Weekend reading links

1. Toyota fact of the day

Toyota... the world’s largest auto manufacturer by volume. The company’s annual revenues now account for roughly 8 per cent of Japan’s nominal GDP.

2. AI is supercharging weather forecasting, which has become very accurate over the years.

3. Right to repair

A committee under the Department of Consumer Affairs has designed a Repairability Index for the mobile and electronic sector based on six criteria: Disassembly depth, repair information, availability of spare parts within a reasonable timeline, software updates, tools, and fasteners (types and availability). A scorecard of a product would be asked to be displayed at the sales counter, on the e-commerce platform, or on the package itself. On May 2, Belgium became the second country in Europe after France to implement a Repairability Index. The Belgian index is mandatory for pressure washers and laptops (excluding tablets). It also assigns a score from 1 to 10 to products like dishwashers, vacuums, and lawnmowers, allowing buyers to make a conscious choice based on a product’s repairability. The country is also expected to extend the index to bicycles — especially electric ones — as well as electric scooters in the future.

4. What Tesla stands to lose from the Big Beautiful Bill?

The bill would eliminate tax credits of up to $7,500 for people who buy electric cars. It would quickly phase out subsidies for battery factories and lithium refineries, and end financial support for electric vehicle charging stations. The bill imposes an annual fee of $250 on electric vehicle owners that environmental groups say is punitive. Those measures would hurt all carmakers that sell electric vehicles. But the Trump administration and Republicans in Congress are also trying to kill regulations that are especially beneficial to Tesla. Those rules allow Tesla to sell clean air credits to other carmakers that fail to meet environmental standards. During the first three months of the year, Tesla sold regulatory credits worth $595 million, which was more than the company’s net profit of $409 million. In other words, without the credits, Tesla would have lost money...

The Republican measures would result in sales of 7.7 million fewer electric vehicles by 2030 than would be the case if Biden administration policies remained in place. Tesla would sell 3.4 million fewer electric vehicles, or almost two years’ worth of sales, assuming it maintained its current U.S. market share of 44 percent of all new electric cars sold. Republican legislation would also eliminate programs that subsidize the cost of large battery storage projects, which has been a growth business for Tesla.

More here

5. Vietnam's spectacular manufacturing success is not translating into much value addition and risks the middle income trap. 

Annual foreign direct investment (FDI) reached $19bn in 2023. Foreign enterprises accounted for a fifth of GDP that year, up from 6% in 1995. The biggest is Samsung, whose complex in Pho Yen, a factory town near Hanoi, employs some 160,000 workers, who assemble the bulk of Samsung’s smartphones. The FDI boom, in turn, has produced a surge in exports, which have risen eight-fold since 2007, to $385bn a year. Foreign firms account for just 10% of employment and 16% of investment, but 72% of exports. Samsung alone accounts for 14%. Yet Vietnamese workers are simply assembling parts made, by and large, in China or South Korea. Even as export volumes have ballooned, the average unit value has stagnated. Vietnam adds less value to its exports than do nearby Malaysia and Thailand. Because final assembly is labour-intensive, productivity is low. Vietnam’s output per hour worked is 37% below the average for upper-middle-income countries in Asia. Over 90% of jobs in manufacturing require few or no skills...

Multinationals in Vietnam source the lowest share of local inputs of any country in East and South-East Asia. Despite Samsung Electronics’ huge presence in Vietnam, none of its core suppliers is a homegrown Vietnamese firm, noted a recent article in Guancha, a Chinese news outlet, that was widely read among the Vietnamese elite. The small number of Vietnamese firms that do supply global manufacturers mainly provide simpler materials, such as cardboard and plastics.

Meanwhile, Vietnam has reached the “Lewis turning point”, at which developing economies exhaust their rural labour surpluses and wages begin to rise swiftly. Between 2014 and 2021, over 1m agricultural jobs disappeared each year despite a growing labour force; in 2022-23 the pace decelerated to 200,000. Labour costs in manufacturing are already higher than in India or Thailand and are set to climb by a further 48% by 2029, according to the Economist Intelligence Unit, our sister company. Vietnam could soon end up too expensive for labour-intensive manufacturing yet too technologically unsophisticated to do much else—a classic middle-income trap.

This low value addition is something India should guard against. This sounds impressive reform by President To Lam.

