Tuesday, January 23, 2018

UK NAO questions the value for money from PFI

Last week the UK's National Audit Office (NAO) released a report on the rationale, costs, and benefits of the country's much acclaimed Private Finance Initiative (PFI) to build infrastructure, the pioneering PPP experiment. The report is a very damning indictment of PFI, concluding that the country has incurred billions of pounds in extra costs for no clear benefit.

The PFI was introduced in UK in 1992 as an innovative way to leverage private capital to supplement governments investments in infrastructure. In 2010, the UK government initiated PFI2, or PF2, with some learnings from PFI and greater role for the government, focusing on smaller deals, involving facilities and services rather than buildings.  Over the past 20 years, PFI investments in social and economic infrastructure have averaged around £3 bn every year, small compared to the total £50 bn capital investments of the government. There are currently 716 PFI and PF2 projects operational or under construction with a total capital value of £59.4 bn.

Consider this on the presumed efficiency gains, 
The Department for Education is currently collecting data and developing methodology and has, so far, found that the financing route has little or no effect on the construction costs of schools being built as part of the Priority School Building Programme (PSBP)... Our work on PFI hospitals found no evidence of operational efficiency: the costs of services in the samples we analysed were similar. Some of those data are more than 10 years old. More recent data from the NHS London Procurement Partnership shows that the cost of services, like cleaning, in London hospitals is higher under PFI contracts.
On the illusion of budget flexibility, or "fiscal illusion" as a July 2017 report of the Office of Budget Responsibility described,
Private finance increases departments’ budget exibility and spending power in the short term, as no upfront capital outlay is required. But departments face a long-term financial commitment – any additional investment will need to be paid back. For example, in the first 12 years of PFI use in the health sector, PFI resulted in extra capital investment for the Department of Health and Social Care (the Department) of around £0.9 billion each year on average: £0.5 billion a year more than the a average annual spending of the Department on operational PFI projects over the same period. However, in recent years PFI has been used much less by the Department and the operational PFI contracts, which cost over £2 billion a year, have reduced the Department’s budget flexibility.
On the higher cost of capital with private finance,
Private finance procurement results in additional costs compared to publicly nanced procurement, the most visible being the higher cost of nance. The 2010 National Infrastructure Plan estimated an indicative cost of capital for PFI as 2% to 3.75% above the cost of government gilts.Data collected by IPA on PFI and PF2 deals entered into since 2013 show that debt and equity investors are forecast to receive a return of between 2% and 4% above government borrowing. However, some 2013 deals, agreed when credit market conditions were poor, projected an annual return for debt and equity investors of over 8%; this was more than 5% higher than the cost of government borrowing at the time.20 Small changes to the cost of capital can have a signi cant impact on costs – as an illustration: paying off a debt of £100 million over 30 years with interest of 2% costs £34 million in interest; at 4% this more than doubles to £73 million.
There are other ways in which PFI adds to cost. Insurance, holding surplus cash to meet stricter lender requirements, use of advisers by both government and private partner given the complex nature of private finance procurement, arrangement fees for raising money, and so on are all additional layers. The net result in terms of total capital cost,
The higher cost of finance, combined with these other costs, means that overall cash spending on PFI and PF2 projects is higher than publicly nanced alternatives. The Department for Education has estimated the expected spend on PF2 schools compared with a public sector comparator (PSC). Our analysis of these data for one group of schools shows that PF2 costs are around forty per cent higher than the costs of a project nanced by government borrowing. The Treasury Committee undertook a similar analysis in 2011, which estimated the cost of a privately nanced hospital to be 70% higher than the PSC.

Consider these snippets of the costs inflicted by way of operational inflexibility, 
The PFI structure means that changes in contracts can be expensive with lenders and investors charging administrative and management fees. For example, additional capital works of approximately £60,000 in a local authority PFI school increased to over £100,000 once fees were factored in – the local authority challenged this and the SPV agreed to reduce some of the management and approval fees although bank fees of £20,000 will still have to be paid. Department of Health and Social Care papers similarly highlight that some trusts with PFI facilities have to use alternative forms of procurement for capital variations. Government can also be locked into paying for services it no longer requires: for example, Liverpool City Council is paying around £4 million each year for Parklands High School which is now empty. Between 2017-18 and the contract end in 2027-28, it will pay an estimated £47 million, which includes interest, debt and facilities management payments, if no changes are made to the contract. The school cost an estimated £24 million to build.
On pricing in life-cycle risks, 
The Department of Health, in a paper on PFI prepared for HM Treasury in 2012, noted that “there is an inbuilt incentive to price cautiously for lifecycle risk, requiring the build up of significant reserves. This may not necessarily result in optimum value for money for the public sector, although data illustrating out-turn costs for lifecycle is scarce”. It also reported that bidders were currently pricing the cost of insurance at a 20% premium to the market price in order to provide protection against future price rises. To mitigate this, HM Treasury introduced insurance gain-share arrangements in the standard PFI contract (paragraphs 2.12–2.13). There are also other risks, for example potential tax increases, that investors may factor into the prices they bid at the outset. These risks may not materialise and in some cases subsequent changes, such as reductions in corporation tax rates, have increased rather than reduced investor returns.
And on the importance of the discount rate used to assess value for money, or comparing with public sector comparators,
The VfM assessment compares private nance costs with a government discount rate of 3.5%, which is 6.09% with inflation, known as the Social Time Preference Rate (STPR), which is higher than government’s actual borrowing costs. The higher the rate applied, the lower the present value of future payments. For example a payment of £100 in 12 years will have a present value of just £49 when discounted by the STPR. Discounting using a lower discount rate, which compares private finance with the actual cost of government borrowing, results in fewer private nance deals being assessed as VfM... HM Treasury does not consider the cost of government borrowing to be relevant in making financing decisions on PFI and PF2 deals. However, other countries, such as Germany and the United States, do compare the cost of private finance with government borrowing costs when assessing financing options like PFI.
And its legacy on the fiscal balance sheet,
The public sector will still be making PFI unitary charge payments to private nance companies in the 2040s. Future payments for existing projects are forecast to total £199 billion from 2017-18 onwards – an average of £7.7 billion a year over the next 25 years. In 2016-17, total payments amounted to £10.3 billion, of which 59% related to four departments (Health and Social Care; Defence; Education and Transport). These payments cover financing costs (debt and interest payments and a return to shareholders) and operational costs. Public bodies also have to pay for maintenance and operational costs of publicly financed buildings.
This blog has been a very consistent critic of the indiscriminate use of PPPs. It has argued that PPPs should be deployed with great discrimination, the cost of capital is much cheaper for governments than the private sector for the same project, construction and commissioning risks are best borne by governments, O&M poses massive risks of skimping on investments and cutting corners on quality, and the near inevitability of renegotiations.

Monday, January 22, 2018

Lessons from the Carillion collapse

The first month of the new year has ushered in two events which could be triggers for the definitive reversal of fortunes for public private partnerships (PPPs), not just in the UK but also elsewhere. They are the collapse of public contractor Carillion and an assessment of UK's PFI released by the National Audit Office (NAO). I shall cover them in two posts, starting with Carillion.

