Saturday, August 18, 2018

Reform experimentation in China slows down?

I have blogged on several occasions about "crossing the river by feeling the stones" and "let a million flowers bloom" approach to reforms by the Chinese government. Allow sub-national governments to experiment in a low stakes manner without the threat of recriminations on failure. 

Sample this,
Though it brooks no dissent and has a taste for strongman politics and centralised leadership, the Communist Party has shown an admirable willingness to let small areas of the country try out reforms before they are introduced nationwide. These local experiments with reform have been cited by some Western scholars as examples of China’s “adaptive authoritarianism”. This is a way of describing the party’s ability to avoid the fate of its counterparts in other communist-ruled countries by flexibly adjusting policy in order to satisfy public demands for greater prosperity. The pilot system has been an important means of achieving this... In the past, the central government was sometimes ready to devolve considerable power in order to promote experiments with reform. Take the “special economic zones” (SEZs), which the party set up along the southern coast in the 1980s. In these, local officials were given extraordinary leeway to approve foreign investments, grant tax breaks and waive price controls. Their experiments succeeded in producing rapid economic growth. They were, in effect, the pilot projects for the market-oriented policies that helped China become the economic giant it is today. A raft of other experimental reforms followed elsewhere, including the introduction of stock exchanges and greater tolerance of private enterprise. Xu Chenggang of the Cheung Kong Graduate School of Business in Beijing says that in the first three decades of the reform era, which was launched by Deng Xiaoping at a meeting of the party’s Central Committee in December 1978, nearly all the main economic changes began as local pilot schemes...
The decision by China’s legislature earlier this year to establish a national anti-corruption agency, for example, followed the successful piloting of such bodies in the provinces. In 2016 experiments were launched with innovative public-private ownership structures at some of the country’s largest state-run enterprises. Last year five pilot “green finance zones” were established in various parts of the country. These are intended to try out markets for the trading of water- and energy-use rights and, it is hoped, help banks to lend in an environmentally friendly way.
The Economist suggests that this permissiveness may be changing, and it blames Xi Jinping's centralisation and anti-corruption drive for this,

Even before Mr Xi took over, the pace of experimentation had been slowing. Sebastian Heilmann of the University of Trier in Germany reckons that the number of provincial-level policy pilots declined from around 500 in 2010 to about 70 in 2016 (see chart). Over the same period, the share of national regulations with experimental status dropped from nearly 20% to about 5%... Mr Xi’s ruthless crackdown on corruption and demands for unswerving loyalty to himself as the leadership’s “core” have spread fear among bureaucrats. Few want to risk the unwanted attention that might result from reforms going badly. Mr Heilmann says the central government has also become less open to input from below. “Experiences and initiatives put forward by various regions tend to be ignored” under Mr Xi’s more centralised and personality-based leadership, he says... But the growing indifference of the central leadership to feedback from the grassroots is hampering experiments.
I had blogged earlier arguing that China's Achilles Heel may not be the vast volumes of debt or its aggressive foreign policy posturing, but Xi Jinping and his authoritarian rule. It is just that the unintended consequences can be very many, impossible to predict, and deeply harmful. 

Friday, August 17, 2018

Rare industrial policy success in India

Manufacturing of mobile phones has got a boost from industrial policy pursued by Government of India,
Xiaomi, by far the top-selling Chinese smartphone brand in India, started having handsets assembled in the country by Taiwan’s Foxconn in 2015, and now says 95 per cent of those sold in India are put together there... In April Xiaomi said it had started local production of the printed circuit boards that are the heart of every smartphone. It made the announcement at a conference of dozens of international suppliers it had invited to India to discuss local investment opportunities. Xiaomi’s actions... reflect smart if belated policy moves by Narendra Modi’s government. Onshore phone assembly has boomed since the 2015 introduction of stiff tariffs on imported handsets. Crucially, the government has also taken steps to encourage domestic manufacturing of the parts inside phones. Xiaomi timed the start of printed circuit board production in India to coincide with the April introduction of an import duty on the item — part of a multiyear programme to gradually introduce tariffs on smartphone components, starting with basic accessories such as chargers in 2016 and working up to touch panels next year.
More importantly, great example of why free trade and lower duties are not always the best solutions.

Could the restrictions imposed by the Reserve Bank of India and the draft e-commerce policy on data location be another success? As part of the data protection policy, the RBI has already mandated that by October 2018, all payment firms like Visa, MasterCard, PayPal etc will have to keep their Indian data exclusively in India based servers. The draft e-Commerce policy too requires the same for social media, search engines, and e-commerce firms within two years. China already has the same policy. If all goes well, it could give a fillip to the country's IT industry.

Wednesday, August 15, 2018

Inequality and the financial crisis - role of housing and equity prices

The latest research in inequality studies comes from the Minneapolis Fed which draws attention to the evolution of wealth among US households.

Moritz Kuhn, Moritz Schularick, and Ulrike Steins used the Historical Survey of Consumer Finances (HSCF) and examined the distribution of household income and wealth across population groups and asset categories for the 1949-2016 period and found,
Middle-class portfolios are dominated by housing, while rich households predominantly own equity. An important consequence is that the top and the middle of the distribution are affected differentially by changes in equity and house prices. Housing booms lead to substantial wealth gains for leveraged middle-class households and tend to decrease wealth inequality, all else equal. Stock market booms primarily boost the wealth of households at the top of the distribution. This race between the equity market and the housing market shaped wealth dynamics in postwar America and decoupled the income and wealth distribution over extended periods... We estimate that until 2007, middle-class capital gains on residential real estate slowed down wealth concentration in the hands of the top 10% by about two-thirds. The housing bust of 2007-2008 was a watershed event as it hit the middle class particularly hard.
More specifically,
The HSCF data show that incomes of the top 10% more than doubled since 1971, while the incomes of middle-class households (50th to 90th percentile) increased by less than 40%, and those of households in the bottom 50% stagnated in real terms... However, when it comes to wealth, the picture is different. For the bottom 50%, wealth doubled between 1971 and 2007 despite zero income growth. For the middle class (50%-90%) and for the top 10%, wealth grew at approximately the same rate, rising by a factor of 2.5. As a result, wealth-to-income ratios increased most strongly for the bottom 90% of the wealth distribution... Importantly, price effects account for a major part of the wealth gains of the middle class and the lower middle class. We estimate that between 1971 and 2007, the bottom 50% had wealth growth of 97% only because of price effects — essentially a doubling of wealth without any saving. Also, the upper half of the distribution registered wealth gains on an order of magnitude of 60% because of rising asset prices. For the bottom 50%, virtually all wealth growth over the 1971-2007 period came from higher asset prices...
From a political economy perspective, it is conceivable that the strong wealth gains for the middle and lower middle class helped to dispel discontent about stagnant incomes... When house prices collapsed in the 2008 crisis, the same leveraged portfolio position of the middle class brought about substantial wealth losses, while the quick rebound in stock markets boosted wealth at the top. Relative price changes between houses and equities after 2007 have produced the largest spike in wealth inequality in postwar American history. Surging post-crisis wealth inequality might in turn have contributed to the perception of sharply rising inequality in recent years. 
In simple terms, the relative price of the two assets - land and equity - is the driver of wealth distribution and thereby inequality.

For the period from 1971-2007, total wealth growth from houses and stock prices and their respective  shares for different population percentile of the wealth distribution.
But since 2007, following the bursting of the housing bubble and the subsequent equity market boom, there has been a significant shift in trends.
The inequality impact of financial crises is best captured by the graphic below. It shows that the average household in the top 10% of today's wealth distribution is three times as rich as the average household in the top 10% of 1971's distribution, whereas those in the bottom half are poorer. 
Notice the dramatic wealth destruction faced by the bottom half from the financial crisis. And the reason for that being the knock-on effect on housing prices.

