Wednesday, April 18, 2018

The protectionist debate in perspective

As trade wars loom large (or is it one more example of this), it is worth remembering that everyone is equally to blame. Further, the historical trajectory of development of every country is filled with policies that have helped level the playing field for their local industries.

In fact, to the extent that development is a form of arbitrage play, whereby countries seek to exploit their advantages to squeeze their competitiveness compared to competitors, protectionism in some form or other has been always around the corner.

Times has a nice article which captures some of the protectionist policies that China and the US have resorted to. What has China been doing?
To stay in business in China, Apple has had to set up a data center there to store Chinese customers’ personal information. Amazon recently had to sell equipment to its Chinese cloud services partner to comply with new Chinese rules. Facebook and Twitter are blocked in the country; newer American players, such as Snap, are not even trying to enter anymore... China could require that foreign tech companies undergo costly additional tests for new products, or simply make it more difficult to operate in the country... It could also devise new regulatory hoops for foreign companies to jump through. China’s Ministry of Commerce has not yet approved Qualcomm’s proposed, $44 billion purchase of NXP Semiconductors, a Dutch chip maker. The deal, more than a year in the making, needs a signoff from Chinese antitrust authorities because the two companies count a large number of electronics makers in China as customers...
A Communist Party-linked newsmagazine singled out the American companies that it said had penetrated most deeply into China’s information infrastructure. The “Eight Guardian Warriors,” as they were called — Apple, Cisco, Google, IBM, Intel, Microsoft, Oracle and Qualcomm — had been able to “drive right into China,” the article said, whereas Huawei and another Chinese equipment maker, ZTE, had been kept out of the United States... Beijing banned government offices from installing the most recent version of Microsoft Windows, and antitrust investigators raided Microsoft’s offices. Cisco, Apple and Intel products were removed from state lists that officials use as guides when buying equipment. Qualcomm got slapped with a $975 million fine for anticompetitive behavior... Cisco partnered with a Chinese firm to sell networking systems. Microsoft, in conjunction with a state company closely tied to the Chinese military, developed a version of Windows more suitable for China’s government. Advanced Micro Devices, Intel and Qualcomm began working with Chinese organizations in microchips, which China imports in huge quantities to put into smartphones, computers and other electronics.
What has the US been doing?
In the United States, regulators have repeatedly thwarted attempts by Chinese tech groups to acquire American firms. And espionage concerns have for years kept Huawei — one of the world’s biggest suppliers of telecom gear, and a powerhouse of China’s tech scene — largely out of the American market... Mr. Trump recently blocked a hostile bid by Broadcom to buy Qualcomm. He did so not because the bidder was Chinese — Broadcom is headquartered in Singapore — but because the administration said the deal would weaken Qualcomm, leaving Huawei with a stronger hand to shape 5G, or fifth-generation mobile technology... Chinese attempts to scoop up foreign chip makers mostly have not worked out. State-owned Tsinghua Unigroup tried to buy Micron Technology, a memory chip maker based in Idaho, for $23 billion in 2015, but regulatory worries scuttled the deal. The Trump administration last year blocked a China-backed investor from buying Lattice Semiconductor, an Oregon-based manufacturer. And regulatory concerns scotched a Chinese investment group’s plan to buy Xcerra, even though the Massachusetts-based company makes chip-testing equipment and not chips themselves.
These restrictions have all along been imposed, albeit silently, without high-profile twitter rants. Chinese, in particular have never shied away from aggressive use of industrial policy to tilt the playing field for its businesses. 

Traditionally India has been on the defensive with respect to protectionist allegations on local content requirements, public procurements, food subsidy, and so on. These are perfectly legitimate policies which every developed country of note have pursued at their respective development stages. It therefore need not be defensive on these perfectly justifiable policy decisions. However, it needs to cautious in stretching this too far and falling back to a bygone era by introducing import restrictions and raising tariffs on a broad cross-section of goods.

Monday, April 16, 2018

The Xi Jinping turn in Chinese policies

The Economist gets to the heart of US-China trade dispute,
At the heart of the disagreement is China’s industrial policy. The Americans suspect the Chinese government of enticing their firms with the promise of a vast consumer market, only to use regulatory pressure to strip them of their bargaining power and expose them to the theft of intellectual property by forcing them into joint ventures. They spy a plot to undercut and eventually surpass American industry... Upon joining the WTO (and a further eight times since 2010) China’s government pledged not to make handing over technology a condition for market access. But the Americans say Chinese officials continue to pressure firms to do so. Such a claim is hard to prove—all the more so, given the opacity of China’s regulatory processes. And experience suggests that any deal would be devilishly difficult to enforce. The Chinese authorities can say that contracts involving technology transfer were signed voluntarily. They can make life hard for any foreign company that dares say otherwise.
Depending on which side you are on, it is hard not to be impressed by the Chinese playbook. I am surprised why India does not do the same with say, at least its strategic and large procurements - airlines, defence, metro rail, power etc? Or does India not yet have the economic leverage to play this hardball? Or is it that India does not have the stomach to play this game? Or is it not desirable at all?

But all that is beside the main point and to be discussed another time. Staying on the same topic, Chris Balding shines light at the creeping nationalisation of Chinese tech sector and how it could exacerbate trade tensions with the US. Consider this,
Communist Party committees have been installed at many tech firms, reviewing everything from operations to compliance with national goals. Regulators have been discussing taking a 1 percent stake in some giants, including Alibaba and Tencent, along with a board seat. Tech companies have been widely encouraged to invest in state-owned firms, in the hopes of making them more productive. The common denominator of all these efforts is that the government wants more control... One recent report found that 60 percent of Chinese unicorns have either direct or indirect investment from the Baidu Alibaba Tencent (BATs). China's venture-capital sector is dominated not by traditional tech dealmakers but by the state: There are more than 1,000 government-owned VC firms in China, controlling more than $750 billion.
The US is not the only aggrieved partner. Consider the situation as perceived by Germany, China's largest European trade partner. 
Not only has the opening of China shifted into reverse under President Xi Jinping, but Chinese firms have moved up the value chain far faster than many in Germany expected... In private, some executives liken the situation of German industry in China to the proverbial frog in a pot of slowly heating water which ends up boiling to death because it won’t or can’t jump out. Germany’s ambassador to China, Michael Clauss, warned at a meeting with industry chiefs in Berlin last month of “tectonic changes” in the relationship, according to participants... Bauer AG, which employs 11,000 workers in 70 countries, built its first production facilities in China in the mid-1990s. At the time, not a single Chinese firm could make the sophisticated drilling machines it produces – towering yellow structures used to build the foundations for skyscrapers, power stations and airports. By 2013 Bauer counted 36 Chinese competitors able to make such machines, a shift the CEO says was accelerated by European suppliers selling co-designed parts to the Chinese...

Today, what Bauer and other German firms say they are most worried about is the role of the Chinese state in the economy. Last year, China introduced a cyber security law which tightened state control over internet services, including secure VPN connections that are used by foreign firms to communicate confidentially with headquarters. More recently, some German companies have complained of pressure to accept Communist party officials on the boards of their joint ventures. The Bauer boss fears that Xi’s “Made in China 2025” strategy, which identifies 10 key sectors – including robotics, aerospace and clean-energy cars – where China wants to be a leader, represents a direct challenge to German manufacturing dominance. 
This blog, while cognisant of the several critical failings and distortions, has been in general an admiring observer of the awe-inspiring growth of China as well as its ability to put its money where its mouth is and execute both massive engineering projects as well as complex social and industrial policies. It has believed that the Chinese will eventually figure a way out of any problem. But that view may need to be revisited. 

