Levelling the playing field - incentivising exports

In the context of China’s stifling dominance across manufacturing supply chains, and as industrial policy interventions proliferate globally and the WTO is rendered comatose due to the dysfunction of its Dispute Settlement Body (DSB), it may be time for India to re-assess its industrial policy instruments, especially concerning export promotion. 

The WTO’s Subsidies and Countervailing Measures (SCM) Agreement categorises two kinds of “prohibited” subsidies - those “contingent on export performance” (Article 3(1)(a)), and those “contingent on the use of domestic over imported goods” (Article 3(1)(b)). It allows for subsidies that are specific to enterprises, industries, and regions. 

When the SCM and other WTO Agreements were being negotiated in the nineties, it was thought that only the subsidies contingent on export performance would be trade-distorting in any significant manner. It was thought that the subsidies specific to enterprises, industries, and regions (or the economy as a whole) could not be sustained at the scale required to distort trade in particular products much less global trade in general. 

Nobody anticipated China’s extraordinary scale of economy-wide industrial policy subsidies. It’s estimated that China spends 5% of GDP annually on its industrial policy, compared to 0.4-0.6% of GDP for US, Japan, and France and 0.9% of GDP for South Korea. India’s annual expenditure on its flagship production-linked incentive (PLI) scheme is a modest 0.15% of GDP. In the 2000-18 period, Chinese Government Guidance Funds have given over $1 trillion in capital and guarantees to more than 28,000 companies. As part of the Made in China 2025 initiative, the government committed nearly $300 bn in 2018 with an additional $1.4 trillion after Covid 19 to achieve technological self-sufficiency and global leadership in critical sectors. All told, in sectors like semiconductors, steel, and aluminium, China makes up 80-90% of all global subsidies.

Its domestic policies artificially suppress business costs and give its firms an unmatched competitive advantage. Its financial repression keeps the cost of capital suppressed, the hukou system has depressed wages, and intense competition by local governments has kept land and utility costs low. Add to this all the direct state support of the kind mentioned above and the massive economies of scale, and it becomes almost impossible to compete with Chinese firms. Further, the scale and scope of these subsidies have allowed even loss-making firms to expand production and flood the market at deeply discounted prices. 

Accordingly, Chinese firms have built up production capacities in steel, cars and electric vehicles, EV batteries, solar panels, metro railways, heavy equipment etc., that are far in excess, often in multiples, of domestic demand. In many of these sectors, they make up 50-90% of the global production capacity. Finally, with the domestic economy slowing and demand weakening, these firms have come to rely even more on exports and further discounting to capture foreign demand. There cannot be any doubt that China’s excess capacity and discounted sales that render its trade partners uncompetitive should be treated as “prohibited subsidy”. 

In this context, two IMF papers by Lorenzo Rotunno and Michele Ruta examined the trade spillover impacts of domestic subsidies generally and specifically by China. They quantify the significant impact of domestic subsidies on exports from G20 EMs. Exports of subsidised products increased for eight years since its introduction relative to exports of other products, whence the growth rate of exports of subsidised products is 15% higher. Similarly, at extensive margin (new products being exported), domestic subsidies increase the probability of a new product being exported by 3 percentage points relative to other products. 

They also quantify the impact of Chinese subsidies.

Our results point to significant effects of China’s subsidies on its trade flows. On the export side, exports of subsidized products are 0.9% higher (relative to non-subsidized products) after China’s subsidies… This average effect masks significant heterogeneity across destination markets and sectors. Our estimates suggest that exports of subsidized products from China to other G20 emerging economies (G20 EMs) are 2.1% higher after the subsidy than exports of other products to the same destinations. Furthermore, the export effects of China’s subsidies vary considerably across sectors. Within electrical machinery – one of the new ‘strategic’ sectors – for instance, exports of subsidized products are found to be 7% higher than exports of other products after China’s subsidies.

On the import side, China’s subsidies are found to depress imports of targeted products relative to imports of non-subsidized products – an effect that is not found for other countries. Across origin countries, the implied effect on imports of subsidized products is stronger for Advanced Economies (AEs) – a 3% and 4.8% decrease in imports of subsidized products from G20 AEs and other AEs, respectively. Electrical machinery and metals are among the sectors where China’s subsidies have strong import-substitution effects. Our estimates therefore suggest that China’s subsidies have increased the country’s share in export markets and reduced its share in import markets of subsidized products.

The effects of China’s subsidies are amplified by supply-chain linkages… the exposure of downstream sectors to subsidies in upstream industries (through cost shares) and the exposure of upstream sectors to subsidies in downstream industries (through sales shares)… The results reveal strong effects of subsidies propagating from upstream industries. More subsidies given to supplying industries are associated with higher exports in the buying industry… consider the case of subsidies provided to the steel industry, which is the main supplier of inputs to the automotive industry (10 % of its total costs). The empirical results imply that increasing subsidies to steel by the number observed over 2015-2022 is associated with a 3.5% increase in exports of autos from China. These indirect effects are concentrated on exports to G20 AEs. The findings on the indirect effects of subsidies are consistent with upstream industries expanding supply and lowering their prices following the deployment of subsidies. This upstream effect allows industries downstream to become more competitive in export markets. Results from import regressions point to a negative effect of upstream subsidies on imports in downstream sectors. This result suggests that upstream subsidies allow downstream industries to also expand domestically and substitute for imports.

Subsidies form the overwhelming share of Chinese industrial policy instruments, representing 95% of all trade-distorting policies implemented in the 2009-22 period. This compared with 60-65% for other emerging economies in G20. Further, 98% of subsidies are monetary transfers to firms - state aid and grants.

Chinese subsidies are focused on the manufacturing sectors.

The significant impact of domestic subsidies on exports in general (for all subsidising countries) and the especially higher impact of domestic subsidies observed in case of China is a reminder on the limitations of the SCM Agreement and WTO provisions in containing trade-distorting subsidies. As industrial policy interventions proliferate and as China exports its excess capacity aggressively, fixating on a narrowly defined set of subsidies that are “contingent on export performance” is meaningless. Other trade-distorting subsidies are allowed to expand without infringing on any WTO provision. 

This is a matter of great significance for developing countries like India with limited fiscal space to provide subsidies at anything remotely close to China, and also especially because the Chinese subsidies are having a greater impact on exports to G20 EMs and imports from them. 

