Saturday, September 29, 2018

Weekend reading links

1. As global supply chains show stirrings of calibrating in response to the US tariffs on China, it is a reasonable proposition that India stand to gain. But not by much if we examine China's competitors in some of the largest affected sectors.
2. Another FT report points to how China has swiftly moved up the value chain to dominate the medium-level technology areas.
The country today has a 32% share of the global medium high-tech industries. Its share of the global capital goods market has risen from 5% to 20% in the 2007-16 period.

3. Another article draws attention to the pensions crisis staring at developed economies in this age of low interest rates. The graphic below show the grossly inadequate savings of working age population and those close to retirement.
4. Nice article on the growing trend of "pass-the-parcel" deal making (or secondary deals) in private equity space, where one PE firm sells stake to another. Last year the industry did a record 576 such deals. The trend has been associated with successive owners paying themselves large dividends, leveraging up, skimping on investments and maintenance, piling up unpaid pension obligations, and passing on to the next firm when they have squeezed out all the juice they can. In industry lingo, the existing owners "sweat" the asset as much as they can before passing it on. And the game goes on.

This story of Simmons Bedding in the US is emblematic,
In the US, mattress maker Simmons Bedding, which was bought and sold by private equity owners seven times in 20 years, filed for Chapter 11 bankruptcy protection in 2009 and more than 25 per cent of the workforce was laid off. Still, its former owners, which included Thomas H Lee Partners, made a profit of $750m through special dividends, according to a New York Times investigation.
Given the vast volumes of dry powder accumulated by PE firms in recent times, $1.7 trillion and growing, industry watchers expect secondary transactions to rise in the immediate future.

5. Renewable energy facts for the week,
Last year, China added 50 gigawatts of solar power capacity, according to the International Energy Agency — more than it added for coal, gas and nuclear power capacity put together, and equivalent to the combined solar capacity of France and Germany. India, the world’s fastest-growing major economy, added around 9.5GW of solar. The country is on course to hit 28GW by the end of 2018 — six times what it had installed three years ago. Wind is growing less quickly, but from a higher base. Last year, China added 15.6GW of wind capacity — an increase of 10 per cent.
By the end of 2017, the price of solar panels have fallen by more than 80% since 2009, and wind turbines by half. However, recent decision by China to cut incentives for solar power have had the effect of weakening domestic demand for panels forcing manufacturers to dump panels at lower prices abroad, in turn eliciting anti-dumping duties in US, EU, and India.

6. Funny how signatures of Marxian analysis making a comeback is everywhere. The latest is Leonid Bershidsky declaring the gig-economy workers as the modern proletariat. He examines a recent ILO report which surveyed 3500 workers in 75 countries employed on web-based gig-economy jobs found in digital labour platforms,
the average worker on five such platforms earned $4.43 per hour—or just $3.31 an hour if one takes into account all the unpaid time, about 20 minutes per hour, spent looking for orders, researching clients, taking qualification tests and writing reviews. Even that is relatively generous: Another study published last year estimated that “Turkers,” as workers on the Amazon platform are known, made a median hourly wage of $2. Almost two-thirds of US “Turkers,” according to the ILO study, made less than the federal minimum wage of $7.25 an hour, and only 7% of Germans on the Clickworker platform made the statutory minimum wage of 8.84 euros ($10.40) an hour. This would perhaps be marginally tolerable if “crowdworkers” only logged on to supplement income from other jobs. But 32% of those surveyed by the ILO earned their primary income from the platforms. These mostly educated people spend many hours filling out questionnaires for academic researchers, transcribing audio, even moderating content for social networks, which means watching violent videos or reading hate-filled posts all day. This is not the nicest work, and some of it can even have a lasting psychological impact, yet the “crowdworkers” live in a world without the basic worker protections guaranteed even to holders of most menial real-world jobs. Not only do they earn less than the minimum wage, they are not protected against non-payment. No one owes them an explanation when their work is rejected or when they fail a test or receive an unfavourable rating.
7. As IL&FS totters at the precipice and strains show up at others like Dewan Housing Finance, it should serve as a wake up call for financial market regulation. It has rattled the financial markets, and spooked the fixed income securities market and shadow financial sector. The 11,400 odd Non Banking Financial Companies (NBFCs) market with a combined loan book of INR 22.1 trillion ($304 bn) is expected to undergo a major churn with several smaller companies winding down. Several debt and hybrid mutual funds have significant exposure to IL&FS's debt securities and a liquidity crisis threatens the market if funds redemption pressures mount. 

There should be greater scrutiny of at least two market participants. One, rating agencies, a culprit in every major financial market crisis in recent times across the world, did not fail to show up this time too. Sample this
On credit quality, IL&FS group’s debt securities looked good till a month and a half ago. The rating rationale for IL&FS Financial Services Ltd was reaffirmed A1+ (top most rating—highest probability of repayment). However, as on 17 September, IL&FS Financial Services was downgraded to D... One must question why the A1+ rating was reaffirmed in August 2018.
The failings of credit rating agencies cannot condone the mindless acceptance of such ratings by fund managers despite the several signatures of concern associated with IL&FS and its business model

The second one is state-owned Life Insurance Corporation (LIC). It owns a quarter of the failing entity and runs the risk of of being forced to pour money in order to prevent a contagion and systemic collapse. The worrying thing is that LIC, in view of its role as the state-directed buyer of last resort of capital market instruments, may actually be sitting on more such potential duds. 

There should also be a deeper scrutiny of the transactions undertaken by IL&FS over the years and their adherence to corporate governance standards. Andy Mukherjee has an excellent starting point here. Ravi Parthasarathy's $3.65 m (INR 25 Cr) take home salary last year is only the latest example of sordid ethics in corporate India.

8. The US enjoys its "exorbitant privilege" in being able to run up deficits in perpetuity and fund it at lower cost than others. While that situation is likely to continue well into the future, some recent trends should a matter of some concern.
Dollar's share of global foreign exchange reserves slid from 66% to 62% since 2014, and that too at a time when the dollar has strengthened by 4.52%.