Since its re-integration with the world economy nearly four decades back, the Chinese economic and foreign policy playbooks have been largely about recovering lost ground and catching up. Doubtless this has involved an aggressive industrial policy to nurture domestic industry and keepings it disputes with neighbours simmering as a low-cost strategy to retain its geo-political influence and focus its energies on economic growth and internal policies. 

But such industrial policies were not new. Which country would not have maximised their leverage and resorted to help local firms with subtle ways to force technology transfers or impose local content requirements? The fact is that China is such a big country and market conferred it with unique advantages of scale, unavailable to others. It did not hesitate to exercise the choice available. As mentioned earlier, I am sympathetic to India exercising the same options. Actually, any big enough country which has that leverage would have done. History is littered with such examples. 

The Communist Party had enough internal checks and balances to prevent the recurrence of a Maoist autocracy and align incentives of Party functionaries across the length and breadth of a large country with the country's development objectives. The Party Politburo was tolerant of the creative tensions on economic and political policy directions.  

Then came Xi Jinping and things have gradually taken a turn in domestic, economic, and foreign policies. This shift in China's policies is a qualitatively different paradigm. Consider the economic policy domain. 

Instead of focusing on improving its own productivity and national income, China is trying to achieve economic supremacy by dominating and controlling the markets of the future and that too by pushing the boundaries of unfair trade and investment practices beyond what may be construed as acceptable. The nationalisation and infiltration of corporate Boards with party functionaries is only one example. There was no need for this. Even without these practices, Chinese makers would have been at least dominant in these markets. 

The centralisation of authority within the Party with Xi is striking. All the safety valves to release the inevitable discontent have been shut. In fact, the discontent is now likely to be aggregated to the top. The different institutional forums to debate different perspectives on economic and social policies, albeit within the acceptable Party line, have been weakened. The internal checks within the Party to prevent the emergence of an echo-chamber have been destroyed.

On the foreign policy side, instead of keeping the disputes simmering, the objective now appears to be settle them at China's terms. More importantly, Beijing now seems to have the intent to engage aggressively with its external partners, neighbours and others. It wants to ring-fence its near-abroad from external influences and bring it firmly under its own control. It has not hesitate to use military brinkmanship to secure this objective. This is surprising since the Chinese can easily afford to be very generous with its ASEAN neighbours. Is Vietnam or Philippines even a remote threat to today's China? It has used economic levers, whether the sovereign loans to countries in Africa and Latin America or the One Road One Belt (OBOR) initiative, in pursuit of its larger global geo-political agenda.

One could always argue that this Xi turn was always likely. It was part of a larger plan to buy time to regain its economic might and then pursue aggressive policies for world domination. Or it is the latest incarnation of the Thucydides Trap - the inevitability of war when one power seeks to displace another. There is no satisfactory way to settle this debate. My personal inclination is to believe that this shift is part of the new paradigm that Xi Jinping has brought to Chinese polity. 

I am inclined to believe that this shift may actually carry the seeds of its own destruction. What was the need for aggrieving countries like Germany with whom the mutually beneficial partnership could have gone on for much longer? What was the need to pursue economic policies in such a nakedly exclusionary manner as to get every developed economy ganged up against China? After all, the global market is large enough to be able to support several firms in robotics, aerospace, drilling equipment and so on!

Anyways this is part of the several wrong turns that Xi has forced China to take during his tenure - aggressively exclusionary economic policies, expansionist foreign policy, repressive domestic policies, excessive centralisation within party etc. If in twenty years China falls short of its ambitions it has today, it may well have its roots in the shifts which are happening now. 

In cricket sometimes when two batsmen are batting very fluently and without a care in the world, it is often said that only way to get them out may be a run out. The Xi Jinping turn may well be the Chinese runout!

Saturday, April 14, 2018

Weekend reading links

1. My graph of the week, a fascinating one which nicely captures arguably the biggest challenge faced by our urban engines of growth, affordable housing, and its reason, restrictions on housing stock expansion due to restrictive regulations and other limits to growth (like spatial expansion).
2. As protectionist rhetoric dominates, a reminder about the benefits of trade and openness to foreign investment comes from Vietnam. The Economist explores how Foreign Direct Investment (FDI), especially from South Korea, has transformed the country. On the importance of Samsung, 
Samsung Electronics’ factories in Vietnam produce almost a third of the firm’s global output. The company has invested a cumulative $17bn in the country. But Samsung is as important to Vietnam as Vietnam is to it. Its local subsidiary’s $58bn in revenue last year made it the biggest company in Vietnam, pipping PetroVietnam, the state oil company. It employs more than 100,000 people. It has helped to make Vietnam the second-biggest exporter of smartphones in the world, after China. Samsung alone accounted for almost a quarter of Vietnam’s total exports of $214bn last year... The number of local firms listed as important suppliers to Samsung has increased sevenfold in the past three years.
And on FDI, especially from S Korea,
Of the $108bn of foreign direct investment (FDI) Vietnam has received since it joined the World Trade Organisation (WTO) in 2007, a third originated in South Korea... Vietnam received FDI worth 8% of GDP last year—more than double the rate that went to comparable economies in the region. Foreign-owned firms now account for nearly 20% of the country’s output. They have grown more than twice as fast as state-owned enterprises over the past decade, despite the country’s nominally communist government. 
3. SCMP reports on the latest big-bang reform from China - the announcement during Xi Jinping's visit there that Hainan, a 35000 sqkm island populated by 9.3 million people, and home to China's largest Special Economic Zone, will be the country's 12th and largest free-trade port. 

And it is not just an announcement, there is a clear vision and even a plan,
Xi said... that it was an important step in China’s opening up to the world and advancing economic globalisation. He urged the island authorities to speed up reforms in urban-rural integration, human resources management, fiscal policy and finance, income disposal and state-owned enterprises. Exchanges in international energy, shipping, commodities and carbon trading will also be established. Xi said Hainan would build a modern economy and develop information technology in fields such as big data, satellite navigation and artificial intelligence. The island will also focus on developing modern service industries such as tourism, the internet, health care, finance and hosting conferences and exhibitions. Direct international flights to the island will be increased and duty-free shopping will be expanded beyond the city of Sanya to the whole island. Authorities on the island will also be encouraged to pilot a scheme to attract foreign talent and technology experts. This will include measures to make it easier for people from overseas to find work and acquire permanent residency. Also, foreign students who have obtained master’s degrees will be allowed to start their own companies.
The thing about Chinese economic growth is that they seem to have this unending supply of big growth boosters, which are not just unveiled but is also executed in quick time. Of course, there is no doubt that the financing strategy and capital use efficiency is questionable. 

So even if we think the entire Chinese growth today is a giant Ponzi scheme, moving from one booster to another, we have the world's BIGGEST ever Ponzi scheme at work. Something to be looking at with awe, if only when the party is on...

How long will this last? Or will the dynamics of sustainable growth (increasing consumption, growing middle class, moving up the value chain etc) kick-in at some point to ensure that Ponzi scheme will not collapse but there will be a gradual and slow landing?