As it seeks to expand its manufacturing base, India faces an onerous challenge across sectors. Competing with Chinese manufacturers requires significant levelling of the playing field to balance the massive subsidies that its exporting firms receive. This may no longer be confined to competition with exports coming directly out of China, but even those from countries like Vietnam. As FT reports, Vietnam is rapidly becoming an off-shore site for Chinese manufacturers, fuelling a third of all new investments in the country. 

India’s industrial policy response has been to support its domestic manufacturers with its own subsidies, mainly through the PLI scheme and Basic Customs Duty (BCD) tariffs on imports. 

But this has its limitations for at least two reasons. One, given the extent of the competitiveness gap, these subsidies and tariffs may not be adequate in many industries. Two, shorn off the BCD support, Indian firms fall behind even further in the export markets.

The first can be bridged to some extent by increasing the domestic value addition. This can help domestic manufacturers lower costs and increase their competitiveness. However, given the limited component manufacturing ecosystem, this can only be done in a phased manner. A possible strategy in this regard would be to target a handful of products with high domestic demand volumes and double down on the creation of a component ecosystem, thereby maximising domestic value addition. It might be required to provide a higher level of incentive than currently provided under the PLI for products to encourage component ecosystems to relocate. Once a critical mass of the component manufacturing ecosystem emerges, it may become possible to expand the base faster. 

The second point on levelling the playing field on exports is equally important. Like maximising domestic value addition, another channel to improve the competitiveness of Indian manufacturers is economies of scale. Here, the small size of the Indian domestic market is a problem. For all its population size, India does not have the domestic market size to be able to generate the scale of demand required to reap the benefits of large economies of scale in most export market segments. This means that capturing export markets is an essential requirement. But the competitiveness gap is even higher in the export markets. 

It is, therefore, essential that these domestic firms have some form of export subsidies. An option is to provide a higher level of incentives such that they are enough to match the competitiveness gap after excluding the BCD. But that would require a higher fiscal allocation and would also entail giving excess incentives for domestic sales. Another option would be to provide concessional trade finance or reimburse taxes on exports. Other instruments from the Table above could be considered. 

In conclusion, for domestic industrial policy to be effective in expanding the domestic manufacturing base, it must necessarily include both some form of import protection and export incentives. Notwithstanding their WTO commitments, this choice is unavoidable for any country.

Weekend reading links

1. Shang Jin-Wei makes some important suggestions on how countries can mitigate the Trump trade shock.

First, they must devise effective retaliation strategies. The European Union’s (EU’s) Anti-Coercion Instrument provides a useful model for applying economic pressure without directly harming domestic industries. For example, these measures could allow the bloc to suspend intellectual-property protections for US software and streaming services or restrict US banks and financial-service providers from operating within EU markets. Developing countries might find such measures especially attractive, because the US tends to run large trade surpluses in intellectual property and financial services.

China’s mineral-export restrictions offer another example... A number of other countries have market power in some key products they export, and might explore a similar approach. Governments must also consider the indirect yet significant impact of interest-rate and exchange-rate fluctuations from Mr Trump’s tariffs. For emerging markets and developing economies, this means keeping short-term foreign debt at sustainable levels. Globally, companies must prepare for the possibility that interest rates will remain elevated for longer than anticipated... Strengthening regional economic integration by removing trade and investment barriers within existing trade blocs would be much more productive than raising tariffs on US goods.

2. Important emerging threat, the security of undersea cables and pipelines. 

In October 2023, the Chinese-owned container ship Newnew Polar Bear performed a mysterious trip during which several undersea installations in the Baltic Sea were damaged. First, the Balticconnector gas pipeline connecting Finland and Estonia lost pressure, then a cable sustained mysterious damage. Authorities discovered that another cable had been damaged hours earlier.

A few months after that, the Joint Expeditionary Force — a regional military grouping comprising the UK, the Nordic nations, the Baltic nations and the Netherlands — announced a new initiative to track precisely such threats to Baltic Sea infrastructure. Last month, after a further string of suspicious cut cables, the group announced it was activating the initiative, called Nordic Warden. Just a week later, Nato unveiled Baltic Sentry, an operation with naval vessels patrolling the waters above undersea cables and pipelines. Although Baltic Sentry is a Nato operation, it was conceived by Baltic Sea leaders at a meeting in Helsinki. Like Nordic Warden, it is an entirely European undertaking.

This has an important implication at a time when the US has been actively disassociating itself from European security

The Baltic Sea countries have cobbled together a Baltic Sea maritime presence that — while not yet large enough — doesn’t depend on America... on a daily basis, the nations look after their waters. Making America redundant was never their intention; they just knew that constabulary services in their region were not a top US Navy priority. If Trump were to announce tomorrow that America is pulling out of the Baltic Sea, little would change. One might even ask whether anyone would notice. This approach is likely to extend elsewhere as allies assemble enough resources (and some form of nuclear umbrella extended by Britain or France) to render the US good-to-have rather than need-to-have.

3. BYD is upending the extant business models in the global car market by providing advanced driver assistance systems a standard feature across most of its models at no additional cost. 

For years, carmakers have looked to driver assistance software as the key to offsetting declining hardware margins. This held promise as a cash cow, much like tech companies monetise cloud services, a high-margin add-on that would generate billions in new revenue. Tesla, for example, charges $8,000 for its driver assistance software in the US as of April. Mercedes-Benz and GM are among many carmakers banking on monetising assisted driving technology. There are inherent risks to self-driving software, from technology failures to potential cyber security threats. But unlike fully autonomous vehicles, which remain controversial and unproven at scale, advanced driver assistance systems — which enhance rather than replace human control — have already demonstrated their value. 

Studies suggest that these systems, which include highway and traffic assist systems, automatic emergency braking and forward collision warnings, could significantly improve road safety. Research from the Insurance Institute for Highway Safety has shown that cars with these features can reduce rear-end collision involvement rates by up to 50 per cent. Wider adoption could reduce accident frequency by around a quarter, according to research in the UK, while the most common types of accidents would be reduced by 29 per cent with full deployment. Assuming a conservative 30 per cent adoption rate and a $5,000 fee per vehicle, a carmaker selling 10mn cars annually could potentially generate $15bn in revenue a year from self-driving features alone. Some carmakers have introduced subscription models: Tesla, for example, charges $99 a month, which helps generate recurring revenue long after a car is sold. Scale that adoption further — as technology advances and consumer scepticism declines — and the financial potential becomes even more compelling. That explains why automakers have been so eager to monetise the technology. Safety sells. 