Mr Lam has been boldest. He has abolished five ministries and eliminated an entire layer of the bureaucracy, at the level of Vietnam’s 705 districts. He is reducing the number of provinces from 63 to 34. All this is eliminating 100,000 jobs from the civil service. He has decreed that there should be a 30% reduction in red tape. At the same time Mr Lam wants to build administrative capacity. He has called for higher pay for capable civil servants. Some of his changes seek to reverse the legacy of “blazing furnace”, an anti-corruption campaign initiated by his predecessor. Over 330,000 party members were prosecuted or punished and tens of thousands resigned. The effect was to make bureaucrats drastically risk-averse. Mr Lam has instead sought to engender an atmosphere of tolerance of mistakes.

6. China's EV dominance in two graphics. First, its share of major global markets

Second, the competitiveness gap between its battery manufacturers and the rest of the world. 

7. Important graphic about the changing perceptions about dollar safe haven status.

What we’ve been seeing in recent months, with interest rates and the dollar moving in opposite directions, doesn’t look like what we normally see in the United States, or for that matter advanced nations in general. Instead, it’s the kind of thing one sees in emerging markets, where big market moves often reflect crises of confidence: International investors lose faith, pulling their money out, and capital flight causes both a falling currency and rising interest rates.

8. Reshoring manufacturing to the US faces daunting challenges. For most products, manufacturing in the US is more costly than for its largest trading partners.

Manufacturing costs in the United States are significantly higher.

9. If the tariffs on China were intended to gain leverage in negotiating a trade deal for the US, then it appears to have handed back all that leverage with the two rounds of negotiations that have been held to date. It appears that China has succeeded in linking its restrictions on rare earth exports to the US's restrictions on high technology exports. 

The US has accused China of not honouring its pledge in Geneva to ease restrictions on rare earths exports, which are critical to the defence, car and tech industries, and dragging its feet over approving licences for shipments, which has affected manufacturing supply chains in the US and Europe. Beijing has accused the US of “seriously violating” the Geneva agreement after it announced new restrictions on sales of chip design software to Chinese companies. It has also objected to the US issuing new warnings on global use of Huawei chips, and cancelling visas for Chinese students. On Monday, a senior White House official indicated that Trump could ease restrictions on selling chips to China if Beijing agreed to speed up the export of rare earths. That would amount to a significant policy shift from former president Joe Biden’s administration, which implemented what it called a “small yard, high fence” approach designed to restrict Beijing’s ability to obtain US technology that could be used to help its military.

Instead of building on President Biden's successes in restricting high-technology exports, President Trump appears to have allowed the Chinese to place on the negotiating table their easing in return for similar easing of their recently imposed export controls on rare earths. Here is Hal Brands,

China wants few things more than a relaxation of curbs on its access to high-end semiconductors; so do corporate players and analysts who argue that they do more harm than good. Although the details are hazy, the Trump administration reportedly agreed to lift some recent controls as part of a deal to deescalate the trade war. Let's hope the administration doesn't go much further than that. Ditching or dramatically rolling back the measures that preserve American's technological advantage — and that have been imposed, with bipartisan backing, over the past several years — would be strategic self-sabotage of the highest form.

The export controls at issue pertain to the most advanced computer chips and the inputs, both hardware and software, required to make them. During Trump’s first term, the US hit specific Chinese firms, namely Huawei, with targeted bans. Under President Joe Biden, Washington went big: It intensified the tech war by expanding their application to cover China as a whole. Since then, Washington and Beijing have been playing cat-and-mouse, as China has sought to evade tech controls while the US gradually tightens them... The goal, as then-National Security Adviser Jake Sullivan said in 2022, was to maintain “as large a lead as possible” in key sectors like AI and advanced computing, because those sectors will shape the future economic and military balance... if Trump's deal with Xi entails an agreement not to impose new export controls in the future, it will — thanks to the cat-and-mouse dynamic — severely erode America's ability to keep even its existing restrictions effective and up to date.

10. Samsung appears to have done a better strategy of geopolitical risk diversification than Apple.

A research by S&P Global shows that Samsung’s share of global final assembly volume of smartphones in India in 2024 was at 25 per cent compared to only 15 per cent of the Cupertino-based Apple Inc in the same period. For Samsung, its biggest exposure is smartphone assembly in Vietnam, which is more than double of India at 55 per cent, and Brazil is in the third spot at 12 per cent. These account for the top three assembly markets. In the case of Apple Inc, its exposure to different countries is very different — China still dominates with 83 per cent, a market from where Samsung had withdrawn assembly years ago in phases, preferring to shift to Vietnam and India. And apart from China and India, Apple has a small exposure of 2 per cent in Brazil and some other countries... one commonality in both Samsung and Apple is that they don’t assemble their phones in the US.

