Saturday, October 31, 2015

Weekend reading links

1. Polio is the new cross-border threat for India from Pakistan,
Experts warn that neighboring India, which succeeded in shedding its label as a polio-endemic nation three years ago, could face serious cross-border infection.
As immunization efforts flounder in Taliban-controlled northwest regions, the number of Polio cases reported have been growing, thereby raising the specter of cross-border infection. Yet another reason why India needs a stable and developing Pakistan.

2. Livemint has a graphic on judicial vacancies and case loads.

3. Arguably one of the most important macroeconomic debates in recent years has been over the relative superiority of fiscal austerity or expansion in combating economic weakness in developed economies. Two contrasting tales from both sides of the Atlantic.

In Spain, the Conservative Popular Party has pursued a vigorous austerity policy, slashing public spending in the middle of a recession and pushing through a series of labor reforms to improve external competitiveness. It has achieved internal devaluation through wage compression - wages have fallen in nine of the last fourteen quarters since the PP government assumed power. These measures appear to have succeeded, with output estimated to grow by 3% this year, Spanish exports have grown fastest rising from a share of 17% of GDP in 2007 to 23% in 2014, the number of Spanish companies selling abroad has risen 50% in the same period, and unemployment though still high has been declining. In contrast, in Canada, the center-left Liberal Party of Justin Trudeau recently won elections on an avowedly Keynesian platform.

4. Times points to this paper that evaluated the impact of seven cash transfer programs in Mexico, Morocco, Honduras, Nicaragua, Philippines, and Indonesia and found "no systematic evidence that cash transfer programs discourage work" and thereby promote lazy behaviors.

5. Business Standard points to another price transmission problem in India, in piped natural gas (PNG) distribution in cities. An 18% recent reduction in the regulated (by indexation) upstream price of natural gas (from $4.66 mBtu to $3.82 mBtu due to fall in global oil prices) translated to a mere 3% cut in the PNG price for consumers. As of June 2015, India had 2.8 PNG consumers in 11 states. 
The Indian Supreme Court had in July 2015 ruled that the Petroleum and Natural Gas Regulatory Board (PNGRB) had no powers to regulate transmission through CGD network and could only determine tariff for gas transmission through common or contract carrier pipelines. It, therefore, rejected PNGRB's claim to fix retail city gas prices. City gas distribution (CGD) firms are, therefore, currently monopolies and enjoy freedom from price regulation. They have marketing exclusivity for the first five years of their operations. Subsequently, the CGD network would be on "open-access", available to third parties to supply gas as a "common carrier", thereby ushering competition in the closed market. Once they become "common carriers", the PNGRB would have the regulatory powers to fix tariffs. However, the challenge then would, in all likelihood, be to get the incumbent network owners to not sabotage the open access arrangement. 

6. The digital traces left by mobile phones have emerged as one of the most exciting areas of studying human behavior in real-time, with the potential to frame public policy accordingly. Here are a few applications. 

LogAnalysis software developed by Emilio Ferrara and Co of Indiana University analyzes social networks developed from telephone calls (chiefs of gangs makes a few calls to trusted lieutenants who in turn disseminate the same widely and repeatedly) and compares them with crime data to identify (and pre-empt) criminals and crime locations. Adeline Decuyper and Co in Belgium monitored food consumption patterns by superposing an FAO household survey data with mobile phone calls data from Rwanda and found that airtime top ups correlated with purchases of high-value food items. Kevin Kung and Co at MIT used data from Ivory Coast, Portugal, and Boston and found that humans spent an hour daily commuting, independent of distance or mode of transport or the country, thereby validating the old Marchetti's constant (they assumed people's homes as where they made calls in the night and office as the location of calls during working days). Vasyl Palchykov and Co use the duration and frequency of telephone calls from a database of nearly 2 billion calls (age and sex of the callers were available) to tease out the changing patterns of relationships between men and women at different ages. Jameson Toole and Co use mobile data to study the economic and social impact of mass lay-offs by analyzing the changes in people's social networks. 

7. Andres Velasco points to the findings of Tulane University's Commitment to Equity Institute, which examined the impact of various fiscal policy instruments (direct taxes, indirect taxes, direct transfers, indirect subsidies like food and energy prices, and in-kind transfers like education and health care services) on inequality and poverty for Brazil, Chile, Colombia, Indonesia, Mexico, Peru, and South Africa,
The largest income redistributive effect is in South Africa and the smallest in Indonesia. Success in fiscal redistribution is driven primarily by redistributive effort (share of social spending to GDP in each country) and the extent to which transfers/subsidies are targeted to the poor and direct taxes targeted to the rich. .. South Africa’s result can be attributed to the combination of a large redistributive effort with transfers targeted to the poor and direct taxes targeted to the rich... While fiscal policy always reduces inequality, this is not the case with poverty. Fiscal policy increases poverty in Brazil and Colombia (over and above market income poverty)... meaning that a significant number of the market income poor (nonpoor) are made poorer (poor) by taxes and transfers. This startling result is primarily the consequence of high consumption taxes on basic goods... 
The marginal contribution of direct taxes, direct transfers, and in-kind transfers is always equalizing. The marginal effect of net indirect taxes is un-equalizing in Brazil, Colombia, Indonesia and South Africa. Total spending on education is pro-poor except for Indonesia, where it is neutral in absolute terms. Health spending is pro-poor in Brazil, Chile, Colombia and South Africa, roughly neutral in absolute terms in Mexico, and not pro-poor in Indonesia and Peru.
They calculate the marginal contribution of a tax or transfer (as the difference in inequality gini with and without the intervention) and the total redistributive effect (difference between market income gini and disposable or post-fiscal (disposable income plus indirect subsidies minus indirect taxes) incomes gini). 
Several counter-intuitive findings stand out - regressive taxes in Chile and South Africa are equalizing or neutral; the marginal contribution of contributory social security old-age pensions is un-equalizing in Chile, Mexico and Peru. 

Given this heterogeneity, to the question of whether direct taxes or indirect taxes and direct transfers or in-kind transfers are more effective at lowering inequality or reducing poverty, one can only say that "it depends" on its interaction with the other fiscal policy instruments already in operation. 

Thursday, October 29, 2015

More on India's GDP growth rates

Much has been said about the last revision to the India's official economic growth statistics. To the extent that an economy's strength is reliably reflected in the underlying contributors, the graphic below raises more concerns about its veracity.
Clearly, since 2013, there is a distinct divergence in the trends between GDP growth and that of some of the important underlying contributors.  