The question now is: can it still be sold? BYD is making that question harder to answer. By including advanced driver assistance systems as standard across its line-up — even on its $9,500 Seagull EV — BYD is challenging the pricing strategy that rivals have relied on. Automakers will find it increasingly difficult to justify charging for software in markets where BYD is offering it as standard. The longer-term consequences could be even more disruptive. If BYD’s move forces rivals to slash software prices — or abandon paid models entirely — the industry’s vision of AI-powered, high-margin profits may never fully materialise... Now, with each new market it enters, BYD won’t just be selling more cars, it could start to redefine industry expectations. History suggests that once a technology becomes indispensable, the premium disappears. Power windows, anti-lock brakes, rear-view cameras — all were once luxury features that have become standard. Once consumers get used to something as standard, there is no turning back. Just like seatbelts.

4. Meanwhile, amidst increased competition from Chinese EV makers and delays in the mainstreaming of EV's, European car makers are returning focus on ICE vehicles. 

Global new model launches of ICE and hybrid vehicles are expected to rise 9 per cent this year from 2024, according to S&P Global Mobility. Carmakers are expected to introduce 205 petrol models, down 4 per cent from 2024, while hybrid launches are predicted to rise 43 per cent to 116 models.

5. Germany faces an erosion in manufacturing, especially pronounced among car makers, industrials, and chemicals.

The contraction of Germany’s industry is evident in the fall of market value in the sector. Together, Dax constituents Volkswagen, Thyssenkrupp and BASF have lost €50bn, or 34 per cent, in market capitalisation over the past five years. From 2010 to 2014, carmakers on the Dax index were more valuable on average than their peers in any other sector, but valuations have slipped as demand has started to falter. VW’s deliveries to customers last year slumped by nearly a fifth compared with the pre-pandemic year of 2019. In other industrials, steelmaker Thyssenkrupp has announced plans to reduce its production capacity by up to a quarter and cut 40 per cent of jobs. BASF is looking to cut costs at its Ludwigshafen headquarters, the world’s largest chemical site, by €2bn a year.

An important contributor is the high electricity prices, higher than in competitors.

Production in energy-intensive industries is 20% below pandemic levels, with the country's world-leading chemicals industry being among the worst hit..

According to Destatis data, roughly 40 per cent of jobs and more than half of revenues in Germany’s chemical industry are tied to so-called base chemicals, most of which are derived from gas and crude oil. Producers of the materials, used in plastics, fertilisers and coatings, rely on cheap energy to maintain narrow margins in a highly competitive market... And the sector, which supplies other industries, has long been a bellwether for industrial demand. 

6. Good graphical summary of the problems facing Germany's railways. Deutsche Bahn's intercity service is now less punctual than the continent's worst operator in Britain.

About 72 per cent of Deutsche Bahn’s intercity trains arrived within 10 minutes of their scheduled arrival time in the year to January 2025, compared with 78 per cent of British long-distance trains, according to the FT analysis. Any interaction with the German rail network is also one of the biggest factors affecting the punctuality of long-distance rail travel in central Europe. Services from Germany to Amsterdam, for instance, are delayed by an average of almost 13 minutes, while trains coming to the city from elsewhere are typically within two minutes of their scheduled arrival time... The analysis is based on more than 1.9bn train arrivals at stations that were tracked by the websites from February 2024 until the end of January 2025, amounting to more than 5mn a day... The performances of the rail networks in both the UK and Germany lag far behind some of their European peers. In Austria, Switzerland and the Netherlands, punctuality consistently exceeds 90 per cent. Germany’s neighbours also suffer from Deutsche Bahn’s patchy performance, as its delayed trains have knock-on effects for timetables across central Europe.

In Basel’s central station, trains originating in Germany arrive with an average delay of more than 12 minutes — 12 times higher than those coming from elsewhere. The Swiss network, renowned for its punctuality, has resorted to stopping some late-arriving German services at the border to prevent them disrupting local operations. Deutsche Bahn told the FT that infrastructure was “the key to more punctual railways”, adding that 80 per cent of all delays were caused by the poor state of its network. The company described its infrastructure as “too crowded, too old and too prone to disruptions”... For decades, Germany skimped on maintenance and infrastructure upgrades as successive governments put a higher priority on fixing roads and balancing budgets. According to data by Pro-Rail Alliance, a German railways lobby group, the German government in 2023 spent just €115 per citizen on railway infrastructure, compared with three times that amount in Austria and four times in Switzerland. Andreas Geissler, a transport policy expert at Pro-Rail Alliance, told the FT that investment surged to €190-€210 per citizen in 2024. Over the past 15 years on average the investment stood at just €73 per citizen. 

Deutsche Bahn has labelled 16 per cent of all German railways infrastructure as “poor”, “deficient” or worse. The investment backlog that needs to be dealt with grew by €2bn in 2023 to €92bn, according to Deutsche Bahn estimates.

7. The US federal government paid $18 bn to consulting firms in 2024. 

Elon Musk's cutting of the traditional consulting firm contracts may well result in their replacement by those like Palantir.

Palantir, an analytics firm chaired by Peter Thiel, who worked with Mr Musk at PayPal, has gained a foothold in the Department of Defence and is spreading quickly across the federal government. Among other things, it helps organisations feed their data into artificial-intelligence (ai) tools. In the final quarter of 2024 its revenue from America’s government grew by 45% year on year. Its share price has been on a remarkable ride, more than doubling since Mr Trump’s election in November. Booz Allen Hamilton’s has fallen by a third. Unlike most other software providers, Palantir embeds teams of engineers with its clients to help them make use of its technology. For now, it works on many projects alongside firms such as Accenture and Deloitte. But some also view it as a potential competitor to the big consultancies, particularly when it comes to ai. Mr Thiel has described conventional consulting as a “total racket”.

8. Impact of US aid freeze on Kenya is severe.

Business at hotels, car rentals and shops — even a nail bar — in aid-dependent areas of Kenya has fallen in the weeks since Donald Trump suspended funding to USAID... Hotels were refusing bookings for NGO workers, fearing they wouldn’t be able to settle their bills... Staff working on US-funded projects had begun pulling children from school, abandoning rental properties and heading elsewhere, she added... Hundreds of expatriate aid workers, either directly or indirectly employed by USAID, are languishing without pay, uncertain about schooling for their children, and in some cases poised to leave the country. Estate agents are anticipating a dip in rental markets in leafy neighbourhoods of Nairobi, while financial analysts predicted a slight softening in the value of the shilling. In 2023, the last year for which official data is complete, Kenya received $850mn in US aid, backing more than 230 projects to varying degrees. Projects in higher education, hospitality training for orphans, drought mitigation and water sanitation, all stalled at the stroke of Trump’s pen. Banks are declining to provide emergency loans, uncertain if the tap will ever be turned back on. The agency subcontracted a growing proportion of its work to Kenyan organisations, many of which are not equipped to survive three months without core funding. Please use the sharing tools found via the share button at the top or side of articles. Hardest hit has been healthcare, which at $402mn received nearly half of the US funding.