11. Are private credit and hedge funds the likely sources for the next financial crisis? TT Rammohan writes

The Economist says, “The five top players in private credit manage $1.9trn of credit assets across funds and insurance balance-sheets. Assets of the five biggest multi-manager hedge funds sit at $1.6trn, including huge leverage.” Moody’s Analytics warns that private credit’s linkages with banks and insurers could make it a “locus of contagion” in the next crisis. It warns that private credit could amplify a future financial crisis even if it’s not the source of one... after the GFC, bank ownership or sponsorship of hedge funds in the US has come to be heavily restricted under the Volcker Rule. Data on bank exposure to hedge funds in the US must be made public... Bank failure during the GFC was pervasive due to the combination of three factors: Excessive leverage, inadequate liquidity and mark-to-market losses on the proprietary trading book (and not losses on loan exposures). All three have come to be addressed by regulation. Banks are better capitalised. The Liquidity Coverage Ratio ensures that banks are better covered for liquidity. Stiffer capital requirements have discouraged proprietary trading. These measures may need to be augmented by bringing systemically important entities among hedge funds and private credit under the ambit of regulation if required. The Financial Stability Oversight Council in the US has the authority to do so.

12. Which is the world's largest packaged food company? JBS, a Brazilian company started in 1953, had revenues of $78 bn in 2024 with half its sales in the US.  

13. The Print has a good article on Gujarat’s potato revolution

The growth of the fast-food industry and increasing consumer cravings for fries, hash browns, and ready-to-cook frozen products kicked off this change. Homegrown companies like HyFun, Falcon Agrifriz, Iscon Balaji, and McCain started investing in processing technologies and an expanding network of high-end cold chain facilities crystallised. Scientists did their part as well. The Central Potato Research Institute (CPRI), under the Indian Council of Agricultural Research (ICAR), developed varieties with low sugar and high dry matter—qualities that make for crispier fries that soak up less oil. Now, India is not only meeting its own demand but shipping frozen potato products internationally.

Programs and ideas are a distraction in development

Arguably, the biggest distraction in development is the disproportionate importance given to the idea of designing programs or schemes to address specific problems as the primary route to development and economic growth. 

It displaces attention away from the core broad issues of development and economic growth. It encourages a reductionist view of development and detracts from the processes and struggles associated with making choices and decisions in acutely resource-constrained environments. 

Instead, it fixates the public system (politicians and bureaucrats, but in their different ways) on the implementation of narrowly defined inputs and activities of programs. It’s an unfortunate reality of modern development discourse since the end of colonialism that whole systems and countries have become entrapped in the pursuit of programmatic development. 

This distortion has been the combined handiwork of politicians, bureaucrats, donors, and experts. The programmatic approach to the development endeavour suits them all in their different ways. The politician gets to appropriate the credit, the bureaucrat gets the comfort of being able to administer something tangible, donors know what they are funding and whether it’s achieving its objectives, experts can critique and offer new ideas about improving the design of these programs, and academicians can evaluate them. 

These programs are built on a body of assumptions about the problem statements, objectives, diagnoses, and prescriptions. So, for example, in the world of programs, the issue of poor learning outcomes is dealt with primarily by building schools, hiring teachers, providing uniforms and textbooks to students, prescribing a curriculum and syllabus, conducting tests, and monitoring the implementation of all these (and now we also have providing digital devices and content). These components are brought under the umbrella of one or more programs and schemes. There’s a neatness and simplicity to this approach. 

This programmatic focus sidesteps the hard public debates and tough choices and trade-offs around the expectations from education expenditures, prioritisation of scarce resources, creation of implementation capabilities, monitoring of outcomes and impact, and accountability mechanisms at different levels. Such debates tend to be anchored on the local context, its challenges, and practical issues with solutions and their implementation. Most importantly, the absence of such debates prevents ownership of education department initiatives by its primary stakeholders (students, parents, teachers, and communities). 

At a macro-level, it engenders critical distortions. It anchors the agenda around redistribution and expenditures, while also marginalising the focus on economic growth and resource mobilisation. It glosses over the debates about the constraints on and enablers of economic growth, and the capabilities, strategies and choices necessary to address them. 