Alternatively, one could say that the bottom half were kept in the wealth game for the quarter century till the crisis by the booming housing market. 

Noah Smith has the graph below from the work of Edward Wolff that indicates the shares of total wealth in housing and financial assets in 2013.
The Minneapolis Fed research authors also shine light on the broader racial distribution of wealth and income in the US and associated trends,
The historical data also reveal that no progress has been made in reducing income and wealth inequalities between black and white households over the past 70 years, and that close to half of all American households have less wealth today in real terms than the median household had in 1970... In 1950, the income of the median white household was about twice as high as the income of the median black household. In 2016, black household income is still only half of the income of white households. The racial wealth gap is even wider and is still as large as it was in the 1950s and 1960s. The median black household persistently has less than 15% of the wealth of the median white household... In terms of labor market outcomes, we document that over seven decades, next to no progress has been made in closing the black-white income gap. The racial wealth gap is equally persistent and a stark fact of postwar American history. The typical black household remains poorer than 80% of white households.

Monday, August 13, 2018

Story of growth - ideas and institutions?

Andrew Haldane has a nice speech where he draws attention to the work of economic historians Steve Broadberry and John Wallis, who offer an alternative explanation for long-term economic growth. 

The conventional wisdom is that since per capita incomes were largely stagnant till it started rising from the middle of 18th century, historically the "global economy stood still in growth terms" and that industrial revolution (and associated "ideas") was the game changer for economic growth. By this argument, the subsequent versions of general purpose technologies led industrial revolution - electricity, IC engines, and sanitation (late 19th century); digitisation, computers, and internet (later part of 20th century); and AI, Big Data, automation, robotics, nano-technologies (ongoing) - have been the growth drivers. In other words, "ideas" were the drivers of growth.

But closer scrutiny questions this line of reasoning. Broadberry and Wallis use moving ten year average annual GDP per capita growth data to show that there were as many, or more and higher, growth spurts in the 1300-1750 period as in the subsequent period. But, unlike during that period, there were as many similar contractionary episodes. As Haldane writes,
Between 1300 and 1700, GDP expanded slightly more than half the time. Over these expanding periods, growth averaged 5.3% per year. The reason average growth was far-lower over this earlier period – indeed, little more than zero – was because expanding periods were almost exactly offset by contracting periods. They accounted for slightly less than half the period, during which growth averaged minus 5.4% per year.
So what has changed in the period since the Industrial Revolution? Growth during expansion periods is relatively little changed. Since 1750, it has averaged 3.2% per year. That is in fact a bit less than growth during expansion periods prior to the Industrial Revolution. This strongly implies it is not the greater incidence of ideas-fuelled booms after 1750 that accounts for the growth inflexion. The explanation lies instead in the dramatic fall in both the probability and cost of GDP contractions. Recessions have occurred only 30% of the time since 1700 and only 17% of the time since 1900. During these periods, growth has averaged minus 2.2% per year since 1700 and minus 3.4% per year since 1900. Since 1750, recessions have become far less frequent and less painful. It is the avoidance of deep recessions that differentiates the Golden Era from its Malthusian predecessor. 
And the explanation, "institutions". So "ideas" and "institutions" were responsible for the remarkable growth since industrial revolution. Haldane writes,
I will argue that it was the emergence of institutions that explains the rise in the other capitals that were essential pre-conditions for growth (human, social, infrastructural, intellectual etc.) It was the emergence of these same institutions which also cushioned the damaging effects of recessions... a rather broader set of “capitals” – not just physical capital (plant and machines) but human (skills and expertise), intellectual (ideas and technologies), infrastructural (transport and legal systems), social (co-operation and trust) and institutional (national and civic, private and public) capital.
Political upheavals and technological disruptions are the common triggers for emergence and evolution of institutions. They trigger the formation of social infrastructure or "enabling" and "insuring" institutions. As to the latter, relevant today for developing countries, there was a wide-ranging shift in the role of State in society from 17th century,
State spending as a proportion of national income rose from around 1% in the 16th century to around 12% in the 18th, 14% in the 19th and 33% in the 20th.39 It financed social infrastructure of various kinds supporting those facing greatest hardship. This ranged from social housing to healthcare to income support. Its effect was to cap the downside, recessionary risk to individuals, economies and societies.
So the takeaway,
Well, the story that better fits the facts appears to be one in which the conveyor belt of ideas and innovation has been continuous over the centuries, causing lengthy if lumpy ideas-fuelled expansions. But whereas prior to the Industrial Revolution this conveyor belt was regularly halted by recessions, more recently these interruptions have been far fewer and less costly. Put differently, the real revolution in living standards after 1750 came about not exclusively, or perhaps even mainly, from the surge in ideas and technologies. Rather, it resulted from societies having found some means of avoiding the subsequent recessionary bullets. Prior to the Industrial Revolution, these killed expansions dead. After it, societies appear to have found some effective means of dodging them... 
Joseph Schumpeter spoke powerfully about the forces of “creative destruction”. The lesson of history seems to be that we need both to “cultivate the creative” and to “disarm the destructive” if innovation is to translate into rising levels of social, human and infrastructural capital and, then, higher living standards. It is only by establishing strong institutional roots that technological fruit can subsequently be harvested... But if history is any guide, the story of growth will hinge on the interplay between the two “i”s – the disruptive forces of innovation on the one hand, the stabilising role of institutions on the other.

Sunday, August 12, 2018

Black Death and Industrial Revolution

Peter Temin distils the literature that connects industrial revolution to the Great Plague,
Voitländer and Voth argue that the scarcity of labor after the Black Death led to a change in agricultural technology. Moving along the wage-rental isoproductivity line, farmers changed from growing crops to tending animals, from arable farming to husbandry... The result of this adaptation of agricultural technology changed the role of women in Medieval society. Switching from crops to husbandry reduced the demand for strength to push plows and expanded the scope of work that women could do. The result was a change in the status of women in society... The reduction in plowing reduced the demand for men’s labor and increased it for women’s labor. Women’s wages rose and their opportunity for work expanded. They delayed marriage, entered service and became more independent... It was a massive change in the structure of society...

The opportunities open to women delayed their marriage and reduced the rate of population growth. The result was the birth of the high-wage economies of England and a few neighboring countries. Voitländer and Voth... estimate that the share of pastoral production in English agricultural output rose dramatically from 47 to 70 percent between 1270 and 1450. And they show by regressions that... the extensive use of pastoral production increased the age of female marriage by more than four years... The adaptation to the initial shock led to a durable rise in people’s income. This in turn led to a demand for more meat in their diet, which of course was accommodated by more husbandry. The whole pattern fit together with the Black Death as a shock that shifted households and the economy from one equilibrium to another.

This all fits in with Allen’s view of the Industrial Revolution being the result of a high-wage economy... Allen argued that the initial innovations of the Industrial Revolution emerged from tinkering by producers to reduce the costs of expensive labor and reap the benefits of cheap power... Allen argues in more recent work that wages and energy prices in North America were close enough to the British pattern for policy initiatives like tariffs, education and infrastructure investments to create conditions hospitable to industrialization. This clearly was true of countries in Western Europe that also followed the British pattern once industrial productivity advanced from its initial level. These countries did not have the factor prices to make the initial innovations of the Industrial Revolution profitable, but further development of these innovations rendered them profitable at factor prices close to those in Britain. And, as Allen noted, policy changes helped industrialization along as it spread.