Carillion, a large outsourced service provider of public services and construction contractor for mostly public projects, went into compulsory liquidation on January 15 after its creditors refused any more support. Carillion, with a market capitalisation of £61 million, has left been left in the lurch with its 19500 UK employees, and £ 5bn in liabilities of which £2.6 bn goes into pensions to 28500 pensioners.

Carillion manages 200 operating theatres and 11800 hospital beds, 18500 patient meals per day, is a major contractor on HS2 rail project and Crossrail, manages 50,000 homes for Department of Defence, build and operate 150 schools, catering and cleaning at 875 schools, maintenance and repairs at half of UK prisons, many public libraries, builds substations for National Grid. These are largely public goods. None of these activities can stop, even temporarily, without enormous social and political consequences and human suffering. Irrespective of how Carillion is liquidated, in the short-term governments have no option but to take over these services.
Carillion's collapse has starkly illustrated the risks borne by governments when they outsource public services. The service provider may collapse, but governments cannot abdicate from the provision of public services and the responsibility will fall on it. This creates a potentially big moral hazard for any service provider. Imagine the situation if G4S or Serco files for bankruptcy!

For example, what prevents them from stripping assets with obscene salaries and bonuses, excessive dividend payouts, starving the company's pension fund, piling up massive debts, and then filing for bankruptcy, leaving the government to bear the liabilities? And all this while skimping on investments and cutting corners with service quality. Is there any more remunerative business to be in? Isn't this the playbook for private equity firms in public services?

This is not the only issue. There is a fundamental problem with the unqualified assumption that private providers can provide value for money from provisioning of public services. Fundamentally, there are two problems with  service delivery in public systems. The first one is the standard problem of inefficient resource deployment and management. The second less-known problem is that of constraints imposed by eco-system factors.

Eco-system constraints can vary across sectors and contexts. For example, in transportation, it may be difficult for governments to raise tariffs on a toll road operated by itself compared to a contractually obligated tariff increase. Or government employees may be captured by political and other vested interests that public managers may not be able to control. Or inter-jurisdictional co-ordination may be easier because the private management can exercise more control over their employees than government management (say, co-ordination among different sanitation wards, different property tax collectors etc). Or the private provider is better positioned in being able to ring-fence activities, cost them, and levy user fees.

The presumption is that the private provider is better positioned to reduce the significant costs these two problems impose. But if evidence from across the world over decades and across sectors is taken into consideration (a subject of several blog posts here), this presumption is just a chimera. Even if we assume that the private sector can wring out efficiencies, the second problem is not easily surmounted. In fact, addressing the second problem may be much costlier for the private sector.

This can be traced to an irony about how the public views government and the private sector. We may collectively agree that the private sector is more efficient and less corrupt than government. But when the rubber meets the road and problems surface - tariff increase, user fees, big accident, grave omissions, loss of jobs etc - debates are triggered that invariably frames the problem (correctly, most often) as one of private profiteering, and the same social mood swings violently against the private sector. In fact, the public have deeply internalised the belief that private sector delivery will be much superior that even small shortfalls in quality arouses a disproportionately (when compared to a similar failure by government) higher level of anger and public discontent.

While the public may prefer private efficiency over government sloth, they are likely to vociferously revolt at private windfalls and socialised losses. In fact, losses and quality shortfalls by private providers are certain to evoke an indignation and anger several times more than similarly sized losses and quality deficiencies by public providers.  

Further, once a service provider is large enough and service delivery interfaces closely with the civil society, it starts to face the same problems with employees and their unions, sub-contractors, local political leaders, consumer groups etc that governments struggle with. In such large entities, their managers and workers are no less prone to be captured by vested interests. And unlike the government with its institutional authority, the private provider is very badly positioned to negotiate acceptable enough bargains in such situations.

Finally, even the apparent strength of co-ordination that private providers are presumed to enjoy is questionable. More than internal co-ordination, all such outsourced activities involve significant co-ordination with external agencies, the majority of whom are again government controlled, and with civil society, which trusts the government more than a private provider. The private provider is at a big handicap compared to public providers in this regard.

Private providers and contractors hedge for all these risks. Lenders too have internalised these risks. All these add up several layers of costs. The result is higher life-cycle costs associated with PPPs when compared to the public sector comparators. In simple terms, the transaction costs due to eco-system constraints associated with outsourcing incurred by the private provider end up likely to more than offset any efficiency gains. It is this that the NAO report lays bare in great detail. 

Saturday, January 20, 2018

Weekend reading links

1. Development of sub-centres as "wellness centres" and promotion of Ayush are two priorities of the government. But data on patient preference of different health facilities from NFHS 4 shows that this may be one hell of a challenge. The sub-centre is used by just 1.5% and 3.1% of the rural and urban populations respectively. About 1% of people use Ayush facilities. It is to be noted that only 42% in urban areas and 46% in rural areas opt for government health services. 

Another striking graphic is below about the reasons for not visiting public facilities.
Note that absenteeism is among the least of problems. Even when doctors are available, people prefer to skip public hospitals for reasons like poor quality of care.

2. Justin Sandefur uses data from the new and richer dataset of the World Inequality Report to show that the famous Elephant graph of incomes gains to world population percentiles over the past twenty years constructed by Branko Milanovic and Christoph Lakner may have to be replaced by a Loch Ness Monster graph. See the original Milanovic et al graph...
And Sandefur's Loch Ness Monster graph for the same period by using WIR data
The WIR graph for 1980-2016 looks like this
The takeaway is that incomes gains have been much smaller than expected even among those benefiting from the rise of China and India whereas that accruing to those at the top of the income ladder much higher. In simple terms inequality has worsened even more than we had thought.

3. Richard Thaler's Nobel Lecture slides here.

4. Uday Kotak makes a less discussed point about foreign ownership of Indian companies,
In 1982 when I started my career, HDFC Ltd’s total market capitalization was Rs 500 crore and foreign ownership was zero. Today that Rs 500 crore has become Rs 275,000 crore. More than 80 per cent is foreign owned. Here’s a company whose core business is money from retail savers – Indian house owners. And of the entire gain made by that company, 80 per cent belongs to foreign investors... Four out of five Indian private banks have majority foreign ownership. Only one with Indian majority is us (Kotak Mahindra Bank)... Let me give the comparison of America and China. The biggest growth companies in the US are Amazon, Facebook, Google, Microsoft and Apple. Go and check out. The majority of these companies are American owned. American savers benefited by them. In China, Alibaba, Tencents and Baidu. What’s the majority holding?
He makes the point about India's relative aversion to foreign debt as against foreign equity. This one deserves a longer post. 