Another consequence of the program focus in development is that it crowds out the process. It’s appropriate here to point out that we consistently overestimate the importance of ideas in development when, in reality, implementation is what matters. As I have written here, there is hardly any idea in development that is truly new and innovative, and has not already been tried before at multiple places. And where they have been tried earlier, they have succeeded or failed in varying degrees depending purely on the quality of implementation.

Lack of ideas is not a constraint on the resolution of the big problems in development - sanitation and hygiene, nutrition and child health, learning outcomes and skills acquisition, lifestyle diseases, affordable housing and traffic congestion, community ownership and management, etc. Commentators and experts wax eloquent with op-eds and books prescribing ideas on every problem in the world. They are barking up the wrong tree. 

The biggest variance in development is implementation. Essentially, the same things are being done across development sectors everywhere, developed and developing countries, though their success or failure varies widely, almost completely due to the nature of their implementation. 

With this backdrop, a few observations:

1. The foremost requirement for sustainable and focused change is political ownership. While bureaucrats may be able to take the lead with limited infrastructural, logistical, and regulatory initiatives and reforms, systemic transformations rooted in deep behavioural and attitudinal acceptance/change cannot happen without political leadership. Such political leadership can be driven only by public demand. In simple terms, the issue must become an electoral imperative. Unfortunately, none of the problems discussed above are yet an electoral good.

2. There cannot be any meaningful effort to address complex (or wicked) public issues without ownership by the bureaucratic system, especially of the frontline bureaucracy. There must be an account or narrative that is individually and collectively internalised. Accountability must be built and shaped by this account. 

3. Account-based accountability is meaningless and unsustainable without sufficient agency for bureaucrats, especially those at the frontline, given the critical importance of implementation. Besides, agency also creates ownership. 

4. Effective implementation requires sufficient space for problem-solving. This space should be available at all levels of implementation, especially at the cutting-edge level where things get done. The most important requirement to create this space is a culture that allows experimentation and tolerates honest failures.

5. Effective problem-solving requires a few things. Foremost, it requires the application of an analytical framework that enables understanding and defining the problem, diagnosing its reasons, evaluating solutions, finalising and implementing a solution. Given the uncertainties involved, it must use data and evidence to monitor and guide the trajectory of implementation. Problem-solving in development should generally be seen as a never-ending iterative process, where outcomes improve gradually and continuously. 

None of this should be seen as a critique of all programs. In some areas, programs are useful. Further, once the debates are had and choices are made, programs are a useful anchor for execution. 

Weekend reading links

1. Some snippets about the Dharavi redevelopment project master plan that has been approved by Maharashtra government.

The Dharavi redevelopment is being carried out by Dharavi Redevelopment Project Private Limited (DRPPL)—a special purpose vehicle that is a joint venture between the state government’s Slum Rehabilitation Authority (SRA) and the Adani Properties Private Limited (APPL). The DRPPL is now called the Navbharat Mega Developers Private Limited (NMDPL), in which APPL holds 80 per cent stake while the remaining 20 per cent is with the SRA... According to official estimates, a total of 72,000 tenements will be constructed for rehabilitation, which includes 49,832 residential units for eligible slum dwellers, 8,700 renewal units for residents with valid tenure,12,458 commercial/industrial units and 1,010 commercial renewal units. According to the master plan, out of the total net usable area of 108.99 hectares available for development, 47.20 hectares is for rehabilitation of Dharavi tenants, 10.88 hectares for additional facilities such as museums, hostels and community halls, 2.96 hectares for utility and the remaining 47.95 hectares is land that will be developed for market sale by the SPV NMDPL. The total estimated cost of the project is Rs 95,790 crore... the special purpose vehicle that is undertaking the Dharavi redevelopment on the 251.24 hectares of Dharavi Notified Area... it needs to construct 72,000 housing and commercial units on 47.20 hectares. According to the special purpose vehicle, only those who occupy ground floor structures will be eligible for rehabilitation

The real challenge will be now with the claims and counterclaims on the actual number of eligible beneficiaries. And disputes are already out in the open.

“In Dharavi, there are one lakh ground-floor structures, whose residents are eligible for rehabilitation. Apart from that, there are at least 1.5-2 lakh tenants who reside on the second and third floors. If only 72,000 units are there for eligible tenants, are they going to declare the remaining 30,000 tenants ineligible for rehabilitation? Is their survey accurate? Have they completed the survey?,” said Rajendra Korde, president of Dharavi Redevelopment Samiti.