9. India holds just 0.23% of the world's AI patents.

India ranks 13th globally in AI talent concentration, with 0.42 per cent of LinkedIn members saying they have skills in the technology. The rank positions it behind smaller but technologically advanced nations of Israel, Singapore and South Korea. Despite its vast population and network of science and engineering colleges, India's AI talent pool is not as deep as one might expect... India is experiencing the biggest AI talent exodus in the world, with a net migration rate of -0.76 per 10,000 LinkedIn members who have AI skills, according to the Stanford report.

10. Thanks to shale oil and Canadian imports, US oil imports from Saudi Arabia has been on continuous decline and has now hit its lowest since 1985. 

11. US Treasury Secretary Scott Bessent makes an economic partnership proposal to Ukraine.

Ukraine is endowed with natural resources and other national assets that can drive its postwar economic growth, but only if its government and people are armed with sufficient capital, expertise and the right incentives. The terms of our partnership propose that revenue received by the government of Ukraine from natural resources, infrastructure and other assets is allocated to a fund focused on the long-term reconstruction and development of Ukraine where the US will have economic and governance rights in those future investments... The terms of this partnership will mobilise American talent, capital, and high standards and governance to accelerate Ukraine’s recovery and sends a clear message to Russia that the US is invested in a free and prosperous Ukraine over the long term... The proceeds from future revenue streams would be reinvested back into key sectors focused on unlocking more of Ukraine’s growth assets. The terms of this agreement would also ensure that countries that did not contribute to the defence of Ukraine’s sovereignty will not be able to benefit from its reconstruction or these investments... The US would not be taking ownership of physical assets in Ukraine. Nor would it be saddling Ukraine with more debt. This type of economic pressure, while deployed by other global actors, would advance neither American nor Ukrainian interests. In order to create more value over the long term, the US must be invested alongside the people of Ukraine, so that both sides are incentivised to gain as much as possible.

12. Signatures of reversing consensus on climate change forged at the Paris Agreement 2015

Friedrich Merz... warned that German economic policies had been “almost exclusively geared towards climate protection”, and that “we will and must change that”. Decommissioning coal and nuclear power plants without an adequate replacement in place would “massively jeopardise Germany as an industrial location”, and thus was “out of the question”... the US may abandon climate action at the federal level altogether... (in China) the construction of new coal-fired thermal power plants on the mainland reached a 10-year high in 2024, with almost 100 gigawatts of additional capacity being added to the pipeline. Fewer plants are being shut down as well; about 13 gigawatts of capacity went offline in 2020, as compared to 2.5 gigawatts in 2024... The premium for green bonds — which represents how much extra investors are willing to pay for environmentally-sustainable investments — almost vanished in 2024. Meanwhile, issuances of green bonds from US-based sources are half of what they used to be, and dollar-denominated green bonds now represent only 14 per cent of the global green bond market.

13. Janan Ganesh writes that the pendulum on the anti-woke movement may have swung too far.

Until recently, conservatives put forward a case that had lots of voters nodding: that woke-ism is illiberal dogma; that liberals themselves are too weak to stand up to it. Now, having prevailed, this argument is sliding into free speech absolutism, scolding of the insufficiently patriotic and a general obsession with culture for which the public appetite is smaller... Having rejected woke, voters will be increasingly protective of other liberal gains. Misreading this, and high on themselves, conservatives will end up weirding people out in a major way. We can’t predict the exact form of the over-reach — the right’s equivalent of Defund the Police — but some fatal gilding of the lily is coming. These people don’t know how to take Yes for an answer. It is a wonder that such enthusiasts for western culture should ignore one dictum of it, inscribed on the Temple of Apollo as an eternal warning. “Nothing in excess.”

14. More on the K-shaped recovery facing the Indian economy. On SUV sales

SUV sales grew 14 per cent in 2024, more than double the overall passenger vehicle market’s 5 per cent, according to GlobalData. They accounted for 56 per cent of the car market, up from 51 per cent the previous year.

15. Rana Faroohar has an important point about the Trump administration.

There is a notable silence on these topics from Republican senators and business leaders alike. Plenty of people will say privately that they are worried about Doge’s slash-and-burn techniques. But no one wants to run afoul of Musk or Trump in public for fear of retribution (indeed, I will say that in my 33 years of journalism, I’ve never had as many sources want to speak only on background as they do now).

Max Hastings echoes 

The fear — and it is indeed fear — that suffuses much of the world after these first weeks of the Trump presidency derives from a belief that the great engines of American democracy are being shut down. A supine Congressional majority and a partisan Supreme Court decline to check Trump’s absolutism, and he marches roughshod over the law. He aspires to be a Sun King — contemporaries’ name for France’s Louis XIV (1638-1715) — making all those around him captives of his rays, and doomed if his warmth is withheld.

16. Germany presents a fascinating political experiment in so far as it contains two parts which were in opposing ideological and political factions before the Berlin Wall collapsed. The FT has a good graphic that captures the divide.

This also shows that if this were a first-past-the post voting system, the CDU/CSU would have swept the West and Afd the East. As Times writes, in the recent elections, the two parts voted as different countries.  

If East Germany were still its own country, the hard-right Alternative for Germany, or AfD... would have scored a convincing win in the elections on Sunday, with nearly one in three voters there casting ballots for it. Only two of 48 voting districts outside of Berlin in the former East Germany were not won by the AfD. In a handful of districts in the east, the AfD got nearly 50 percent of the vote... The vote tally in the east mirrored state elections in three eastern races in September... That division... has become a persistent feature of Germans’ voting habits... only 42 percent of Germans in the east voted for traditional West German parties... In the former East, the AfD is increasingly visible. Many members are active in civil society — including several mayors — which means even people who do not vote for the party come in regular contact with it.

And this may owe to the persisting differences between the two parts even after nearly 35 years of reunification.

