intervention is implemented across the state or country in the business as usual sense, a more focused implementation strategy can be adopted for the identified positive deviances. Public policy should help expedite program diffusion by close engagement with the positive deviances, holding them up as local change agents, supporting leaders inclined to whole-heartedly embrace the intervention, building capacity among those positively inclined groups, etc.

Programs like SBM and efforts to improve learning outcomes would do well to take a leaf out of this play book and embrace this nuanced scale-up strategy. With SBM, those already existing shining examples of small towns and villages which have done remarkably well to improve their sanitation through community engagement should be encouraged to assume the role of spear-heading the campaign, atleast in their neighborhood.

Another approach would be to focus initially on interventions that can become totemic symbols of the campaign and generate adequate positive externalities that spill over into the remaining parts. For example, a SBM campaign focused on keeping important public places – transit stations, parks and squares, schools and hospitals, and government offices – clean can, over time, potentially nudge the civic sensibilities of citizens into maintaining personal hygiene and keeping their environment clean. Such campaigns would have to be supported with adequate personnel and financing, and complemented with focused and long-drawn monitoring.

In any case, standard norms and components based, one-size-fits-all scale-up strategies with aggressive time-lines are most certain to be ineffective with such interventions. A more nuanced and  multi-dimensional approach sustained over a longer period may be necessary.