5. Gautum Bhatia has a good article on why the Chief Justice of India's power to allocate cases is a matter of concern.
First, the Supreme Court now consists of 26 judges, who predominantly sit in benches of two. Compare this with the US Supreme Court, for example, where all its nine judges sit together (en banc) to hear cases, or the UK’s Supreme Court, where 12 judges often sit in panels of five (or more). The Chief Justice of the US Supreme Court, therefore, has no choice in the question of which judges will hear a case, and in the UK, the choice is significantly constrained. By comparison, the Chief Justice of India has significantly more discretion in determining which judges will hear and decide a case... 
The rise of public interest litigation has diluted the practice of strict adherence to the legal text, and the Court’s habit of sitting in multiple small benches has undermined the gravitational pull of precedents. This means that when a judge surveys the legal landscape before her, she finds that it gives her greater room to effectuate a personal interpretive philosophy than she might otherwise have. Multiple examples can be cited to demonstrate this. Perhaps the starkest is a brief period in the mid-2000s, where two Supreme Court benches were hearing cases involving the death penalty. One of these benches confirmed virtually every death sentence, while the other commuted most of the cases before it. The question of whether a person lived or died, then, depended upon the lottery of which bench his case came before or — in the Indian legal system — which bench the chief justice assigned it to.
And third, the Supreme Court is dealing with a massive backlog of cases. This means that “in the normal course of things”, a petition will take many years to be heard and decided. The chief justice, however, has the power to “list” cases for hearing. Given the huge backlog, this simple administrative function becomes a source of significant power... Backlog, therefore, allows the Court, through the office of the chief justice, to engage in the practice of judicial evasion — that is, effectively deciding a time-sensitive case in favour of one party by simply not hearing it. In a legal system where a significant percentage of the judges of the Court sit on every case, where there is at least a surface consensus about the interpretive philosophy that judges use to decide cases, and where all cases are heard within a short time of being filed, the chief justice’s power as “Master of the Roster” would be purely administrative. However, in our system, where none of these three conditions obtain, this harmless administrative power has transformed itself into a significant ability to influence the outcomes of cases.
6. More on the puzzle that global equity markets have become,
In all of 2017, the Standard & Poor’s 500-stock index experienced no decline greater than 3 percent, the first time that had happened. And a widely followed volatility index known as the VIX closed below 10 on more than 40 days in a six-month period through late November, according to Citi Research. Before that, the VIX had not closed below 10 on more than six days in any six-month period.
7. The decision by India's securities regulator, SEBI, to ban Price Waterhouse, the auditing arm of PwC, from auditing listed firms in India for two years for its complicity in manipulating accounts in the Satyam scandal may sound harsh but is a very welcome decision.

We have seen too many examples of these large institutional service providers escape with slight rap on their knuckles for even very grave misdemeanours. The expectations need to be realigned. It is therefore appropriate that the regulator took the harsh step.

8. Is Amazon under-paying its workers compared to industry standards? The Economist writes,
According to available data from the Bureau of Labour Statistics (BLS), warehouse workers in counties where Amazon operates a fulfilment centre earn about $41,000 per year, compared with $45,000 per year in the rest of the country, a difference of nearly 10% (see chart 2). The BLS data also show that in the ten quarters before the opening of a new Amazon centre, local warehouse wages increase by an average of 8%. In the ten quarters after its arrival, they fall by 3%.
And adding more evidence to the growing body of reasons supporting exercise of monopoly power by large corporates,
An NBER working paper by José Azar of the IESE business school, Ioana Marinescu of the University of Pennsylvania and Marshall Steinbaum of the Roosevelt Institute finds that a relatively small number of employers account for a large share of job opportunities in many American communities. In places where such labour-market concentration is highest, wages tend to be lower. These findings suggest that if Amazon is the only major employer in the cities and towns where it operates, the company can offer wages that are well below those of its competitors.
How much more evidence will be necessary before the likes of folks at Marginal Revolution accept the reality of business concentration and its damaging social and political consequences?

9. The competition-gone-crazy (or beggar-thy-competitor) story that is India's telecom market,
Reliance Jio’s entry in 2016, with never-before tariffs, has led to a calamitous fight for dominance over the last 18 months. It dragged down Airtel’s profit by a staggering 90% in the June-September 2017 quarter while Idea swung to a loss of over Rs 1,100 crore, 11 times worse than a year earlier. British telecom major Vodafone had to write down the value of its India business by a mind-boggling 5 billion euros, even as it worked a merger with Idea to take on its competitors.

“You have built a market that expects you to give 35 GB of data for a monthly price of Rs 400 [$6.25] per month. How will you make money?,” Kapoor said. “In the US today, you won’t get more than 3-4 GB data for $100 a month. Wireless networks are not built to give you 35 GB of data a month”.
10. Finally, this may be a simplification, but the coincidence between convergence of income shares of the top 0.1% and bottom 90% in the US and the rise of populism is striking,

Wednesday, January 17, 2018

India state capacity graphs of the day - police and judiciary

From a Livemint article examining the slow pace of India's criminal justice system comes this graphic about India's policemen to population ratio.
And this about judges to population ratio!
We are stuck in a really bad equilibrium with respect to government. We have the classic "starve the beast" at work. The intellectuals, opinion makers, and media have to share the major part of the blame for creating an environment where anything government has become stigmatised and any plans of expanding the "bloated" bureaucracy is scorned upon. Even government officials aware of the gravity of the state capacity challenge being faced have become captives of this ideological hegemony. 

Leave aside the likes of teachers and medical personnel, recruitments to important regulatory positions in the government (judges and policemen, building and food inspectors, drugs and school inspectors, and so on) have been either frozen or are being done very parsimoniously. This has coincided with a period of dramatic expansion of the scale and scope of responsibilities of these regulatory officials. The result has been to make an already overburdened bureaucracy even more so, and in turn appear even more inefficient. And this makes the demands for privatisation and outsourcing grow louder.

None of this is to suggest that we go ahead and hire people and things will be fine. It is not a good use of money to just hire people without more deep structural reforms of the bureaucratic system - process re-engineering, delegation of authority, right level of regulatory engagement, use of technology to make transactions more transparent and efficient, measures to contain politicisation etc.  But hiring more people should be right at the top of the agenda! There is just no need of being defensive about this! 

Monday, January 15, 2018

Uber and traffic congestion - two sides of the same coin?

I have blogged earlier pointing to the negative externalities of transport aggregators by way of increasing traffic congestion, drivers without social protections, and crowding in large number of drivers into a business whose commercial viability (especially in developing country markets) is still not established. 

But I am surprised that the case about traffic congestion is still contested.

Consider this. Cities suffer from traffic congestion. Public policy response to address them include congestion pricing, license plate auctions, high vehicle taxes, prohibitive parking fees and so on. All of these seek to make vehicle ownership and use expensive. In other words, reduce the number of vehicles on the road. There is nothing profound here - take vehicles off the road to reduce congestion! 

Now what does Uber do. It brings those idle vehicles into the road. In other words, more vehicles into the road. Exactly the opposite of what public policy tries to do to reduce congestion. 

So here is an innovation, which in the guise of enhancing efficiency (better use of investments already made), artificially increases vehicles on to roads, which are already choking with traffic, with limited prospect of any commensurate or reasonable accompanying infrastructure expansion. 

Note that the efficiency improvement argument too is biased - it takes into account the private benefit for the vehicle owner while overlooking the social costs from all the negative externalities. In fact, I will argue that far from promoting innovations that allow more optimal use of purchased vehicles, public policy should have made the vehicle ownership itself prohibitive. Having missed the first window, the least that one can do is to ensure that vehicle use is curtailed. Aggregators do exactly the opposite!

In simple terms, the likes of Uber increase our private convenience (we can easily summon a car at any time, not own a vehicle and so on) but at the far higher social cost of greater traffic congestion. 

The real efficiency improvement would be to encourage all existing taxis (individual and operators) to move into aggregator platforms (and individual taxis can even offer their own specific rates) and there is competition among the various platforms.

Sunday, January 14, 2018

Development graphic of the day!

