Wednesday, May 16, 2018

A Nudge carried too far?

I am a strong believer in the use of nudges in development. They are cute and simple. But the same cuteness and simplicity can blind us to the relevance of the specific nudge (in the specific context) as a serious enough development tool.

Martin Abel and Co have a paper which examines a nudge to increase the effectiveness of job search efforts by unemployed youth in S Africa. The youth are grouped with peers, encouraged to make daily job search plans, and are sent weekly SMS reminders. The youth in the treatment group (in the RCT evaluation) had 30% more job offers and were 27% more likely to get a job.

This is undoubtedly a really cute nudge, a useful addition to the body of knowledge on nudges in development. But is this something which would excites policy makers? Very very unlikely. Let me illustrate. 

The hypothesis is that nudging job seekers into being more effective with their job searches will increase their likelihood of getting jobs - more active searches, more offers, and greater likelihood of a placement. Given all these jobs will anyways be filled, the intervention will only add one more person (the one treated with this intervention) into the long line of active job seekers. We cannot claim any social return on investment (SROI) since for each person who is nudged ahead of his competitors to get the job, another equally deserving person (who ironically was enterprising on his own with the job search and did not need the nudge to be active with job search) is denied the job. 

In other words, the net partial equilibrium social impact of the intervention is virtually zero. 

In the general equilibrium, one can of course say it has contributed its tiny bit to improving the efficiency of labour market matching (for e.g., assuming the treated person was more capable than the one who would have otherwise got the job).

But should a deeply capacity constrained government get into such things, with the certainty of this activity displacing effort from something else more likely more important?

And we have not even talked about the state capacity challenge in implementing this with acceptable fidelity in these countries. Take this description of the treatment,
Study participants are randomly assigned to one of three treatment arms: Control (pure control), Workshop (workshop only), and Workshop Plus (workshop + plan making). A random subset of job seekers in the Workshop Plus group were additionally asked to identify a peer. Participants across the Workshop and Workshop Plus groups were further randomized to receive text-message reminders. 
This is not as simple as it appears. Making plans, weekly reminders, peer-support engagements etc in scale requires reasonably strong state capacity. It is inconceivable that this can be done in scale without being routinised by the implementing bureacracy to a degree that makes it ineffectual. Do we really think that the S African State (in any province) can do this in scale without significantly compromising the quality of implementation as to render it virtually ineffectual?

We are also talking about countries where for every decent job opening that becomes available, there are potentially thousands go job seekers. It is very unlikely that a job will remain unfilled because of lack of applicants or lack of awareness among job seekers (in any case with such cases the more appropriate intervention, by orders of magnitude, is to support placement agencies). For sure, some individual job seekers will be better off if they can be nudged into being more effective at jobs search (though at the cost of making some others, who would have got the job without this intervention, worse-off). 

The best that can be said about this is that, IF implemented in scale, it can very marginally (or more appropriately trivially, considering all the factors that constrain S African labour market and placing this intervention in perspective) increase the efficiency of S African labour market. And compare this with the competing areas for policy attention on the labour market side - education of kids, trainings to make the educated kids employable, facilitate job creation by businesses, enhancing productivity of those jobs, mechanism for efficient matching job seekers with jobs and so on.