See also this on exemptions and concessions sought by NMDPL, which has also been allotted 541 Acres outside the city.   

2. Andy Haldane suggests that countries should shed the focus on GDP and instead focus on what he feels citizens value, intergenerational or social mobility.

Based on surveys of citizens, academic Carol Graham’s research suggests upward mobility is more important to public satisfaction than income. For example, poorer communities and countries, where prospects have improved significantly relative to earlier generations, are happier than richer places where generational prospects have faltered or fallen. In short, generational journeys matter more than GDP destinations. When it comes to wellbeing, then, social mobility trumps national income. Lasting societal success relies more on unlocking opportunity than on maximising output... 

The American dream has, for many, died. Surveys suggest only around a quarter of Americans now believe “the American dream holds true”. As recently as 2010, it was more than half. The “Opportunity Atlas” constructed by economist Raj Chetty suggests these perceptions accurately reflect a new reality in which social mobility has stalled, or is in retreat, across many parts of the US over the past half-century. UK measures of social mobility suggest a similar stalling or retreat. The average person today in their twenties and early thirties is earning less than their parents at an equivalent age, after accounting for inflation. Many are less likely to own homes than their grandparents and some than their great-grandparents. For them, the opportunity escalator has stalled or is in reverse...GDP measures everything except that which is worthwhile. These words of Robert F Kennedy in 1968 are even truer now than then. Stalled social mobility has blocked the only reliable road to sustained wellbeing and growth.

3. Apparently, 478 unicorns were created in the US in 2021, about 31% of all VC-backed unicorns ever created. It came on the back of "the combination of low interest rates, abundant capital, sugar-high valuations and the rush to digital platforms during the Covid lockdown was the industry’s happy hour".

4. Football as an urban regeneration anchor?

The football stadium is the linchpin. Clubs are building new stadiums or refurbishing existing homes to target fans with the money to splash on high-end hospitality. They are also competing to host the world’s most famous singers and bands to squeeze additional revenue out of their infrastructure. The money helps clubs to buy top players and pay their multimillion-pound salaries. But Wagner and the other wealthy owners buying into England’s favourite sport want to convince the government that new stadiums can also be the catalyst for broader urban regeneration and economic growth... Local politicians are also considering setting up an urban development corporation — a tool first used in the city in the 1980s, intended to fast-track planning — across part of that area. Birmingham and Manchester are considering similar vehicles, headed up by metro mayors, to fast track their own football-led regeneration schemes...

One of the most controversial proposals for stadium-led regeneration is in Manchester. Sir Jim Ratcliffe, the Monaco-based billionaire co-owner of Manchester United, is making the case for building a “Wembley of the North” — referring to the £750mn national stadium in London that was built with private and public funding and boosted the local area through investment in roads, rail and routes for pedestrians. Ratcliffe argues that a new 100,000-seat stadium can “be the catalyst for social and economic renewal of the Old Trafford area”. The project’s cheerleaders have requested more than £200mn in June’s spending review to unlock development around the stadium. The funds would ostensibly pay to remove an adjacent freight terminal to open up space for the new stadium.

5. Contrary to popular narrative, India's deep tech innovation funding is limited.

Even in 2022, its peak, deep tech funding was just $2.6 bn, and is now less than a billion dollars. 

6. Innovation is required in areas of importance for countries like India. An example is air conditioners, which are still stuck in the more than a century-old technology of compression and gasification of climate-unfriendly coolants.

7. Last week President Trump paused the exports of airplane and semiconductor technologies to China. This is a serious problem for the Chinese aeroplane manufacturing endeavours. 

In 2008, China established the state-owned Commercial Aircraft Corporation of China, or COMAC, with the goal of putting a single-aisle commercial jet into service by 2016. Development of the plane has been slow. The company, which occupies a large expanse of newly built hangars and design studios in Shanghai, suffered delays despite extensive assistance from American and European companies. Its plane, the C919, did not go into commercial service until 2023... At least 40 percent of the C919 is made by companies in the United States and other countries in the West... The C919 is similar to an Airbus A320, a popular single-aisle jet made by the European aviation manufacturer. It also competes with the Boeing 737... the C919 also depends on engines and other key components controlled by the United States... COMAC had put only 16 C919s into service by the start of this year, but is now ramping up production and has amassed close to 1,000 orders... China has shared limited information about the plane, which only mainland China and Hong Kong have approved for use... 