9. Finally, Bhanuj Kappal has an excellent story in Mint about the problems facing the 30,000 resettled illegal slum residents of Mumbai's Mahul Prakalpgrast Samiti (MMRDA Colony). The colony situated in the outskirts amidst polluting chemical and other industrial factories has become a toxic "human dumping ground".

This is so representative of similar slum rehabilitation programs across Indian cities. Relocate residents far away from their livelihoods (after all large vacant tracts are likely to be available only in the suburbs), poor quality of housing construction by government agencies, colonies with any basic community facilities (schools, hospitals etc) and limited transport connectivity. 

Thursday, September 27, 2018

The out-sized importance of basic management practices

There is perhaps no branch of development economics research which has a richer systematic body of rigorous evidence than the new empirical economics of management.

Rafaella Sadun, Nicholas Bloom, and John Van Reenan examined the management practices of over 12000 firms across 34 countries and found that firms with superior core management practices are "more profitable, grow faster, and are less likely to die", these practices accounts for "a large fraction of performance differences across firms and countries", and they are "incredibly hard to copy". They rated companies on their use of 18 practices in four areas - operations management (flow of information across and within functions), performance monitoring, target setting, and talent management. They write,
In MBA programs, students are taught that companies can’t expect to compete on the basis of internal managerial competencies because they’re just too easy to copy. Operational effectiveness—doing the same thing as other companies but doing it exceptionally well—is not a path to sustainable advantage in the competitive universe. To stay ahead, the thinking goes, a company must stake out a distinctive strategic position—doing something different than its rivals. This is what the C-suite should focus on, leaving middle and lower-level managers to handle the nuts and bolts of managing the organization and executing plans... but our research shows that simple managerial competence is more important—and less imitable... There are vast differences in how well companies execute basic tasks like setting targets and grooming talent, and those differences matter: Firms with strong managerial processes perform significantly better on high-level metrics such as productivity, profitability, growth, and longevity. In addition, the differences in the quality of those processes—and in performance—persist over time, suggesting that competent management is not easy to replicate... if a firm can’t get the operational basics right, it doesn’t matter how brilliant its strategy is. On the other hand, if firms have sound fundamental management practices, they can build on them, developing more-sophisticated capabilities—such as data analytics, evidence-based decision making, and cross-functional communication—that are essential to success in uncertain, volatile industries. Achieving managerial competence takes effort, though: It requires sizable investments in people and processes throughout good times and bad. These investments, we argue, represent a major barrier to imitation... According to our estimates, the costs involved in improving management practices are as high as those associated with capital investments such as buildings and equipment...
Data has led us to two main findings: First, achieving operational excellence is still a massive challenge for many organizations. Even well-informed and well-structured companies often struggle with it. This is true across countries and industries—and in spite of the fact that many of the managerial processes we studied are well known. The dispersion of management scores across firms was wide. Big differences across countries were evident, but a major fraction of the variation (approximately 60%) was actually within countries. The discrepancies were substantial even within rich countries like the United States... These differences show up within companies, too... variations in management practices inside firms across their plants accounted for about one-third of total variations across all plant locations... Even the biggest and most successful firms typically fail to implement best practices throughout the whole organization. Some parts of it are effectively managed, but other parts struggle.

Our second major finding was that the large, persistent gaps in basic managerial practices we documented were associated with large, persistent differences in firm performance... our data shows that better-managed firms are more profitable, grow faster, and are less likely to die. Indeed, moving a firm from the worst 10% to the best 10% of management practices is associated with a $15 million increase in profits, 25% faster annual growth, and 75% higher productivity. Better-managed firms also spend 10 times as much on R&D and increase their patenting by a factor of 10 as well—which suggests that they’re not sacrificing innovation to efficiency. They also attract more talented employees and foster better worker well-being. These patterns were evident in all countries and industries.
They attribute the failure to adopt these simple management practices to false (or excessively optimistic) perceptions about their own operational efficiency, insufficiently democratic/collaborative governance structure, poor employee skill levels, and organisational politics and culture.

Going forward, as developing countries seek to increase their productivity, I am inclined to believe that improvements in management practices may be at least as important as technological advances.

This applies as much to management of businesses as to administration in government. The weak capacity of public systems is well acknowledged. Its contributors include chronic resource scarcity, politicisation and corruption, and apathy and complacency. But a less noticed fact is deficient management or administrative capacity at the leadership levels. 

Like with private businesses, certain basic management practices can be high value in weak state capacity and resource constrained public systems. Foremost are prioritisation, identifying and nurturing competent and committed sub-ordinates, work delegation, fixing accountability, and systems for the diligent follow-up on the prioritised issues. One could add a few other practices like time management. These are, on the face of it, simple administrative practices, but they are very scarce. 

While there is no empirical evidence to validate, there are several anecdotal examples that attests to its importance and scarcity. For example, it is common place that offices which had been floundering for long occasionally become abruptly functional and energised when certain new officers take charge. In most such cases, the change can be traced back to some of the aforementioned practices and culture introduced by the particular new official. 

This carries relevance for those designing training programs for government managers. It may generate more bang for the buck and strengthen state capacity if these trainings focus on basic administrative practices that have the potential to significantly impact efficiency than on say, substantive content. 

Monday, September 24, 2018

Hedge Funds and Currency Volatility

Gillian Tett points to this JP Morgan Chase research that appears to point to hedge funds being a major contributor to currency market volatility.