Saturday, May 12, 2018

Weekend reading links

1. Barry Ritholtz argues that the restrictive policies favoured by taxi cab owners in New York created the likes of Uber,
Consider, the number of licensed cabs was about 16,900 in 1937, when the city's population was more than 1 million lower than it is today. Today, there are fewer medallions than 80 years ago. There have been only about 1,800 new medallions issued since 1996. It is an artificially created monopoly, and monopolies tend to lead to terrible economic behaviors. Just consider one aspect of the appalling level of service on offer. In New York, many taxi drivers change shifts between 5 p.m. and 6 p.m., abandoning the city in the midst of rush hour, returning to the outer boroughs or even New Jersey for driver changes. Let a single drop of rain fall and it is almost impossible -- no, it is impossible -- to find a cab. The cars are often in bad shape, devoid of shock absorbers, and back seats that make me want a shower afterward. Yellow Cabs also have been known to illegally refuse to pick up the hails of African-Americans. Unlike London, where drivers have an almost tour guide-like knowledge of their city, New York cab drivers are often utterly ignorant of the city where they work.
And on Uber's effect on medallion prices, 
Bloomberg Businessweek reported that medallion prices, which peaked at $1.3 million in 2013, were already sliding, falling below $900,000 in 2013. Just two years later 2015, prices had fallen another 40 percent. And it got worse: By 2016, the lowest reported price was $250,000. Last year, medallions sold for as little as $241,000. They are still falling. Axios noted a recent transaction that went for just 8 percent of the peak value, or about $100,000. Other cities, such as Chicago, have seen similar declines in medallion prices.
2. David Bell has a scathing critique of Steven Pinker's new book, Enlightenment Now, which is a celebration of the progress made by human civilisation in the post-Enlightenment era thanks, in the main, to the scientific and technological advances that arose from Enlightenment's reasoning and scientific enquiry. He writes,
Enlightenment Now... is a dogmatic book that offers an oversimplified, excessively optimistic vision of human history and a starkly technocratic prescription for the human future. It also gives readers the spectacle of a professor at one of the world’s great universities treating serious thinkers with populist contempt. The genre it most closely resembles, with its breezy style, bite-size chapters, and impressive visuals, is not 18th-century philosophie so much as a genre in which Pinker has had copious experience: the TED Talk... It makes use of selective data, dubious history, and, when all else fails, a contempt for “intellectuals” straight out of Breitbart. Pinker might not have intended the book to do so, but it will bolster the claims of populist politicians against intellectuals and movements for social justice while justifying misguided, coldhearted policy choices in the name of supposedly irrefutable scientific rationality... When it comes to issues like “democracy” and “equal rights,” Pinker seems to believe that progress has occurred almost by itself, as a result of whole populations spontaneously turning more enlightened and tolerant. “There really is a mysterious arc bending toward justice,” he writes. Almost entirely absent from the 576 pages of Enlightenment Now are the social movements that for centuries fought for equal rights, an end to slavery, improved working conditions, a minimum wage, the right to organize, basic social protections, a cleaner environment, and a host of other progressive causes. The arc bending toward justice is no mystery: It bends because people force it to bend.
In some ways, like Nassim Nicholas Taleb and Richard Dawkins, Steven Pinker may be respresenting the era of pop-intellectualism. 

3. Ricardo Hausmann makes the point that has been a constant theme of this blog for more than a decade - private participation in infrastructure is best done by way of public finance of construction followed by private concession of operation and maintenance. 

But he glosses over the challenge with even the latter. As I blogged here in case of India's roads monetisation, private participation in O&M too is fraught with several risks.

4. I liked this Amartya Sen assessment of Karl Marx's legacy. Sample this,
I would place among the relatively neglected ideas Marx’s highly original concept of “objective illusion,” and related to that, his discussion of “false consciousness”. An objective illusion may arise from what we can see from our particular position — how things look from there (no matter how misleading). Consider the relative sizes of the sun and the moon, and the fact that from the earth they look to be about the same size. But to conclude from this observation that the sun and the moon are in fact of the same size in terms of mass or volume would be mistaken, and yet to deny that they do look to be about the same size from the earth would be a mistake too... The phenomenon of objective illusion helps to explain the widespread tendency of workers in an exploitative society to fail to see that there is any exploitation going on — an example that Marx did much to investigate, in the form of “false consciousness”...