General Electric in particular has played a central role on the C919. It has worked with a Chinese military contractor to supply avionics computers for navigation, communication and controls. And a GE joint venture with Safran Aircraft Engines of France supplies the plane’s jet engines... Less than two years after COMAC was founded, when the C919 was still a distant dream, General Electric agreed to a partnership with the Aviation Industry Corporation of China, or AVIC, a leading Chinese defense contractor. General Electric shared its most advanced commercial avionics with AVIC for the C919, the same state-of-the-art system it had just developed for Boeing’s 787 Dreamliner jet. General Electric and AVIC worked together on equipping the C919 with an advanced computer core processing system. AVIC has also developed China’s most advanced bombers and its latest stealth fighter jets. It does much of its production in Xi’an, the hub of China’s military aircraft manufacturing industry.

8. NYT has an article on the one topic that should have attracted more attention, the impact of job losses from US tariffs on the Chinese economy and society. Estimates point to job losses in the range of 6-9 million in China with reduced exports to the US. 

9. President Trump monetises the presidency for the private benefit of him and his family, normalising activities that would have been scandalous in any other times. A sample.

After dinner at Mar-a-Lago, Jeff Bezos agreed to finance a promotional film about Melania Trump that will reportedly put $28 million directly in her pocket.. The Trumps... have done more to monetize the presidency than anyone who has ever occupied the White House. The scale and the scope of the presidential mercantilism has been breathtaking. The Trump family and its business partners have collected $320 million in fees from a new cryptocurrency, brokered overseas real estate deals worth billions of dollars and is opening an exclusive club in Washington called the Executive Branch charging $500,000 apiece to join, all in the past few months alone. Just last week, Qatar handed over a luxury jet meant for Mr. Trump’s use not just in his official capacity but also for his presidential library after he leaves office. Experts have valued plane, formally donated to the Air Force, at $200 million, more than all of the foreign gifts bestowed on all previous American presidents combined. And Mr. Trump hosted an exclusive dinner at his Virginia club for 220 investors in the $TRUMP cryptocurrency that he started days before taking office in January. Access was openly sold based on how much money they chipped in — not to a campaign account but to a business that benefits Mr. Trump personally... The money Mr. Trump’s family is now bringing in from the Middle East is going into their personal accounts through a variety of ventures.

This is an interesting observation about the lack of public outrage.

Paul Rosenzweig, who was a senior counsel to Ken Starr’s investigation of President Bill Clinton and later served in the George W. Bush administration, said the lack of uproar over Mr. Trump’s ethical norm-busting has made him wonder whether longstanding assumptions about public desire for honest government were wrong all along. “Either the general public never cared about this,” he said, or “the public did care about it but no longer does.” He concluded that the answer is that “80 percent, the public never cared” and “20 percent, we are overwhelmed and exhausted.” “Outrage hasn’t died,” Mr. Rosenzweig added. “It was always just a figment of elite imagination.”

10. India's private fixed capital formation has been stagnant at about 25% for more than a decade. 

11. Regulation in the US

The California Environmental Quality Act (CEQA) was passed in 1970, a law that grants standing to all 40mn residents of California to sue any project they want, public or private. The suits can be anonymous. By one estimate, only 13 per cent of CEQA lawsuits are launched by environmental organisations; the rest are filed by business competitors, Nimby neighbours or labour unions. It is less an environmental law than a tool for extortion. In one recent case, the University of California at Berkeley wanted to add a few thousand students to their student body; the school’s upper middle class neighbours sued under CEQA on the grounds that the extra students would in effect constitute an environmental pollutant. A judge agreed, and the school’s expansion was blocked. While it is usually conservatives who complain about excessive permitting, it was progressives who initially backed CEQA because they didn’t trust the government to enforce its own rules. This has led to the ironic result that building renewable energy infrastructure is being blocked by environmental regulations like CEQA that make it very hard to do things such as construct transmission lines or offshore wind farms.

And the big, beautiful bill adds to this. Gilliant Tett writes

But what investors should also fret about, if they care about the state of Treasuries or are a non-American entity holding US assets, is a clause buried in the bowels of this behemoth called section 899. This would enable the US Treasury to impose penalties on “applicable persons” from “discriminatory foreign countries” by increasing US federal income tax and withholding rates by up to 20 percentage points on their US investments, on a variable scale. It might thus be viewed as a novel “revenge tax” (as some lawyers call it) that Trump could use to bully friends and foes alike in trade negotiations.