The Bank researchers used JP Morgan's database of 400 m institutional investor transactions to isolate 120,000 spot and forward forex trades conducted just before and after the unexpected 2015 Swiss central bank decision to abandon its floor for the Swiss franc, the 2016 Brexit vote outcome, and Donald Trump's US election victory. She writes,
In normal times, JPMorgan cuts an average of $500m in trades each day with hedge funds that involve the Mexican peso and dollar, and some $2.8bn of sterling-dollar trades and $900m for the Swiss franc and euro. Trades with other banks and asset manages are similar in size. But just after the Swiss bank, Brexit and Trump shocks, daily trading volumes by hedge funds more than tripled. Bank trading volumes also rose sharply after the Swiss and Brexit events (but not after the Trump victory). This might imply that it was the hedge funds that pushed the currencies around. Not entirely so. Most funds did buy francs after the Swiss bank announcement. But they bought and sold sterling after Brexit, trading on opposing sides on a massive scale. So too after the Trump shock, although there were more hedge fund dollar sales. This is striking. But what is more important is that the volume of trades cut by pension funds, insurance companies, public investment groups and corporate treasury departments did not rise at all after the shocks. These groups only started to shift risk much later, long after prices had been reset... this pattern has important implications. Traditionally, banks were the main providers of liquidity in foreign exchange markets. But since 2008, they have reduced this role because of post-crisis regulatory reforms. Regulators had hoped that other long-term holdings of capital would start to fill that gap, supplying badly needed liquidity that could stabilise markets when a crunch hit. But the data suggest this is not happening. Most institutions are sitting on their hands in a crisis instead... the unpalatable truth is that it is they (hedge funds) who often keep markets trading in a crunch.
Talk about efficient financial markets, the belief that markets take care of themselves, and that market regulation should be minimal!

General Vs particular in policy making

Apurva Bamezai and MR Sharan have an excellent follow-up to Jean Dreze's brilliant articulation of the limitations of economists to offer good policy advice.

They draw attention to the limitations of quantitative techniques in studying particular effects (in specific localities or on specific categories of population), as opposed to general (or aggregate and average) effects, which are important to understand distributional consequences. Similarly, it is not much useful to study mechanisms of impact. They argue that centralised policy making privileges evidence on average or general effects. They write,
Insofar as we have centralised policymaking and an over-burdened policy apparatus, the ‘general’ will be privileged over the ‘particular’ and development economists will continue to generate the kind of evidence that influences policy. However, this does not preclude the need for much greater State engagement with a wider set of researchers, cutting across disciplines in social sciences. This is particularly true for researching impact of policies on poor, vulnerable, and marginalised groups. Furthermore, policy design affects different groups differently and it is imperative that the State listens more (thereby also diversifying its evidence base) to citizens, civil society groups, social movements, and NGOs. Plugging gaps in policy design and implementation cannot be just a product of technocratic thinking and economic efficiency, especially in a democracy.
Agree. But there is more to this than these limitations. 

There is a fundamental difference between policy making and policy implementation. While policy is made in the aggregate or at the general level, successful policy implementation (in a diverse country) demands attention to the specific context and its particular details. This, in turn, demands that policy be made by according adequate flexibility in implementation. In simple terms, since implementation has to be tailored to fit the context, policy has to be offer the greatest flexibility consistent with an acceptable degree of control over the implementation and the realisation of objectives. 

But the point about implementation flexibility raises the practical issue of state capacity. Customisation to meet contextual requirements, howsoever marginal, demands significant quality of engagement by officials at that level. Further, it also requires credible enough monitoring metrics and system for officials at various higher levels. Unfortunately, all these are difficult to realise in the short-run, maybe even the medium-term of a particular implementation. In its absence, tinkering with implementation design is more likely to leave us worse off than with an one-size-fits-all implementation.

This is the Catch 22 situation that policy makers face. 

Sunday, September 23, 2018

A graphical look at the post-Lehman world economic trends

AnanthJohn Authers, and JP Morgan have nice summaries of the post-Lehman events and trends. 

The defining feature of the post-Lehman decade has been the zero-bound interest rates, which is still in the negative territory in a few cases.
The central banks embarked on an extraordinary expansion of their balance sheet, buying up more than $10 trillion in bonds. And it remains at historic highs
The ultra-low rates penalised savers, benefited borrowers and corporates, boosted asset prices, and increased the top 1 percent's share of global wealth by 10 percentage points.
One of the most important consequences of the extraordinary monetary accommodation has been a surge in global debt burden. Global debt has surged from $84 trillion at the turn of the century to $173 trillion at the time of the 2008 crisis, and $250 trillion today.
Non-financial corporations (77% of GDP in 2008 to 90% today), governments, and China have been the biggest offenders. Consider this,
China is now saddled with almost $40 trillion of debt, compared with less than $30 trillion for all other emerging markets combined. In 2008, the group had $16 trillion of debt, while China only carried $7 trillion. 
Excluding financial corporations, it was $169 trillion in H1 2017
Non-financial corporate bonds outstanding have increased 2.7 times over the past decade to $11.7 trillion.
Governments too have been the big offenders,
The US government has been leading from the front,
The $15.3 trillion U.S. Treasury market, the world’s biggest bond market... has tripled in size since August 2008. For context, in the prior 10-year period, it grew by “only” $1.5 trillion, even amid the beginning of the Iraq War. The totality of U.S. federal debt now makes up more than 100 percent of America’s gross domestic product. 
Student loans have exploded in the US,
The issuance of leveraged, covenant-lite loans and junk bonds by US non-financial corporates has doubled.
Even as wages have remained stagnant, corporate profits have surged,
Irrespective of Dodd-Frank legislation and creation of resolution mechanisms for systematic winding down of failed institutions, markets seem to still believe in the too-big-to-fail (TBTF) subsidy. As a reflection, the difference between the interest rate differential in the borrowings of the parent financial institution and its banking unit has remained stable. Clearly the markets believe that in case of a systemic crisis, the parent units will get bailed out along with the banking units.
The remarkable growth of Chinese banks to top the global banking table adds more to the ever growing concerns about the next crisis being made in China.
A rare encouraging feature has been the reversal of financial globalisation and step fall in global cross-border flows.
Global bonds held by non-bank investors as a percentage of their total holdings of equities/bonds/M2 has risen sharply post-Lehman, reflecting risk reduction, regulatory changes, and demographic shifts.
As to real GDP growth, the US economy may appear to have rebound the most.
But once controlled for working age population, Japan has been the undoubted best performer since the crisis in terms of real output per working age person...
... and in terms of employment creation.

Wednesday, September 19, 2018

The misleading narratives of our time

Narratives define our lives. Even when they are completely divorced off reality or any evidence, they exercise vice like grip on our imagination. In fact, all of us, howsoever smart, are captives of narratives.  

Consider some of the enduring narratives of our times. 

People on welfare prefer to stay on and not search for work, thereby necessitating tight restrictions on welfare amounts and duration. Market dynamics ensures efficient allocation of returns on economic activity between labour and capital. Higher minimum wages lead to businesses hiring less or relocating or even closing down. 