In one of Eric Hobsbawm’s lesser known essays, called “Where Are British Historians Going?”, published in the Marxist Quarterly in 1955, he discussed how the Marxist pointer to the two-way relationship between ideas and material conditions offers very different lessons in the contemporary world than it had in the intellectual world that Marx himself saw around him, where the prevailing focus — for example by Hegel and Hegelians — was very much on highlighting the influence of ideas on material conditions. In contrast, the tendency of dominant schools of history in the mid-twentieth century... had come to embrace a type of materialism that saw human action as being almost entirely motivated by a simple kind of material interest, in particular narrowly defined self-interest. Given this completely different kind of bias (very far removed from the idealist traditions of Hegel and other influential thinkers in Marx’s own time), Hobsbawm argued that a balanced two-way view must demand that analysis in Marxian lines today must particularly emphasise the importance of ideas and their influence on material conditions... To Hobsbawm’s critique, it could be added that the so-called “rational choice theory” (so dominant in recent years in large parts of mainstream economics and political analysis) thrives on a single-minded focus on self-interest as the sole human motivation, thereby missing comprehensively the balance that Marx had argued for. 
5.  The Economist has a briefing on the global logistics market. This is interesting,
The industry’s backwardness can be seen in its thrall to paperwork. Systems based on e-tickets that say who is entitled to go where, and how, have been mandatory in air-passenger transport for ten years. But half of air cargo still travels with paper “bills of lading” rather than e-tickets. In the world of containerised shipping things are even worse: freight forwarders deal with shipping firms, airlines and hauliers mainly by fax. The cargo on each voyage of the Munich Maersk generates a library of documents—many of which then need to be sent to the ship’s destination by some other means. That secondary shipping is not foolproof, either: vessels and aircraft are often delayed in port because the paperwork has not caught up with the goods that they carry. The cost of all this is enormous. Removing administrative blockages and outdated practices would, by some accounts, do more to boost international trade than eliminating tariffs. The UN reckons that putting all the Asia-Pacific region’s trade-related paperwork online could slash the time it takes to export goods by up to 44%, cut the cost of doing so by up to 31%, and boost exports by as much as $257bn a year.
6. Putting Chinese foreign lending in perspective,
By the end of 2014, just two Chinese policy banks — the China Development Bank and Export-Import Bank of China had outstanding loans to foreign borrowers of nearly $700bn, much the same as the total outstanding lending of the World Bank and six regional development institutions... As a study from the Center for Global Development notes, 23 of the 68 countries potentially eligible for lending under the Belt and Road Initiative are vulnerable to debt distress. In eight of these countries — Pakistan, Djibouti, Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan — the lending associated with the Belt and Road Initiative will add substantially to the risks.
7. Fiscal incentives to attract businesses is arguably one of the largest examples of wasteful public policy. Eduardo Porter from the example of state and local governments in the US,
Research on a program of corporate tax breaks in Texas found that 85 to 90 percent of the projects benefiting from such incentives would have gone forward without them. Even when tax breaks work and spawn new jobs, local residents gain little if anything... State and local government spending on tax incentives like those offered by Wisconsin and New Jersey has increased sharply since 1990, to about $45 billion in 2015... It amounts to roughly all the money that state governments collect from corporate income taxes. Is this just about opportunistic politicians dipping into state coffers so they can be photographed cutting the ribbon at a spanking new factory? I wouldn’t doubt it. But I would also suggest another, more troublesome motivation: desperation. Fiscal incentives are one of few tools for cities like Racine and Newark to create jobs.
Much the same most likely applies to state governments in India competing with each other to attract investors.

8. International development's mindless obsession with RCTs has crowded out much more valuable ethnographic studies like this by Aditya Dasgupta and Devesh Kapur on the challenges faced by the frontline development bureaucracy in India. Nice documentation of a reality which is deeply internalised by those working within these systems but not amenable to any randomisable study. It also highlights the challenge of implementation validity that I blogged about here.

9. Vietnam may only be the latest example in the well established fact that many countries have achieved US levels of student learning outcomes in Math and Science at very low levels of income. 

10. An assessment of the progress made by China's One Belt One Road (OBOR) initiative in the Nikkei Asian Review. In particular, it finds that projects sometimes experience serious delays and resultant cost-escalation, ballooning debts in Pakistan, Sri Lank, Maldives, and Laos, sovereignty concerns, and lack of participation by local workers and local banks.
11. CityLab has a series of articles on the problems being faced by public buses in US cities. It writes,
Numbers released last month from the Federal Transit Administration’s National Transit Database show a 2.5 percent decline in total transit ridership from 2016 to 2017, with bus ridership leading the way with a 5 percent drop... Going back to 2014, ridership is down 7 percent, and bus ridership in 2017 was down almost 20 percent from its peak in 2008. During the same nine-year period, the Chicago Transit Authority alone lost more bus riders than all U.S. agencies with growing ridership gained.
And on the role of ride sharing services in this state of affairs,
2018 will be the first year that for-hire vehicle trips (including taxis, Uber, Lyft, and their peers) will outnumber bus trips in the U.S., transportation consultant Bruce Schaller forecasts. Research in New York, San Francisco, Boston, and nationally show that the rapid growth of ride-hailing is adding new vehicles to congested city streets. These services offer shared rides via “pooling” services, but they have seen limited uptake and cannot physically match the people-moving efficiency of city buses.
12. Keith Gessen has a fascinating exploration that rips off the veil shrouding what actually determines the US view of Russia and how its drives American policy towards that country. The essay explores the relationships through the lens of the worldview and prejudices of Russia hands in the Military and State Department who run the bilateral relationship.
The abiding mystery of American policy toward Russia over the past 25 years can be put this way: Each administration has come into office with a stated commitment to improving relations with its former Cold War adversary, and each has failed in remarkably similar ways. The Bill Clinton years ended with a near-catastrophic standoff over Kosovo, the George W. Bush years with the Russian bombing of Georgia and the Obama years with the Russian annexation of Crimea and the hacking operation to influence the American election. Some Russia observers argue that this pattern of failure is a result of Russian intransigence and revisionism. But others believe that the intransigent and unchanging one in the relationship is the United States — that the country has never gotten past the idea that it “won” the Cold War and therefore needs to spread, at all costs, the American way of life.
Sample this about the different world-views of American officials,
The longtime Russia hand Stephen Sestanovich, a veteran of the Reagan and Clinton administrations, says there are two kinds of Russia hands — those who came to Russia through political science and those who came to it through literature. The literature hands, he suggests, sometimes let their emotions get the best of them, while the political-science hands, like Sestanovich, are more cool and collected. Fried, who served in every administration from Carter to Obama, also thinks there are two kinds of Russia hands, though he draws a different dividing line: There are those, like himself, who “put Russia in context, held up against the light of outside standards and consequences.” These people tend to be tough on Russia. And then there are those “who take Russia on its own terms, attractive and wonderful but subject to romanticization.” These people tend to give Russia what Fried would consider a pass.