Saturday, October 24, 2015

Indian economy reading links

1. More confirmation that India's middle class may be much smaller than originally thought comes from the latest Credit Suisse Global Wealth Databook 2015. It finds a middle class of just 24 million adults, less than a fourth of China. This is confirmed by findings of recent Pew survey, the Government of India's own socio-economic and caste census, and by the income tax assessee base.
The report also finds disturbing trends on wealth dispersion, with the richest 1% and 10% Indians respectively owning 53% and 76.3% of the country's wealth, far more unequal than the US where the top 1% own 37.3% of the total wealth.
Highlighting the rapid widening of inequality, even as the national wealth rose by $2.284 trillion in the 2000-15 period, the richest 1% and 10% respectively claimed 61% and 81% of the increment.

2. More dismal news from Credit Suisse through the latest version of its status report on the debt levels of India's ten most indebted infrastructure firms. Their cumulative debt has risen seven-fold over the past eight years to reach 12% of all bank loans and 27% of all corporate loans, with debt levels rising for all the ten groups. Their interest cover dropped to 0.8 in 2014-15 from 0.9 in 2013-14, despite a significant share of interest being capitalized, and debt/EBITDA rose to 7. 
While the loans are standard in the bank books, 35-65% of the debt of four groups have been downgraded to default by rating agencies. In fact, the report points to auditor findings that 48% of the total debt, or $53 bn, was in some form of default, with $37 bn for 0-90 days and $16 bn for more than 90 days. It also estimates that 20-90% of the loans for some groups, aggregating to $48 bn or equivalent to declared banking sector gross NPAs, may be under severe stress. Taking all these into the count, the report estimates that the total NPA of India's banking system could be close to 17%.
Some of the groups have sold away their better-performing assets to raise capital, leaving them with an even greater struggle to repair their balance sheets. Faced with such levels of balance sheet problems, these firms have cut back on capital expenditure by 20-70%. Most worryingly, many projects have 20-70% cost over-runs, thereby pushing capital costs beyond their pre-loss replacement costs and leaving the projects unviable. 

It is most certain that many of these projects will have to be restructured with large haircuts and/or further equity infusions, maybe even public support. The aggressive traffic forecasts and tariff estimates that formed the basis of financial closure in road and power projects respectively may be impossible to realize. This coupled with the accumulated interest during construction and construction cost escalation may have made many projects insolvent. Any simple rescheduling of loans may be merely kicking the can down the road. 

3. Rajan Govil joins those questioning the GDP growth numbers based on underlying indicators. He points out that nearly three-quarters of August's 6.4% annual IIP growth are explained by four items - gems and jewelry, insulated rubber cables, heavy commercial vehicles, and electricity - whose out-sized growth rates are simply unsustainable. He also points to the unabated trend of declining credit growth - non-food credit growth was 8.4%, and that to industry and services was 5-6%. 

4. A new report by Bain and Co estimates private equity (PE) investments in India to touch $22.3 bn in 2015, exceeding the previous record of $17.1 in 2007. With this, PE would make up more than half the FDI into India.  
While this is an encouraging trend, its details need to be carefully parsed. Investments in consumer technology (e-commerce, aggregators, and other sharing economy firms), real estate, and financial services collectively made up 65% of all inflows and those into manufacturing is marginal. By its very nature, PE investors generally take positions in existing firms. A few large deals make up a disproportionate share of all PE investments - the top 25 deals made up 49% of 2014 PE investments. Finally, as the graphic below shows, the potential inflows from such sources is very small.
In any case, as I have blogged earlier, all such sources are a rounding error when compared to the country's credit needs, the overwhelming majority of which is met by the banking sector. 

Friday, October 23, 2015

Comparing urban footprints

A fascinating graphic of city sizes, to scale, and their respective populations.
Another graphic compares the respective sizes of Atlanta and Barcelona, which both have the same populations. 
Note the comparison between the respective sizes of similarly populated cities like New York and New Delhi or even Tokyo and Dhaka. In this context, it is worth recollecting that both Delhi and Dhaka have stringent height restrictions, as reflected in their low floor area ratios (FARs), which are orders of magnitude lower than those in New York or Tokyo. This naturally translates into low per capita space availability for residents of these cities, which is reflected in their large shares of slum populations. 

Thursday, October 22, 2015

Mid-week reading links

1. The most popular criticism of cash transfers has been that recipients will squander it away on alcohol and other temptation goods and services. In this context, Tim Harford points to a World Bank paper which reviewed 19 field experiments and 11 surveys across the world on the impact of cash transfers on temptation goods and found,
Almost without exception, studies find either no significant impact or a significant negative impact of transfers on temptation goods. In the only (two, non-experimental) studies with positive significant impacts, the magnitude is small. This result is supported by data from Latin America, Africa, and Asia. A growing number of studies from a range of contexts therefore indicate that concerns about the use of cash transfers for alcohol and tobacco consumption are unfounded... Thus, it seems that the flypaper effect and the effect of women controlling more resources (the household bargaining effect) likely compensate for the income effect, leading to no significant net change in alcohol and tobacco consumption. We see no difference between conditional and unconditional cash transfer programs, so this does not seem to be a function of conditions.
2. Coming on the back of this study on the large productivity differential across manufacturing firms, Jason Furman and Peter Orszag find equally large differential among listed non-financial firms' returns on capital invested. Peter Orszag writes,
Among the top nonfinancial U.S. companies that are publicly traded, capital return has shown a stunning rise over the past three decades. Excluding goodwill, for example, the 90th percentile of such returns has risen roughly fivefold, from about 20 percent in the mid-1980s to an eye-popping 100 percent in 2014. In other words, the top 10 percent of publicly traded nonfinancial firms earned 20 percent or more on their invested capital in the 1980s, and 100 percent or more in 2014. Two features of these high-return companies stand out: They are disproportionately in health care and information technology -- from 2010 to 2014, two-thirds were in these sectors. And they are persistent. Among companies that, in 2003, had a return on invested capital in excess of 25 percent, only 15 percent had a return below that threshold in 2013. The vast majority remained in the 25-percent-plus bucket.
Interestingly, a comparison of individual and firm-level income dispersion reveals that virtually all of the dispersion is due to inter-firm dispersion than intra-firm (or wages).
Their conclusion, 
All this could help explain why Americans' earnings are becoming more unequal. Some companies in, say, the technology or financial sectors could generate consistently supernormal returns. Their employees would share the wealth by earning higher wages. Consistent with this possibility, other research suggests that the rise in wage inequality is driven more by a widening gap in the average earnings of workers in different companies than by a widening gap between paychecks inside individual businesses.
3. I have blogged on several occasions that finance loses its disciplining powers and lenders supply credit without due diligence when the markets are riding a wave. Solar power in India looks increasingly frothy. The assumptions that underpin the commercials of recent bids may be untenable. Even assuming the country gets the regulatory and demand-side challenges addressed, itself debatable, the grid management (balancing solar with conventional power which can alternatively be made operational and backed-down based on demand) and evacuation capacity constraints are certain to bind beyond a few gigawatts of capacity addition. And disturbingly, alleviating them, even in the best of circumstances, is likely to take many years. So brace yourselves for post-bubble clean-ups in the coming 4-8 years in solar sector.