Higher taxes discourage people from working and businesses from investing. Higher taxes force businesses to relocate. Capital gains taxes should be lower than income taxes so as to avoid double taxation. Soaring wage compensation is just desserts for superstar executives, attracting whom is essential to compete in the market. 

Large companies are also the biggest job creators. The vibrancy of economic activity is dependent on the economy's large companies. Industrial policy is about providing input subsidies and fiscal concessions - this is what attracts businesses. Foreign direct investment leads to technology transfers, is associated with manufacturing activity, results in large job creation, and is therefore critical to economic growth of developing countries.   

The main role of financial markets is to intermediate capital for economic activities. Financial markets facilitate efficient allocation of resources between savers and borrowers. Capital markets are the most efficient part of the financial markets. Boring banking is inefficient and lazy, even perhaps an example of rent-seeking. Stock markets can be made more efficient by financial engineering and high frequency trading. Stock prices are a fair reflection of life-cycle valuation of the business. Sophisticated financial engineering is productivity enhancing and creates value. Hedge funds and private equity firms contribute to more efficient financial intermediation. What is good for Wall Street is good for Main Street!

Public private partnerships (PPPs) are the most efficient and cost-effective approach to managing infrastructure projects. Private sector delivers more value for money with managing infrastructure projects than the public sector comparators. Infrastructure funds and private equity investments bring in high quality management practices to improve the efficiency of large and long-term infrastructure projects.   

Business competitiveness is about containing costs, especially worker wages, almost to the exclusion of all else, including retaining workers or externalising internal costs. Higher business profitability and surpluses are good for the economy since companies will re-invest them to create more growth and jobs. Higher interest rates discourage businesses from investing. Government regulation of any kind is bad, unless there is a clear market failure and the costs-benefits balance from that regulation is favourable. Mergers and acquisitions help businesses leverage economies of scale and scope to increase competitiveness and maximise profits. Maximising shareholder value should be the objective of businesses.

Digital economy companies are unlocking more value than the externalities they create. The business structure in industries with network effects have to be oligopolistic - therefore the inevitability of behemoth superstar monopolies like Facebook, Google, Amazon etc. The superstar technology companies are the touchstone for innovation. They are led and populated by nerds who have created fantastic products and services on their own.

It is markets, and not governments, who lead on innovation and cutting edge technologies. Most of the great new technologies have   been the outcome of private entrepreneurship and initiative. Most the global research and development (R&D) work takes place in private companies and R&D spending comes from the private sector. The leading companies in their areas, especially in technology and pharmaceutical sectors, invest heavily in R&D so as to stay ahead of the market. The prevailing intellectual property (IP) rights protections are necessary to promote investments in R&D. Innovative technologies from the private sector are the result of IP protections.

Finally governments are invariably inefficient, corrupt, and unproductive. Government officials are slothful, inept, apathetic, and unimaginative. Governments, in general, are sand on the wheels of market enterprise. Governments should be involved only in areas where markets cannot work or till markets become mature enough. Governments need to step aside to let markets unlock value and realise the full potential. 

Where is the evidence for the unqualified embrace of any of these narratives?

Some of these narratives do not stand even a cursory test of empirical scrutiny. Most of them stand on weak ground when faced with empirical evidence. In some cases, the evidence is too confusing to form any definitive opinion. In some other cases, like with executive compensation, the response function may well be a reverse U-shaped curve - higher compensation upto a certain level is good, but it starts becoming counter-productive beyond a certain level. We know about the famous Laffer curve in taxation, though we have no evidence about its actual shape for different contexts - when the rising curve turns around.  

Never mind all these bitter realities, these narratives form the basis for modern capitalist economies. Ideologies are formulated, opinions are formed, policies are made, and behaviours are shaped based on these narratives. These narratives exercise a form of hegemony over the society's collective consciousness.

Accomplished economists speak with great certitude about each of these without anything remotely close to the standard of evidence required to do so, one which they themselves aggressively promote and accuse governments and others of not adhering to. Ideologues and opinion makers confidently follow suit. Newspapers quote all of them and peddle them as definitive. Policies get made. Narratives get entrenched. These become conventional wisdom.

This blog itself has posts, scattered across, on most of these narratives, outlining the evidence to the contrary. The incisive Ha-Joon Chang has outlined several of these with illustrations here

US-China trade facts of the day

As the trade-war intensifies, highlighting the complex trade-offs involved, the Times writes,
The Dartmouth economist Douglas Irwin estimated 140,000 American workers make steel, while 6.5 million workers make products that include steel.
The Obama administration imposed tariffs on Chinese car and light-truck tire makers in 2009-12, and 2015 onwards for five years. The result,
Imports of Chinese tires for sale to American consumers fell to 12.3 million in 2017 from 43 million in 2009, according to Modern Tire Dealer, a trade magazine.
On Chinese FDI into the US,
Amid rising tensions, Chinese direct investment in the United States declined to $2 billion during the first half of 2018 from $45.6 billion in 2016, according to Rhodium Group, a consultancy.
But here is China's problem
China doesn’t import nearly enough from the United States to target $200 billion in American goods — let alone the additional $267 billion in Chinese goods that Mr. Trump has threatened to target... Chinese officials “are generally confused,” said Raúl Hinojosa-Ojeda, a trade specialist at the University of California, Los Angeles.. “They don’t know what to do,” he added. “They worry that the tit-for-tat model is playing into Trump’s hands.”... But China’s leaders feel they can’t back down. They have presented the trade war as part of a broader effort by the United States to contain China’s rise. The Chinese public could see any effort to soothe tensions as capitulation.
And this is even more disturbing for China,
The tariffs may be here to stay. Mr. Trump is suffering from weak approval ratings and could lose influence in congressional elections in November. But while Democrats have opposed most of his agenda, many have supported his attacks on trade with China. Even if Mr. Trump leaves office in two years, there is little guarantee that his China trade policies will be changed.