Stunning contrast of Doha skyline between 2006 and 2016.
This really is one small powerhouse of a country which punches way above its weight!

(HT: Spectator Index)

Thursday, January 11, 2018

Priorities for a District Collector?

It would be a useful exercise to study the priorities of District Collectors or Municipal Commissioners across India. 

I will stick out my neck and claim that in general two priorities would stand out. One, effective implementation of important (as signalled by the Chief Minister or the Government) hand-me-down government programs. Two, pursue specific individual initiatives (mostly very narrowly defined) launched by them (which generally get dismantled by the successor). 

I am not sure that this is what they ought to be doing. Come to think of it, many districts are large enough to be equivalent to full-fledged countries. Imagine a world where the main priority of national governments (or Prime Ministers) is implementation of one-size-fits-all programs made by a distant multilateral entity like the United Nations. It does not need much convincing that it would be an extremely dysfunctional world. Yet we unquestioningly adopt the same approach for our Districts. 

Now, I don't want to get into the well-known debate on the pros and cons of program design for large countries. The objective is to figure out a more relevant set of priorities for the District Collector in today's world. 

It is useful for the government, at state and centre, to go beyond programs and signal to its officers a more broad-based set of expectations, with focus on outcomes. How about economic growth, job creation, human resource quality development, and a couple of issues specific to the district? How many Collectors have sought to address job creation or learning outcomes (beyond skill development  trainings or increasing attendance/enrolment) in a comprehensive enough manner? How about economic growth, affordable housing, and transportation planning and infrastructure for the Municipal Commissioner? How many commissioners have sought to address traffic congestion or affordable housing (beyond road widening and weaker section housing construction) in a comprehensive enough manner?

Unfortunately these are not the typical uni-dimensional projectisable activities (though the components may be) nor possible to complete within the two-three year duration that is the tenure of officers. Further, meaningful attempts at addressing them demands comprehensive and multi-pronged strategies and their long-drawn implementation, not exactly the sort of things that District administrations typically do or prefer.

It is therefore important that officers be encouraged to look beyond their limited tenures and focus on the big picture of creating the enabling conditions for achievement of each of the identified priorities. This involves preparing long-term action plans (or updating an existing plan, if required), mobilising stakeholder coalitions, dovetailing resources, institutionalising implementation protocols and monitoring frameworks, and so on. In other words, laying the foundations or creating the conditions for sustainable progress. They should view success or failure of their tenure in terms of achieving progress with the priorities.

We need to make these the aspirational goals for young officers (and not claiming success with geo-tagging toilets or completing biometric attendance in schools or planting 1 million saplings in a day or getting the highest matriculation pass percentage). How about signalling accordingly with the likes of Prime Minister's Award for Excellence? How about retweeting and FB liking of achievements in these new areas (not the latter)?

This paradigm shift cannot be achieved by individual District Collectors acting on their own in the prevailing regime. It will require State and central governments embracing this world-view of development and supporting the District Collectors as required both administratively and financially. For example, programs should have sufficient flexibility to allow District Collectors to shift resources across components (of the same program) or programs themselves, as well as tweak norms based on the local requirements.

It is also not possible nor desirable to achieve this as a uniform and abrupt transformation. The State simply does not have the capacity to do this with any reasonable degree of effectiveness in most districts. Once the enablers are in place, some Collectors, both due to their own commitment and initiative as well as favourable contexts in their districts, will show the way. Staying the course over a decade can help achieve a transformation in the thoughts, priorities, and strategies at the cutting-edge of government.

None of this is to deny the importance of effective implementation of government programs. In fact, given the extreme poverty in the vast hinterland, coupled with a withering state, good old trying to just implement hand-me-downs effectively can make massive difference in savings lives and mitigating social discontent. But we should strive to gradually make them by an large (except those that sync with the district's own long-term growth agenda) simple hygiene factors to be addressed systemically without expending too much of the energy and commitment of the District Collector.  

I have blogged here and here about a closely related skew in priorities - the excessive focus on redistribution to the marginalisation of focus on growth. While pervasive extreme poverty and the stage of development means that redistributionary policies are important, the latter is no less so. In fact, if the former is about getting through life today, the latter is about creating the conditions for the world of tomorrow we aspire for. In the absence of the latter, we end up having more of today tomorrow too.

Wednesday, January 10, 2018

The challenge faced by small cities

Granted cities are the engines of growth, but it is not clear that urbanisation in the developing countries will involve big and small cities or mostly a few big cities. The context for this debate is the the perceived trend of hollowing out of small cities in countries like the US and the success of the larger cities. So what is the outlook for small cities? 

Two separate examinations by Paul Krugman and Emily Badger both raise questions about the future of small cities. 

Emily Badger points out that in earlier times, cities were built on the one or two big businesses that made the city their base. They created supplier networks and jobs which in turn supported significant economic activity not just in the city but its surrounding region. In contrast, the big modern companies have limited local supplier networks and are part of large global supply chains (or the digital ones do not even have a physical supply chain), and even have greater affinity with other similarly place global cities. 

Sample this,
Such a picture, Ms. Saskia Sassen, a sociologist at Columbia, said, “breaks a past pattern where a range of smaller, more provincial cities actually fed the rise of the major cities.” Now major cities are feeding one another, and doing so across the globe. Ram Mudambi, a professor in the Fox School of Business at Temple University, offers an even more unnerving hypothesis, in two parts: The more globally connected a city, the more prosperous it is. And as such cities gain global ties, they may be shedding local ones to the “hinterland” communities that have lost their roles in the modern economy or lost their jobs to other countries...
Those changes have come from multiple directions — from globalization, from computerization, from the shift in the United States away from manufacturing toward a knowledge and service economy. These trends have buffeted many smaller cities and nonurban areas... “The economic base has shifted in a way that highly favors cities — and big cities — because it’s now based on knowledge, on idea exchange, on agglomeration,” said Mark Muro, the policy director of the Metropolitan Policy Program at the Brookings Institution. Programmers benefit from having more programmers nearby, in ways different than when assembly line workers gather together. The forces of agglomeration, which big cities enable, are strongest in the kind of knowledge work that has become central to the economy... “The hinterland for Silicon Valley is Shenzhen,” said Timothy Sturgeon, a senior researcher at the M.I.T. Industrial Performance Center.
Then Paul Krugman has a fascinating hypothesis on how Agriculture sustained small cities earlier and then it was the good luck of industrial development triggered off by the chance coming together into that area of one or two companies. 
Once upon a time, it was obvious what towns and small cities did: they served as central places serving a mainly rural population engaged in agriculture and other natural resource-based activities. The rural population was dispersed because arable land and other resources were dispersed, and so you had lots of small cities dotting the landscape. Over time, however, agriculture has become ever less important as a share of the economy, and the rural population has correspondingly declined as a determinant of urban location. Nonetheless, many small cities survived and grew by becoming industrial centers, generally specialized in some cluster of industries held together by the Marshallian trinity of information exchange, specialized suppliers, and a pool of labor with specialized skills.
What determined which industries a small city developed? In some cases particular features of the location and nearby resources were important, but often it was more or less random chance at first, then a sequence in which one industry created conditions that favored another... Some localized industries created fertile ground for new industries to replace them; others presumably became dead ends. And while a big, diversified city can afford a lot of dead ends, a smaller city can’t. Some small cities got lucky repeatedly, and grew big. Others didn’t; and when a city starts out fairly small and specialized, over a long period there will be a substantial chance that it will lose enough coin flips that it effectively loses any reason to exist... it makes sense to think of urban destinies as a random process of wins and losses in which small cities face a relatively high likelihood of experiencing gambler’s ruin... for generations we have lived in an economy in which smaller cities have nothing going for them except historical luck, which eventually tends to run out.
And he has dismal prognosis about their future,
Are there policy implications from this diagnosis? Maybe. There are arguably social costs involved in letting small cities implode, so that there’s a case for regional development policies that try to preserve their viability. But it’s going to be an uphill struggle. In the modern economy, which has cut loose from the land, any particular small city exists only because of historical contingency that sooner or later loses its relevance.
I am inclined to agree with both of them in the context of developed economies.