4. Arguably the digital sharing economy's greatest contribution is in reducing market frictions and enabling the most efficient match between buyers and sellers. Michael Spence has two recent articles where he highlights how the internet enable more efficient utilization of under-utilized assets (Uber, AirBnb), creates new businesses (sharing clothes, selling part-time work etc), increases transaction efficiency and lowers their costs (network effect, rating systems), and so on.

5. MR points to this tweet from Ian Bremmer which has a stunning graphic on the creeping dispossession of the Palestinians.
6. Nice MRU video on China's economic prospects.
I'll tend to agree with most of what Tyler Cowen says. The risks from real estate and equity market bubbles, large municipal debt, excess manufacturing capacity, and capital flows are indeed very high and atleast some of them are certain to materialize. 

But I am more optimistic than Tyler and not just because the Chinese have invested heavily and very well on human capital development. While 48% investment rate is simply unsustainable, 35% consumption share of GDP can only go up significantly. If that starts to happen the excess capacity in many areas will start to look less a problem. The balance sheets of the central and provincial governments and consumers are healthy enough to sustain policies that can enable such structural transformation. 

The challenge, as I have blogged earlier, is not so much the economic strategy, but the political willingness to loosen control over the polity and society, so essential to transition to the next stage in the country's development trajectory. It is here that my concerns are greater. In this context, a government in Beijing that feels most secure about itself is more likely to have the stomach and political capital required to deregulate and liberalize, if only gradually, the political and social order. It is this transition that is likely to be of the greatest relevance for the prospects of the Chinese economy and the biggest test yet of the Chinese strategy of "crossing the river by feeling the stones".

7. I agree with Luigi Zingales' disturbing assessment of the state of capitalism today,
The form of capitalism prevailing in most of the world is very distant from the ideal competitive and meritocratic system we economists theorise in our analyses and most of us aspire to. It is a corrupt form, in which incumbents and special-interest groups shape the rules of the game to their advantage, at the expense of everybody else: it is crony capitalism. The reason why a competitive capitalism is so difficult to achieve is that it requires an impartial arbiter to set the rules and enforce them. Markets work well only when the rules of the game are specified beforehand and are designed to level the playing field... While everybody benefits from a competitive market system, nobody benefits enough to spend resources to lobby for it. Business has very powerful lobbies; competitive markets do not. The diffused constituency that is in favour of competitive markets has few incentives to mobilise in its defence.
He argues that media, with its role of gathering and distributing information on the cronyism, has the power to "create the demand for competitive capitalism". But I do not share his belief in the ability of media today, constrained as they are by the same forces, to recalibrate capitalism. 

Monday, October 19, 2015

The one graphic about India's learning outcomes that you should see

The conventional wisdom on learning outcomes is that the country's state government public schools and low-end private schools are where the problem lies and their troubles have to do with poverty and other social issues. And that the remaining part of the country's education system is in good shape and those students can compete with the best in the world. This belief gets entrenched by the excellent performance of Indian students in international Math and Science competitions as well as the dominance of graduates from IITs etc in various professional fields.     

So, it comes as a surprise (HT:Lant Pritchett) when we examine the relative performance of Indian students at the top end of the achievement spectrum in the 2009 PISA tests which assessed a representative sample of students from the two best performing Indian states, Himachal Pradesh and Tamil Nadu. As can be seen, less than a percent of students in both states were above Level 4 (out of six levels) in the PISA test. The contrast with those countries that we aspire to match or even claim equivalence, atleast for the best and brightest among Indians, is staggering.
The comfort that we are better off comes from a cognitive bias. The immediacy of these kids engenders an availability bias, which makes people feel as though the schools where their children are going are as good as anything in the world. Sure, there are outliers, and they are the top 0.1% (or maybe 1%) or so of the schools. 

Saturday, October 17, 2015

Weekend Reading Links

1. Insightful analysis by Dani Rodrik on why liberal democracies are so scarce,
Liberal democracy rests on three distinct sets of rights: property rights, political rights, and civil rights. The first set of rights protects owners and investors from expropriation. The second ensures that groups that win electoral contests can assume power and choose policies to their liking – provided these policies do not violate the other two sets of rights. Finally, civil rights guarantee equal treatment before the law and equal access to public services such as education. 
Property rights and political rights both have powerful beneficiaries. Property rights are of interest primarily to the elite – owners and investors. They may be comparatively few in number, but they can mobilize material resources if they do not get their way. They can take their money elsewhere, or choose not to invest – imposing substantial costs on the rest of society. Political rights are of interest primarily to the organized masses – the working class or ethnic majority, depending on the structure and cleavages in society. Members of the majority may be comparatively poor, but they have numbers on their side. They can threaten the elite with uprisings and expropriation.
The main beneficiaries of civil rights, by contrast, are typically minorities that possess neither wealth nor numbers. Turkey’s Kurds, Hungary’s Roma, Russia’s liberals, or Mexico’s indigenous population ordinarily command little power within their countries. Their demands for equal rights therefore do not have the potency that demands for property and political rights have.
Theories that purport to explain the historical origins of democracy have overlooked this asymmetry among claimants for different types of rights. These theories revolve largely around a bargain between the propertied elite and the working classes: faced with the threat of revolt, the elites expand the franchise and allow the masses to vote. In return, the masses – or their representatives – agree not to expropriate the elite... But these democratic bargains, by their very nature, produce electoral democracies rather than liberal democracies. The dispossessed minorities who have the strongest stake in civil rights play no role during the democratic transition for the simple reason that they cannot normally bring anything to the bargaining table. So the democratic bargain yields property and political rights, but only rarely civil rights as well.
The full paper is here.