Sunday, September 16, 2018

The balance sheet of the global financial crisis

An excellent summary of the balance sheet of the global financial crisis from Nelson Schwartz in the Times,
The financial crisis didn’t just kill the dream of getting rich from your day job. It also put an end to a fundamental belief of the middle class: that owning a home was always a good idea because prices moved in only one direction — up... When the bubble burst, the bedrock investment for many families was wiped out by a combination of falling home values and too much debt. A decade after this debacle, the typical middle-class family’s net worth is still more than $40,000 below where it was in 2007, according to the Federal Reserve. The damage done to the middle-class psyche is impossible to price, of course, but no one doubts that it was vast.

Banks were hurt, too, but aside from the collapse of Lehman Brothers, the pain proved transitory. Bankers themselves were never punished for their sins. In one form or another — the Troubled Asset Relief Program, quantitative easing, the Fed’s discount window — the financial sector was supported in spectacular fashion.
Like the bankers, shareholders and investors were also bailed out. By cutting interest rates to near zero and pumping trillions — yes, you read that right — into the economy, the Federal Reserve essentially put a trampoline under the stock market. The subsequent bounce produced a windfall, but only for a limited group of beneficiaries. Only about half of American households have any exposure to the stock market, including 401(k)’s and retirement plans, and ownership of the shares of individual companies is clustered among upper-income families.
For homeowners, there wasn’t much of a rescue package from Washington, and eight million succumbed to foreclosure. Sometimes, eviction came in the form of marshals with court orders; in other cases, families quietly handed over the keys to the bank and just walked away. Although home prices in hot markets have fully recovered, many homeowners are still underwater in the worst-hit states like Florida, Arizona and Nevada. Meanwhile, more Americans are renting and have little prospect of ever owning a home.
Worsening the picture, the post-crisis era has been marked by an increased disparity in wealth between white, Hispanic and African-American members of the middle class. That’s according to an analysis of Fed data by the Pew Research Center, which found that families in the latter two groups were more dependent on housing as their principal form of investment. Not only were both minority groups harder hit by foreclosures, but Hispanics were also twice as likely as other Americans to be living in Sun Belt states where the housing crash was most severe.

In 2016, net worth among white middle-income families was 19 percent below 2007 levels, adjusted for inflation. But among blacks, it was down 40 percent, and Hispanics saw a drop of 46 percent. For many, old-fashioned hard work has simply not been a viable path out of this hole. After unemployment peaked in the fall of 2009, it took years for joblessness to return to pre-recession levels. Slack in the labor market left the employed and unemployed alike with little leverage to demand raises, even as corporate profits surged... A recent study by the Federal Reserve Bank of St. Louis found that while all birth cohorts lost wealth during the Great Recession, Americans born in the 1980s were at the “greatest risk for becoming a lost generation for wealth accumulation.”...
Maybe it was inevitable that when half the population watches its wages stagnate while the other half gets rich in the market, the result is President Donald Trump and Brexit.
By the way, as an assessment of the post-crisis response, there could not have been anything more stark than this by Neil Irwin, and this by Peter Doyle. The former was a close observer of the response whereas the latter was a participant in the response. In particular, their respective assessments of the recent Brookings conference that brought together the leading crisis policy makers. 

Neil Irwin describes the post-crisis response as "the high-water mark for a mold of centrist, technocratic policymaking that seeks to tweak and nudge existing institutions toward better outcomes". His enthusiastic paean to the "technocrats" like Tim Geithner, Hank Paulson, and Ben Bernanke, without any reference to counterfactual situations nor the issues raised by his own colleague, Nelson Schwartz in the above-referenced article, is representative of the hegemony and rot among opinion makers on the liberal side. Doyle raises several concerns, none of which merit even a cursory mention for Irwin. Nor any mention of the consequences of the post-crisis response, nor the fact that the so-called recovery is confined only to the top 10% and has barely touched the rest, nor even the toxic debt legacy fuelled by the extraordinarily long period of low interest rates. 

This and this present alternative perspectives just on the Lehman decision. 

It is not so much the specifics of the policies initiated in the immediate aftermath of the crisis that should be the matter for debate. It is about the manner in which those policies were formulated and the stakeholder consultations that went into it. It is about those who were heard and who were not, those whose interests were prioritised and those whose interests were marginalised. It is about those policies which were not pursued with same fervour or not initiated at all. It is about the continuation of those policies well beyond reasonable limits, both in scale and in time duration. It is about the consequences of those actions that has left the financial markets more concentrated and arguably at least as unstable as before the crisis. It is about the failure to entrench the learnings from the crisis and prevent a slip-back to the same ideologies and policies that led to the crisis. It is about how the post-crisis response policies have set the stage for the next financial crisis. It is about how the same "technocrats" contributed to each of the aforementioned failings. In the absence of a reference to any of these, Irwin's qualification of the post-crisis policy responses as a "success" is stunning!