But this was all within the high-wage area described by Voitländer and Voth. They noted that the European Marriage Pattern extended only from the Atlantic to a line from St. Petersburg to Trieste. Other countries in Asia or Africa were low-wage economies subject to Malthusian pressure on wages, and their factor prices were not close to English prices. Small changes in economic policies were not sufficient to make industrialization profitable in India or Egypt. The story that links the Black Death to the Industrial Revolution therefore is also a story why Europe has industrialized most easily in the past two centuries.

Friday, August 10, 2018

Weekend reading links

1. Ananth points to the stunning shift in the market for leveraged loans,
Right now roughly 78% of the more than $1 trillion in outstanding U.S. leveraged loans are cov-lite, compared to just 29% in 2007, at the peak of last credit cycle (and just before the financial crisis). Cov-lite loans place fewer restrictions on a borrower than do traditionally structured credits... the average discounted recovery rate on cov-lite loans undertaken before 2010 is 78%. That figure drops to 56% for cov-lite loans originated in 2010 and after...
2. As the 5G telecommunications spectrum auctions beckon, Mobius Philippose raises the inevitable questions around winner's curse,
The recommended price for the 5G spectrum on offer is over seven times of what was discovered in a recently held auction in South Korea for 3,500 MHz spectrum. 
At the recommended reserve prices, the Telecom Regulatory Authority of India (TRAI) estimates the auctions would be worth over ₹5 trillion, or as much as $78 billion. Mobius feels that given their troubled balance sheets, the high reserve prices are likely to deter telecom providers from bidding for spectrum. 

I am inclined to agree with his view, but not the conclusion that keeping reserve prices high "shows that the regulator and the government don’t care much about the financial health of surviving telcos".

3. SEBI has a draft proposal to deepen capital markets in India by mandating corporates with outstanding long-term borrowing greater than Rs 100 Cr and with credit rating of AA and above to raise 25% of borrowings through corporate bond market. It is proposed for implementation from 1 April 2019, would be on a "comply or explain" mode for the first two years, and would have fines ranging from 0.2-0.3% of the shortfall.

Tamal Bandopadhyay has a nice article which highlights some of the concerns. 
According to a recent analysis by Care Ratings, as of March 2017, the credit limit of such borrowers was 1.5 times the amount of loans actually taken. The Care analysis finds that 106 large companies with over ₹ 10,000 crore credit limit in March 2017 sourced 47% of funds from banks and 16 of them have never entered the bond market. From a group of 42 companies with bank credit limit between ₹ 7,500 crore and ₹ 10,000 crore, 11 never raised money from the bond market...

In a rising interest rate scenario, companies prefer to borrow from banks where the cost is relatively lower than the bond market which reacts fast to rising rates. In the first quarter of current fiscal year, ₹ 66,997 crore has been raised from the market against little over ₹ 1.48 trillion in the year-ago quarter. The volume of gross issuance was ₹ 6.4 trillion in 2017 but dropped to ₹ 5.8 trillion in 2018 and will reduce further in the current year given the rising yields...
Currently, the bond market is dominated by AAA issuers and the issuances by A-rated entities are a measly 2%. The key reasons for the lack of appetite for the A and lower-rated companies’ papers (a bond is considered investment grade if its credit rating is BBB- or higher by Standard & Poor’s or Baa3 or higher by Moody’s) are that most of the investment regulations either do not permit investment in private corporate bonds with rating lower than AA and, even where it is permitted, discouraged through regulatory interventions.
4. Dani Rodrik makes the case to reform WTO to make it accommodate more diversity, 
Negotiated at a time of neoliberal triumphalism, WTO reached inside the border to constrain domestic policies in subsidies, health and safety and intellectual property. Any domestic regulation with an adverse impact on imports could now be treated as a trade restriction. Subsequent trade agreements went further, prioritising trade and foreign investment over domestic concerns. Western policymakers tend to think of today’s global trade rules as neutral and impartial, treating all participants fairly. But trade agreements are political documents, reflecting the interests of dominant coalitions. Multinational corporations, international banks and Big Pharma play a particularly important role in shaping them. It is no surprise that long-term concerns about development, or indeed labour rights and the environment, are given short shrift... When trade threatens to undermine domestic labour standards, fiscal systems, or investments in advanced technology, rich nations should be just as entitled to privilege these concerns over imports and foreign investment...  
If the WTO has become dysfunctional, it is because our trade rules have over-reached. A fair world trade regime would recognise the value of diversity in economic models. It should seek a modus vivendi among these models, rather than tighter rules.
The point being made is less about a justification of China as a case for flexibility within international  trade frameworks, but more about allowing the freedom for individual countries to respond to trends which are genuinely detrimental to their interests.

5. Global tourism has been growing at an explosive pace,
International tourism rose from fewer than 300 million trips in 1980 to some 500 million in 1995, before exploding to 1.3 billion trips in 2017—a number that’s expected to rise to 1.8 billion in 2030.
And China has been the main driver,
China also accounts for an estimated 80 percent of the growth in tourism spending over the past 10 or so years.
6. NYT chronicles Mawlynnong, the cleanest village in India.

7. One of the less discussed problem mounting up across the US and now UK (and elsewhere too) is the financial crunch faced by local governments and its impact on their ability to continue the delivery of regular civic and utility services. Sample this from UK,
Central government funding for local authorities has been reduced in real terms by 49 per cent between 2010-2011 and 2017-18, according to the National Audit Office, parliament’s spending watchdog. Nearly half of England’s 353 local authorities recorded real-terms falls in their reserves between March 2015 and March 2017, according to an FT analysis conducted earlier this year
With economic stagnation, declining or stagnant median incomes, widening inequality, rise of part-time jobs, and so on, cuts in important civic services and consequent pressure to pay for them could be adding fuel to the fire of discontent that feeds populist politics.

8. There is no bigger market failure than in the market for audit services. Talk about the illusion of competition and conflicts of interest in that market,
No fewer than 98 per cent of FTSE 350 constituents (the largest companies on the UK market) have their books vetted by one of KPMG, EY, Deloitte or PwC. In the US, the figure is 99 per cent for the S&P 500... Conflicts are often hidden discreetly beneath the surface. Accountancy firms are not required to be open about the consulting work they provide to companies, from pension and tax advice, to advising on pay policies or restructuring. These ancillary activities can often be much more lucrative than a plain audit contract (which, in addition to legal risk, also limits a firm’s ability to bid for non-audit business)... While situations where conflicts restrict large companies to considering at best two, or in some cases one, of the Big Four are rarely public knowledge, they are relatively routine.
And the conflicts can be egregious,
PwC was recently confirmed as the “delivery partner” to the regulator, Ofwat, for its next price review in 2019, This involves vetting industry business plans to determine appropriate prices. PwC undertook the previous price review in 2014, at a time when it audited or advised no fewer than nine of the UK’s 19 water companies. This time its role is more modest. But it remains statutory auditor to three firms, including the UK’s largest, Thames Water, and provides services to several more. Prem Sikka, professor of accounting at the University of Essex, said of the situation: “Such links will no doubt be exploited to attract clients and say that the firm will show you how to duck and dive and negotiate the regulatory environment. Firms can’t serve more than one master and must be banned from having their fingers in all pies.”
There are also more pernicious forces at work that deter smaller rivals from competing for audit contracts,
Across Britain’s largest listed companies, 61 of the 100 audit committee chair positions at the end of last year were held by Big Four alumni, according to Accountancy Daily. The ties that bind the Big Four to big business extend beyond the boardroom, to the worlds of politics and regulation. This creates a feedback loop that reinforces the giants’ dominance as their connections give them a powerful advantage when bidding for public or private work.
Wholesale break-up of the Big Four or separation of consulting and audit business or selection of the audit firm by a regulator, stock exchange or government are ideas under discussion to address the problem.