2. Even as trade between China and Latin America surged from $12 bn in 2000 to $285 bn in 2014, the Chinese embarked on a "railroad diplomacy" in the continent. This has now hit a roadblock
China has sought to build a “dry canal” in the form of a railway across Colombia, linking the Caribbean to the Pacific. Chinese investors announced another huge venture in Honduras, two ports and a 375-mile railroad from sea to sea. Then this June, China announced yet another megarailway — nearly 10 times as long — across Brazil and Peru, stretching from one coast of South America to the other. But across the region, one large Chinese rail venture after another has come crashing against the hard realities of Latin American politics, resistance from environmental groups, and a growing wariness toward China... Still, political leaders, farmers and environmental activists are eyeing China’s difficulties in completing railroads elsewhere in Latin America. They point out Brazil’s particularly nettlesome bureaucracy, its laws prohibiting China from hiring its own laborers, a web of auditing courts, and the capacity of dozens of different prosecutors to cripple megaprojects with lawsuits... Powerful political and business figures, whose river ports and soybean processing centers could be threatened by the railway, are already blasting the Chinese venture. 
3. Paul Theroux laments the decline of America's Deep South, which he blames on globalization and the off-shoring of manufacturing,
Take a Delta town such as Hollandale, Miss. Two years ago, the entire tax base of this community of around 3,500 was less than $300,000. What the town had on hand to spend for police officers, firefighters, public works, outreach, welfare and town hall salaries was roughly the amount of a Bill or Hillary one-night-stand lecture fee; what Tim Cook, the chief executive of Apple, earns in a couple of days. When Hollandale’s citizens lost their jobs in the cotton fields to mechanization they found work nearby, in Greenville and elsewhere, in factories that made clothes, bikes, tools and much else — for big brands like Fruit of the Loom and Schwinn. They are gone now.
4. John Tierney has a contrarian take on the conventional wisdom that promotes recycling of all waste, and argues that it makes sense to recycle only cardboard, some paper, aluminium cans, and some plastics,
To offset the greenhouse impact of one passenger’s round-trip flight between New York and London, you’d have to recycle roughly 40,000 plastic bottles, assuming you fly coach. If you sit in business- or first-class, where each passenger takes up more space, it could be more like 100,000. Even those statistics might be misleading. New York and other cities instruct people to rinse the bottles before putting them in the recycling bin, but the E.P.A.’s life-cycle calculation doesn’t take that water into account... if you wash plastic in water that was heated by coal-derived electricity, then the net effect of your recycling could be more carbon in the atmosphere. To many public officials, recycling is a question of morality, not cost-benefit analysis.
According to the E.P.A.’s estimates, virtually all the greenhouse benefits — more than 90 percent — come from just a few materials: paper, cardboard and metals like the aluminum in soda cans. That’s because recycling one ton of metal or paper saves about three tons of carbon dioxide, a much bigger payoff than the other materials analyzed by the E.P.A. Recycling one ton of plastic saves only slightly more than one ton of carbon dioxide. A ton of food saves a little less than a ton. For glass, you have to recycle three tons in order to get about one ton of greenhouse benefits. Worst of all is yard waste: it takes 20 tons of it to save a single ton of carbon dioxide. Once you exclude paper products and metals, the total annual savings in the United States from recycling everything else in municipal trash — plastics, glass, food, yard trimmings, textiles, rubber, leather — is only two-tenths of 1 percent of America’s carbon footprint.
5. The completely deregulated (prices are decontrolled) pharmaceuticals industry in the US has been witnessing a new trend of firms (floated by financial market executives) buying up existing drugs and steeply raising price to maximize their returns. In recent weeks, Turing Pharamaceuticals has taken flak for raising the price of anti-infection drug Daraprim from $13.50 to $750. Now comes Valeant Pharmaceuticals, which this year alone, has raised the prices of its brand-name drugs by 66%.
The Times writes about Valeant's version of predatory capitalism with attendant market failure,
Valeant is known for buying one company after another, and laying off their employees to achieve savings, while accumulating a debt of about $30 billion. It spends an amount equivalent to only 3 percent of its sales on research and development, which it views as risky and inefficient compared to buying existing drugs. Traditional big drug companies spend 15 to 20 percent of sales on research and development. Valeant also pays extremely low taxes because it is officially based in Canada...
But while more conventional companies do not typically triple or quadruple prices overnight, they do often raise them year after year at a rate far faster than inflation. Big pharmaceutical companies like Pfizer and Merck raised list prices an average of 13 percent in 2014 and 8 percent so far this year... smaller price increases on widely used drugs had a much bigger effect on health care spending than the larger increases by Valeant on drugs with small sales... insulin prices had risen so much in recent years that some patients were scrimping on groceries to pay for it. The price of a package of five Lantus injectable pens from Sanofi has gone from about $179 in 2010 to $372 last year and insurance will often cover only one package at a time.
6. The big story of the week was the conclusion of the Trans-Pacific Partnership Trade deal between 12 Pacific-rim countries who make up 40% of world GDP and a third of global trade. The importance of the deal, the biggest after the 1994 GATT, is not so much in reduction in tariffs but in its quest at regulatory harmonization of environmental, labor, intellectual property, subsidies to state-owned enterprises, legal systems, and investment protection standards; facilitation of unimpeded data flows (including the requirement that servers be not located within the country to conduct business there); easing nationality requirements and restrictions on investing in services sector,;and competitive neutrality with respect to state-owned businesses. Fundamentally, it frames the agenda and sets the rules for the next phase of international trade liberalization, focused on regulatory harmonization, and is therefore a major victory for the United States foreign policy. See also this from Pratap Bhanu Mehta on the choice facing India.