Employed but poor in America

A superb long form by Matthew Desmond in the Times on the paradox of poverty amidst high employment rate in the US. Sample this,
Over the last 40 years, the economy has expanded and corporate profits have risen, but real wages have remained flat for workers without a college education. Since 1973, American productivity has increased by 77 percent, while hourly pay has grown by only 12 percent. If the federal minimum wage tracked productivity, it would be more than $20 an hour, not today’s poverty wage of $7.25. American workers are being shut out of the profits they are helping to generate. The decline of unions is a big reason. During the 20th century, inequality in America decreased when unionization increased, but economic transformations and political attacks have crippled organized labor, emboldening corporate interests and disempowering the rank and file... Today, 41.7 million laborers — nearly a third of the American work force — earn less than $12 an hour, and almost none of their employers offer health insurance.
The Bureau of Labor Statistics defines a “working poor” person as someone below the poverty line who spent at least half the year either working or looking for employment. In 2016, there were roughly 7.6 million Americans who fell into this category. Most working poor people are over 35, while fewer than five in 100 are between the ages of 16 and 19. In other words, the working poor are not primarily teenagers bagging groceries or scooping ice cream in paper hats. They are adults — and often parents — wiping down hotel showers and toilets, taking food orders and bussing tables, eviscerating chickens at meat-processing plants, minding children at 24-hour day care centers, picking berries, emptying trash cans, stacking grocery shelves at midnight, driving taxis and Ubers, answering customer-service hotlines, smoothing hot asphalt on freeways, teaching community-college students as adjunct professors and, yes, bagging groceries and scooping ice cream in paper hats. America prides itself on being the country of economic mobility, a place where your station in life is limited only by your ambition and grit. But changes in the labor market have shrunk the already slim odds of launching yourself from the mailroom to the boardroom.
Worse still, this state of affairs has an intellectual rationalisation, that "indolence and poverty go hand in hand", we need innovative approaches to address poverty, and so on,
Ask us why the poor are poor, and we have a response quick at the ready, grasping for this palliative of explanation... How can a country with such a high poverty rate — higher than those in Latvia, Greece, Poland, Ireland and all other member countries of the Organization for Economic Cooperation and Development — lay claim to being the greatest on earth?... But rather than hold itself accountable, America reverses roles by blaming the poor for their own miseries... Poor people lacked work ethic, they told me, or maybe a strong backbone or a commitment to a better life...
Here is the blueprint. First, valorize work as the ticket out of poverty, and debase caregiving as not work. Look at a single mother without a formal job, and say she is not working; spot one working part time and demand she work more. Transform love into laziness. Next, force the poor to log more hours in a labor market that treats them as expendables. Rest assured that you can pay them little and deny them sick time and health insurance because the American taxpayer will step in, subsidizing programs like the earned-income tax credit and food stamps on which your work force will rely. Watch welfare spending increase while the poverty rate stagnates because, well, you are hoarding profits. When that happens, skirt responsibility by blaming the safety net itself. From there, politicians will invent new ways of denying families relief, like slapping unrealistic work requirements on aid for the poor.
Democrats may scoff at Republicans’ work requirements, but they have yet to challenge the dominant conception of poverty that feeds such meanspirited politics. Instead of offering a counternarrative to America’s moral trope of deservedness, liberals have generally submitted to it, perhaps even embraced it, figuring that the public will not support aid that doesn’t demand that the poor subject themselves to the low-paying jobs now available to them... Because liberals have allowed conservatives to set the terms of the poverty debate, they find themselves arguing about radical solutions that imagine either a fully employed nation (like a jobs guarantee) or a postwork society (like a universal basic income). Neither plan has the faintest hope of being actually implemented nationwide anytime soon, which means neither is any good to Vanessa and millions like her. When so much attention is spent on far-off, utopian solutions, we neglect the importance of the poverty fixes we already have. Safety-net programs that help families confront food insecurity, housing unaffordability and unemployment spells lift tens of millions of people above the poverty line each year. By itself, SNAP annually pulls over eight million people out of poverty. According to a 2015 study, without federal tax benefits and transfers, the number of Americans living in deep poverty (half below the poverty threshold) would jump from 5 percent to almost 19 percent. Effective social-mobility programs should be championed, expanded and stripped of draconian work requirements.
While Washington continues to require more of vulnerable workers, it has required little from employers in the form of living wages or job security, creating a labor market in which the biggest disincentive to work is not welfare but the lousy jobs that are available. Judging from the current state of the nation’s poverty agenda, it appears that most people creating federal and state policy don’t know many people like Vanessa. “Half of the people in City Hall don’t even live in Trenton,” Vanessa once told me, flustered. “They don’t even know what goes on here.” Meanwhile, this is the richest Congress on record, with one in 13 members belonging to the top 1 percent. From such a high perch, poverty appears a smaller problem, something less gutting, and work appears a bigger solution, something more gratifying. But when we shrink the problem, the solution shrinks with it; when small solutions are applied to a huge problem, they don’t work; and when weak antipoverty initiatives don’t work, many throw up their hands and argue that we should stop tossing money at the problem altogether. Cheap solutions only cheapen the problem... “Study hard, stick to it, dream big and you will be successful” — had been internalized as a theory of life. We need a new language for talking about poverty. “Nobody who works should be poor,” we say. That’s not good enough. Nobody in America should be poor, period. 
Those searching for explanations for the rise of populism and responses to it need to look no far than read this article and internalise its message.

Thursday, September 13, 2018

Midweek reading links

1. Arguably the biggest suffering caused by the sub-prime mortgage meltdown involved the 7.8 m home foreclosures during the 2007-16 period. While the TBTF firms got bailed out, households got foreclosed out!
And who purchased them? Sample this
Since the crisis Blackstone has marched into markets that others have been forced to vacate. Its credit arm finances businesses that would once have borrowed from Wall Street banks. But nothing underscores Mr Schwarzman’s rise more clearly than the portfolio of more than 80,000 single-family homes that have made his firm one of America’s biggest private landlords. With so many people unable to get on the property ladder, Blackstone reckoned the rental market would be highly lucrative. Beginning in 2012, the firm dispatched representatives to buy houses in fast-growing metropolitan areas across the nation, including southern California, Chicago and Atlanta. About one-third of the properties were bought in foreclosure auctions, typically without anyone even inspecting them first. The result of that effort is a company called Invitation Homes that floated on the stock market last year. Today it is worth $21.6bn including debt, buoyed by a 35 per cent increase in US house prices since the start of 2013 and an unyielding approach that few private landlords can match.
People lose their houses and with it their hard-earned life-time savings. Hedge funds, benefiting from the extraordinary monetary accommodation, pocket these houses for fire-sale prices!

2 Interesting take on Trump by Peter Beinart who argues that Trump's supporters fear the corruption of American traditional identity, not American law. In the context of a murder in Iowa of a white woman by a Latino immigrant,

In a forthcoming book titled How Fascism Works, the Yale philosophy professor Jason Stanley makes an intriguing claim. “Corruption, to the fascist politician,” he suggests, “is really about the corruption of purity rather than of the law. Officially, the fascist politician’s denunciations of corruption sound like a denunciation of political corruption. But such talk is intended to evoke corruption in the sense of the usurpation of the traditional order.”... When Trump instructed Cohen to pay off women with whom he’d had affairs, he may have been violating the law. But he was upholding traditional gender and class hierarchies. Since time immemorial, powerful men have been cheating on their wives and using their power to evade the consequences. The Iowa murder, by contrast, signifies the inversion—the corruption—of that “traditional order.” Throughout American history, few notions have been as sacrosanct as the belief that white women must be protected from nonwhite men. By allegedly murdering Tibbetts, Rivera did not merely violate the law. He did something more subversive: He violated America’s traditional racial and sexual norms.