The vote also signalled the sharply contrasting fortunes of AfD and SPD (which did its worst performance since 1887).

The youngest voters shifted sharply to the Left and AfD. 

Political and economic stability - the most important public goods

The geopolitical and economic tumult unleashed by Donald Trump has awakened us to the importance of political and economic stability. While their presence is rarely acknowledged, their absence becomes immediately evident. They are the invisible hand that guides development, progress, and prosperity. 

In this context, two articles in FT provide some food for thought. 

Bronwen Maddox has a very good article in FT which argues that defence is the greatest public benefit for all. 

“For 30 years, we have been taking money out of defence budgets and putting it into health and welfare,” one senior European minister told me. “Now, we will have to reverse that.” The point has been made by generations of US politicians and military leaders even before Donald Trump made the “freeloader” charge his own: Europe has relied for its defence on the US, making itself the continent of the proud welfare state. Ursula von der Leyen, head of the European Commission, acknowledged that earlier this year in her analysis of Europe’s competitiveness problems: that the continent had enjoyed years of cheap gas from Russia, in effect cheap labour from China through imports, and cheap defence from the US. Now it needed to compete without them. Easier said than done. Benefits, pensions and healthcare are popular with voters. Defence, not so much… politicians will have to persuade voters to surrender some of their benefits to pay for defence, perhaps the essential public benefit above all, even if it has been taken for granted for decades.

Robin Harding draws attention to Charles Kindleberger who, in the context of the Great Depression, highlighted the importance of a global hegemon or stabiliser. 

The world economy, he argued, needs a hegemon: a leader willing to incur some cost and risk for the sake of the whole. “For the world economy to be stabilised,” he wrote, “there has to be a stabiliser, one stabiliser.”… Without an economic hegemon in the 1930s, wrote Kindleberger, there was nobody to provide three crucial functions: to maintain a relatively open market where countries in distress could sell their goods; to provide long-term loans to countries in trouble; or to act as a global central bank, and offer short-term credit against collateral in times of crisis. The result was protectionism, currency devaluations, wrangling over war debts and contagious financial crises that swept from one centre to the next… 

Kindleberger published his book, The World in Depression, in 1973 and ended it with a few words on “relevance to the 1970s”… The “relevance to the 2020s” of Kindleberger’s book is greater and gloomier. We have two competing superpowers, the US and China. Both fancy themselves as hegemons; neither is willing to accept the responsibilities of the role. The US vows vengeance on anybody who threatens the primacy of the dollar even as its own actions put that primacy in doubt. China rails against its lack of status in the current economic system, even as it plays a prime role in destabilising it.

Since the War, and especially since the fall of the Berlin Wall, the US, as a global hegemon, intervened to contain civil wars and geopolitical tensions, became the buyer of last resort, absorber of excess liquidity and surpluses, provided a haven for investors, and shaped and maintained a global political and economic order. 

Trump’s actions have shaken the comforting political and economic consensus that underpinned the post-war order, which was reinforced by the collapse of the Soviet Union. The emergence of China appeared to have further reinforced the consensus in both political and economic realms. Democracy, free speech, free markets, trade, capital flows, technological collaborations, migration, and mutual defence commitments bound the Western countries together through a series of interlocking multilateral treaties, alliances, and agreements. There was a global order shaped by the US leadership that had become entrenched over the last seventy years. 

It survived several challenges over the years, including President Trump’s first term. The impressive resolve shown by the Western allies in quickly rallying together to respond to Russia’s invasion of Ukraine was only the latest demonstration of the strength of this alliance and the global order created by it. 

In fact, the high noon of this post-war consensus may have been the period from 1991 to 2015. The period between the collapse of the Soviet Union and the arrival of Xi Jinping’s China no longer willing to hide its strength and bide its time coincided with remarkable geopolitical stability and the Great Moderation economically. 

The biggest beneficiaries of global political and economic stability, underpinned by the US-built global order, are perhaps the East Asian economies, China, and India. These countries have been among the biggest beneficiaries of globalisation and unbundling of supply chains, trade liberalisation, cross-border capital flows, immigration to Western countries, access to US colleges, diffusion of technologies developed in the West, benign global macroeconomic conditions, resolution of regional disputes and containment of regional wars, and so on. Among them all, China has been the stand-out beneficiary. 

The resolution and localisation of conflicts, especially in Africa and the Middle East, were central to securing and assuring access to mineral resources critical to sustaining economic growth. Global oil and gas supplies were underwritten by the US. As also the security of global shipping routes, whose importance has been rudely reminded by the Houthi rebel attacks in the Red Sea area. It has allowed these countries to focus on development, economic investments, and the welfare of their citizens while allowing defence spending to decline as a share of the GDP. It provided them with certainty and stability that were critical to the long period of unprecedented global economic growth. 

On the same lines, the global response to all the major post-war economic crises has been coordinated by the US. They include the Latin American debt crises of 1980s, recurrent debt waivers and restructuring of low-income countries, the East Asian financial crisis of 1997, the global financial crisis of 2008-09, the pandemic response of 2020-21, all of which stabilised the global economy and backstopped contagion and economic depression. 

Closer home, India has benefited greatly from the post-war global order, especially in the last three decades. The two widely cited and proudly proclaimed achievements of post-independence India, its software industry and the hugely successful Indian diaspora in the US and Europe, owe their success almost completely to this consensus. 

While it is difficult to quantify the contribution of political and economic stability, it’s useful to think about a counterfactual world without these trends and institutions that are maintained by the prevailing global order. It’s hard to not believe that these countries could not have developed and prospered in the manner that they have done. 

Unfortunately, this counterfactual world now appears a reality in the face of the actions of the Trump administration.

I can think of three reasons for the support or at least approval of the Trump administration’s actions. The first explanation revolves around the conservative pushback at the swing towards excessive liberalism, manifest in the rise of woke attitudes and trends. The second is the blend of libertarianism and techno-optimism, coupled with the belief in some innate superiority of the private sector and that the government is incompetent, is impeding technological progress, and there should be large-scale deregulation. The third is the opportunistic belief that Trump’s political leanings make him more likely to contain China (belief in India), be tolerant to autocracies and willing to strike value-free “deals” (belief in the Middle East and Russia) etc. 

I confess to being sympathetic to the first and third explanations. 

But as Janan Ganesh has written in FT, it may be that we are not only past peak-woke but perhaps past even the peak of the anti-woke movement. The second is in keeping with the times of AI exuberance and the swing to deregulation is the latest fashion in macroeconomic policymaking. The third is more about parochial hope in a hostile world. 