7. Chiara Criscuolo (via MR) has an interesting article in HBR which discusses this OECD study which finds vast variations in productivity across firms in both manufacturing and services. Most strikingly, as the graphic below shows, even as average productivity growth has slowed down, a small group of the most productive firms, those at the "global productivity frontier", are experiencing robust productivity gains
The study attributes this trend, which appears to debunk the notion of stagnation in innovation, to constraints on innovation diffusion. They include restrictive patenting regime, and the possibility that innovations are embedded in capital thereby requiring new investments (which are not readily forthcoming) for innovation diffusion. Drawing similarity with the fact that only a small percentage of firms export, Tyler Cowen points to the possibility that increasing returns to scale and fixed costs to trade abroad contributes to a bifurcation of firm productivity outcomes. His argument is that "only a small percentage of firms export"  and the "only a small percentage of firms are on the productivity frontier" may be used inter-changeably.

8. Larry Summers proposes pandemic bonds, similar to catastrophe bonds, to finance relief and rehabilitation in case pandemics strike. The bonds would be issued by some public entity, like a multilateral agency, "to investors and would be deemed to default in the event of an epidemic, thereby assuring the availability of resources to respond before the epidemic takes on pandemic proportions". Such bonds, uncorrelated with normal business cycle turns, are attractive for investors seeking risk diversification. The implementation question he raises is
Experience with hurricane and earthquake bonds suggests that in order to accept a 1 per cent chance of default, investors require about a 3 per cent yield premium. The same is probably true of epidemic or pandemic bonds... As an aid agency concerned with, say, health in sub-Saharan Africa, is it better to pay $3 m to support the issuance of a bond that will with 1per cent probability pay off $100 m, or is it better to give the $3 m to support improvements in local health care.
9. As domestic demand slumps, Chinese manufacturers are increasing their exports. Chinese steel exports have surged to a record high of 11.3 mt in September 2015. 
10. Fascinating set of graphics about start-ups in India. Though the country boasts 4200-4400 start-ups, the third highest in the world after US and UK, and is estimated to see $5 bn flowing into them this year, the total employment in these firms is just 80000-85000. While e-commerce, consumer services, and aggregators make up nearly 40% of all startups, there are number of them exploring ways to address various social and public policy challenges

Friday, October 16, 2015

Leveraging bilateral finance in metro-rail projects

The tenders for the third phase of Mumbai metro rail for 32.5 km at Rs 231.36 bn between Cuffe Parade in South Mumbai and Santacruz Electronics Export Processing Zone at Andheri have been received. The project will be financed with a Rs 133.25 bn soft loan from JICA, Rs 34.28 bn central share in the form of equity and debt, Rs 40.17 bn state government share, and Rs 7.77 bn from the Mumbai International Airport Ltd. The stretch, expected to be completed by 2019-20, will have 27 stations, with all but one being underground. 

Interestingly, among the nine selected bidders for the seven sections, there are only two Chinese contractors. Further, none of the biggest Chinese metro rail contractors, China Railway Construction Corporation (CRCC) or China Railway Rolling Stock Corporation (CRRC), which have been bidding aggressively across the world and have bagged contracts in Mexico, Argentina, and Boston, figure among the successful bidders. Given the competitive advantage of these firms, it is inconceivable that they would not have succeeded in winning atleast some of the packages. As I have blogged earlier, India's best hope of leveraging Chinese capital and construction technologies is to get Chinese contractors bid in such large construction contracts across India.

Did the central role of Japanese lending play a role in keeping them away? In any case, this raises an interesting tender design dimension. Countries like China, Japan, Germany, and South Korea have in recent months shown great interest to invest in India. There is already an established mechanism for private investments by their respective companies. But none exists for investments supported by bilateral loans from that country. Currently, bilateral loans are finalized through negotiations.

So how about a tender design where Chinese or Japanese bidders structure their bids contingent on the bilateral loan? In other words, the contractor negotiates the terms of the financing with its government and offers its bid accordingly. In a competitive bid process, each bidder has the incentive to negotiate the most favorable financing terms with their national governments. The bids become a proxy for competitive price discovery in the terms of bilateral loans. In order to avoid infringing WTO regulations, once the bids are finalized, the loan can be contracted between the two national governments. Or do the transaction costs associated with this structuring offset the gains by way of more efficient price discovery?

Wednesday, October 14, 2015

Mobility and access to better opportunities

The debate on capitalism and widening inequality is far more complex than appears at first sight. For example, consider this from a review of Caroline Freund's new book,
At the World Economic Forum in Davos this year, Winnie Byanyima, executive director of Oxfam International, referred to the relief charity’s findings that the richest 1 per cent of the world’s population would own more than 50 per cent of the world’s wealth by 2016. In response, Sir Martin Sorrell, chief executive of WPP, the advertising group, said: “I make no apology for having started a company 30 years ago with two people and having 179,000 people in 111 countries and investing in human capital each year to the tune of at least $12bn a year.”
Ms Freund's taxonomy of the super-rich in the emerging world shows that such wealth is largely self-made, and the share of inherited wealth is continuously declining. Obviously, I do not imagine that she is trying to justify widening inequality on this ground, though many others argue vehemently that if anybody can become super-rich, then what is wrong with the dynamics whose one consequence is widening inequality. What gives?

Rationalization of widening inequality on grounds of self-made wealth (as against inherited wealth) overlooks the important point that even access to the opportunity to create self-made wealth is increasingly an ovarian lottery - function of where (country, city/region, locality, and family) you are born. When all is said and done, you are, largely (because of), where are you are born!

Malcolm Gladwell, chronicler par excellence of the less-discussed, has a fascinating essay in New Yorker where he explores the unintended positive consequence of the dislocation caused by Hurricane Katrina on the black population of New Orleans. He argues that by being forced out from the excruciating poverty and blight of pre-Katrina New Orleans black neighborhoods, the nearly 80,000 black population which moved out of the city in its aftermath were presented with an opportunity for social and economic mobility they would otherwise have not had. 