9. Finally, comparing China, India, and Vietnam,
“In China, the government can do everything; in India they can’t do anything,” says Huynh The Du, a lecturer at Saigon’s Fulbright University. “In Vietnam it’s somewhere in between: sometimes the government can’t do things because of the resistance of the people.”

Wednesday, August 8, 2018

The interesting case of employee promotions

Tim Harford points the work of Alan Benson, Danielle Li, and Kelly Shue which appears to establish Peter's principle ("every employee rises to his level of incompetence") at work in modern organisations. They use data from 214 firms, more than 53000 sales employees, and more than 1500 promotions into managerial positions. 
The authors of the paper discovered that the best salespeople were more likely to be promoted, and that they were then terrible managers. The better they had been in sales, the worse their teams performed once they arrived in a managerial role. What’s more, people were not promoted for behaviour that might seem correlated with managerial ability — in particular, those who collaborated with others were not rewarded for doing so. What mattered were sales, pure and simple. In short, Professor Peter was right. Brilliant people are promoted until they become awful managers.
If this is true, then Alessandro Pluchino, Andrea Rapisarda and Cesare Garofalo have another suggestion,   
If performance at one level of a hierarchy is uncorrelated with performance at the next level up, the best strategy is simply to promote the very worst people. Nobody knows whether they will make good managers, but at least they will no longer be dreadful staff — or as Dogbert in the cartoon strip Dilbert put it back in 1995: “Leadership is nature’s way of removing morons from the productive flow.” There are two difficulties with this approach: first, it may be too extreme to assume that no skills at all carry over from one job to the next; second, if the reward for failure is promotion, then the likely response is an organisation full of people bent on sabotage. So Profs Pluchino, Rapisarda and Garofalo suggest a compromise: promote people at random.
Managerial capacity, while often taken for granted, does not come by default or naturally. It needs to be cultivated just as an other skill. And even when cultivated, it is a scarce resource not easily imbibed by everyone. 

Tuesday, August 7, 2018

Are RCTs crowding out serious research on India?

Devesh Kapur writes on India focused scholarship emanating from the US. He has this assessment of the RCT research,
Suffice it to say the effects have been much more positive for the careers of US-based researchers than for India. Ironically, some of the very strengths, such as the stress on identification and causal inference, have been a source of weakness. The stress on these methods as “the gold standard” comes at the cost of relevance and timeliness. Only certain types of questions can be addressed by these methodologies. This is not to say there aren’t excellent studies that address important policy questions. But more often than not, even if they can address them, the costs and duration of these studies means they are more useful as citations than policy.
When asked how many of these expensive RCTs had moved the policy needle in India, Arvind Subramanian, Chief Economic Advisor, GOI, was hard pressed to find a single one that had been helpful to him in addressing the dozens of pressing policy questions that came across his table.
Kudos to him for having called this out!

This proliferation of RCTs in India may have also had the unintended effect of crowding out other more relevant research on issues concerning India. It should be a matter of great concern that even as many of the RCT papers have become popular, I cannot recall a single serious work by a reputed US-based researcher on India's ongoing banking crisis (say, a comparative study), the infrastructure boom and bust of the last decade, heterodox monetary policy success during the global financial crisis, financial market architecture and capital markets, economic growth trends and drivers over the past two decades, experience with PPPs, comparison of India's SEZs and industrial policy with China and others, public finance reforms, informal markets, fiscal federalism, urbanisation and so on. 

In all these areas, apart from some high quality work by local Indian researchers, serious exploration is confined to either reports by global Consultancies or one-off papers by researchers from IMF, WB, and ADB. It is a pity that even ethnic Indian researchers in these Universities prefer either to do the RCT stuff or focus on US and other countries.

The contrast with works on macroeconomy, infrastructure, financial markets, public finance and so on concerning China, Latin America, Italy, Spain etc coming out of places like Harvard is very stark. It may be no exaggeration to suggest that the only area of interest concerning India in top US Universities revolves around poverty studies of the kind involving randomised control trial (RCTs) and romanticised visions of entrepreneurship and social enterprises that serve the Bottom of Pyramid!

This is not the only negative externality. The RCT movement has also displaced good old ethnographies and other insightful qualitative studies. Consider this. Devesh Kapur again, has a very good paper which goes beyond the IAS bureaucracy and shines light on the dark underbelly of the Indian state - the "chronically under-resourced" frontline bureaucracy and the constraints they face. It is an indictment of the development research that this may be the only such ethnographic study of Indian bureaucracy by a foreign based academic. The vast majority of RCT researchers themselves would be enormously enriched by internalising the field conditions described by Devesh and his co-author.

In order to catalyse serious research on India, institutions like the RBI and NITI Aayog may have to take active interest. In co-ordination with the Ministry of Statistics and Program Implementation, they  could guide research on some of the aforementioned areas by making available with appropriate safeguards and conditions the country's very rich set of databases from Economic and ASI census, Companies Registration (MCA), labour related data (Labour Bureau, EPFO, NPS etc), taxation (CBDT, CBEC, GST, States etc), PPPs (MoRTH, DEA etc), stalled projects, and so on.

Wednesday, July 25, 2018

India's agriculture paradox - farmers subsidising consumers?

Harish Damodaran coined a nice term to describe a perceived paradigm shift in India's agriculture landscape - a shift from the "age of scarcity" of farm products, which spawned a labyrinth of regulatory and subsidy policies, to an "age of surplus" which demands a new set of policies. The critical change has been two-fold, both an absolute increase in production as well as the sharply increased elasticity of supply response to price changes. It has predictably triggered a series of articles. A summary is here.

TN Ninan is the latest to weigh in,
The country produces more food than it can consume: More rice, more sugar, more milk, and frequently more tomatoes, onions and potatoes. There are 68 million tonnes of wheat and rice in stock, more than twice what buffer stocking norms require. Milk production has been growing at four times the rate of population growth. That’s true of potatoes too, whose production has increased by 80 per cent in a decade, while the population has grown by less than 20 per cent. Sugar output this year is expected to be 32 million tonnes when consumption usually is 25 million tonnes. The result is that you have farmers pouring tanker-loads of surplus milk down highways in protest at low prices (this in the lean summer season, when milk output falls). Or leaving unwanted potatoes in cold stores; the store owners then dump thousands of tonnes of the stuff out in the open, to rot.
Ashok Gulati adds a new dimension to the debate arguing that contrary to the conventional wisdom, it is farmers who subsidise consumers. He points to a newly published OECD-ICRIER study on India's agriculture. 

The report draws on a global standard, Producer Support Estimates (PSEs) and Consumer Support Estimates (CSEs), to compare the terms of trade between producers (farmers) and consumers. The PSE compares the price received by farmers to the globally benchmarked output price for that crop, by separating out the various positive transfers (input subsidies etc) and negative transfers (regulations like export restrictions, price controls etc) received by farmers. A positive PSE ( a net subsidy) indicates consumer (and taxpayers) subsidise the farmers, whereas a negative PSE indicates the other way (an implicit tax). 

The report finds that contrary to conventional wisdom, India's farmers lose out from the maze of agriculture related policies - domestic marketing regulations (APMC, EC Acts), fiscal support (input subsidies), trade regulations (MEP, export bans, tariffs), and consumer subsidies (PDS etc). The graphic below captures the negative PSE.
The negative market price support indicates that prices received by farmers are lower than those prevailing on international markets for the same commodity, and the transfers do not make up for the shortfall. 