But I do think that small cities have more legs to play out in the developing countries. For one, agriculture and rural areas are and will remain major economic drivers well into the future. Second, knowledge based industries are not as predominant as drivers of urban growth as in developed economies.

Finally, there is nothing sacrosanct about the dynamics and trajectory of urbanisation from developed countries which should be applicable to developing countries too. For example, unlike the developed countries in their growth phase, two major factors - traffic congestion and resultant commute times, and affordable housing - have worsened to an extent that they seriously threaten the growth prospects  of the largest cities in developing countries. Unplanned development means that spatial growth in the larger urban centres of developing world is inefficient and it hits its its limits much sooner in the city's development when compared to cities of the developed world.

Tuesday, January 9, 2018

India state capacity fact of the day - fire safety

In the aftermath of the Kamala Mills fire accident, Livemint digs up this status report on India's fire safety preparedness,
A ministry of home affairs-sponsored study found that of the minimum 8,559 fire stations needed in the country, only 2,087 are in place, a shortage of 65%. Urban areas alone require an additional 4,200 fire stations just to meet the minimum standard for response time... As many as 17,700 Indians died—48 people every day—due to fire accidents in 2015, of which 10,925 (62%) were women.
Even where stations are available, the equipments available, they are insufficient and also woefully inadequate to fight fires in high rise buildings etc. 

And to pre-empt the natural inclination in such situations. No, I don't believe this should be outsourced. This is just one Exhibit. It has to be borne by the government. And local governments have to bear a significant share of the burden.

But how many states have transferred Fire Department to the local government under the 74th amendment?

Monday, January 8, 2018

Caution about globalisation and harmonisation

The very wise Dani Rodrik has this summary of his thoughts on globalisation.
There is little question that multiple rounds of multilateral trade negotiations after the end of the Second World War did a lot of good. Import tariffs and quotas on trade in manufactured goods were back then extremely restrictive; relaxing them allowed the world to reap serious gains. Furthermore, at first, this liberalisation affected trade mostly among relatively advanced economies, where wages and working conditions were not so different. The first signs of trouble started after developing countries began to join the world economy: because their low wages began creating distributional tensions in the importing countries.
All this is just as economics teaches. According to the celebrated Stolper-Samuelson theorem of trade theory, in places—like the US and western Europe—where skilled workers are plentiful, unskilled workers will see their wages decline under freer trade. Openness to trade always hurts some people in society, except in the extreme case (not relevant for any large economy) where the only things imported are things that are never produced at home. In theory, countries could always compensate their losers by redistributing from the winners, and in practice they sometimes did. With its extensive safety nets, Europe in the second half of the 20th century was relatively well prepared to deal with disruptive trade flows. In addition, trade negotiators initially carved out special regimes for garments and textiles exporters in the advanced economies, limiting their exposure.
This explanation of the diminishing returns and rising distributional costs associated with increasing globalisation is less discussed but very important,
Even in the best of circumstances, however, freeing up trade caused pain as well as gain. After the 1980s, the balance began to look worse and worse. When tariffs (like taxes) are too high they distort economic behaviour more, and do more damage to prosperity. Back in the 1950s and 1960s, tariffs were often very high and so their reduction did much to grow the overall economic pie. But four or five decades later, in a world where typical tariffs were in single figures, the picture was different. If you’re starting off with the tariffs of the post-war era, the standard economic models suggest that to achieve an overall net gain of $1 in national income through liberalising trade, you could expect to see around $4 or $5 of income being reshuffled across different groups within a particular country. But under the tariffs that applied by the end of the 20th century, achieving that overall dollar of gain would be associated with as much as $20 being redistributed, implying the creation of an awful lot of losers. And what’s more, by the 1990s we were into an era of welfare state retrenchment rather than expansion. So it became less plausible than it used to be to believe that those losses will be compensated.
Let’s take Nafta, for example, which entered into force in 1994. A recent study of the labour market impact finds that an important minority of US workers suffered substantial income losses. Not surprisingly, the effect was greatest for blue-collar workers: a high-school dropout in heavily Nafta-impacted localities had 8 percentage points slower wage growth over 1990-2000 compared to a similar worker not affected by Nafta trade. Wage growth in the most protected industries that lost their protection fell 17 percentage points relative to industries that were unprotected initially. And the overall benefit of the agreement? According to most recent estimates, the net economic gain to the US was well below 0.1 percentage points of GDP—that is, less than one-tenth of one per cent of national income. 
On the "unfairness" of trade,
Sometimes international trade involves competition that would be ruled out at home because it violates agreed norms. It’s one thing to lose your job to someone who competes under the same rules as you do. It’s another when you lose your job to a company that takes advantage of lax labour, environmental or safety standards abroad. Such competition can undermine important regulations and also tax rules through the back door. The concerns about fairness here go beyond the individuals directly affected. The broader community will be troubled when it sees fellow citizens being denied decent work as the result of “unfair” practices. The hyper-globalisers, however, ignored such concerns. Instead, they doubled down and pushed for trade deals which were, in truth, no longer really about free trade at all. Their focus shifted to regulations beyond the border—restricting agricultural subsidies, standardising investment regulations, product standards, intellectual property rights, financial measures. All of these things are traditionally the product of institutional arrangements, or domestic political bargains. Suddenly, they came to be seen as trade barriers and subject to remake through trade agreements.
On the quest for harmonisation of policies,
Unlike conventional free trade, beyond-the-border harmonisation does not necessarily promise efficiency enhancements. There is no general theory to compare with Comparative Advantage to explain why unified food or banking regulations should, for example, in principle be able to work to the advantage of all countries. What harmonisation does entail, however, is sacrifice of national regulatory autonomy—and with it the ability to respond to the contours of individual economies and societies. Pacts governing cross-border investment and initiatives such as the TRIPS agreement, which has regulated intellectual property since 1995, were certainly what multinationals, financial firms, and big pharma wanted, and often obtained. Such agreements became contentious because they were viewed as privileging corporate interests over societal ones—and also as representing a direct assault on national democratic control.
On the contrast between theory and reality with financial globalisation,
Free flow of finance across the world would, it was confidently predicted, set money to work where it could do most good. With free-flowing capital, savings would be automatically channeled to countries with higher returns; with access to the world markets, economies and entrepreneurs would have access to more dependable finance; and, ordinary individual savers would benefit, too, as they’d no longer be compelled to put all their nest eggs in one national basket.
These gains, by and large, simply never materialised; sometimes, the effect was the opposite of what was promised. China became an exporter of capital, rather than an importer of it, which is what the theory implied young and poor countries should be. Loosening the chains of finance produced a string of extremely costly financial crises, including that in East Asia in 1997. There is, at best, a weak correlation between opening up to foreign finance and economic growth. But there is a strong empirical association between financial globalisation and financial crises over time, as there has been since the 19th century, when freely moving international capital would flow with gusto into the Argentinean railways or some far-flung corner of the British Empire one minute, only to flee away from it the next.
He raises important questions about the conventional wisdom that while short-term portfolio flows are bad foreign direct investments are an unqualified good. In particular, he questions their impact on labour's bargaining power and tax base erosion,
For as long as wages are partly determined by bargaining, employers will benefit from having a credible threat: accept lower wages, or else we move elsewhere. There is some evidence that the decline in the labour share of national income is related to the threat of relocating production abroad. Furthermore, if capital becomes much more mobile than labour, then labour is left more exposed to local shocks. Workers with the lowest skills and qualifications, those least able to move across borders, are typically the most affected. As capital becomes mobile, it also becomes harder to tax. Governments increasingly have to fund themselves by taxing things that are less footloose: consumption or labour. Indeed, corporate tax rates—which Trump is currently engaged in cutting—have come down sharply in virtually all advanced economies since the late 1980s, sometimes by half or more. Meanwhile the tax burden on wages (social security charges, for example) has remained roughly constant, while rates of consumer and value added taxes (VAT) have very often increased.
As to the way forward, he fears for a failure to learn lessons and a continuation of the hyper-globalising agenda which would fuel more populism and protectionism with potential threat to liberal democracy itself. 