In this context, he writes about the acclaimed work of Raj Chetty, Nathaniel Hendren, and others which documented economic mobility across the US and found the dominant influence of people's immediate socio-economic environment in their life outcomes. He writes,
Moving matters: going to a neighborhood that scores high on those characteristics from one that does not can make a big difference to a family’s prospects... Suppose you look at parents who earn in the first quintile—that is, the bottom fifth of the U.S. income distribution. What are the odds that one of their children will—by the time that child reaches adulthood—make it into the top fifth of the income distribution? Those odds, they found, vary dramatically from one city to the next. In San Jose, for example, the probability is 12.9 per cent... At the other end of the spectrum is Charlotte, North Carolina, where the probability is 4.4 per cent: a poor child is almost three times more likely to reach the top in San Jose than he or she is in Charlotte.
In a second analysis, Chetty and Hendren assigned a value to every major metro area in the country, according to how much more (or less) a child can expect to earn depending on the city where he or she grew up. The No. 1 urban area, by this measure, is Seattle, at 11.6 per cent: by the age of twenty-six, the child of a family in Seattle earning just above the poverty line will make 11.6 per cent more than would otherwise have been expected. The place bonus for Minneapolis is 9.7 per cent; in Salt Lake City, it is 9.2 per cent. Coming in last on the list of the hundred largest commuting zones in the country, by contrast, is Fayetteville, North Carolina, which has a place penalty of negative 17.8 per cent: the child of a poor person in that city will end up earning substantially less than he or she would otherwise have earned, simply by having been raised in Fayetteville.
So how did moving out of New Orleans improve access to opportunities and likelihood of better life outcomes?
In the Chetty-Hendren-Kline-Saez analysis, New Orleans has a bottom-to-the-top probability of 5.1 per cent, which is half a percentage point behind Detroit. And the place bonus / penalty for New Orleans? Minus 14.8 per cent, which puts it ninety-ninth out of the top hundred biggest urban areas in the country, ahead of only Fayetteville.
So is moving poor people out of their existing neighborhoods the best poverty reduction strategy? Unfortunately, as with everything in life, there are no such neat and simple solutions. The problems starts when the partial equilibrium findings of Chetty, Hendren et al intersects with the general equilibrium dynamics that are triggered by such mass movements,
If too many poor African-Americans move into a middle-class neighborhood, then the middle class leaves—robbing the community of many of the things that the movers came in search of.
This is apart from the other major consequences of inequality, on which I have blogged repeatedly - the capture of political decision making and the inhibition of economic growth itself

Friday, October 9, 2015

The challenge with monetary policy transmission in India

Even as the RBI delivered larger than expected rate cuts, its transmission remains a matter of concern. After immediately announcing a cut in its base rate by 40 basis points, the State Bank of India (SBI), the country's largest lender, has now decided to limit the reduction in new home loan rates to 15-20 basis points.  

Their deeply stressed balance sheets naturally encourage banks to immediately pass on the cuts into deposit rates and limit the pass-through into lending rates, so as increase their net interest margins. A more fundamental reason is the nature of the bank liabilities itself. Unlike in the advanced economies and even the larger emerging economies, Indian banks are heavily dependent on bank deposits to finance their asset purchases. The graphic below shows the share of total deposits in the banks' total liabilities.
Clearly, deposits as a share of total liabilities is easily the highest in India among all large emerging economies. Since a significant share of deposits have interest rates locked-in, the banks ability to immediately reduce their cost of capital in response to the reduction in repo rate is constrained. In contrast, in the advanced economies, deposits make up just half of total liabilities, with the remaining coming from various types of borrowings, including inter-bank lending, which can be immediately swapped for lower cost borrowing once the central bank lowers the benchmark rate. 

This also contributes to a wedge between the bank lending rate on the one hand, and long-term bond yields and the money market rates, which in turn gets transmitted across the fixed-income markets in general. 
As can be seen from the graph constructed with EIU data, the wedge between the lending rate (here, taken as the SBI base lending rate) and the money market rate and 10 year government bond yields is considerable. Encouragingly, the wedge has been on a decreasing trend. It is therefore no surprise that short term commercial paper and similar instruments become more attractive for short-term borrowers following a central bank repo rate reduction. 

Monday, October 5, 2015

India's healthcare quality gap

India's healthcare system, as I had blogged earlier, mirrors education as an example of a massive governance failure. Just as with the poor learning outcomes in education, the quality of health care is seriously compromised, as is borne out by a large and growing body of research.

This graphic from a cross-country comparison of vignettes (providers are given hypothetical cases and responses/questions compared to a checklist of essential nationally accepted set of procedures) and direct observation of the doctor-patient interaction by Jishnu Das, Jeff Hammer, and Ken Gordon is revealing,
They document the time spent, number of exams done, and medicines given across providers based on their effort levels (itself a measure of all the three).
Another study benchmarking quality of care in four countries, based on the percentage of mandatory tasks (as in a checklist) completed by the providers shows,
Shockingly, even the top quintile of Indian doctors (sample of public and private providers in clinics in Delhi), perform worse that their counterparts in Tanzania, Indonesia, and Paraguay on all the four diarrhea procedures as well as on different measures of effort. They write,

Doctors in Tanzania complete less than a quarter of the essential checklist for patients with classic symptoms of malaria, a disease that kills 63,000-96,000 Tanzanians each year. A public-sector doctor in India asks one (and only one) question in the average interaction: "What's wrong with you?"... We find that the quality of care in low-income countries as measured by what doctors know is very low, and that the problem of low competence is compounded due to low effort - doctors provide lower standards of care for their patients than they know how to provide. 
They construct a competence index (constructed by applying Item Response Theory to the responses of doctors to various types of patients) of providers based on their responses and finds out,
As an indicator of how poor overall competence is, a doctor in India has to be above mean competence in the sample to have a better than even chance of not harming the patient.
They compare the relative performances of three categories of doctors based on their competence and effort,
First, private doctors without an MBBS complete just over 20 percent of all essential tasks, but they are doing pretty much all they know to do—the constraint on their performance is competence. Second, private doctors with an MBBS knew 40 percent of the essential tasks, but in actual practice were completing only 25 percent of them. The constraint on their performance is effort. Third, the gap between competence and practice among public-sector doctors is even higher—these doctors knew to complete 30 percent of essential tasks, but actually completed only 8 percent. Here, the constraint on performance is clearly effort.
This dynamic is captured by the graphic below,
Just in case, one is tempted to explain away these findings claiming that the patient load in India is massive, the findings remain robust when controlled for patient case loads. 

Sunday, October 4, 2015

Government as engine of innovation

Mariana Mazzucato has a brilliant TED talk on government as investor, risk-taker, and innovator which questions the conventional wisdom on private sector as leading technology innovation with cognitively striking examples of Apple and the pharmaceuticals industry. 