Tuesday, May 8, 2018

The false dawn of micro-pensions

There is a disturbing irony in encouraging poor people, who barely manage to make ends meet just for physical survival, to save for old-age and insure themselves against diseases. Self-financed micro-pensions and micro-insurance, aided by the allure of modern technologies, are a fad in international development and impact investing. It is flawed on both philosophical and financial considerations.

The fundamental assumption with micro-pensions is that it is both desirable and possible for informal workers (or poor and lower middle-class) to save money from their current income to finance their pensions. 

The desirability condition is, at best, a benign paternalistic concern of outsiders for the welfare of the poor and informal workers during their retirement. I will leave this at that. The possibility condition is contingent on another assumption. These people have the incomes to save long-term for their pensions, and it is human behavioural and cognitive failings that prevent them from doing so. 

This assumption flies against the near universal evidence on the difficulty impossibility of long-term financial savings (pensions or insurance) among the poor. Forget the poorest, even the typical rural and urban informal worker in a low income country lives a virtual hand-to-mouth existence, barely surviving from month to month on their meagre wages. 

India, for example, has a pension and health insurance scheme for all formal sector workers which requires mandatory deductions from worker’s salaries. The mandatory deductions amount to slightly above 30% of the worker’s salaries, including the employer contributions. This is actually counter-productive because it deprives the badly stretched worker off money he badly needs today to meet daily needs and forces him to borrow at much higher cost from local money lenders for those needs, thereby likely making him more indebted. While the logic of making this voluntary at least for workers with monthly wages below Rs 15000-20000 is clearly understood, its politics very challenging.  

It is also for this reason that almost all developed countries have either lower mandatory deductions or higher government contributions for low income workers. In fact, this was a major component of the acclaimed 2004 Hartz IV reforms of Germany, often claimed as the cornerstone of Germany’s recent economic success. In case of the poor, it is almost always completely public funded social safety nets that provide pensions and health insurance. 

It is ironical that international development entities promote self-financed pensions and insurance for the informal workers even though it is an idea that is not even considered for their arguably far better off (both in relative and absolute terms compared to others in their respective countries) counterparts in developed countries. 

How many countries have self-financed pension schemes for informal workers? Is there any country at all that has this creature of innovation? In fact, how many examples of micro-pension business is there in any developing country? Is there any self-financing (or non-subsidised by governments) micro-pension company which has say, 100,000 regularly paying informal worker subscribers? Is there any micro-pension company in any country which has been in existence for even 10 years? Do we have entrepreneurs offering micro-pensions to the legions of part-time or contractually (hourly-wages) employed workers (say, McDonalds and Walmart workers), who form a very big share of the labour force in the US? Do we have impact investors offering financing for such entrepreneurs? If not, why?

This is a bit like Lant Pritchett’s example of women in rural India asking him how the women Self Help Groups were in the US! 

Even if we set aside the philosophical objection, there is the question of its financial viability. In order to be sustainable, a micro-pensions entity has to overcome the following constraints.

1. The country should have deep enough long-term investment opportunities. Pension funds will have very strict and low regulatory limits on equity exposure and that too to highly rated ones too. But in low income countries the supply of such instruments which are not very risky and which can generate a significant return (to cover inflation, costs and returns) is likely to be limited.  

2. These micro-instrument agencies are unlikely to have the expertise to manage these funds internally in a manner as to generate the required returns, thereby necessitating outsourcing of funds management responsibilities to asset managers, with the attendant high management cost. This is a problem for even established microfinance NBFCs in mature markets like India. 

3. Since poor people are unlikely to be able to make certain in-payments for long periods (and in case of micro-pensions are also likely to withdraw money at the earliest opportunity), the entity offering such instruments may have to offer the product with flexible terms. This would seriously limit the flexibility of its investment options.