Interestingly, on a comparative perspective, India is among the tiny minority of just three countries which penalises its farmers. They lose out on atleast 6% of their gross farm receipts due to all the agriculture related policies. 
And the corollary, the CSE shows exactly the inverse, with Indian consumers being the largest recipients of subsidy among all the major economies. This amounts to 25% of their consumption expenditure, against a negative CSE of 8% for OECD countries.
The conventional wisdom would have it that India's agriculture and its farmers are heavily subsidised and therefore inefficient. This is clearly not borne out by data. 

As to the sector itself, a combination of support to individual farmers (PSE) and policies from infrastructure investments, R&D, training, standards and inspections, marketing and promotion, and public stockholding (GSSE), captures the total support or the Total Support Estimates (TSEs). GSSE broadly captures the budgetary support to agriculture sector as a whole. This too paints a similar picture, though has been growing in recent years.
On a global comparative perspective, India is among the countries which offers the least support to agriculture sector.
This should be a matter of concern,
The GSSE can be expressed as a share of the sum of the budgetary transfers in PSE (mainly input subsidies) and the GSSE. This share rose from an average of 29% in 2000-02 to a high of 38% in 2005, before declining to an average of 30% in 2014-16. The decline seen in the last decade in the share of budgetary support that is provided as general services to the agricultural sector as a whole rather than to individual producers is of concern since it represents a move away from the less distorting forms of producer support expenditure. The kind of support provided through GSSE measures is also the kind that most effectively builds resilience and sustainability in the agriculture sector, in contrast to ongoing expenditures on input subsidies and, in some countries, on price support.
In simple terms, while investments in agriculture public goods have been declining compared to subsidies to farmers. 

The report has several other insights including a series of recommendations and looks a good read.  I have not read it, except glance through. One of the things that stuck me is this graphic about the institutional architecture of agriculture policy making in India.
This is a bewildering array, with all the co-ordination challenges and possible loss of synergies. A clear area for administrative reform.

Monday, July 23, 2018

Wealth concentration and political capture as threats to our social order

Wealth and political power have been a central concern for as long as organised social life. Concentration of wealth (business concentration, skill-biased technologies, executive compensation, tax cuts etc) leading to widening economic inequality, leading to concentrated political power and consequent capture of the political agenda has been a constant theme of this blog.

I struggle to understand why we need more evidence on this, and regard this as the biggest challenge facing the liberal democratic market economies of today. But while it gets mentioned everywhere, it is widely seen as a manageable problem rarely as an alarming existential concern. Contrast this with the attention and shrill debates that issues like China, migration, Donald Trump, and protectionist trade practices generate.

But Free Exchange has an excellent summary of the latest research in this regard. And, at least in the opinion of this blogger, it is very important. The most heartwarming fact is that it comes not from economists but researchers of good old politics and governments. 
The relation between concentrated wealth and the political power of the rich is scarcely limited to political spending, or to America. The rich have many means to shape public opinion: financing nominally apolitical think-tanks, for instance, or buying media outlets. Although their power may sometimes be used to influence the result of a particular vote, it is often deployed more subtly, to shape public narratives about which problems deserve attention. 
Derek Epp and Enrico Borghetto examine the evidence in the context of Europe and write,
This article considers two competing hypotheses: (1) that policymakers will act to counter rising inequality by renewing their focus on redistributive social policies, and (2) that rising inequality makes legislative agendas especially vulnerable to the influence of economic elites, and that these elites will attempt to keep redistributive social policies off the agenda. Empirical tests, which are designed to arbitrate between these hypotheses, use data on public laws and parliamentary bills introduced in the legislatures of nine European countries between 1941 and 2014. The evidence is supportive of the second hypothesis: as inequality becomes more acute, European legislative agendas become systematically less diverse and this narrowing of attention is driven by a migration away from social safety-net issues toward issues relating to law enforcement, immigration, and national defense.
Benjamin Page, Larry Bartels and Jason Seabright drill down further to explore political and social preferences of different income groups and find,
There can be little doubt that the wealthy exert more political influence than the less affluent do... Recent evidence indicates that “affluent” Americans in the top fifth of the income distribution are socially more liberal but economically more conservative than others... We report the results of a pilot study of the political views and activities of the top 1 percent or so of US wealth-holders. We find that they are extremely active politically and that they are much more conservative than the American public as a whole with respect to important policies concerning taxation, economic regulation, and especially social welfare programs... 
The wealthy are much more favorable toward cutting social welfare programs, especially Social Security and health care. They are considerably less supportive of several jobs and income programs, including an above- poverty-level minimum wage, a “decent” standard of living for the unemployed, increasing the Earned Income Tax Credit, and having the federal government “see to” —or actually provide—jobs for those who cannot find them in the private sector... wealthy Americans are much less willing than others to provide broad educational opportunities, by “spend[ing] whatever is necessary to ensure that all children have really good public schools they can go to” or “mak[ing] sure that everyone who wants to go to college can do so.” They are less willing to pay more taxes in order to provide health coverage for everyone, and they are much less supportive of tax-financed national health insurance... to a much greater extent than the general public—the wealthy oppose government action to redistribute income or wealth...
Variation within this wealthy group suggests that the top one-tenth of 1 percent of wealth- holders (people with $40 million or more in net worth) may tend to hold still more conservative views that are even more distinct from those of the general public. We suggest that these distinctive policy preferences may help account for why certain public policies in the United States appear to deviate from what the majority of US citizens wants the government to do. If this is so, it raises serious issues for democratic theory.
The paper contrasts the preferences of the top 1 per cent wealthiest with those of the general public on a variety of issues from education and health care to taxation and redistribution to economic regulation and environment. It finds very stark divergences. This summary of federal government spending priorities itself is revealing.
Finally, Lee Drutman explores the underlying influence pathway, campaign finance, 
In the 2010 election cycle, 26,783 individuals (or slightly less than one in ten thousand Americans) each contributed more than $10,000 to federal political campaigns. Combined, these donors spent $774 million. That’s 24.3% of the total from individuals to politicians, parties, PACs, and independent expenditure groups. Together, they would fill only two-thirds of the 41,222 seats at Nationals Park the baseball field two miles from the U.S. Capitol. When it comes to politics, they are The One Percent of the One Percent...
(they) have unique access to candidates and party leaders. They know that candidates and parties need their money, and this presumably allows them to play a kind of gatekeeper role, allowing them to set the parameters of priorities of “legitimate” politics. They congregate in a limited number of elite zip codes. Their concerns are not the concerns of ordinary Americans. Some are motivated by ideological reasons. For others, the motivation is less partisan and more pragmatic: Many are lawyers and lobbyists, and even more are corporate executives, all seeking to influence legislation and policy... In the 2010 election cycle, the average One Percent of One Percenter spent $28,913, more than the median individual income of $26,364... In a world of increasingly expensive campaigns, The One Percent of the One Percent effectively play the role of political gatekeepers. Prospective candidates need to be able to tap into these networks if they want to be taken seriously. And party leaders on both sides are keenly aware that more than 80% of party committee money now comes from these elite donors.
Whether we like it or not, the stark differences in preferences on social/public concerns between the wealthiest and the rest is a reflection of the growing divergence between their respective interests and a rapidly decreasing overlap of their respective physical lives. Indeed, it is not incorrect to describe it as a deep fracturing of the social contract itself. Whether we like it or not, the core democratic ideal - governments listen to all its citizens and represent them all (at least the majority) - is just that, an ideal increasingly divorced from practice. And worryingly so it has been the case for sometime now. 

It is time to recognise this as the greatest danger to the liberal democratic and market economy based social order.

Friday, July 20, 2018

The rise of McPolitics in the US?