4. Good Survey in The Economist on Artificial Intelligence (AI). Sample this,
Ping An, a Chinese insurance company... lets customers apply for loans through its app. Prospective borrowers answer questions about their income and plans for repayment by video, which monitors around 50 tiny facial expressions to determine whether they are telling the truth. The program, enabled by artificial intelligence (AI), helps pinpoint customers who require further scrutiny... Johnson & Johnson, a consumer-goods firm, and Accenture, a consultancy, use AI to sort through job applications and pick the best candidates. AI helps Caesars, a casino and hotel group, guess customers’ likely spending and offer personalised promotions to draw them in. Bloomberg, a media and financial-information firm, uses AI to scan companies’ earnings releases and automatically generate news articles. Vodafone, a mobile operator, can predict problems with its network and with users’ devices before they arise. Companies in every industry use AI to monitor cyber-security threats and other risks, such as disgruntled employees.
The Survey is good all around - monitoring employees and workplace activities to make workplace more efficient and creepier; recruitment and human resource management practices in companies; making customer service more responsive and cost-effective; transforms supply chain management by making companies swifter, cleverer, and leaner.

And its costs on the labour market is never far away. Sample this,
China Merchants Bank, a commercial bank, uses a bot on the popular Chinese app WeChat to handle 1.5m-2m queries every day, a workload equivalent to around 7,000 human staff... Gartner, a research firm, expects the number of phone-based customer-service agents worldwide to decline by 10% by 2019.
But this FT article looks at the AI hype in banking and comes out less than impressed. 

5. Staying on with AI, this article by Erik Brynjolfsson and Andrew Mcafee presents a reality check on AI. This graphic captures some common use cases of AI systems.

6. Chris Balding shines light at the creeping nationalisation of Chinese tech sector. Consider this,
Communist Party committees have been installed at many tech firms, reviewing everything from operations to compliance with national goals. Regulators have been discussing taking a 1 percent stake in some giants, including Alibaba and Tencent, along with a board seat. Tech companies have been widely encouraged to invest in state-owned firms, in the hopes of making them more productive. The common denominator of all these efforts is that the government wants more control... One recent report found that 60 percent of Chinese unicorns have either direct or indirect investment from the Baidu Alibaba Tencent (BATs). China's venture-capital sector is dominated not by traditional tech dealmakers but by the state: There are more than 1,000 government-owned VC firms in China, controlling more than $750 billion.
The article talks about the likelihood of nationalisation in technology sector exacerbating trade tensions with US. This is where I do not agree. I can understand the argument that this nationalisation may be bad for the Chinese tech sector in the long-run. But the decision to nationalise is a conscious political decision by a sovereign country and why should it be constrained by any trade regulations? If international trade regulations favour private ownership over public ownership, a clear political choice that I strongly feel national governments should have, then I am inclined to abrogating those regulations. 

The case against public ownership is that State can lavish subsidies on their enterprises and thereby distort the level playing field. By the same argument, private market dynamics confers an unfair advantage to the larger firms which are more likely from developed economies? Why should the benefits of economies of scale not be considered a level playing field distorting problem, and a less disturbing concern to the benefits of public subsidies?

7. The Chinese One Belt and Road Initiative (OBOR), with its focus on sovereign loan financing, has the potential to become the largest indebtedness creating single initiative in history. Ananth points to a CGD paper that documents the likely implications in terms of indebted low income countries.
Pakistan and Maldives are among eight countries most vulnerable to become heavily indebted due to the OBOR loans from China. The IMF Chief Christine Lagarde has cautioned that “ventures can also lead to a problematic increase in debt, potentially limiting other spending as debt service rises, and creating balance of payments challenges”.

8. The retaliatory airstrikes on Syrian chemical weapons facilities near Damascus and Homs by US, British, and French will most likely, as was the case with last year's bombing, turn out to have been made on fake news! And NYT was even suggesting that the strikes have been inadequate.

There is little to suggest that the Assad regime in Damascus was behind the alleged chemical weapons attack on civilians in Douma last week. In fact, the strikes came well before a fact-finding team from the Organisation for Prevention of Chemical Weapons even landed in Douma to establish whether it was indeed a chemical weapons attack. Even if it were so, what would Assad have gained by chemical weapons bombing at this point in time, a surefire invitation to Trump to retaliate, when he was clearly winning the war with the rebels almost flushed out and the US had even announced last week its decision to withdraw its troops from Syria? But wouldn't many others on the rebels side have had enough incentive to do so and blame Assad so as to suck the US into the situation and pre-empt a withdrawal?

Governments fabricating news (or at the least jumping into critical decision making without anything close to proportionately sufficient evidence) seems to have become the norm in US and UK. There was little evidence that Russia was behind the chemical agent attack on turncoat Russian spy Sergei Skripal when UK decided to impose sanctions on Russia. Similarly, it has since become clear that Assad was not behind last year's alleged chemical weapons attack which led to US air strikes on Syrian targets. 

There is clearly a narrative on among the liberals in the US. Anything that involves Donald Trump has to be a faith-based (and not fact-based) perception. And since Russia and Trump have become synonymous, anything involving Russia has to be bad. So the Syrian situation gets viewed through that lens. And this gets amplified by the instinctive urge to intervene unilaterally in some (not in others though, given what the Saudis are doing in Yemen is in no way any less repugnant) countries, bomb the hell out of them and effect regime change. 

A regime change in Syria may be the worst of all worlds, and pose a massive danger from stability in the region. It may well give a new lease of life to ISIS. 

In any case, isn't it striking that the liberals and the establishment want US to intervene and bomb Syria, whereas Trump supporters would prefer not to. And the liberals by their rhetoric in forcing Trump's hands may actually be only hardening his support base!

9. Fascinating interview in FT with Vladimir Potanin, one of the last two remaining of the seven original oligarchs who benefited from the Yeltsin era shock therapy and privatisations. He comes out as being practical and realistic. For example, this is a very surprisingly less understood insight,
“Some people like attention and to appear bigger than they are,” Potanin responds, with a sip of his wine. “Look,” he says, speaking very carefully. “I always felt smart enough and have good connections to bring my ideas to decision makers. But I have never felt I could push them through.”
And this perspective of the shock therapy may not be too inaccurate,
“Of course, the privatisation process has to be transparent. And in our case it was not. My plan was different. I wanted to privatise the companies with banks and qualified people, raise their value, and then sell them. “The choice was not between being fair and open or creating oligarchs. It was whether to leave these companies in the hands of [former Soviet] red directors and forget efficiency forever, or sell them in any way possible.” ... “Yes, it made me incredibly rich,” he says, glancing out over a frozen lake. “Everybody knows I won control of 38 per cent of Norilsk in loans for shares, cheap.” The last word drips with condescension. “There is a certain unfairness in treating those deals as evil. It was more complicated than that.... “When people come from a totally closed system to openness; from a planned economy to a market economy; from a powerful state to a state in difficulties, there is no place for fairness.”
10. Finally, Dileep Premachandran relays Victor Hugo Morales' commentary of Diego Maradona's memorable second goal against England in the 1986 Football World Cup,
Maradona on the ball now. Two closing him down. Maradona rolls his foot over the ball and breaks away down the right, the genius of world football. He goes past a third, looks for Burruchaga. Maradona forever! Genius! Genius! Genius! He’s still going... Gooooal! Sorry, I want to cry! Good God! Long live football! What a goal! A memorable run from Maradona. The greatest solo goal of all time. Cosmic Kite, which planet did you come from?
That would have been fabulous if it were written words. But to have come out spontaneously in a commentary is awesome!

Saturday, April 7, 2018

Some reflections on the Facebook data leakage

The Facebook problems over personal data leaks is yet another reminder that left to their own devices, businesses will always skimp on areas which are perceived as secondary concerns and socialise the externality costs. Regulation is therefore necessary. 