4. Minimise customer acquisition and retention costs, as well as ensure reasonable average savings inflows for each customer, and that too among the most financially vulnerable groups of people

5. Overcome the business longevity risk and remain a going concern for a long time, in the range of decades, a critical determinant for a business like insurance/pensions. It is also not for no reason that large legacy institutions are, for good or bad, the ones who have been successful with penetrating the insurance and pensions market in developing countries. Successful pension and insurance companies don’t suddenly emerge overnight and grow big. The entry barriers are very high. They have to piggyback on existing credible platforms. 

6. Finally, as discussed earlier, success of these instruments will have to overcome the large body of evidence on poor people being unable to accumulate large amounts in cash (as against physical assets like house, livestock, gold etc), even through small periodic cash savings, required to sustain a pension or insurance scheme. 

There are the following costs associated with these constraints and the final investment returns have to offset them

1. Cost of routine operations (acquiring, retaining pensioners etc)

2. Outsourced asset manager cost (even if done in-house, the costs can be prohibitive, in terms of attracting and retaining talent etc)

3. Costs due to uncertain inflows and outflows associated with the nature of customers 

4. Reasonable profits for the entity

5. Inflation – typically high in all low income countries

In a typical case, the first four alone will aggregate to 10-15% returns, if not more. Add in a 10% inflation rate, and we are looking upwards of 20-25% rate of return over a very long-term for this to be commercially viable as a micro-pension entity. Can we imagine the enormity of this challenge? How many such asset managers (or any kind, much less those dealing with low risk instruments/asset categories) are there in any developing country who can generate such returns? And all this out into the future? 

As an illustration of a micro-pension program, MicroSave has this nice illustration of the Abhaya Hastham program of the Government of Andhra Pradesh for women self-help group members, which pays out Rs 500-Rs 2200 per month (depending on the age of enrolment, and in today's nominal rupee) by saving Rs 1 per day (or Rs 365 per year). As the graphic below shows, when the program reached 4 million clients, it required very significant top-up by government required to make it sustainable. 
Whatever the wonders of technologies like digital money and blockchains, we cannot escape the bitter reality that poor people have hardly anything to save. It is a constraint which cannot be relaxed. I cannot imagine that we are helping the poor by making them cut back on their basic human necessities to save penurious amounts for their old age. And that too by asking them to trust a financial model which does not stand the test of even a cursory scrutiny. 

The micro-pensions fad is yet another example of the unfortunate digression away from serious  debates on important development challenges like, in this case, fiscally sustainable and incentive compatible social safety nets. 

Friday, May 4, 2018

The Mumbai DP - vertical development and population density are not the same!

The just approved Mumbai Development Plan 2034, while a mutilated version of the original ambitious proposal, does significantly increase the city's permissible Floor Space Index (FSI). It has also generated the usual debates about how deficient infrastructure would limit the gains from vertical growth. 

I have blogged about this on several occasions. This argument misses the point completely.

The issue is not at all about density. Among cities with population above 2.5 million, only Dhaka has a higher population density than Mumbai. 
The problem with Mumbai is not so much lack of density, but its very low per capita space availability - 4.5 sqm compared to 34 sqm in Shanghai! If we take the slums, the per capita space available is just 2.73 sqm, which makes those areas the densest urban habitation anywhere in the world at about 120,000 people per sqkm! Far from being the Maximum City, for its residents Mumbai is actually a Minimum City! The new DP aims to increase this to 18-20 sqm. 

In this scenario, vertical development is not going to increase the density significantly. In fact density could even fall. For, as height increases, the average size of each dwelling unit built upwards is likely to be much larger than the currently existing tiny single-storied and semi-permanent units that are a feature of the slums. To this extent, unless we go significantly upwards, the increased unit size is more likely to cause gentrification and, to thereby cause a decline in density. So, there is a logical likelihood that a small increase in FSI could actually tip over to a gentrification equilibrium which lowers density and makes housing less affordable for the less well-off. 

Infrastructure augmentation is important, but its deficiency is not as bad as is being made out, especially in the short to medium-term. In the long-run the likelihood of rising infrastructure investments may be more promising.

After all these same areas already have the world's second highest density. And they are less likely to have more people coming in. They have just about the carrying capacity - roads, mass transit, water and sewerage pipes, schools, hospitals etc - to support the existing population, though the quality of the provision is inferior, a concern not quite related to density itself.

Yes, we need  bigger water pipes and wider roads. But that, and the resultant increased service quality, depends on more city-wide water availability, more water and sewerage treatment facilities, more  and better mass transit options, better run schools and hospitals etc. This a felt-need irrespective of whether FSI remains the same or is increased. And the higher FSI does nothing to make it any more relevant.