New Yorker has a nice article that documents the changing face of politics in the US arising from the homogenisation of the two political parties.
For much of the twentieth century, the real power in American politics rested not with U.S. representatives or senators but with the governors, mayors, and assemblymen who controlled local purse strings... At the federal level, the two parties resembled loose associations of disparate interests rather than ideologically cohesive movements. They had few resources and virtually no means of insuring ideological discipline among their members. Many Democrats were more conservative than many Republicans. All of that had real advantages: Congress was, for much of the past century, a place of remarkable comity, where politicians routinely struck compromises on public spending or judicial appointments. Even as Americans found themselves deeply divided on everything from foreign policy to rock and roll, high politics was relatively free of acrimony... So long as America’s main political parties remained pragmatic associations of local interests, socially progressive Democrats in the North were yoked to segregationist Democrats in the South. Neither Democrats nor Republicans consistently fought to end Jim Crow.
This localised party system has undergone a radical shift in recent times,
American politics has become thoroughly nationalized: voters pay vastly more attention to what is going on in Washington, D.C., than to what’s going on in their own town or state. The Democratic and the Republican Parties have become much more homogeneous, offering largely the same ideological profile in Alabama as they do in Vermont. In each election, Americans now face a choice between two clearly demarcated alternatives of action... In the ensuing years (following the civil rights legislation)... segregationists in the South no longer saw the Democratic Party as their natural home... During the following decades, conservative Democrats slowly gravitated toward the Republican Party, and the Democratic Party, for the first time in its history, became liberal on both social and economic issues: across the nation, Democrats now stood for at least some modicum of wealth redistribution and racial integration. Republicans underwent a similar transformation, adopting a militant preference for free markets and low taxes while opposing abortion and gay rights... 
In the past few decades... Americans have grown less able to name their governor and less likely to vote in local elections. Conversely, they now have much stronger feelings about national figures, like senators or Presidential candidates. If they could choose whether their party got to occupy the White House or the governor’s mansion, most would pick the former. Even the attention of the donor class has nationalized. From 1998 to 2012, the amount of money poured into an average Senate race doubled; the cost of governors’ races barely budged.
And why did this happen,
As the ambitious civil-rights legislation of the nineteen-sixties realigned America’s political parties, a host of deeper structural changes redirected citizens’ attention toward the capital. Thanks to the postwar boom, public jobs came to look less attractive than private ones, weakening the power wielded by local party bosses. More recent changes in the media have also played an important role. Local papers and radio stations, once the country’s dominant sources of information, brought together national, state, and municipal news; as a result, Americans who were primarily interested in what was going on in Washington still learned a lot about their home towns. Today, voters increasingly get their news from broadcast networks and cable channels, or from social-media sites and online publications, which are less likely to require them to pay attention to their city hall or state capitol... The power of the Presidency had greatly expanded. The national parties had gained vastly more control over state and local subdivisions.
The consequence of this "nationalisation of politics",
According to a recent study by the political scientists Shanto Iyengar and Sean Westwood, Americans may now be more likely to discriminate on the basis of party than on the basis of race: asked to choose between equally qualified scholarship applicants, Democratic and Republican participants alike heavily favored applicants who were identified as belonging to the same political party they did. White participants in the study were much less likely to penalize an applicant for being black than participants of one party were to penalize applicants of the other... People now cast their votes to advance their political ideology, not to get a public job... voters, donors, and activists are much more likely to judge elected officials on whether they pass an ideological purity test than on whether they bring tangible benefits to their districts... Once upon a time, every community in America had its own store with its own local products. Today, chains like Walmart and Home Depot offer the same wares all over the country. The parties, Hopkins believes, have undergone a similar process of homogenization: “Just as an Egg McMuffin is the same in every McDonald’s, America’s two major political parties are increasingly perceived to offer the same choices throughout the country.”...
As Lilliana Mason argues in a sobering new book, “Uncivil Agreement: How Politics Became Our Identity” (Chicago), factors such as class, race, religion, gender, and sexuality used to cut across one another to a significant extent. In an earlier age, a voter might have identified herself as both a conservative and a Presbyterian. Each of these identities predisposed her to have a negative opinion of people who did not belong to the same group. But since there were plenty of non-Presbyterian conservatives, as well as plenty of non-conservative Presbyterians, each of these “cleavages” held the other one in check. In the past decades, though, “partisan, ideological, religious, and racial identities have . . . moved into strong alignment,” Mason writes. Religious communities, for example, are far less politically diverse than they once were: “A single vote can now indicate a person’s partisan preference as well as his or her religion, race, ethnicity, gender, neighborhood and favorite grocery store.” As a result, Mason argues, all those factions have fused into two new mega-identities: Democrat and Republican.

Thursday, July 19, 2018

Technologies and their diffusion intensity

Marginal Revolution points to the work of Diego Comin and Marti Mestieri, who document the trends associated with the diffusion of 25 technologies in 139 countries over the past two centuries, and posit an explanation for cross-country differences in income growth over the long-term. They focus on two distinct margins of adoption that are specific each technology and country, the adoption lag and the intensity of use.

They simulate a model to study the effect of technology diffusion process on the productivity growth,
Adoption lags have converged across countries, while the intensity of use has diverged... Our simulations have shown that differences in technology diffusion patterns account for a major part of the evolution of the world income distribution over the last two centuries. In particular, differences in the evolution of adoption margins in Western and non-Western countries account for around 75% of the income per capita divergence observed between 1820 and 2000... First, our findings show that the majority of the divergence in productivity can be accounted for by technology diffusion. Second, the critical dimension of technology diffusion to understand the divergence in productivity is the intensity of use of technology. Third, economy-wide factors such as exogenous TFP not only played a minor role in explaining cross-country productivity dynamics. They also played a minor role in explaining differences in the evolution of technology diffusion across countries...
The average estimated adoption lag is 42 years. The average intensity of adoption in Non-Western countries is half (47%) of the level of Western countries. We document significant dispersion on both margins of adoption across countries and technologies. For example, comparing the 90th to the 10th percentiles of our estimates, we find 10-fold differences in adoption lags and 8-fold differences in the intensity of adoption.
Nice summary from Tyler
The mean adoption lag for spindles, classified as a 1779 technology, was 130 years, or in other words that is how long it took for the technology to move to poorer countries. For ships, listed as a 1788 technology, the mean lag is 110 years. Synthetic fiber is a 1931 technology, with a mean adoption lag of 29 years. For the internet, a 1983 technology (is that right?), the mean adoption lag is only 6 years. But the overall story is not so simple. The more advanced countries use more of these technologies, and use them more effectively (“intensity”), and that gap has been growing over time. Yes, Ghana has the internet, but it is Silicon Valley that is working wonders with it. Some technology use begs more technology use.

Tuesday, July 10, 2018

The challenges with Telangana's farm income transfer experiment

The Telangana state government's decision to implement direct income transfer to all its farmers is surely a landmark in India's agriculture policy space. Its outcome will be very closely scrutinised over the coming years. 

In brief, the State government have decided to transfer Rs 4000 per acre per season for the Rabi and Kharif crop seasons to all the 5.83 millions farmers as part of the Farmers Investment Support Scheme (FISS) or Rythu Bandhu Scheme. The transfers are to all agricultural land owners, irrespective of whether the land is brought under cultivation. This amounts to an annual subsidy outflow of Rs 12000 Cr or 7% of the total government expenditure, and would cover from 10-30% of the cost of cultivation depending on the type of crop. Two good assessments here and here.

Arguably the biggest challenge in achieving the scheme's objective of reaching small and marginal farmers arises from its not covering tenant farmers, a category not legally recognised in the State. Such farmers may cover atleast a third of all farmers.

