Saturday, January 12, 2019

Weekend reading links

1. When delays and cost over-runs in infrastructure projects are passe, the Mumbai metro rail project appears an impressive achievement.
More than 8,000 workers and a fleet of 360-foot-long boring machines are working 24 hours a day—even through monsoon rains—to finish the 27-station, 21-mile subway through some of the world’s most densely populated neighborhoods, around the edge of one of Asia’s biggest slums, below an airport and under temples and colonial buildings to end at a green edge of forest where leopards still roam. The train is also cutting a path through the country’s religious traditions, legal system and every layer of its society, with challenges at each stop... Despite the difficulties, the subway, which was started in 2016, is now getting built at a pace of just over one mile a month. So far, 9 miles are complete. The $3.3 billion “Metro Line 3,” Mumbai’s first underground train, is on track to be finished and open by the end of 2021.
All the more so given that this is not a PPP but a purely public project.

2. A good article by Rohit Prasad in Mint about the farm loan waivers and corporate NPA write-off equivalence.
The equivalence arises when conditions warrant that the state must indirectly bear the burden of corporate NPAs by infusing funds into banks, as had happened in the US following the 2008 financial crisis and as is happening now in India. Equivalence can also be drawn when the problem of corporate NPAs repeats itself in the same sectors implying that, for some reason, banks keep lending to the same sectors even in the absence of structural improvements... Another ground for equivalence arises if the resources of the exchequer are used to buoy companies that would otherwise go into bankruptcy. 
And this is interesting,
It is true that there has been a marked increase in the share of large loans in agriculture since 1990. In the same vein, the top 12 corporate houses received close to 15% of ₹70-80 trillion in total advances to the corporate sector and accounted for approximately 25% of the NPAs. The share of these borrowers in credit from the formal sector is almost the same as that of the entire agriculture sector. Four of these have been resolved within a year with about 52% recovery, representing only 14% of the dues from these 12 accounts.
And this point about the agriculture cross-subsidy, from farmers to (especially urban) consumers,
It is believed that food prices for consumers must be kept low through restrictions on farmers and subsidies to consumers. The Organization for Economic Co-operation and Development (OECD) estimates that the average yearly revenue lost by Indian farmers between 2014 and 2016 on account of export restrictions, net of subsidies received, is ₹1.65 trillion... Historical performance shows that the credit quality of large corporate borrowers is not superior to that of agriculture/priority sector lending. In that context, interest rates charged by banks to large corporate borrowers have been kept artificially low and incommensurate with the risks involved.
Even in terms of incentives, the distortions are similar.

3. Very interesting extract from a chapter by Christophe Jaffrelot on the Gujarat model in a new book on business and politics in India. Drives home the point about the relative superiority of growth that is built on SMEs than on a few large businesses. Sample this,
In the Nano plant, out of 2,200 employees, 430 are “permanent workers”. They earned ₹12,500 in 2016, whereas the informal workers earned about ₹3,300 a month... in 2013, Gujarati industry represented 17.7% of the fixed capital of India but only 9.8% of the factory jobs, whereas the industry of Tamil Nadu represented 9.8% of the fixed capital but 16% of the factory jobs.
4. The problem with many PPP policies is that about attendant downstream policy interventions that distort markets. For example, creating the private sector supply-side for Ayushman Bharat by providing land and/or viability gap funding to establish private hospitals in smaller towns. In addition, other subsidies like interest subvention on loans, electricity at residential rates etc are being proposed.

For weak states, which struggle to effectively regulate even those small number of existing PPP and other subsidised private facilities, this expansion of contract management may prove simply unmanageable. And worse, private hospitals know this is most certain and unscrupulous promoters will bid to capture the land or subsidy. Every major Indian city has public land allotted to large private hospitals with contractual obligations to provide some share of free/subsidised care to poor patients, and perhaps no city has been able to enforce them.

Further, apart from the monopoly problems in smaller towns, there is also the problem of private providers across the state coming together and holding the state to ransom demanding periodic unreasonable rate increases. The case of Aarogyasri is well known.

Amidst all this, nobody seems to be talking about the one obvious solution to address the problem, strengthening and expanding public facilities.

5. Fascinating account of the trolley problem in different cultures, economies, and geographies.
Participants from collectivist cultures like China and Japan are less likely to spare the young over the old—perhaps, the researchers hypothesized, because of a greater emphasis on respecting the elderly. Similarly, participants from poorer countries with weaker institutions are more tolerant of jaywalkers versus pedestrians who cross legally. And participants from countries with a high level of economic inequality show greater gaps between the treatment of individuals with high and low social status. And, in what boils down to the essential question of the trolley problem, the researchers found that the sheer number of people in harm’s way wasn’t always the dominant factor in choosing which group should be spared. The results showed that participants from individualistic cultures, like the UK and US, placed a stronger emphasis on sparing more lives given all the other choices—perhaps, in the authors' views, because of the greater emphasis on the value of each individual. Countries within close proximity to one another also showed closer moral preferences, with three dominant clusters in the West, East, and South.
6. Ananth points to this excellent Lynn Stout article which lays bare the critique against modern finance. Its questions the arguments about finance's role in capital raising, liquidity provision, and resource allocation. This is the summary,
Doctors and nurses make patients healthier. Firefighters and EMTs save lives. Telecommunications companies and smart phone manufacturers permit people to communicate with each other at a distance. Automobile executives and airline pilots help people close that distance. Teachers and professors help students learn. Wall Street bankers help—mostly just themselves.
7. Evidence (HT: MR) that traders exhibit greater skill and rationality while buying than when selling,
Most research on heuristics and biases in financial decision-making has focused on non-experts, such as retail investors who hold modest portfolios. We use a unique data set to show that financial market experts - institutional investors with portfolios averaging $573 million - exhibit costly, systematic biases. A striking finding emerges: while investors display clear skill in buying, their selling decisions underperform substantially - even relative to strategies involving no skill such as randomly selling existing positions - in terms of both benchmark-adjusted and risk-adjusted returns. We present evidence consistent with limited attention as a key driver of this discrepancy, with investors devoting more attentional resources to buy decisions than sell decisions. When attentional resources are more likely to be equally distributed between prospective purchases and sales, specifically around company earnings announcement days, stocks sold outperform counterfactual strategies similar to buys. We document managers' use of a heuristic that overweights a salient attribute of portfolio assets - past returns - when selling, whereas we do not observe similar heuristic use for buys. Assets with extreme returns are more than 50% more likely to be sold than those that just under- or over-performed. Finally, we document that the use of the heuristic appears to a mistake and is linked empirically with substantial overall underperformance in selling.
8. Nice article by Shailesh Chitnis in Mint on the state of startup universe. Among the world's fastest growing startups, just 9% are apparently doing truly innovative and cutting-edge work. Just 27 of the world's 289 unicorns, which have sucked in $980 bn in investment capital, are creating innovative new products. Sample this on how innovation is getting more expensive,
Nicholas Bloom, an economist at Stanford University, and his colleagues studied research productivity across a variety of sectors. Their findings suggest that the cost of finding new ideas has increased, both financially and in the number of researchers needed. In aggregate, they compute that research productivity falls in half every 13 years. To maintain a constant growth in per capita GDP, the US must double the amount of research effort every 13 years. Simply put, coming up with new ideas is getting more expensive... The number of researchers required to double chip density today is more than 18 times larger than the number required in the early 1970s.
9. Finally, from Marginal Revolution, this is a superb economics cheat sheet. 

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