It’s fair to argue that only someone like Trump could have reversed certain trends and practices that had gone overboard - erosion of conservative values, trade liberalisation, immigration, dependence on Chinese manufacturing etc. The woke capture of liberalism is loosening. On trade liberalisation, immigration, and China, Trump has succeeded in rebalancing and forging a new consensus within the US and Europe. These are all welcome developments. 

Shifts like Apple’s pivot to India have been hastened by Donald Trump. Climate transition and the abandonment of legacy energy sources had become too ideological and disconnected from its real costs, especially for developing countries. This needed rebalancing, though not to the extent that is now happening in the US. International development had become a cosy club of disconnected cosmopolitans and needed a shake-up, though not abruptly and destructively as is now happening with USAID. 

But all this is coming at a prohibitive cost to the two important public goods that underpinned sustained development, economic growth, and progress. Political and economic stability are the biggest casualties of the Trump administration. 

Besides, it does little to address the main problems that have been contributing to the gradually eroding social and political contract. This erosion manifests in the form of widening inequality, rising business concentration, and elite capture of the rule-making processes and institutions. Worse still, the Trump administration may end up reinforcing and turbocharging the dynamic of this erosion. The economic policies of the Trump administration appear most likely to benefit Big Tech and Wall Street but at the cost of Main Street. Capital at the cost of labour. Profits and efficiency maximisation at the cost of equity and resilience. 

But for how long? Is it the climax of the high noon of individualism, capitalism, and efficiency maximisation?

Perhaps the long period of excessive stability instilled a sense of complacency and sowed the seeds for the current tumult. This anti-thesis to the post-war liberal democratic capitalist thesis may be an essential requirement to develop a new synthesis. 

International development - dissonance between discourse and practice

I have consolidated the posts on international development into a working paper. It’s available here. The abstract is reproduced.

This paper will draw attention to some commonly observed dissonances between development thinking and its practice. While they are most salient in the thinking around international development, they manifest in several ways within the world of development practice too.

They cover the obsession with new ideas and innovations, especially technical fixes, and the belief that they can have transformative impacts; the marginalisation of priors and the elevation of rigorous evidence on what works; the importance attached to headline impact evaluations and the deceptive ideology of evidence-based policymaking; the critical importance of the implementation of ideas, the mechanisms of implementation, and the importance of effective management; and the ability to exercise good judgment being the biggest constraint to development, and the problems created by the grafting of best practice ideas using aid money.

This paper will present the perspective of a policymaker and policy implementor on these articles of faith that permeate the discourses and institutions of international development.

I want to make a contextual point here. While the manner of the Trump administration’s assault on regulations and the federal bureaucracy in the US, illustrated by the virtual shutdown of USAID, is both unacceptable and disastrous, the international development world needed a bit of shaking up. Its discourse, in general, has for long been disconnected from its practice.

Weekend reading links

1. It's reported that India has disbursed Rs 8700 Cr ($ 1 billion) to 19 companies under its production-linked incentive (PLI) scheme for smartphone manufacturing in the first three years of the scheme from 2022-23 to 2024-25. Foxconn, Tata Electronics, and Pegatron, the three contract manufacturers of Apple, have received over 75% of the amount, and the top five beneficiaries received over 98% of total disbursals. So far 32 companies have been approved in two rounds under the scheme. 

2. As the world figures out trade arrangements at a time when President Trump is waving the tariff stick, it may be useful to use the opportunity to push for certain reforms in WTO. One pointed out in this article is to revise the External Reference Price (ERP), an average price in the Agreement on Agriculture (AoA) established based on the base years of 1986-88 against which subsidies like India's MSP is compared to determine trade distorting subsidies.  

3. Donald Trump's reciprocal tariffs are a reversion back to the pre-WTO era. Reciprocal tariffs would mean the US matching imports tariffs on its exports - "an eye for an eye, a tariff for a tariff, same exact amount". While Japan, EU, and India have been identified as the main targets, the biggest relative costs will be faced by Indian exporters. India has the highest trade-weighted tariffs among all major economies at 17% (compared to 2.2% for the US), thereby making the US retaliate with similar rates on Indian exports. 

On the basis of tariffs, analysts at Morgan Stanley found India, Thailand and South Korea would be most exposed to retaliation, calculating they would be at risk of an increase of four to six percentage points in weighted average tariffs. Morgan Stanley also found that Japan, Malaysia and the Philippines could be targeted, based on their higher average tariffs. Analysts at Barclays added Indonesia and Vietnam to that list. The EU could also suffer. It levies 10 per cent on car imports, while the US only charges 2.5 per cent. Cars account for 8 per cent of EU exports to the US. The US trade-weighted average tariff is 2.2 per cent, according to the WTO. By contrast, India’s average rate is 12 per cent and reaches 177 per cent for oilseeds, fats and oils.

Also this

4. China's auto industry may be the latest example of its guided markets at work.

China’s auto industry, home to more than 100 carmakers, is vast yet deeply fragmented. Oversupply and a flood of unprofitable start-ups have created an unsustainably crowded market. As a result, investors have largely shunned the sector’s legacy carmakers, instead betting on newer, more innovative EV makers such as BYD and Xpeng... History provides a clear precedent: Beijing has regularly stepped in with policies to consolidate fragmented industries, from steel to telecom. That could be particularly helpful, too, to China’s most profitable EV makers, state-owned groups, such as SAIC Motor Corporation and Guangzhou Automobile Group, and private-sector giants such as Geely Auto Group and Great Wall Motors.

5. China's demographic problem in a graphic.

China’s 1.4bn population declined for a third consecutive year in 2024, despite government efforts to encourage family formation as part of a “birth-friendly society”. Marriages also plummeted. Births did increase last year, their first rise since 2016 and a rebound from a record low in 2023. The birth rate, at 6.77 per 1,000 people, compares with 11.17 births per 1,000 people in the UK in the same year. China’s retirement age is also among the earliest in the world, though policymakers last year outlined plans to raise it gradually, as the economy faces the prospect of a smaller working-age population. The retirement threshold will rise from 60 to 63 for men and from 55 to 58 for women in white-collar jobs. The retirement age for women in blue-collar work will climb from 50 to 55.