1. It is difficult to not believe that for Facebook, the biggest priority was to increase the value of its platform for users, content providers, and advertisers. Data protection, while important, cannot have ever been a proximate and direct commercial (bottom-line) concern. From all the news stories, it is clear that even certain basic minimum safeguards were not provided in the Application Programming Interface (API) that allowed third party content providers access to the platform and its data.

While such protection is important in the long-term for the firm's credibility, firms like individuals suffer from hyperbolic discounting and value the immediate much much more than something far later in time.  

In the absence of any strong enough regulation on data protection standards and its enforcement, what incentive did Facebook have to police it with intensity? Why would Facebook exercise self-restraint and err on the side of caution to disallow access to important platform features in the name of personal information safety to an external app which has the potential to bring in significant revenues? How many times over the past three years would the top 2-3 executives have personally reviewed data protection standards as they would have platform content, advertisement revenues etc? In fact, we need to go even further and investigate whether Facebook deliberately and with full-knowledge of the consequences (bypassing internal control cautions) decided to allow access to certain types of content and advertisers. I would not be surprised if there were instances. The stakes were simply too high.  

2. Some of the comments by the Facebook leadership were stunningly insensitive,
Mr Zuckerberg spoke about the power of Facebook to reconnect families, help couples meet, and marry and organise social movements and marches. Ms Sandberg described a taco maker in Houston who teamed up with a competitor during Hurricane Harvey last year and found hungry people to feed because they were sharing their location on Facebook.
We all know how much of these things happen and they need to be placed in their true perspective, given the costs associated - wholesale transfer of personal data to unknown parties and all the attendant risks (and benefits). Such comments are classic red herrings. They can detract attention from the central incentive compatibility challenge that exclusive data companies like Facebook and Google face. How much restraint should they exercise when faced with opportunities for commercial exploitation of the data they posses? Given the commercial stakes and returns-seeking investors involved, how much restraint can the company actually exercise? Worse still, wouldn't it be very natural for a profit maximising entity to err on the side of commercial returns and compromise on data protection and privacy concerns?  

3. The case for regulation of such market failures could not be stronger. As I blogged earlier, the entire sharing and e-commerce economy, including iconic firms, is built on a massive regulatory arbitrage, where such market failures are building up everyday and is waiting to implode one day as the Cambridge Analytics-Facebook episode. The European General Data Protection Regulation (GDPR) even with its compliance costs is well worth the trouble. 

If this is the state of data protection at Facebook, what about Google and Amazon? In the aftermath of the global financial crisis, bank balance sheets were repeatedly stress-tested by regulators. Why is nobody calling for an independent stress-test of the data protection and use standards of all the major tech firms whose business model relies exclusively on personal data? Apple's acceptance of the European GDPR is a step in the right direction. 

4. The callous disregard for the safety of personal data has strong similarities with the cavalier attitude with pollution from oil pipeline leakages and deaths from overhanging and unprotected electric lines in the early stages of development of both those technologies. The difference is critical - unlike the earlier oil, water, electricity, and so on, now we are dealing with people's personal, deeply personal, data. The need for safeguards and protections become even more compelling.

5. There were massive low hanging fruits from the initial flush of success from an emerging data economy, an opportunity which was amplified by light regulation and delayed appearance of egregious negative consequences (unlike say, smoke from a factory). The likes of Facebook, Google, Uber, and Amazon are reaping this first mover advantages just as Ford, GE, and Westinghouse reaped nearly a century earlier and other first movers in the technological cycles that followed. Two big differences that make the current technology cycle stand out is that unlike earlier this one has been much faster and on a much larger scale (given the global market place involved).  

6. The resultant successes may have papered over the concerns over several important business issues. Data safety is now being discussed. Would the markets have tolerated a regular firm where, like Zuckerberg, the founder is the Chairman, Chief Executive, and controlling shareholder? What is the difference between these firms and the routine family owned firms in developing countries? I guess only the good fortune of being at the rightpface and time in the evolution of the technology cycle!

What about competence at the executive levels, not just in terms of being smart but in being able to effectively manage large and rapidly growing organisations? How much of the expansion (I make the distinction with origination or establishment) of these firms have been the consequence of active management actions and decisions and how much that due to the market (and customer) momentum and a technology playing itself out? In simple terms, how much of the growth of the likes of Uber and Facebook have been due to the enterprise and superior skills of their glorified and even revered pioneering founders and how much due to post-emergence auto-pilot? 

They say adversity is the true test of a leader. And what does the duo of Mr Zuckerberg and Ms Sandberg do when faced with their first real test,
David Kirkpatrick, author of The Facebook Effect, says Mr Zuckerberg may have opened a can of worms by claiming connecting the world has always been more important to Facebook than advertising. Both he and his COO are resolute that one thing does not need to change: a business model built on targeted advertising that generated $16bn in net income last year. Ms Sandberg said keeping Facebook free is important for its 2bn users and that targeting enables 7m small companies to buy ads when they cannot afford traditional media such as television. She added that Facebook never worked to maximise profits.
Mr Kirkpatrick says: “For a leader of the most profitable company of its size in the history of capitalism, who has herself personally garnered over $1bn in stock gains based on the company’s success, to claim that the business side of the company, which she runs, has never worked to maximise its profits seems disingenuous to say the least.” Others were also quick to challenge Mr Zuckerberg’s claims. In an interview with Vox, he spoke of how Facebook had stopped false reports on its Messenger platform designed to incite violence in Myanmar. But those suggestions were strongly contradicted by civil society groups in the country, who said Facebook’s response has been “inadequate”.
Clumsy and ham-fisted responses to data leakages are not the exclusive preserves of governments governments and bureaucrats. One can imagine the way in which these rationalisations found its way into the responses by the two of them. In fact, by the standards of India's UIDAI, Facebook has been worse! And the leaders make millions for this type of responses!

Further, do not be fooled by the claims that for Facebook connecting the world has been more important that advertising revenues and it has never tried to maximise profits. In fact, that may well have been the case when as an insouciant Harvard dropout Zuckerberg was first developing this platform. Once the first revenues started trickling in, and especially after investors joined in, advertising and the data that pulls in advertising, were always going to have become the existential objective for Facebook. As it stands today, it cannot be any other reason for not only all its investors, but even Zuckerberg himself. Connecting people is certainly only an externality for this advertisement engine. And that's the way it will and should be. This is no blame on Facebook. So the response appears even more disturbing. 

Make no mistake, even though Facebook may be contrite now and apologising and informing that this will not be repeated, this will be repeated if not regulated firmly. It is a reality that businesses, of what ever kind, will skimp and market failures will develop. 

7. Finally, even if late, it is only good that people are waking up to the concerns about data. The concern with something like Aadhaar is not so much its immediate likely misuse or exclusion errors with welfare programs, but it is the powerful enabling tool that it can become in helping link up multiple data bases and the unimaginable ways in which it can possibly be used to manipulate the data and even human identity. In fiction at least, this can make Adolf Hitler look positively a boy scout! 

Thursday, April 5, 2018

Are intermediaries as big a problem as earlier everywhere?

Quite often some narratives endure, even when evidence is much more nuanced. The PDS in India is bedevilled by leakages and corruption. Teachers absenteeism is rampant across the country. All engineering works are of very poor quality. And so on.

And since these are big problems, prioritise addressing them by earmarking the scarce bandwidth of weak public systems into solutions that span the spectrum from digital technologies to outsourcing and cash transfers. And do them as one-size-fits-all nation-wide initiatives.