Once you grasp that for Trump and many of his supporters, corruption means less the violation of law than the violation of established hierarchies, their behavior makes more sense... Why were Trump’s supporters so convinced that Clinton was the more corrupt candidate even as reporters uncovered far more damning evidence about Trump’s foundation than they did about Clinton’s? Likely because Clinton’s candidacy threatened traditional gender roles. For many Americans, female ambition—especially in service of a feminist agenda—in and of itself represents a form of corruption... For many Republicans, Trump remains uncorrupt—indeed, anticorrupt—because what they fear most isn’t the corruption of American law; it’s the corruption of America’s traditional identity. And in the struggle against that form of corruption—the kind embodied by Cristhian Rivera—Trump isn’t the problem. He’s the solution.
3.Tirthankar Roy draws attention to the serious limitations of historical economic data.
Maddison’s work shows growing inequality in average incomes between countries. The data is – to put it mildly – bad data. Look closely, you will see that the average income of India was USD533 for 1820-1870. Year after year for 50 years Indians earned exactly USD533 on average (and exactly USD550 for 320 years before that). These numbers contain no worthwhile information about Indian history. Such is the quality of the statistics on which the divergence debate has so far been based.
4. Fascinating essay on the rise of India's Rs 23 trillion mutual funds industry which today attracts Rs 75 bn every month.
5. FT has a nice story on the emergence of a united US-Japan-US front in the trade war with China and how it is starting to bite in Beijing.

In recent months the EU and Japan have joined forces with the US in WTO complaints against “forced technology transfers” in China through mandatory joint venture structures with local partners... Tokyo has been pleasantly surprised by a Beijing-initiated rapprochement over the past year. According to one Japanese official, a recent spate of Chinese overtures are all “thanks to Trump”. The official adds: “Trump’s trade policies have been influencing China’s diplomatic stance.” ... “The Chinese should be worried about Trump,” says Steve Bannon, Mr Trump’s former political adviser. “They’ve never had to confront anything like this.”... Wang Chong at the Charhar Institute, a Beijing-based think-tank, says China’s current problem in the US is not just related to Mr Trump: “Both the Republican and Democratic parties have reached a consensus that they should try to curb China’s development.”

... the only trade deal he would accept from China is one Mr Xi could not possibly offer, because it would include concessions on how the party manages everything from industrial policy to state-owned enterprises and the renminbi. Others argue that Mr Trump’s ideal outcome is in fact no deal at all, so he can implement long-term tariffs on all Chinese exports to the US in a bid to bring about a radical overhaul of global supply chains. “People in the administration now understand that Trump may be flexible on so much stuff, but the hill he’s willing to die on is China,” says Mr Bannon. “Trump’s focus is shifting the supply chains out of China.”
Donald Trump gets eviscerated in the mainstream media for pretty much everything he does. And rightly too in many cases. But he deserves some applause here.

Not too many people will disagree that China resorts to extremely unfair trade practices, those which hurts manufacturers in other developing countries as much as in the US. In a fair world the Chinese actions should have long since been called to account. No American President who would have represented the mainstream establishment would have had the resolve and courage to do so. Trump has called the bluff and, in his own bluster-filled way, shaken up the entrenched equilibrium. 

6. The popular reaction to Serena Williams' abhorrent antics at the just concluded US Open Women's Final is a great illustration of the duplicity associated with the liberals. Serena has made a mockery of the existing rules of the game, behaved disgracefully (and has a track record of doing so),  and like the classic opportunist taken shelter behind race and sex to justify her actions. The referee has done what he was supposed to do as per the rule book and has a track record of doing so. And what do we get from the liberal establishment? Serena is portrayed as the victim and Carlos Ramos as the aggressor, in fact as a straw man who represents the racist and sexist establishment.

Evidently gender and race are very politically sensitive subjects. It is a mark of a liberal to be always on the right side of any gender and race debate. Serena Williams, also due to the politics surrounding her, ticks both boxes. So, it is almost suicidal to be seen to be taking on Serena, whatever the provocations. Liberals, therefore, rallied to her support. 

Add to the sex and race dimension, Serena is also a powerful persona in the tennis world. Besides being the GOAT, she also wields enormous influence among tennis administrators, sponsors, media, and players associations. Add everything in and the strong reactions in her favour is unsurprising. 

Martina Navratilova is among the very few sane voices trying to put matters in perspective.

This also highlights the contrast between the on-field governance of tennis and cricket. A tantrum like this is just impossible. Just remember the flak Steve Smith got with his "brain fade" moment when he apparently turned back to get dressing room reaction for an on-field review.

7. As emerging economies face turmoil, Times has a graphic that captures the external vulnerability, in terms of external debt to GDP ratio for the major emerging market economies.

8. As its new CEO, David Solomon, prepares to take charge, Times carries the story of sensational leak alleging unethical practices by a Goldman Sachs Partner, James C Katzman. Katzman, while leading Goldman's US West Coast M&A practice, complained to the bank's whistle-blower hotline about repeated attempts to obtain and then share confidential client information and hire a customer's child. Senior Goldman bankers apparently tried to "extract confidential client information from him that they intended to share with other Goldman customers or otherwise use for the bank’s benefit".

But the law firm managing the hotline, instead of independently investigating and presenting it before the Company Board, referred it to the Company's General Counsel and quietly buried it. Worse still, insiders, including the incoming CEO, tried to dissuade Katzman, who resigned from the firm, from pressing forward his complaints.

9. Finally, the Eritrea-Ethiopia border is open for trade after 20 years following the bitter separation of the two countries. Sample this,
Eritrea gained its independence from Ethiopia in the early 1990s, and war broke out later that decade, locking the two nations in unyielding hostilities that left more than 80,000 people dead. The turning point came in June, when Mr. Abiy announced that Ethiopia would “fully accept and implement” a peace agreement that was signed in 2000 but never honored. The formal deal was signed weeks later. Few people expected such a quick turn of events. Embassies have reopened, telephone lines have been restored and commercial flights between the capitals have resumed. An Ethiopian commercial ship docked in an Eritrean port last Wednesday — the first to do so in more than two decades.
Is this the most dramatic reversal of cross-border relations between countries in recent times?