Instead he suggests a 'democratic rebalancing',
Stepping back from hyper-globalisation without slamming the door, while restoring greater national autonomy in the service of a more inclusive domestic order... We can prioritise corporate tax co-ordination over stronger patent protections; better labour standards over special tribunals for investors; and, greater regulatory autonomy over the minimisation of behind-the-border transaction costs.
I am not sure about the benefits from what appears to be global policy harmonisation in areas where electorate in developed economies are aggrieved. What about the concerns of electorates in the developing countries or in the poorest economies? 

For example, a "fair trade" agenda is likely to become a convenient alibi to push through labour and environmental standards harmonisation policies to the detriment of developing countries. Economic theory may find it appropriate to extend the logic of anti-dumping and countervailing duties to cover "social dumping" with policies to harmonise away the labour market and other advantages of developing countries.

But this is a slippery slope. Which (perceived) advantages to address and which not? Why either ways? And what about those which are similarly perceived by the other side (the electorates in the poorest and other developing countries)? We also know that in such instances, the power balance in any multilateral negotiations will always favour the interests of the powerful (developed countries in this context). 

The whole argument about a level-playing field, especially in such contexts, is questionable. The electorate in rich countries will doubtless find it unfair that they are losing jobs due to imports from companies located in countries with poor labour and environmental standards. But doesn't the superior technologies, access to global finance at cheaper rates, access to large domestic markets, capture of national and global regulators, and the associated economies of scale "unfairly" benefit the large multinational corporations compared to the local enterprises in the developing country employing local workers which are shackled by restrictive regulations, harassed by corruption, hobbled with poor infrastructure, and constrained by smaller markets and all forms of resources? Each one of these advantages in turn can be traced back to beneficial eco-system effects that go far beyond the inherent enterprise and efforts of the company itself. Some would trace the beneficial eco-system itself to the good fortune of historical developments. Why should then the electorate in the developing world who lose their jobs not feel similarly short-changed due to imports from MNCs located in developed countries? 

Perceptions of "fairness" is not exclusive to electorates in one part of the world. They are universal. Also, apparent advantages have stories that goes far beyond the conventional notions of merit and innate abilities. Further, once we get into this territory, we would quickly realise that it would go against the whole historical dynamics of development, where arbitrage of various advantages have been the driving force.

Finally, I cannot but not feel a moment of schadenfreude here. All these debates appear like a reprisal of the debates of nineties when countless articles by the likes of Jayati Ghosh, CP Chandrasekhar etc from the left in India who questioned the "fairness" of policies like TRIPS and TRIMS. In the euphoria surrounding the collapse of Soviet Union and the triumphalism around the "end of history", these critics were denounced by esteemed intellectuals as being communist lackeys by esteemed intellectuals in India itself and in the West.  

Having said this, I will emphatically refrain from bracketing Dani Rodrik in the category of these "esteemed intellectuals". That would be "unfair" to someone who has consistently held firm to his beliefs even as the world has shifted around him chaotically! 

Saturday, January 6, 2018

Weekend reading links

1. Spurred by emerging Asia's voracious infrastructure building projects, sand prices are rising and the commodity itself is increasingly becoming scarce. SCMP has a nice article on sand scarcity,
According to Price Waterhouse Coopers, Asia is slated to represent nearly 60 per cent of global infrastructure spending by 2025, mainly driven by China’s growth. In 2019 alone, Asia will need almost 11 million tonnes of sand, of which almost 8 million will be used in solely China, Freedonia Group says.
Aggressive sand mining has led to the disappearance of wholesale islands, and devastated marine eco-systems and river beds. Many countries have banned exports of sand.

Also as prices rise, high-silt and high moisture content sand with reduced binding strength will become available, thereby eroding the quality of construction.