But we now know that while these are still true, the extent of these problems have reduced, have even been significantly addressed in many areas. They still remain critical challenges in some areas. But the clock has moved. 

Another popular narrative is that of farmers being squeezed by brokers and middlemen. In fact middlemen everywhere are considered a scourge to be eradicated on priority. But consider this, received from a friend,
The evidence at least from the US – home to chains like Walmart, Kroger, Supervalue and Safeway – is that the share of farmers for every food dollar spent by consumers has fallen from 40.9 cents in 1950 to 16.8 cents in 2012. This, I am quoting, from the US Department of Agriculture’s own data. In other words, the supply chain for milk in India is far more ‘compressed’ than in so-called advanced economies. There, much of the value between the farm and the fork is captured by expenses incurred not just in handling, processing, packaging, warehousing, refrigeration and transport, but also financing, insurance, marketing, brand promotion, labelling and shelf display.

As far as milk specifically is concerned, the average dairy farmer in 2012 received just $ 1.81 for every gallon of fat-free milk that retailed at $ 4.19. That amounts to a 43 per cent share. By contrast, our farmers here easily get more than 70 per cent of the price the consumers pay for milk, with some dairies managing to give even up to 75 per cent.
I am not for a moment suggesting that we have solved the problem of middlemen in agriculture and dairying. There are undoubtedly big problems. But is the problem still in the same generalised scale as a decade or earlier back? I am inclined to be more cautious and optimistic. 

In any case, independent of specific cases and their contexts, should we not be constantly testing these settled wisdoms? Development is a faith based activity. And these perceptions have over years become entrenched and now are part of the scriptures. They need to be stress-tested and, if things have indeed changed, we need to unsettle them and spin new narratives. At the least be more cautious with entrenched public policy priorities. Is very relevant in India in the context of the most cost-effective use cases for Aadhaar and digital technologies.

Wednesday, April 4, 2018

More explanation for divergence

The causes for the counter-intuitive income divergence between rich and poor countries has been a subject matter for a lot of research for decades.

Valerie Cerra and Sweta Saxena of the IMF add one more to the list. Their fundamental insight is to refute the conventional wisdom that after recessions economies quickly recover back to their pre-recession growth trend. Instead, they use data from 190 countries over the 1974-2012 to show that "all types of recessions - including those arising from external shocks and small domestic macroeconomic mistakes - lead to permanent losses in output and welfare". It would also explain the relatively sluggish post-crisis growth in the world economy. 

They find
On average, the magnitude of the persistent loss in output is about 5 percent for balance of payments crises, 10 percent for banking crises, and 15 percent for twin crises... our evidence suggests that a recovery consists only of a return of growth to its long-term expansion rate—without a high-growth rebound back to the initial trend. In other words, recessions can cause permanent economic scarring.
Since poorer countries suffer deeper and more frequent crises and recessions, with attendant permanent output losses, they continue to keep falling behind the richer countries. 
This assumes significance also in the calculation of output gaps that serve as decision-support to both determine pre-crisis overheating and post-crisis slack. We need to use the new trend output rate in both cases to be able to generate credible decision-support. 


Ananth has a column which examines their paper in great detail. He writes,
Their simple thesis is that crises alone do not lead to permanent output loss. Even garden-variety recessions have that effect. And it is not because economic growth was unsustainably high before crises. They find that more often than not, signs of financial excess do not show up in economic growth. Second, contrary to what many think, they find that post-crisis growth always tends to belie the optimism of a swift reversal to trend. It’s not because crises result in sudden stops in technological progress or productivity improvements, for it is hard to explain why financial crises should result in such an abrupt reversal in technology and productivity-related developments. But they find that the rise in unemployment and fall in prices, after a crisis or recession, eventually leads to a cumulative shortfall in economic output that never catches up with the pre-crisis trend. In short, and in economics jargon, “demand shocks” eventually morph into “supply shocks” that permanently lower the trend rate of growth... they suggest that fiscal dynamics, post-crisis, should take into account the fact that output would never return to the pre-crisis trend, and, hence, accept that pre-crisis trends in tax revenue would be unlikely to be met... In particular, they are in favour of “more financial regulation, financial stability to be included as a consideration for monetary policy, building a larger war chest of foreign reserves, and maintaining a conservative fiscal stance during booms”... the authors bravely assert that monetary policy actions might be needed to supplement regulation and supervision. Prudential regulations may not be effective as, in practice, they can be sidestepped by misclassifying loans, for example. Further, in a world of international capital flows and shadow banking, there are questions over the full effectiveness of prudential regulations in isolation. For example, asset management companies and hedge funds provide credit through specially structured products that circumvent banking regulations.

Monday, April 2, 2018

The evolution of the ball tampering scandal

Had to post something on the great cricket ball tampering incident. One thing that has struck me has been the rapid evolution of indignation at the incident. We've seen a continuous shifting of the moral frame of reference as the situation evolved. 

Consider the following stages of evolution
  • Stage I - In the press conference after the day's cricket, Smith defiantly said that he would not step down. He said it was done at the behest of a "leadership group". James Sutherland of CA implicitly endorsed it. Commentators were talking about the penalties in strictly technical terms - level 2 offence.
  • Stage II - The Australian PM then intervened, and then Smith's position as Captain became untenable. But still punishment considered (or loudly voiced about) was in the terms of demerit points and one or two match suspensions. 
  • Stage III - The global lack of sympathy and outrage, motivated by the track record of the Australian team and the numerous tweets etc pointing to earlier instances of Aussie behaviours, and the stigmatisation of Australia as a country of cheats, hardened the national mood there. News articles joined in with condemnation. Now CA responded to the emerging situation by temporarily suspending the players and withdrawing them from the series. But Lehman is found still acceptable - Sutherland says he will stay on. Lehman too does not own up. 
  • Stage IV - Slowly trickled out news of internal dissensions, the role played by Warner, the forcing down on Bancroft etc, thereby generating more domestic outrage in Australia. Now CA responds with the one-year ban. Everyone understands the decision. The gravity of the situation is appreciated. 
  • Stage V - Questions mount over the role of Lehman in fostering the culture in Aussie cricket. Lehman still holds on. CA reiterates the clean chit.
  • Stage VI - Smith returns and holds a press conference. He owns up responsibility. He cries. The tide suddenly turns. The Players Association of Australia says that the punishment is harsh. Others join in. Lehman now resigns alluding to the Smith presser. 
The situation could have moved in several directions depending on how things evolved. What if the camera shots were inconclusive? What if the PM had not intervened? What if there was no Twitter? What if the Australian cricket team was not as unloved as it is? What if the reactions were more restrained? What if Australia was not sufficiently stigmatised as to be provoked? What if Australian domestic outrage was not stoked? What if it was decided to hang Warner after internal consensus within CA? What if Smith had not cried? 

This story may have more legs. It is possible that the voices in sympathy will mount, and Smith and Co may appeal. As memory fades, the ban could get curtailed. Or Warner may squeal on other team mates - after all it is difficult to believe that none of the fast bowlers did not notice the changes in the condition of the ball they were using. Right now nobody is talking about others complicity, though it very hard not to believe that others did not know. All it requires for that tide to turn is one confession and one or two hard-hitting tweets or articles. 