So we have a pioneering agriculture policy reform being unveiled, perhaps the single largest direct income transfer program to farmers anywhere in the world. As Neelkanth Mishra has very nicely argued, it is almost impossible to make any reliable assessment of the program. And evaluations commissioned by the state government will take years to provide any actionable insight, if at all, whereupon the die would have been cast, either in terms of success or failure of the reform. Other states too would have jumped the bandwagon and emulated Telangana, inclusive of all the program's failings. So what is the best that can be done to ensure that the reform is effectively implemented?

At the very outset, we need to acknowledge that one could not have done an RCT to have evaluated the program before its implementation. Foremost, we do not have the luxury of time and KCR (the Chief Minister of the State) would surely not have had the patience. Public policy reforms rarely ever, if at all, happen in a calculated manner affording the luxury of detailed planning. They invariably happen as mutations. In any case, a small pilot evaluation would not have been able to reveal any of the several general equilibrium effects possible - how much of the money used for consumption, how much for investment, tenant-landowner dynamics and the income sharing, impact on land values, incentive distortion and leaving land fallow, impact on food prices etc. In the circumstances, the best effort would have been a rigorous qualitative assessment. 

Once the policy option is exercised, then the challenge is to ensure its high fidelity execution. This would mean ensuring land ownership details are accurately captured (can remote sensing data and GIS mapping, coupled with a field-survey, help with a one-time clean-up?), payments processed and delivered to the farmers in the most cost-effective and most accessible manner (can technology solutions and digital money help?), some way (short of a regulation or rule) in which tenants can negotiate with landowners to get a share of this money (can nudges help?), the money is withdrawn and utilised in the most productive manner (again nudges, say, to purchase farm inputs?), the float in the distribution channel by way of locked up money due to deaths etc be minimised (can technology help?), discourage farmers who could leave land fallow and just collect the transfers (some information disclosures and structuring of the payments be of use?) etc. 

As can be seen, each of these problems can have unique ways to address them. The government would need to innovate improvise continuously. 

Addressing these execution challenges and ensuring that the reform realises its full value would require action at three levels.

The first would be purely at the level of execution management. Can we have a monitoring system with tight feedback loops that inform decision-makers at District and State levels about bottle-necks, distortions and problems as the implementation proceeds (say, larger and absentee farm owners leaving land fallow to collect the transfers which is higher than the tenancy rent)? Can there be a back-up team which can respond to such emergent concerns and address them swiftly, both at the policy level as well as, more likely, at the level of field implementation? Can we have a strong analytics team that is able to rigorously analyse the data exhaust and offer actionable insights, which can perhaps help iterate and improve the policy over time?

The second would be at the level of policy elements. Can the State government emulate the Giveitup campaign associated with the LPG subsidy program of the Government of India and nudge the richest farmers to voluntarily abstain from taking the subsidy? What would be the most effective way to exercise such moral suasion? Given that 9% of farmers with more than 5 acres each own a third of the land and therefore would claim a third of the subsidy, can the government go one step further and cap the subsidy in an administratively simple manner? Going forward, as the farmer database and transfers distribution channel stabilises, can the government explore options of targeting farmers, crops, regions etc? 

The final level of engagement would have to be at the eco-system. Gradually, after a year or so of the implementation, can the database and monitoring system be used to deliver other types of services? How does this work-flow integrate to the fertiliser subsidy transfer system? Can the foodgrain procurement process be linked up with this database? Can this be linked to the agriculture e-market place, eNAM? Can we use this digital spine to deliver direct cash transfer in return for erecting meters on agriculture power connections? Can we gradually build a robust agriculture information management system and a platform to deliver various kinds of farm services?

It is all too easy for me to write these down as a sort of pre-mortem. In fact, I could dig deeper and get more granular at each level. It is an altogether different task for the State government to just keep its eye on all three levels always, much less translate them into action. The best that can be expected is for the State government to perform reasonably well the limited task of high fidelity execution. That is a two-year agenda.

For now, despite all its flaws, the state government should be applauded for the leap of faith, as is the case with any such reform.

It does not need any great foresight to assess how the program will get implemented, if it is done business as usual by the State government. It is almost unrealistic to expect a state government, even a very high capacity one at that, to execute at all three levels. Even high fidelity execution will be a great achievement. The ebbs and flows of political cycles alone are enough to disrupt any neatly laid down plans at policy and eco-system levels. No point in criticising State government for such failings. We only need to be surprised if that does not happen. 

None of this would prevent opinion makers and academic researchers from sitting judgement five years hence, and with the benefit of hindsight smugly castigating the government for all the distortions and failings (some which cannot even be anticipated now) that would have inevitably crept into the implementation - it was not evidence-based policy making, there was corruption, there was no political commitment, the tenants and therefore the poorest farmers did not benefit, and so on. We told you so! 

Instead, the challenge is to engage in real time. Can evidence-based policy making ideologues offer the State government something tangible in terms of the aforementioned engagement elements that increases success likelihood as it embarks on this challenging reform path? Anyone up for that challenge?

Sunday, July 8, 2018

The competitive race to offer investment subsidies

Governments, across different levels, compete to attract investments, domestic and foreign, that they believe will create jobs for the locals and boost the local economy. In recent times, as the famous example of US cities competing to attract Amazon's second headquarters show, this competition has escalated into a debilitating arms race to offer the largest amount of subsidies with deeply questionable benefits in return.

Now thanks to watchdog group Good Jobs First, it has now become possible to track the business investment subsidies offered by governments to various corporates in the US. It shows that over the past five years, state and local governments, which are facing an acute fiscal crunch to deliver even basic services, have pledged the US technology giants  at least $9.3 bn in subsidies. Apart from the Amazon second headquarters, the largest recent handout was the $4.8 bn promised to Foxconn for its new plant in Wisconsin.

Sample this,
In the last tax year local governments in Nevada lost more than $105m as a result of state abatement programs. Nevada is home to Tesla’s “Gigafactory” - which received $1.3bn in tax benefits, the largest such subsidy the state has ever awarded... Tesla accounted for $68.7m of last year’s loss. Good Jobs First calculates that Tesla’s tax breaks resulted in one school district, Storey County Schools near Reno, losing $36.7m of revenue.
Local governments frittering away scarce resources on subsidies with questionable benefits on large companies is far from the only issue. Most of these subsidies would involve intense lobbying by businesses and their bespoke nature for each company mean significant exercise of discretion by the political representatives and officials concerned. The attendant opportunities for cronyism and corruption are significant. The several exposes in recent times of local government corruption among state and city level leaders in the US is a manifestation. 

At a conceptual level, this cannot but not be regarded a market failure. Cities and states competing in an open market to attract businesses have to be regarded as a monopsony situation. All the more so since, even in a large country like the US, there are only a handful of the big companies which are likely to consider investment decisions at any point in time. The carefully cultivated hype around such investments, despite all the evidence pointing not only to job creation coming mainly from smaller and younger enterprises and larger ones being net job destroyers, has not shaken the faith in large companies.

This trend is now common across the world. In India, industrial policy is dressed up as fiscal concessions and input subsidies to attract large firms. States compete with each other in offering the most attractive package. In fact, some have even started to offer a share of the salary of the first few employees to lure investments. However, like in the US, there is little to suggest that business investment decisions themselves are influenced by such fiscal offers, and at best, this competitive race among States may marginally influence investment location decisions. 

It is difficult to regulate such decisions. After all sovereign governments are fully empowered to offer such subsidies. A more meaningful attempt to reverse the trend may be to force governments to publicise such information at a very granular level (like the recent US Governmental Accounting Standards Board Statement 77) and also develop a mechanism to hold corporations accountable for the promises made in return for the subsidies. Perhaps a nationally organised attempt to quantify and publicise the social balance sheet of these companies would be useful. In any case, information and civil society action, especially at the local government and provincial levels, may be a more effective response to such policies.