6. Tokyo Metro, which debuted last October in the stock market through Japan's largest IPO in six years, had its first fare increase in 28 years in March 2023. It has now signalled the possibility of further increases as inflation starts to bite across the Japanese economy. The Metro, with 6.5 million daily passengers (yet to recover from pandemic), is the most efficient and cheapest in the world and is still half-owned by government bodies and railway operators. 

7. Remarkable story of how South Korea's second largest city, Busan, faces the real likelihood of extinction. 

For most of the 20th century, Busan was a thriving hub of trade and industry. But the city is now in the throes of an exodus of the young that has left it ageing faster than any other metropolitan area in a country that already has the lowest fertility rate in the world. Located on the south-east tip of the Korean peninsula just across from Japan, Busan’s fortunes have worsened since the 1990s as local industries suffer from South Korea’s transition into a high-tech industrial economy... The city of 3.3mn shed 600,000 people between 1995 and 2023. Demographers warn this trend is accelerating as the city’s population ages and Seoul tightens its grip over the country’s economy... Busan retains both charms and assets — mountains and beaches, temples and nightlife, famous film and art festivals and proximity both to Japan and to industrial centres clustered along South Korea’s east coast. While it was the birthplace of leading conglomerates Samsung and LG, not one of South Korea’s 100 largest companies is headquartered in the city.

Busan's ebbs and flows are fascinating

Busan boomed in the second half of the 19th century because of its proximity to Japan — a bridgehead first for Japanese trade and investment and later for colonisation. Japanese industrialists set up factories in Busan producing cheap goods ranging from rubber and shoes to wood. After Tokyo’s defeat in the second world war, the factories were taken over by Koreans and Busan received a surge of returnees from Japan. North Korea’s 1950 invasion prompted a second wave of arrivals after the South Korean government temporarily retreated from Seoul to Busan. Between 1945 and 1951, the city’s population grew from 280,000 to 840,000...

Busan benefited from a “national development strategy” in the 1960s and 70s that built an industrial corridor between it and Seoul, with Busan’s port serving as the main trading hub for a booming export-oriented economy. But the city’s fortunes turned as South Korea moved beyond the production of cheap consumer goods in which Busan’s factories specialised. A Korean economy increasingly powered by the production and export of more sophisticated goods was exemplified by Samsung Electronics’ semiconductor fabrication plants on the outskirts of Seoul. Universities and research institutes migrated to meet the demand for skilled workers. The port of Incheon on the west coast — closer to Seoul, and more convenient for trading with China — supplanted Busan as the country’s leading export hub.

South Korea is at the same time facing a major demographic challenge.

At 0.72, South Korea’s fertility rate — the average number of children a woman is expected to give birth to in her lifetime — was in 2023 the lowest in the world. But despite attracting young people from all over the country, Seoul’s fertility rate in 2023 was even lower — at 0.55. The OECD considers a fertility rate of 2.1 to be necessary to ensure a broadly stable population.

8. Corporate India continues its slow down in Q3 of FY25. 

The combined net sales (gross interest earnings for lenders) of listed companies grew in single digits for the seventh consecutive quarter, while their combined net profit rose by a single digit for the third straight quarter. Total net earnings of 3,618 listed companies increased 6.2 per cent year-on-year (Y-o-Y) to approximately ₹3.47 trillion, while net revenue rose 7 per cent Y-o-Y to about ₹37.73 trillion in Q3FY25. With this, listed companies’ combined net profit rose 4.9 per cent Y-o-Y in the first nine months of FY25 (April-December 2024), against 27.4 per cent earnings growth in FY24 (full year). Their net sales climbed 7.2 per cent Y-o-Y in 9MFY25, a slight improvement from the 6.8 per cent Y-o-Y growth in the entire FY24. Overall earnings growth was primarily driven by improved margins, as manufacturing firms benefited from lower raw material, energy, and interest costs. However, banks and non-banking financial companies (NBFCs) saw margin compression due to rising interest expenses outpacing gross interest income. 

This is an important set of statistics that point to the reality of rich companies in a poor economy.

The profit before interest, depreciation, and taxes margin (PBIDTM), or operating margin, for the entire Business Standard sample expanded 155 basis points Y-o-Y to 28.7 per cent of total income in Q3FY25 -- the highest level in at least 21 quarters. Similarly, the profit before tax margin (PBTM) rose 76 basis points to 12.7 per cent, the second-highest in 21 quarters, while the net profit margin (PATM) increased by about 10 basis points to 8.9 per cent of total revenue from 8.8 per cent a year earlier... companies managed to sustain margins despite weak revenue growth through cost optimisation and reductions in discretionary spending. Other operating expenses — including promotions, advertising, and overheads — declined 1.4 per cent Y-o-Y in Q3FY25, compared with a 9.6 per cent Y-o-Y rise a year earlier and an 11.4 per cent Y-o-Y increase in Q2FY25. The numbers also suggest efforts to optimise labour costs, as total salary and wages expenses for listed firms grew just 6.2 per cent YoY in Q3FY25 — the slowest in at least 17 quarters.

Important pointers about where growth is good and where not so.

Among key sectors, telecom, capital goods & construction, pharmaceuticals, power, and IT services delivered double-digit earnings growth in Q3FY25. Meanwhile, oil & gas, cement, FMCG, mining & metals, and automobiles lagged, posting little to no earnings growth.

9. As foreign manufacturers seek to shift out of China, the country is raising obstacles.

Chinese officials had made it difficult for the Taiwanese-owned contract manufacturer (Foxconn) to send machinery and technical Chinese managers to India, where Apple is keen to build up its supply chain. A manager at another Taiwanese electronics company said that they too were facing challenges sending some equipment out of China to plants in India, though he noted shipments to south-east Asia remained normal. An Indian official alleged China was using customs delays to impede the flow of components and equipment heading south. “Electronic industry supply players have been told not to establish manufacturing and assembly operations in India,” the official said, asking not to be named. Media site Rest of World earlier reported on some of Foxconn’s issues. Analysts say Beijing’s emerging playbook resembles the western tech transfer restrictions it has loudly criticised as unfair. The informal controls appear in particular to target China’s geopolitical rival India, with some Chinese groups saying that projects in south-east Asia and the Middle East remain unaffected.

This on Apple's quest to make India rival China as its major manufacturing hub.  