Another thing of note has been the lack of sympathy for David Warner. This about David Warner from Mark Nicholas is interesting,
Warner is the attack dog. It is a position that lights the fire in his stomach, fuels the engine of his batting, and determines the confrontation of his day.
Can we not say the same of Kohli? And Anderson? When the going is good, they get disproportionate praise and adulation, and when the tide turns (as can happen with something like this), the opprobrium can be equally disproportionate on the other side. 

In terms of behaviour, riling up opponents, Kohli (and Anderson) is especially bad. I will argue that minus his on-field exploits, Kohli could have been the most unloved Indian superstar cricketer. It is his exceptional batting performances that masks his behavioural failings. 

In fact, in this incident, as several commentators have written, this level of global indignation and lack of sympathy has to do with the fact that the team in question is Australia - the most unloved cricket team in the world. I have a feeling that now that the Aussies are laid low, the Shastri/Kohli combination could potentially help India take that dubious distinction away from Australia!

Saturday, March 31, 2018

Markets in bail bonds - the limitations of market solutions

The Times carries a very good story on bail bond agents in the US. The $2 bn industry has its business to deliver their clients to court, by charging them with non-refundable fees for the service of guaranteeing their bond and securing bail. The Times writes, 
The bond agent takes a fee in exchange for guaranteeing the amount of the bail on the defendant’s behalf. But the fee — or premium — usually about 10 percent, is too high for many defendants, the vast majority of whom are poor. So they arrange a payment plan. The debt, paid over weeks or months of installments, can outlast the criminal case. The arrangement can include steep late fees or require signing over collateral worth many times what is owed. And while defendants, or the family members and friends who often shoulder the costs, typically pay no interest as long as their payments are on time, if they go into default they can trigger annual interest rates as high as 30 percent...
The system has worked well for the industry, even attracting private equity investors. Mom-and-pop bail companies are backed by large surety companies, which guarantee the full amount of the bond in exchange for a portion of the premium. Together, the surety companies and the bail bond agents collect about $2 billion a year in revenue...
As commercial bail has grown, bond agents have become the payday lenders of the criminal justice world, offering quick relief to desperate customers at high prices. When clients... cannot afford to pay the bond company’s fee to get them out, bond agents simply loan them the money, allowing them to go on a payment plan. But bondsmen have extraordinary powers that most lenders do not. They are supposed to return their clients to jail if they skip court or do something illegal. But some states give them broad latitude to arrest their clients for any reason — or none at all. A credit card company cannot jail someone for missing a payment. A bondsman, in many instances, can. Using that leverage, bond agents can charge steep fees, some of which are illegal, with impunity, according to interviews and a review of court records and complaint data. They can also go far beyond the demands of other creditors by requiring their clients to check in regularly, keep a curfew, allow searches of their car or home at any time, and open their medical, Social Security and phone records to inspection. They keep a close eye on their clients, but in many places, no one is keeping a close eye on them.
Such services typically operate in regulatory vacuums,
Bond companies fall into a sort of regulatory gulf between criminal courts and state insurance departments, which are supposed to regulate them but seldom impose sanctions. With rare exception, defense lawyers and prosecutors are too busy with their caseloads to keep bond companies in line. Further complicating things, it is often unclear whether consumer protection laws apply, and insurance departments say they lack the resources to investigate complaints.
And even where the law is clear, enforcement failures is typical of markets which service predominantly the poor, 
Though California law appears to be quite clear about what bond agents can charge, a review of more than 100 bail contracts and legal documents by the criminal justice reform clinic at the University of California, Los Angeles, School of Law found that such protections were routinely ignored. The contracts included all manner of additional costs, including late fees, interest on delinquent balances and “renewal premiums” that required the defendant to pay again to stay out of jail if the case was not resolved within a year.
In the final analysis, the logic of market efficiency is elusive,
The entire premise on which the commercial bail system is built — that when defendants skip bail, someone must either find them or pay, is somewhat illusory.
The problem with any private sector based solution to what are essentially public services (bail bond enforcement) is that market failures invariably develop and concentrate around fleecing consumers, skimping on expenditure, creating social costs, stretching the boundaries of the law, and in general cutting corners wherever possible. All these get amplified if the services serve predominantly the poor.  

Supporters would argue that the problem is with poor regulation and once it is sorted out, then everything would be fine. This situation is something like saying free-trade is great as long as there is a mechanism to sufficiently compensate the losers. When we know that some assumptions are impractical, it is just as well to acknowledge the failing of the original idea itself!  

The point I wish to highlight when I post such examples, as I often do, is not a blanket assertion that markets are bad or ineffective and governments are good. Far from it. 

Instead, my point is that the problems that governments typically deal with are complex ones - some people call them wicked problems. It is facetious to then carry the generalised perception that the private sector and markets can solve them more effectively. At best, we can say that market solutions are more likely to be effective in certain limited and specific contexts (or when certain conditions are available) or to address certain parts of the problem. But for the major part these problems are better managed by governments and the focus should be on trying to make public systems manage them more effectively.

Wednesday, March 28, 2018

Shareholder capitalism - JP Morgan Edition?

Consider this story of a large financial institution located in the country considered the flag-bearer for rule of law and free-market capitalism. The firm is charged with misleading clients, selling dodgy securities, deceiving and mis-selling to customers, rigging bids and interest rates, foreclosure abuses and mortgage misrepresentations, market manipulation, predatory sales, fraud cover-ups, and so on. In sum, the full spectrum of white collar crimes, many with outright criminal liabilities. And those at the receiving end included both retail customers, regular investors and high-net worth ones, and institutional investors, including public pension funds.

Enough one would have thought for the knives to be out - dismissal of the CEO, replacement of the Board, imprisonment of several employees including maybe even the CEO, radical restructuring of the firm, and so on. And also the country being the paragon of strong institutions and free-press, one would have thought of vociferous outrage if the regulators back-pedalled on any of these. 

So some questions. What happened to the CEO and the Board? What happened to those found responsible for these individual charges? What happened to the firm? 

Answer. None of the expected scenarios. In fact, exactly the opposite. The Chairman became the most influential and admired Bank CEO in the world. The firm became one the largest and most powerful banks in the world. Not one employee at any serious enough levels, leave aside executives, went to jail. The executives got promoted and were paid out fat bonuses. What's more, the CEO became the highest paid Bank CEO in the world, making the median employee's salary in just one day! 

For the record, this is no banana republic and any ordinary small financial institution. This is the United States, home to the Wall Street, corporate governance standards, beacon on shareholder capitalism and so on. These crimes belong to the long list of achievements of JP Morgan under Jaime Dimon that Zero Hedge has listed out. 

In the aftermath of the global financial crisis and spooked by some high-profile bank failures, the remaining few large banks like JP Morgan benefited from state support that helped them through the crisis not just unscathed but bigger and with a larger share of the market. As to Dimon himself, he enriched himself with $28 m in salary for 2017. He is feted everywhere as the face of the new Wall Street. He even sits on the New York Federal Reserve, influencing sabotaging any financial market reform proposal that seriously hurts Wall Street's interests, and advises the President of the United States on national economic policies by sitting on the President's Business Advisory Council. 

JP Morgan settled all these cases with a host of US regulatory agencies - SEC, DOJ, CFPB, FHFA, OCC, and even the FERC - and paid a small amount of over $35 bn in just over 3 years. And these fines came not from the salaries and bonuses of Jaime Dimon and other executives, but from the profits accruable to its shareholders. Not one person at the leadership level has been held accountable for the $35 bn in fines, leave aside all the frauds and crimes. It is almost as if those fines and long list of charges were respectively the cost and legitimate actions to boost the firm's share price and profits. 