Driving home the message that government, and not entrepreneurs, is the real engine of innovation, she informs that the NIH funds 75% of all revolutionary new drugs and that all the core technologies of iPhone (internet, cellular communications, GPS, solid-state memory, siri, touch-screen, capacitive sensors, and microchips) were the result of public innovation. She claims that government spending on research and innovation does more than fix market failure, it creates new products and whole markets. Further, interestingly, this and most other similar innovations and their commercial exploitation is largely confined to the United States. 
She argues that there is no substitute for long-term, patient government funding for scientific innovation and though the private sector in turn should be allowed to build on these innovations there should be a mechanism to plough back a bigger share of their profits to refinance more public spending on research. She gives the example of Finland's state research agency, SITRA, which retained its investments in Nokia and used the returns to finance newer research areas. 

Saturday, October 3, 2015

Weekend Reading Links

1. Dani Rodrik makes and assessment of India's economic prospects that deserves the attention of policy makers. When asked about the world's most over-rated economy by Tyler Cowen, Dani replied,
I think India, because I think the kind of growth that India has had, I don’t think it’s sustainable. Partly going back to our earlier discussion about premature deindustrialization. I think they have these plans to significantly strengthen their manufacturing base. I just don’t see it happening. I think India can grow at 4, 5 percent per year on a sustainable basis. I don’t think it’s going to be 8 or 9 percent. When this sinks in, I think there’s going to be a negative overreaction, would be my fear.
One could quibble about whether it is 4 or 5 or even 6, but I would tend to agree that 8-9% on a sustainable basis looks more hope than realism. India just does not have the base - infrastructure, consumers, industries, public spending, agricultural productivity, credit, and skilled labor - to support such growth for too long. These deficiencies feed into the other and constrains rapid growth, beyond very short bursts. On top of all these stand the biggest deficiency of them all, weak state capability. 

2. Lant Pritchett is as provocative on learning outcomes as only he can be,
If you want to find a child who lacks education today, the place to find them is in school. That’s because nearly all children are in school. That’s the good news. Governments have built schools and hired teachers. Parents have seen that schooling is key to their child’s future and are sending their children to school... But the bad news is that hundreds of millions of children are starting school, going day after day, year after year, but not really learning. One study found that almost three-quarters of a recent cohort of youth in Zambia were innumerate and six of 10 illiterate. But only 7% of these youth had not attended school. In fact, half of those who were innumerate and a third who were illiterate had not just started school but completed grade 6. These children were being schooled but not educated.
And interesting the call for greater research on learning outcomes,
Research will be an integral part of reaching learning goals. Knowing what you need to know isn’t the same as knowing it or knowing how to do it... Progress on learning goals requires getting systems of education on a much faster pace of improvement. But too little is known about how to do that – which accounts in part for the slow progress. The British government has recognised that and is funding research to generate the practical knowledge needed to improve systems of education.
3. Fascinating map (via FT) that captures the average monthly cost of renting a one bedroom flat within a kilo meter of all London's 250-odd tube stations. See the larger version here
The FT summarizes the affordability challenge,
For the 250-odd Tube stations in London, only a quarter have one bedroom flats costing £1,000 a month or less to rent. As you might expect, these locations are all concentrated at the extremities of lines, meaning a long journey and £225 a month for a zones 1-6 Travelcard. Across the capital, the average rent for a one-bedroom flat within walking distance of a Tube station works out to £1,327. And there are 20 locations where, if you were mad enough, it would cost you above £2,000 a month (all bang in the centre).
Here are interesting sites which show which areas in London are more accessible by bicycles or public transport, another which trades-off average commute times and average rents, and this map of rents on each tube line.

4. Guardian points to the findings from the World Bank-Gallup Global Findex Survey 2014, which asked over 150,000 respondents in 143 countries how and why they access financial services. As the map shows, the North-South divide is clearest in terms of where people spend their borrowed money.
Unlike the North, where mortgage dominates borrowing, in the South the largest share of loans are consumed by education and health care. In India, 21% of people took loans to finance health care needs, 10% to finance education, 9% for business, and just 4% for mortgage.  

5. I have blogged earlier about the corrosive political economy impact of the assault on incentives. A disturbing trend may have been initiated by the Maharashtra government in imposing a "drought surcharge" on items like fuel, liquor, cigarettes, jewelry etc for a period of five months to raise Rs 16 bn in tax revenues. Cash-strapped governments are likely to adopt policy interventions like these to circumvent the constraints imposed by the forthcoming national GST.

6. Early this week, the IMF released its assessment of emerging market corporate debt. The graphic below shows the status of non-financial corporate debt to GDP ratio of the largest emerging economies. 
Developing countries quadrupled their corporate borrowings from $4 trillion in 2004 to well over $18 trillion in 2014.

7. On the back of declining corporate capex investments comes news of fall in capital expenditure by public sector units (PSUs). Underlining the weak demand conditions, the Business Standard finds that the capex by 36 largest listed PSUs, who have been sitting on a cumulative cash reserve of over Rs 2000 bn, declined by 23.5% to Rs 1290 bn in 2014-15.

An RBI survey of ex-ante capital expenditure investment decisions of Indian corporates found that in 2014-15, 830 firms intended to invest in Rs 1459 bn, as against 1056 companies' investment plans for Rs 2081 bn in 2013-14. The time phasing of the investment intentions of these companies indicate likely investments worth Rs 1933 bn in 2014-15, 27% lower than 2013-14.

8. The Institute of International Finance (IIF) estimates that net capital inflows into emerging economies may turn negative for the first time this year, with more a trillion dollars of outflows as repayments of foreign currency loans by EM corporates, especially in China. 
The IIF estimates that indebtedness at EM non-financial corporates has risen five-fold over the past decade to $23.7 trillion. This is a good illustration of the scale of potential debt induced instability,
The IIF estimates that currency depreciation has increased corporate debt in Brazil by an amount equal to 7.3 per cent of gross domestic product, and 6.2 per cent in Turkey, for example.
9. The latest figures on stalled projects in India being tracked by CMIE points to an increase in their stock from Rs 8.8 trillion to Rs 9.9 trillion over the three months to end-September 2015. Interestingly, nearly a quarter of projects are stalled due to lack of promoter interest or commercial unviability. 
The stalling rate, or stock of stalled projects as a share of all projects under implementation rose to 11% in the last quarter, up from 9%.

10. Finally, amidst all the concerns about Japan's low female workforce participation rate, MR points to this graphic which shows that Japan has overtaken US in female workforce participation.
Funny that this fact escaped the attention of everyone calling for the release of third arrow of Abenomics.