2. Fascinating essay in New Yorker about the efforts of China to assume global political leadership, efforts which have gathered pace amidst the vacuum created by Trump's abdications.
In recent years, it has taken steps to accrue national power on a scale that no country has attempted since the Cold War, by increasing its investments in the types of assets that established American authority in the previous century: foreign aid, overseas security, foreign influence, and the most advanced new technologies, such as artificial intelligence. It has become one of the leading contributors to the U.N.’s budget and to its peacekeeping force, and it has joined talks to address global problems such as terrorism, piracy, and nuclear proliferation.
And China has embarked on history’s most expensive foreign infrastructure plan. Under the Belt and Road Initiative, it is building bridges, railways, and ports in Asia, Africa, and beyond. If the initiative’s cost reaches a trillion dollars, as predicted, it will be more than seven times that of the Marshall Plan, which the U.S. launched in 1947, spending a hundred and thirty billion, in today’s dollars, on rebuilding postwar Europe. China is also seizing immediate opportunities presented by Trump. Days before the T.P.P. withdrawal, President Xi Jinping spoke at the World Economic Forum, in Davos, Switzerland, a first for a paramount Chinese leader. Xi reiterated his support for the Paris climate deal and compared protectionism to “locking oneself in a dark room."... China is negotiating with at least sixteen countries to form the Regional Comprehensive Economic Partnership, a free-trade zone that excludes the United States, which it proposed in 2012 as a response to the T.P.P. If the deal is signed next year, as projected, it will create the world’s largest trade bloc, by population.
The article quotes, Daniel Russel, until March 2017, the Assistant Secretary of State for East Asian and Pacific Affairs, who has this portrait of what China thinks about Trump,
“The Chinese felt like they had Trump’s number. Yes, there is this random, unpredictable Ouija-board quality to him that worries them, and they have to brace for some problems, but, fundamentally, what they said was ‘He’s a paper tiger.’ Because he hasn’t delivered on any of his threats. There’s no wall on Mexico. There’s no repeal of health care. He can’t get the Congress to back him up. He’s under investigation.”
This hospitality as a strategy to weaken resolve is fascinating,
In the mid-nineteen-eighties, the C.I.A. commissioned a China scholar named Richard Solomon to write a handbook for American leaders, “Chinese Political Negotiating Behavior.” Solomon, whose study was later declassified, noted that some of China’s most effective techniques were best described in the nineteenth century, when a Manchu prince named Qiying recorded his preferred approach. “Barbarians,” Qiying noted, respond well to “receptions and entertainment, after which they have had a feeling of appreciation.” Solomon warned that modern Chinese leaders “use the trappings of imperial China” to “impress foreign officials with their grandeur and seriousness of purpose.” Solomon advised, “Resist the flattery of being an ‘old friend’ or the sentimentality that Chinese hospitality readily evokes.” (Henry Kissinger, he wrote, once gushed to his hosts, “After a dinner of Peking duck I’ll agree to anything.”)
The Chinese duly exercised this during Trump's November state visit to China. And it worked to perfection,
Upon Trump’s arrival, they took a sunset tour of the Forbidden City. They drank tea, watched an opera performance at the Pavilion of Pleasant Sounds, and admired an antique gold urn. The next morning, at the Great Hall of the People, Trump was greeted by an even more lavish ceremony, with Chinese military bands, the firing of cannons, and throngs of schoolchildren, who waved colored pompoms and yelled, in Chinese, “Uncle Trump!” Government censors struck down critical comments about Trump on social media. 
Trump and Xi met for several hours and then appeared before the press. “The hosting of the military parade this morning was magnificent,” Trump said, and he praised Xi as a “highly respected and powerful representative of his people.” He mentioned the need to coöperate with regard to North Korea, and to fix an “unfair” trade relationship, but he said nothing about intellectual property or market access. “I don’t blame China,” Trump said. “Who can blame a country for being able to take advantage of another country for the benefit of its citizens?” There were gasps from business leaders and journalists. “I give China great credit.” Some Chinese members of the audience cheered. Xi and Trump took no questions from the press.
3. The alleged leakage of Aadhaar data is disturbing. This from the Quint should set off alarm bells,
Let’s face it, even relatively unimportant systems have access control via 2-stage or 3-stage processes, OTPs, biometric checks and the like – but the world’s largest biometric database allows its admin rights to be freely exchanged across any email address in the world. Could the UIDAI not have added a security check, such as a biometric authentication, for any unknown person who tries to log in from these freely exchangeable logins?
4. There is something about the Chinese government which gets them cracking down on complex challenges with meaningful intent. It helps that it is not handicapped by the democratic discount. Take the case of traffic congestion. All the largest cities have policies that cap private vehicle increases through license plate auctions etc to complement massive public transit investments. 

The latest is the no-holds-barred central crackdown on polluting industrial units which has resulted in the closure of tens of thousands of companies. The government has detailed targets for cleaning up air, water, and soil; an environmental protection tax; the world's largest emission trading system; and empowerment of the Central Environment Ministry. This is interesting,
Smokestack industries are based in a small number of provinces such as Shandong in the east and Shanxi in the north. So long as enforcement was in local hands, officials had little incentive to act. None wanted to throttle companies in their own backyard. But from a national perspective, the economic trade-offs of greener growth ought to be easier to stomach. China will both pay a price and reap dividends.
Not something that may be possible in federal democracies like India.  

5. Economist has a feature on Pakistan's experiments with PPPs in education. Since April 2016, 4300 government schools have been handed over to private providers in Punjab, where the Chief Minister no less is personally driving the initiative. 

The success of the charity The Citizen's Foundation is very impressive,
The charity runs perhaps the largest network of independently run schools in the world, educating 204,000 pupils at not-for-profit schools. It is also Pakistan’s largest single employer of women outside the public sector; in an effort to make girls feel safer in class, all of TCF’s 12,000 teachers are female... In 2016 TCF opened its first “college” for 17- and 18-year-olds at this campus in an attempt to keep smart poor pupils in school longer. Every day it buses 400 college pupils in from around the city. It builds schools using a standard template, typically raising about $250,000 for each of them from donors; it recruits and trains teachers; and it writes its own curriculums. Since 2015 TCF has taken over the running of more than 250 government schools in Punjab, Sindh and Khyber Pakhtunkhwa. It gets a subsidy of around 715 rupees per month per child, which it tops up with donations. So far it has increased average enrolment at schools from 47 to 101 pupils, and test results have improved.
And the institutional arrangement to oversee PPPs is impressive,
The Punjab Education Foundation (PEF), another quasi-independent body, oversees some of the largest school-privatisation and school-voucher programmes in the world. It has a seat with the ministers and administrators at Mr Sharif’s quarterly meetings. The Punjab government no longer opens new schools; all growth is via these privately operated schools. Schools overseen by PEF now teach more than 3m children (an additional 11m or so remain in ordinary government-run schools).
I do not believe that PPPs can be driver to significantly improve learning outcomes in countries like Pakistan. PPPs may move the system up to a slightly better learning outcomes equilibrium, but hardly enough to be of any real significance. That can happen only by fixing public schools. 

As the PPPs scale, as with the case of PPPs across sectors, the challenge of monitoring an inherently difficult to monitor indicator (and also easy to game) like student learning outcome will surface. The article itself talks about the gaming of scores afoot. In extremely weak state capacity systems, such contracting and maintaining the quality of contracts is most certain to overwhelm the Punjab Government.

As to lessons for India, this is the relevant takeaway,
Even if there is bluster aplenty and a long way to go, though, the fact that politicians are burnishing their reputations through public services, rather than patronage alone, is a step forward. And if there is a little Punjabi hype to go with the Punjabi speed, then that may be a price worth paying.
When will electoral politics in Indian states gravitate towards demanding good quality of service delivery in public hospitals and schools? Any Chief Ministers to take this?

Thursday, January 4, 2018

The farm story repeats...

I have lamented here and here at the daunting challenge posed by India's agriculture. Indian Express has this article on the increased jeera cultivation acreage in Gujarat following record prices this year. Consider this,
Prices of jeera (cumin seed) hitting record Rs 21,000 per quintal levels at Gujarat’s Unjha market... In a year marked by low realisations for most agricultural commodities — be it cotton, groundnut, potato or tobacco —... jeera has been an exception... The above spike in prices has led farmers in Gujarat to plant 3.48 lakh hectares (lh) under jeera in the current sowing season, which extends from November to early December. This area, which is subject to upward revision, is significantly more than the 2.79 lh of last year. All the major growing districts have recorded higher coverage: Patan (from 40,700 to 68,100 hectares), Banaskantha (from 64,900 to 67,800 hectares) and Ahmedabad (from 12,400 to 19,800 hectares) in north/central Gujarat; Porbandar (from 12,100 to 23,200 hectares), Rajkot (from 4,900 to 22,000 hectares) and Devbhumi Dwarka (from 4,800 to 20,400 hectares) in Saurashtra; and Kutch (from 23,200 to 29,600 hectares)... Ram Patel has sown jeera in seven out of his 10-bigha holding this time. Last year, he grew the crop only on three bigha, while dedicating the remaining seven bigha for mustard (six bigha make a hectare). Jeera is extremely sensitive to weather fluctuations, making its cultivation riskier relative to wheat, chana (chickpea) and dhaniya (coriander), which are the other major rabi season crops in Gujarat. Overcast skies or dew at the time of maturity — jeera is harvested from February to March — can sometimes even lead to complete crop loss.
It is unlikely that policy actions can nudge farmers away from such herding based on previous year's prices.