In simple terms, Dimon and Co bet the Bank and lost, brought the entire financial markets to the brink and the economy to its knees, and came out rewarded with more adulation and much higher salaries!

Monday, March 26, 2018

The challenge of marrying experiential and evidentiary knowledge

Manu Joseph has this very nice article which distinguishes between the arrival of an idea and its justification, their relative merits and importance, and the way in which society perceives each,
An idea comes to some minds as an intuition, to many in the form of faith or imitation, or a convenient corroboration of a bias. An idea always arrives as a realization, spreads as a belief. The arrival of an idea is a religious moment. But its legitimacy is proved in public and private through the fabrication of rational substantiation. An argument then is reverse engineering of a religious moment. Here I am not referring to collegiate people who can debate either way, or are paid to debate for a cause in television studios. I am only referring to people who have ideas, or at least convictions. Even when they practise it, is debate as intellectually robust and pure as we are trained to assume? Isn’t it true that all debates emerge from the scripture of personal faith? Is the pre-eminence of debate then overrated? In the hierarchy of intellectual activities, why is this method of transmission of an idea more respected than the very force that creates ideas—intuition? An intuition is not a supernatural force—it emerges from dormant or subterranean knowledge. Even so, science celebrates intuition only after it has been proven to be right. Can it be that across the ages, superior thinkers have been subdued by lesser minds who were and are merely good debaters? Is the transmission of truth now entirely in the hands of the articulate, who are better at transmission than truth?...
When we debate, argue, or even write a column, we build a case, we substantiate our argument and consider opposing views. There is one thing we do not say at all—how we actually got the idea. Usually, an idea does not come to us after an argument with ourselves, or after a deep investigation into the facts. This is not how ideas usually arrive, or form. The argument does not create the idea, the idea creates the argument.... But the imitation of scientific debate in politics, economics, culture, even literature and other aspects of the subjective arts, is outrageous. In television studios and around dinner tables, people are forced to dress up their intuition or beliefs through the masquerade of logic and evidence. That is a wasteful decorum of modern intellectual life.
This has resonance with the ongoing obsession with argument in the form of evidence generation among development cosmopolitans (not practitioners) residing outside the development context. I have a plausible explanation for this in the case of international development. 

All of the doing in international development is done by the practitioners from inside, especially the government officials, for-profit social enterprises, and non-profits working in the field. A lot of the thinking about and funding of international development is done by outsiders or foreigners. There is a vast difference between how the two parties process information. 

Both sides are equipped with the analytical framework and evidence, the latter much more so than the former, though sufficient for the former to make informed enough comparative and objective judgements. Let us call this the evidentiary knowledge. Then there is experiential knowledge, which comes from a deep understanding of the context and its nuances, informed by a rich and diverse set of experiences accumulated over a long period of living and working in those contexts. By the very nature of their respective nativities and careers, the former internalise this deeply, whereas the latter are sorely deficient. Whether we like it or not, that's the way the world is and we need to accept it. 

Accordingly, the former discounts their evidentiary knowledge base with their experiential knowledge base to make judgement calls. This IT App or innovative product (in any sector) with an RCT to back its efficacy looks logically great but the practical challenges are too many that it is unlikely to make a dent on the problem which is significant enough commensurate with its opportunity cost when compared to alternative efforts (a very relevant trade-off in capacity and resource constrained environments). In contrast, the latter, with an evidentiary knowledge base which is as rich as their experiential knowledge is poor, process information overweighting evidence and logic. So the same IT App or innovative product, with its logical neatness and rigorous enough evidence, looks very appealing.

None of this is to overlook the inevitable human behavioural failings associated with both sides. In the case of the former entrenched priors socialise out evidence and manifest as prejudices. In the latter, logic crowds out reality and manifest as algorithmic reasoning.   

In conclusion, we have the classic tension between inductive and deductive inferences. The former uses inductive inference that draws on a rich set of priors to exercise judgement. In contrast, the latter uses deductive inference to rationalise from a logically drawn and rigorously proven theory of change. 

The gulf is actually much bigger. While talking of experiential knowledge, we grossly underestimate its richness and value. One only needs to keep in mind Karl Polanyi's description of tacit knowledge, "We can know more than we can tell".

Saturday, March 24, 2018

Weekend reading links

1. The persistence of the belief in the use of Public Private Partnerships (PPPs) to address acute problems in health and education, despite overwhelming evidence to the contrary universally from across the world, is an example of why development is a faith-based activity. This is the latest attempt to use PPPs to solve deep structural deficiencies in health care. 

The problem with PPPs in Indian context, apart from the inherent challenges associated with contracting and contract management in these sectors, is that of supply-side constraints with the market itself. PPPs are not going to attract specialist doctors into small town district hospitals. There are unlikely to be more than just a few providers across the country with the attitude and expertise to deliver faithfully and effectively on such contracts. 

The belief that the likes of Apollos and Fortises will step forward to deliver healthcare while also keeping the social equity objectives in mind is misplaced. Forget doing PPPs, these corporate chains do not seem to have the resources and management capacity to even expand by much in their own urban terrains and are now having to fight off foreign takeover attempts. 

2. Livemint points to disturbing signs from India's labour-intensive industries. Since the introduction of GST, exports have been declining, imports rising, production falling, and rural wage growth slowing when compared to the capital intensive industries. 
3. A Livemint analysis of a sample from the Prowess database of over 27000 listed and unlisted firms from both industrial and services sectors provides empirical evidence that the heavy lifting with respect to job creation is done by the small firms. As the graphic shows, the smallest quartile of firms in terms of sales revenues have consistently created more jobs than those in the biggest quartile. 
Further, the largest firms were net job destroyers in recent years. This is in accordance with trends in the developed countries and elsewhere.

4. More labour market news, as Livemint reports of a steep increase in the share of contract labour in organised manufacturing. The graphic shows the share of contract labour from ASI data
To put this in perspective,
In the 17 years between 1997-98 and 2014-15, the compound annual growth rate (CAGR) of directly employed workers was a piffling 0.55%. In stark contrast, the CAGR of contract workers over the same period was 6.79%... In the manufacture of motor vehicles, for example, workers employed as contract labour are now 45.9% of total workers employed. In 1997-98, contract labour was 10.9% of total workers directly employed.
This trend is likely to accelerate as the government has just issued revised rules expanding fixed tenure of contract labour across all industries. 

5. Fascinating comparison of the fates of Martin Shkreli and Elizabeth Holmes, two people who rose to prominence as pharmaceutical entrepreneurs and who have been convicted/admitted of white collar crimes to defraud their investors.

The former gained notoriety for acquiring the rights to generic drugs for rare diseases before jacking up their prices, was convicted for fraud involving $10 million (though he did finally repay the investors, all of whom were wealthy people) for his activities at two hedge funds he ran. The latter becoming a darling of the VC world - appearing on the cover of Forbes, becoming a member of the Board of Fellows of Harvard Medical School, and receiving the Horatio Alger Prize - before being documented to have lied copiously to boost the valuation of her blood-testing start-up Theranos and thereby defraud investors, including public pension funds, to the tune of $700 million. While the former was convicted and jailed for 8 years, the latter settled with the SEC without admitting or denying them and with a fine of $500,000 and a ban on being an officer or director of any public company for ten years.