Thursday, October 1, 2015

Winner's curse in auctions - minerals and telecom spectrum in India

It was inevitable and it now has surfaced on the horizon. Livemint points to a PwC/CII report that the power project developers who bid aggressively to secure coal blocks in recent auctions are reluctant to mine them on the face of the government's decision to cap fixed charges based on regulatory considerations. 

All the power sector coal-block auctions had gone into forward-bids, where not only would developers not pass on the cost of coal to customers, but, in some cases, even pay the government an additional premium (over and above the mandatory royalty and reserve price). It was claimed that the 66 blocks, awarded through auctions and allotments to state-owned firms, will generate revenues of Rs 3.35 trillion and electricity tariff benefits worth Rs 693 bn to consumers. Power producers, instead of bidding at a discount on the reserve price, even offered to give money to the government. Since you cannot buy something and give that free for 25-30 years, these bidders, all of whom have sunk investments in plants which are currently idle and bleeding money, were presumably betting on "smuggling" in the fuel costs elsewhere.
It was abundantly clear during the auctions that the developers had bid aggressively for fuel in the hope that they could recover the costs by transferring it into the fixed capacity charges for the untied part of the plant capacity (aside from the already existing PPA) and/or by the sale of the 15% of generation capacity as merchant power. Livemint also points to an ICRA report which estimated the under-recovery in fuel cost in the range from Rs.0.39/kwh to Rs.1.02/kwh on a levelized basis over a 25-year period and the aggregate under-recovery for the bidders at Rs.8 billion in FY2015-16 and about Rs.18 billion by FY 2017-18. 

At that time, Partha Bhattacharyya, who knows a thing or two about coal mining, had this interesting observation in an oped,
However, whether it is conducive to promoting sustainable mining depends only on the premise that the bidders be fully aware of the implications of their actions. Unfortunately, self-destructive bidding is not unknown in the Indian context. Bidding for ultra mega power projects (UMPPs) has provided examples in the not too distant past, with winners throwing up their hands after finding it impossible to deliver power at the offered price. Analyses of the root cause in all of these cases indicate an inadequate core competence in coal mining or coal sourcing as the underlying reason. In the present case of bidding among end-users, the possibility of a similar inadequacy cannot be ruled out.
Now that the government has capped the fixed capacity charges and the spot markets are down on their knees, the developers have no choice but to take unsustainable losses. In fact, even if the government had not capped the fixed charges, it is unlikely that developers would have been able to realize higher charges given the perilous state of discom finances. It is undeniable that the lack of clarity in the tender documents on the calculation of capacity charges and the failure to quell the doubts in unambiguous terms before the auctions encouraged the aggressive bids.

Much the same story is repeating in telecommunications, with call drops being the commonest manifestation. Irrespective of whether the spectrum available is adequate or not, it cannot be denied that telecom operators, who bid very aggressively in the 3G auctions, have, for some time now, been skimping on capacity improvement investments. As Shyam Ponappa describes, there are other failures arising from the quest for revenues maximization,  India's telecoms spectrum market,
India brought in more operators than other markets, didn't provide as much commercial spectrum, fragmented what it had, and priced it out of sight. Consequently, substantial spectrum is idle with the government, while large operators with very little spectrum and the legacy of underdeveloped fixed networks have over 100 million customers each, with high voice and growing data usage. This situation is likely to worsen as more spectrum holdings come up for renewal.
The widely acclaimed telecoms spectrum auctions realized revenues worth nearly $17 bn. Unlike with coal, spectrum already under use by incumbents was re-allocated through auctions. This left existing operators, who have massive fixed investments, with little choice but to bid aggressively to retain their spectrum. The net result is that India has become one of the costliest telecoms spectrum markets.
The exorbitant cost of spectrum adds to other headwinds that telecoms operators have to navigate. Though one of the fastest growing telecoms market in the world by customer-base, operator margins are squeezed by the lowest average revenue per user (ARPU) of about $3, less than a tenth elsewhere. This is exacerbated by cut-throat competition, with nearly ten operators in each circle. And now, the high cost of spectrum has sharply increased the debt burden of  operators, leaving them with little room to raise resources to invest on network expansion, maintenance, and upgradation.

This leaves operators with no option but to raise tariffs significantly, which will certainly constrain demand, and thereby work against the government's ambitious Digital India objectives. In a highly price-sensitive market where just one in hundred have access to high-speed broadband, and where the baseline penetration of data-services is very small, affordable prices are critical to expanding both customer base and services. 

The aggressive bids made both in the reverse auction (for coal blocks designated for power plants) and forward auction (for non-use specified blocks), and telecoms spectrum, and the attendant squeezing of possible margins, raises more questions about the unqualified acceptance of auctions in the allocations of natural resources.

There is a compelling argument that in the spectrum and mineral allocation auctions, government's immediate fiscal considerations have crowded-out larger sectoral objectives. In other words, the details of the auction design may have been skewed towards maximizing auction revenues than sustainable introduction of new technologies into the telecoms market or delivery of power at a reasonable price and rate of return. 

Interestingly, this skew may reflect the institutional power balance within the Ministries of Government of India, in particular the balance between the Ministry of Finance (MoF) and the respective line Ministries, Power and Telecommunications in this case. The MoF has a very hands-on approach in any such contract formulation, applying due diligence that invariably revolves around the binary "public interest" touchstones of expenditure control and/or revenues maximization. The recommendations of the respective regulatory commissions tend to get sidelined in the face of "public interest". The recent history of scandals and the chaotic investigations and prosecutions that followed, may have only amplified this trend. Not only have the advocates of "public interest" become stronger, the voices of the primary stakeholders, the respective Ministries, have become more wary of being seen to be doing anything which would appear to support the private market participants.  

To the extent that the operator or developer's cost is directly translated as the government's revenues, the MoF's role is clearly that of an agent of the government. Therefore, if the MoF prevails in setting the terms of contracting in such auctions and the departments abdicate their responsibilities as neutral arbiters in the auction, it necessarily becomes an one-sided contract. Winner's curse and renegotiations invariably follow.   

One of the oldest axioms of life is that there is no free lunch. The examples of natural resource auctions and public private partnerships (PPPs), which governments have come to view as as a resource mobilization opportunity and the latter as a means to avoid committing large resources for infrastructure investments, and their respective failings, are forceful reiteration of this axiom.