The binding constraint against shifting in response to such trends is unlikely to be information. After all a farmer is likely to have seen several such cycles in his lifetime. It is more likely a deep behavioural bias that attaches excessive weight to the immediate experience over the less immediate experiences. Accordingly, the high incomes from the past season weighs so heavily on the mind of the farmers that they are willing to gloss over the memories of pain from earlier experiences of market cycles. What can be done to overcome this cognitive bias?

I would say precious little. Unless the farmer's state of poverty is alleviated, information supply will remain largely ineffective. This excessive preference most likely is a result of poverty and the desperation and insecurity arising from it. The farmer behaves like a poor person who fancies lottery tickets. It is the prospect of the windfall and the perceived favourable odds that make them take the bet.

This is a cautionary note for those who are bought into the story that providing (some even claim to want to sell) information to farmers or the poor can be a solution to many of their deep underlying reasons for distress. They are most likely to be disappointed.

Update 1 (06.01.2018)
A comment informs that the Agriculture Department of the Government of Andhra Pradesh succeeded with an information and awareness campaign to moderate the extent of cotton crop sown this year based on an assessment that cotton is not likely to do well this year.

Now there is a difference between good old public information campaigns (effectively done) and nudging  privately with information. The post was in the context of the latter, and did not make the distinction. Privately providing information as a nudge to farmers is qualitatively different from a massive public information campaign that targets the farmers as a collective. With the latter, mobilising a few influencers (or a platform like farmers groups) can swing the collective resolve towards the change.

So let me reiterate - privately nudging individual farmers with information to shift entrenched patterns or behaviours is unlikely to be effective especially given the (cognitively biased) perceptions of costs and benefits associated with status quo and change.

The problem with the standard information and awareness campaigns of government is that in systems with weak state capacity they are generally executed badly in a routine manner and to that extent becomes ineffectual. In the instant case, I have little hesitation that the outstanding individual heading the State's Agriculture Department made the difference.

Tuesday, January 2, 2018

The rote-learning trap

A very disturbing RISE study on the state of the high stakes high school assessment systems in India by Newman Burdett. Its verdict is damning, though not at all surprising,
Overall the CBSE examination papers are heavily biased to rote-learning, do not test higher- order skills, and actively discourage students who try and display them... they are almost exclusively assessing a large body of facts and intimate familiarity with text books that is of very questionable use... The papers from CBSE and Pakistan do not match in any meaningful way what is considered necessary or good education in any of the available benchmarks.
What is surprising is the magnitude of the problem and the fact that the quality is worse than in even countries like Uganda and Nigeria.  

The study classifies questions in each subject in the national-level standardised examinations based on recall (having to recall a fact or piece of knowledge), application (understanding that knowledge and applying it), and reasoning (critically analysing and evaluating facts and potentially putting those pieces of knowledge together in novel ways). It then seeks to identify the share of questions belonging to each category in the different subjects in each of the standardised examinations for all countries. 

While the PISA, TIMSS, PIRLS and other international assessment benchmarks focus more on application and reasoning, minimising or even avoiding recall, India's CBSE assessments for 10th and 12th Grades have no questions that test reasoning and are skewed towards recall.
Even those in the Level 2 category for Math is effectively reduced to a recall category given the repetition of questions (or at least their nature) over years. 

For reference, see the distribution for other major benchmarks...
... and for Alberta, Canada 
Achieving learning outcomes of desired levels will take time. A good place to start would be to signal intent and shape expectations by making the requisite changes to the assessment system itself. And it can start now.

I confess to having hitherto underestimated the depth to which our assessments have plunged and also the potential value of this as an important policy instrument in improving learning outcomes. This really is important and very useful practical lever to improve learning outcomes. 

Update 1 (02.01.2018)
Karthik Dinne has a very good suggestion,
The solution is to upgrade the quality of board exams but to avoid the political pressures during the transition, it would be good to initially conduct two versions (basic, advanced) of each subject, with the choice to the student to choose either. Gradually, one can work on bridging the gap between the two. The idea is that the advanced version will signal the higher expectations to schools and also creates demand from parents by providing them with an easily understandable metric gauge quality. Hopefully, this would lead to change in the status-quo. The splitting of the exam will also serve another problem of our board exam - the dual purpose of both certifying minimum standards and signaling the capability of students. The basic version can be taken by students who are interested only in getting the 10th certificate to demonstrate minimum competency.
Please also see his blogpost on this here.

Monday, January 1, 2018

Market participants game regulations, bureaucracy responds with more red-tape...

I had blogged just recently on India's private sector's collective propensity to game regulations wherever there is an opportunity and the associated bureaucratic response to err on the side of caution with restrictive regulations. 

Consider the latest example from the compensation scheme of the GST,
Goods and services tax (GST) tax returns filed for the July to September 2017 period by firms under the ‘composition’ scheme suggest there is massive tax theft by smaller taxpayers. The composition scheme is a special one to make GST filing easier for small firms; apart from simpler tax procedures, the returns have to be filed once a quarter. To that extent, the government’s plan to bring in the e-way bill and other ways to plug tax theft are quite justified. While there are roughly 15 lakh small firms registered under the composition scheme today, the number was around 10-11 lakh in September. Of these firms, around six lakh filed their returns for July-September by December 24. The total tax they paid was around Rs 250 crore. Assuming a 2% tax incidence on their turnover — it is 1% for traders, 2% for manufacturers and 5% for restaurants — this means these firms had an average turnover of Rs 2 lakh in that period, or Rs 8 lakh for the full year if you annualise the data. The problem, however, is that firms that have a turnover of less than Rs 20 lakh a year, don’t even need to pay GST or file returns. In other words, these firms are understating their returns in a big way.
Let's face this. This is not a problem at the margins - a small share of firms indulging in tax evasion. The sheer scale of evasion is staggering. It is clear that the major share of firms are complicit. In fact, not just in this case, corporate India has shown a consistent collective proclivity to game regulations to maximize illegitimate private gains. 

This story repeats. Government implements a reform. Private sector blames the reform regulations for being very restrictive. Government responds by relaxing the regulations. The private sector responds by collectively gaming the regulations to their benefit. Then why blame the government alone for excessive red tape, especially when at stake is a non-trivial share of the country's tax base?

If this is the scale of gaming, how can we blame the inspections and reporting and other requirements of the Department of Revenue from becoming more intrusive?

We forget that trust is the basis of well-functioning markets. Regulations and enforcement are built on trust, and are largely put in place as marginal deterrence - the vast majority comply on their own and only the small minority need the threat of enforcement to comply. However, when trust is consistently betrayed (or is deficient in the first place), then regulations and enforcement have to become the basis for ensuring compliance. 

In this repeat game with market participants, the bureaucrats have internalised a preference for excessive restrictions in anticipation of the inevitable deviation from businesses.