Wednesday, September 12, 2018

More thoughts on evidence generation

I thought it may be useful to analyse this paper which does an RCT (with three treatment arms) to evaluate the efficacy of a mobile App that can track payment releases in the Government of India's National Rural Employment Guarantee Scheme (NREGS).

For those unaware, as part of the program, rural labour are guaranteed a minimum 100 days of work every year by deploying them to build community assets. The program's execution consists of village level officials maintaining muster rolls of workers and making weekly/fortnightly payments directly to the worker's bank accounts. The program is hobbled by delays in payment releases to the bank accounts (due to delays in recording of work, updation of muster rolls, approvals of muster rolls etc). The immediate supervisors of the village level officials are those at the block level, who, in turn, are monitored by those at the district level.

The 3-arm RCT involved providing a payment tracking App, PayDash, to only the block level supervisors, only the district level supervisors, and to officials at both levels. It found that only the last option was effective in significantly reducing payment receipt delays.

Did we at all need an RCT to know this? Isn't it evident from the well accepted theories of management? How has this research moved the body of practically relevant knowledge on the use of such applications to improve state capacity in any way? The authors make this claim,
we have limited empirical evidence on the relative importance of asymmetric information at different levels of the hierarchy in affecting bureaucratic performance.
Do we need "empirical evidence" on this? Don't we have enough evidence from theories of organisational behaviour and management to validate the hypothesis? Is that evidence inferior in a meaningful way?

Instead, shouldn't the focus of evidence generation be on figuring out the most effective deployment dynamics of PayDash - its Dashboard interface, the periodicity and nature of reviews by block and district level officials, nature of integration of this information with performance management of officials etc? All of these are amenable to evidence generation, but not of the kind that international development community is associated with!

We need another type of evidence generation - tight operational feedback loops and close integration of the learnings into the operational processes. Coupled with an eye on capturing and monitoring credible enough proxies of impact.

Tuesday, September 11, 2018

Superpower China?

Whether we like it or not, only the semantically finicky will deny that China is not already a global superpower. In this context, Bloomberg explores China's economic, military, and soft power projection capabilities. 

China is catching up fast militarily...
... and economically too.
This maritime supremacy map of the Indian Ocean is important given that the Ocean may well turn out to be one of the major battlegrounds for the new world order.  

Even with potential slips-ups due to a debt implosion, China will most likely catch up economically and militarily, may be not in terms of parity but reasonably close enough, with the US in the medium-term. However it is very unlikely that China will come anywhere close to the US in terms of its soft power projection capabilities. 

And that, in the final analysis, may well be what keeps China from ever scaling the heights America reached with global influence and acceptability. In fact, China's aggressive foreign policy actions involving all its own neighbours in recent years may well have been the last nail on its ambitions to be seen as an acceptable a super power like the US. And the Hambantota-type legacy of its Belt and Road Initiative will, in the medium-term, most likely invite a backlash which even the well-oiled Chinese foreign policy machinery and its deep pockets will struggle to stave off. The decision by the Malaysian Prime Minister Mahathir Mohammed to put on hold large BRI projects and warning about a "new version of colonialism" during his visit to China may only be the begining of the backlash. 

And it is here that India can give China a very close run for, at least, regional influence. In fact, given the promising medium to long-term economic prospects of the Indian economy, it may actually be on a strong wicket going forward. So all the more important for the Indian foreign policy establishment to build capacity and engage actively in advancing its soft power. 

Friday, September 7, 2018

The biggest failing of India's urbanisation

What would posterity judge as the biggest collective failures of India's development trajectory today?

Two come straight to mind. The first concerns the abysmal student learning outcomes, which threatens to render the demographic dividend a prohibitive burden. Unfortunately, given the complex and near universal nature of the problem, and the weak state capacity, there is perhaps little likelihood in the short to medium term of any dramatic change.

But the same dismal prognosis may not apply to the second problem, the deeply unsustainable nature of India's urbanisation. Cities need to move and house people. But growing transportation bottlenecks and congestion, and increasingly unaffordable housing threatens to throttle the engine that is driving economic growth. Without radical policy shifts, even upper middle class households and small businesses will (or have already in the largest cities) get priced off the market. The same centers of economic vibrancy will start decaying.

Fortunately, both the threats can be addressed and the urban growth engine can keep going with the right set of policy actions. At the risk of simplification, I will propose three very specific actions.

1. Embrace density through promotion of vertical development by dramatically increasing permissible Floor Area Ratios (FARs). The only way to increase housing stock significantly given the limited land available is to build upwards. Only a very big supply response can make housing and office space affordable in our cities.

2. Shape the urban form using transport infrastructure, or transit-oriented development (TOD). Use high density and fast transport networks to connect large population clusters and aggregate density (both residential and office uses) on important transit corridors by allowing very high FAR and mixed use developments around transit stations. Co-locating offices and houses in the vicinity of transit station would help move people in large volumes from point to point, and minimise commute distances and times. In fact, the implementation of several metro railways projects without these urban planning reforms can perhaps be counted as among the costliest public policy mistake of our times.  

3. Finally, complement the trunk transport infrastructure with last mile connectivity using buses. Even with TOD, a significant proportion of last mile travel cannot be avoided, and modally integrated bus services are the only solution. It is no surprise that even in the largest and best planned global cities of the world, buses are the biggest transit mode. Policy measures like bus lanes and significant increases in bus infrastructure are necessary.

While several complementary measures are also required, any meaningful effort to address the problem is impossible without all the three aforementioned actions. 

Fortunately, unlike student learning outcomes, it is possible to respond immediately with policy actions on each of the above. They do not require enormous capital expenditure. Nor do they involve tricky political trade-offs. Nor do they all even require the sort of persistent and high quality engagement that a weak state is unlikely to pull off. In short, they are very much doable. 

For the most part, all it requires is a set of well-crafted urban planning regulations and let the markets play out. Is there the vision and leadership to realise it? Maybe one state?