What explains the grossly disproportionate nature of punishments given the fraud perpetrated by Holmes being orders of magnitude higher?
John C. Coffee Jr., a professor at Columbia Law School who teaches classes on white-collar crime, said, “Typically you get more sympathy from the criminal justice system if you’re an attractive young woman than a brash, arrogant young male”... In comparison to Mr. Shkreli’s fraud, the Holmes allegations “are really a different order of magnitude,” Ms. Apps said.
Their respective reactions after being charged too appears to have played an important role. While Holmes kept a low profile, Shkreli constantly provoked the Court with his public comments about the case.
Mr. Shkreli repeatedly defied Mr. Ben Brafman’s (his defence lawyer) admonitions to keep quiet and avoid the limelight. He smirked through his trial, taunted prosecutors as the “junior varsity,” called the case a “witch hunt” and was suspended by Twitter after he threatened to have sex with a freelance journalist who covered him. His bail was revoked and he was imprisoned after he offered a $5,000 bounty in a Facebook post for a strand of Hillary Clinton’s hair — a “solicitation to assault,” Judge Matsumoto ruled. In theory, Mr. Shkreli’s well-publicized bizarre antics, both in and out of court, should have had no bearing on his guilt or sentence. As Mr. Brafman put it in his opening statement, Mr. Shkreli shouldn’t be found guilty for being “odd,” “weird,” or having a “dysfunctional personality.” But prosecutors cited his behavior to assert in closing arguments that he “had no respect for the law.” At his sentencing, Judge Matsumoto suggested his actions called into question whether his purported remorse was genuine. 
“I’ve never had a client who did more to hurt his own standing with the court than Martin Shkreli,” Mr. Brafman said. His behavior and comments “probably added several years to his sentence.”
While we all get caught up with the minutiae of legal stuff, ultimately we, including the judges, are all human beings. The cases highlight the critical importance of perceptions and prejudices in determining the fates of court cases.

6. Three very good articles by Anjan Basu, a former official of a public sector bank in India, that shines light on possible distortions that crept into the PSU banks over the years. The first is on the corporate culture of these banks. The second is about the progressive liberalisation of credit appraisal processes - elimination of the credit consortium approach of lending to large projects, which would require all the banks to approve the appraisal and terms negotiated by the lead bank, and its replacement with the multiple banking arrangement where the large company could independently negotiate separate terms with different banks so as to encourage swifter disbursals; removal of the minimum long-term margin requirement stipulations for borrowers; and relaxation in norms for identifying stressed assets whereby if a loan by one bank to a borrower had become NPA then all others too had to classify the same loan account as NPAs. The result was a competitive race to the bottom among PSU banks in lending to and retaining large clients.

The third article refers to business practice reforms for the worse driven by consultants - business process reengineering (BPR) which split loan processing functions into marketing, evaluation and assessment, and supervision and monitoring functions and scattered them across multiple layers within the bank, thereby losing critical synergies and accountability; and treatment of banks as a financial supermarket offering a bouquet of products and financial incentivisation of cross-selling by employees, which in turn enraged customers. The result was erosion of accountability mechanisms within banks and distorted incentives among employees.

This is one more example of the problem with deregulation in financial markets as well as the mindless acceptance of business practice fads that consultants peddle to make a living. 

7. A new IMF working paper explores the distribution of income gains from globalisation. Its summary,
In a panel of 147 countries during 1970-2014, we apply a new instrumental variable, exploiting globalization’s geographically diffusive character, and find differential gains from globalization both across and within countries: Income gains are substantial for countries at early and medium stages of the globalization process, but the marginal returns diminish as globalization rises, eventually becoming insignificant. Within countries, these gains are concentrated at the top of national income distributions, resulting in rising inequality. We find that domestic policies can mitigate the adverse distributional effects of globalization. 
The figure shows that in countries with low level of globalisation, increasing globalisation is associated with a greater income growth and the effect tapers off with increase in level of globalisation. 

8. Staying with globalisation, it may be incorrect to blame Trump alone for the rise in protectionism. Trade as a share of world GDP, which doubled over the 1993-2008 period, has since plateaued off over the last decade and has even been declining since 2013 or so.
Cross-border financial flows too have undergone the same trend. They peaked at 22% of world GDP in 2007, but has since fallen to just 6% in 2016, the same as in 1996! See the graphic below from this MGI report.
Come to think of it, I am inclined to believe that this rise in protectionism is exactly what may be appropriate for China. It is already moving away from the lower end of exports and, given its own large enough domestic market, even dependency on trade itself. But for the American exporters, salivating at the growing and very large Chinese market, this is the wrong time for Trump to be pulling the plug. Now that protectionism has gone global, Beijing no longer needs any excuse to indulge in its version of protectionism! And the Chinese makers now have their market all for themselves.

9. Gaurab Aryal, Federico Ciliberto, and Benjamin Leyden find evidence of anti-competitive collusive behaviour by legacy airlines in the US. They parsed transcripts of quarterly earnings calls for 11 airlines for the 2002-16 period for mentions of "capacity discipline" (restricting the number of offered seats and flights to keep prices high enough). They write,
In recent years, airline executives have been discussing capacity discipline frequently, with the topic coming up in 54 percent of the quarterly earnings conference calls of legacy carriers since the end of 2002... we find evidence that legacy airlines used discussions of capacity discipline in their quarterly earnings calls to coordinate capacity reductions in competitive (non-monopoly) routes. In particular, we found that when all of the airlines serving a particular airport-to-airport market discussed capacity discipline in their most recent earnings call, they reduced the number of seats offered from 1.25 percent in large markets up to 4.21 percent in smaller markets, even after controlling for a rich set of factors that affect airlines’ capacity choices. In other words, legacy carriers used public communication (the discussion of capacity discipline) to collude with their competitors in order to reduce the number of seats that they as a group offered for sale.
An example of how too much information sharing can result in counter-productive outcomes. 

10. Finally, Times has a nice graphical feature on the latest empirical analysis by Raj Chetty, Nathaniel Hendren et al on social trends in the US. They track the anonymise data of virtually all Americans in their late thirties to find,
Black boys raised in America, even in the wealthiest families and living in some of the most well-to-do neighborhoods, still earn less in adulthood than white boys with similar backgrounds... White boys who grow up rich are likely to remain that way. Black boys raised at the top, however, are more likely to become poor than to stay wealthy in their own adult households. Even when children grow up next to each other with parents who earn similar incomes, black boys fare worse than white boys in 99 percent of America. And the gaps only worsen in the kind of neighborhoods that promise low poverty and good schools... Gaps persisted even when black and white boys grew up in families with the same income, similar family structures, similar education levels and even similar levels of accumulated wealth...

According to the study... income inequality between blacks and whites is driven entirely by what is happening among these boys and the men they become. Though black girls and women face deep inequality on many measures, black and white girls from families with comparable earnings attain similar individual incomes as adults.
The authors point to racist attitudes being faced by black males as explanation for this,
If this inequality can’t be explained by individual or household traits, much of what matters probably lies outside the home — in surrounding neighborhoods, in the economy and in a society that views black boys differently from white boys, and even from black girls... Other studies show that boys, across races, are more sensitive than girls to disadvantages like growing up in poverty or facing discrimination. While black women also face negative effects of racism, black men often experience racial discrimination differently. As early as preschool, they are more likely to be disciplined in school. They are pulled over or detained and searched by police officers more often. It’s not just being black but being male that has been hyper-stereotyped in this negative way, in which we’ve made black men scary, intimidating, with a propensity toward violence... this racist stereotype particularly hurts black men economically, now that service-sector jobs, requiring interaction with customers, have replaced the manufacturing jobs that previously employed men with less education.