10. Impressive success story of Nashik's grape farmers.

Sahyadri Farmer Producer Company Ltd (SFPCL) is one such company operating in Nashik district of Maharashtra, which provides a blueprint for success. Founded in 2004 under the leadership of Vilas Shinde, SFPCL started with just 10 farmers. It has grown into a network spanning 252 villages, 31,000 acres, and over 26,500 registered farmers in 2023-24. SFPCL’s annual turnover skyrocketed from Rs 13 crore in 2011-12 to Rs 1,549 crore in 2023-24. Of SFPCL’s total revenue, 64.6 per cent comes from the domestic market, while exports contribute 35.4 per cent, reaching 41 countries worldwide. Grapes and tomatoes lead the total revenue mix, together accounting for 51.7 per cent of the revenue, followed by citrus, dry fruits, and mangoes... At the core of Sahyadri’s success is its ability to bridge the gap between small farmers and global markets by integrating aggregation, value addition, processing, and direct market linkages. SFPCL has built strong relationships with international buyers, ensuring that Indian farmers get access to premium markets by adhering to stringent quality and traceability standards following Good Agriculture Practices (GAP). SFPCL is the largest grape exporter of the country... farmers receive, on an average, about 55 per cent of the FOB price.

11. Kyoto-based Murata Corporation, world's leading manufacturer of multi-layer ceramic capacitors, a major component of iPhones and electronics in general, plans to move some production to India, starting with packaging.

Murata’s components are found in almost all electronics, from Apple Inc. and Samsung Electronics Co. smartphones to Nvidia Corp. servers and Sony Group Corp. game consoles. The company has also helped put a NASA helicopter on Mars. Right now, it makes almost 60 per cent of its MLCCs in Japan... Murata is the world’s leading supplier of capacitors, which regulate the delivery of power to electric components... Murata to rent a plant in OneHub Chennai Industrial Park in India’s southernmost state of Tamil Nadu, where it plans to package and ship ceramic capacitors in the fiscal year starting April 2026. Murata is using the ¥1 billion ($6.6 million) five-year lease to test long-term demand in the country, before it commits to building a factory to span more production processes, Nakajima said. “It’s too early for us to build an integrated production facility in India, because the infrastructure for inputs such as power hasn’t reached the level we need, but we wanted to move early to build some capacity there as our customers shift production,” Nakajima said. “There’s growing consumer demand for electronics in the country, and we also should be ready to respond quickly when India introduces new incentives to encourage domestic manufacturing.”

11. Shyam Saran has a very good oped that looks at the ideological underpinning for the Trump administration, the so-called Dark Enlightenment. 

12. China's increasing influence in Latin America

China controls approximately two-thirds of the energy sector in Chile and virtually all of the power generation in Lima, Peru. In November, President Xi Jinping inaugurated a $3.5bn megaport north of the Peruvian capital, a state of the art logistics hub which serves as a critical link in the Belt and Road Initiative. China has now replaced the US as the predominant trading partner of many of the larger economies in the region, with the exception of Mexico and Colombia. As one observer put it, “the Chinese bring their cheque books and the Americans bring their notebooks”. As a result, the US is losing not just market share and influence, but also the ideological battle between free market, rule-of-law capitalism and state-owned-enterprise autocracy. Pleading with host governments not to strike deals with the Chinese is not an effective strategy. Instead, what the US must do is construct a viable American-led alternative to Chinese investment.

13. Very good summary of the progress made in India's space industry thanks to progressive government policies 

Government policies have been instrumental in nurturing India’s space startup ecosystem. A major boost came with the launch of 75 space-related iDEX challenges during DefExpo 2022. The establishment of IN-SPACe, a regulatory body for private sector involvement, and Isro granting access to its launch facilities, ground stations, and testing infrastructure have further accelerated progress. The government’s commitment is evident in the creation of a Rs 1,000 crore venture capital fund and the allocation of 31 out of 52 SBS-3 program satellites to startups, empowering this burgeoning sector. While Isro pioneered cost-effective space innovations, startups are taking efficiency to the next level. By focusing on smaller, application-specific LEO satellites, they leverage modular designs, commercial supply chains, and off-the-shelf components to build satellites faster and more affordably. Additionally, by utilising ride-share launch options, these startups significantly reduce overall costs.

14. Impressive trajectory of highway and rural roads formation in India.

The national-highway network nearly tripled in length from 52,000km in 2000 to over 146,000km last year, adding an average of around 3,900km a year. Less well-known is the infrastructure revolution in the countryside. In 2000 India had just 545,000km of surfaced rural roads, usually of dubious quality. By last year, the country had added an additional 773,000km, at an annual average of 33,500km, under one programme alone.

15. Important point for Europeans to consider when engaging with India.

Without the kind of outside security guarantor that has underpinned European security for decades, India has developed some measure of the “strategic autonomy” Europeans now crave. It has form when it comes to playing off potential partners against each other. Europeans winced when Mr Modi last year hugged Russia’s Vladimir Putin in Moscow (perhaps unsurprisingly given Russia is still its biggest supplier of arms) while also getting closer to America. That is the type of diplomatic contortion even a yogi would struggle to pull off. Europeans may not like it, but they should at least try to understand it.

16. The Economist has an article on the importance of shoes in running speeds. It talks about the transformation brought about by Nike when it introduced a new type of super shoes with its Zoom Vaporfly 4% model in 2016. 

They typically have curved soles made of a stiff carbon plate sandwiched between layers of specially engineered springy foam. The result is often very thick—up to 40mm tall at the heel, the maximum allowed for competitive racing (regular trainers are usually around 25-35mm tall). These features make running easier. Lab tests have shown that recreational runners use less oxygen and report feeling less tired while jogging in premium trainers compared with regular ones. Platformed soles encourage a slightly longer stride, which means fewer steps per kilometre. And a squishy base, which absorbs impact before bouncing back up, eases the strain on leg muscles. By reducing the energy needed to maintain normal pace, super shoes allow runners to put more effort into going faster.

Of the 50 fastest men’s marathon times only nine predate 2017; the figure for women is just three. In the eight years since the launch of the Nike Vaporfly, more than three times as many men’s marathons were completed in under two hours five minutes than in the eight preceding years. Before super shoes, only 26 women’s races had been run in less than 2:20. In 2024 alone there were 35. Studies estimate that the high-tech trainers have shaved between one and four minutes off elite marathon times... runners wearing super shoes completed races 4-5% faster than those in average trainers, even after controlling for ability and training... wearing the premium shoes gave runners a 73% chance of setting a personal best...Adidas’s top model, the Pro Evo 1... cost $500 and are marketed as a single-race shoe. As the miles add up, most super shoes quickly lose grip and the foam in the sole deteriorates, dampening their signature springiness.