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!

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