Friday, July 6, 2018

Stabilising agriculture markets

Couple of interesting articles covering agriculture over the past weeks. 

One by Harish Damodaran draws attention to the recent spurt in agricultural production, something he has described as an "age of surplus". Consider this,
In 2010-11, pulses production, for the first time, crossed not 15 mt, but 18 mt. Even in 2014-15 and 2015-16, both drought years, it stayed within 16-17 mt. And as farmers ramped up plantings in response to the high prices of 2015 and 2016, output soared to 23.13 mt in 2016-17 and 24.51 mt in 2017-18... In the past, sugar production typically took two years to recover from a drought. But 2017-18 will see output rebound to a record 32 mt-plus, from a seven-year-low of 20.26 mt last season. Thus, the old “sugar cycle”, where three bumper years were followed by two lows, is dead. Now, we have only one-in-five bad years. The same goes for vegetables... We have, indeed, entered a regime of “permanent surpluses” in most crops... There is practically no agri-commodity today that isn’t a victim of “permanent surpluses”. 
Another by Ashok Gulati points to the same story in dairying,
The increase in milk production since 2014-2015 has been unprecedented (6.3 per cent per annum between fiscal year FY 2015 and FY 2017; FY 2018 figures are not yet finalised), compared to about 4.2 per cent in the three years preceding that (see graph-1). Moreover, the milk output, instead of falling during the lean (summer) season, registered high growth in 2017-18 vis-à-vis 2016-17... (but) milk prices have fallen by 20 per cent to 30 per cent (by Rs 5 to10 per litre for cow milk) in several milk-surplus states in western and northern India, including Maharashtra, Gujarat, Rajasthan Punjab, Haryana and UP.
What has contributed to this? Harish has this answer,
Better seeds and faster diffusion of technology have made a difference. HD-2967, a blockbuster wheat variety released in 2011, could cover 10 million hectares area in a single season within five years. Along with HD-3086, a newer variety more resistant to yellow rust fungus, it has ensured that the Green Revolution’s yield gains haven’t plateaued yet: The average Punjab wheat farmer harvested 5.12 tonnes per hectare in 2017-18, as against 3.73 tonnes in 1990-91 and 2.24 tonnes in 1970-71. No less impactful has been Co-0238, a cane variety that not only yields more crop per hectare, but also more sugar from every tonne crushed. First planted in 2013-14, it now accounts for well over half of the cane area in North India, while singularly responsible for UP’s sugar output spiralling from 7.5 mt in 2012-13 to 12 mt this season. But the story of yield increases isn’t limited to publicly-bred open-pollinated varieties (OPV). The 50 quintals/acre yields that farmers in Bihar’s Kosi-Seemanchal belt today realise from rabi corn is comparable to Midwest US levels. With planting of hybrids, as opposed to OPVs, paddy yields have gone up from 15 quintals to 25 quintals per acre even in the Adivasi areas of Jharkhand, Chhattisgarh and Odisha. Kolar farmers, likewise, grow three crops of tomato annually, while Maharashtra’s Jalgaon district would be the world’s seventh largest banana producer, were it a country. The technologies in all these — be it hybrid seeds, high-density cultivation using tissue-cultured plants, or drip irrigation — have been supplied by the likes of DuPont, Monsanto, Bayer, Syngenta and Jain Irrigation.
Note that both public policies and markets have played a role in this. The biggest disappointment has been in the weak government investments in irrigation, especially minor irrigation (the field channels that delivery water to the farmers), and on market's tepid investments in linkages like cold storages. While the failings on irrigation can be attributed to state capacity weaknesses, the market failure in responding with investments in the likes of cold storage, private extension services etc is a matter for reflection. After all vegetable and fruit retailing by retail chains is growing and has enormous potential, and even a small proportion of the market is big. 

Harish's article also has more on the vagaries of price fluctuations, maybe the central social problem with agricultural markets,
Last year, after drought in Karnataka drove up onion prices from July — they went past Rs 30 per kg in Maharashtra’s Lasalgaon market by October — farmers sowed aggressively during the rabi winter season. The result: Average rates crashed to Rs 6-7 this April-May. Farmers did something similar when tomatoes scaled Rs 60-80/kg levels in Kolar (Karnataka) and Madanapalle (Andhra Pradesh) last July. Prices again plunged, to Rs 3-5/kg towards February, and haven’t really looked up even in peak summer this time... Two years ago, garlic fetched an average Rs 60 per kg rate in Rajasthan’s Kota mandi. Enthused by it, farmers in the Hadoti region planted more area, only to see prices halve last May, thanks to demonetisation. This May, rates at Kota further halved to Rs 14/kg. 
Agriculture is more complex than other markets in that we have two directly conflicting dynamics at play - higher prices for farmers and lower prices for consumers. And farm produce being an essential commodity for everyone and farmers being producers themselves exacerbates the challenge. Therefore, public policy and markets have two roles - enhance productivity (and thereby production) and stabilise markets (and thereby increase farm incomes and de-risk agriculture).

It is the latter that is an interesting area since the policies that have been found to be relatively better (albeit with distortions) in realising this objective are not the ones that economists would advocate - public procurements, minimum support prices, direct income transfers, fertiliser and farm power subsidies, and perhaps even loan waivers. Indeed Ashok Gulati proposes public procurement and development of a buffer stock of Skimmed Milk Power (SMP) by the National Dairy Development Board (NDDB) to stabilise price fluctuations in milk. He also makes several other practical suggestions. 

One possible approach to address the price stabilisation problem would be to undertake high intensity public awareness campaigns before each harvest. The campaign should be informed by the best possible assessment of market trends and offer guidance to farmers on crop choices. Remote sensing data and market information (futures, global trade trends etc) can help make good choices. Instead of top-down directions that restrict government's agricultural programs to those not complying (which are unlikely to be actionable given the political realities ex-post), it may be more effective to articulate these concerns (and even threats) in the discussions with farmers groups and other important collective stakeholders at local levels. The success of Andhra Pradesh government with dissuading farmers from planting cotton this year in anticipation of glut and lower prices is an example. The problem though is with carrying out a campaign with high fidelity, which demands both state capacity and high quality leadership (either at bureaucratic or political levels). 

Another area of work is to engage more intensely on refining the electronic market place for agriculture products, eNAM. As I blogged here, this may involve a mission-mode effort involving committed and stable leadership for a sustained period of time to iron out the several loopholes and deficiencies and establish eNAM as a credible and accessible trading platform.  

Yet another option is the choice between crop insurance and direct income transfers. But evidence from everywhere shows that even in the best case scenario, crop insurance is almost 80-90%, if not more, public subsidy. This makes direct income transfer more efficient (less transaction costs) than crop insurance. In fact, it may also be politically more salient (and therefore acceptable) to do direct income transfers. The recent Telangana experiment is a step in the right direction, though the risks of its poor implementation (and resultant disrepute to the approach) is very high.

Though such saliences has its costs (demands to increase transfers, for example), this would have to be traded off with the pain of validation and payouts (and attendant inordinate delays) that weak state capacity and greedy insurers would make inevitable with crop insurance schemes. It is for all these reasons that direct income transfers are the most common farm support mechanism across US and Europe. Crop insurance is therefore yet another example of evidence-free policy prescriptions that international development institutions advocate for developing countries.

It may perhaps be necessary to apply all the three ideas, alongside the buffer stock procurement, to have any significant impact on the market stabilisation challenge in agriculture.