12. The US is powering ahead on AI.

In 2024, private expenditure in AI grew to $109bn, nearly 12 times China’s $9.3bn and 24 times the UK’s $4.5bn, according to Stanford University research. US-based institutions produced 40 “notable AI models, significantly surpassing China’s 15 and Europe’s . . . three”, according to the Stanford researchers.

13. Switzerland's paradox of a strong currency with rising exports.

The world’s richest major economy has both a strong currency and a strong manufacturing base. The Swiss franc has been the top-performing currency over the past 50 years, 25 years, 10 years and five years. It is near the top even over the past year when some of the more beleaguered currencies have staged a comeback against the dollar. Nothing can compare for durable strength. Yet Switzerland also defies the assumption that a strong currency will undermine a nation’s trading prowess by making its exports uncompetitive. Its exports have risen and are near historic highs both as a share of Swiss GDP (75 per cent), and as a share of global exports (near 2 per cent). The global conversation has become unduly obsessed with currency valuations, which are just one of the factors that shape a nation’s competitive position. Like Germany and Japan in their heydays, Switzerland has gained a reputation for goods and services of such high quality that the rest of the world is willing to pay a currency premium for the “Made in Switzerland” label...

It generates more than $100 in GDP per hour worked — that’s more productive than any of the other 20 largest economies. Its decentralised political and economic system encourages the rise of small enterprises, which account for over 99 per cent of Swiss companies. It also has a large share of globally competitive businesses in sectors from pharmaceuticals to luxury goods. Harvard’s Growth Lab ranks Switzerland number one among major economies for the “complexity” of its exports, a measure of the advanced skills needed to produce them. And its exports range from chocolates and watches to medicines and chemicals — belying the notion that strong currencies kill factories. At 18 per cent of GDP, its manufacturing sector is one of the largest among developed economies. Over half its exports are “high-tech” — more than double the US level. Since advanced goods are more expensive, this has helped Switzerland keep its current account in surplus, averaging more than 4 per cent of GDP since the early 1980s.

14. Trump Always Chickens Out (TACO) is the new buzz phrase. This is the finding of research by Jeremy Shapiro of the European Council on Foreign Relations. 

Trump enjoys issuing blood-curdling threats of the use of force. But he very rarely follows through... Looking at Trump’s two periods in office, Shapiro finds 22 occasions so far in which he has threatened the use of force — but only two in which he has actually followed through. There have been 25 actual uses of force — mainly limited strikes against terrorist groups such as Isis or al-Qaeda. But only on two occasions were they preceded by a presidential threat. Surveying the record, Shapiro comes to a clear conclusion: “Trump uses threats and force much like a playground bully: while large and outwardly powerful, he actually fears the use of force in any situation even vaguely resembling a fair fight . . . Actual violence only occurs against much weaker foes that have no hope of striking back.” 

15. Simon Kuper on government successes.

The narrative of government failure is trumpeted by anti-system politicians and amplified by their supposed adversary, the media. The journalistic maxim says, “If it bleeds, it leads.” The corollary is that if somebody stops the bleeding, the story stops being a story. And if politicians make such an efficient early intervention that a disaster never happens, it never becomes a story in the first place. Take the US bailout of banks in 2008/09, which arguably prevented the financial crisis from spiralling... The moment a societal problem is ameliorated, it is practically forgotten.

16. The challenge with reshoring manufacturing to the US in sectors like textiles and footwear.

There just aren’t enough workers. American factories are already struggling to fill around 500,000 manufacturing jobs, according to estimates by Wells Fargo economists... Mr. Trump’s crackdown on immigration has made things worse. Factory jobs moved overseas to countries, like Vietnam, that had growing populations and young people looking for jobs to pull themselves out of poverty... Mass production in America is tough. A sewing machine operator earns $4,000 a month in Los Angeles, compared with $500 in Vietnam.

17. Indebtedness in the developed world is spooking the bond markets.

At the heart of the global economy, long-term yields in the $29tn US Treasuries market have topped 5 per cent in recent weeks, close to the levels reached in 2023 — when investors feared interest rates would have to stay higher for longer to contain inflation — and before that their highest since the financial crisis. This is taking place just as a tax and spending bill that could add more than $2tn to America’s debt makes its way through Congress... France’s debt burden was described as a “sword of Damocles” last year by then prime minister Michel Barnier. Europe’s third-largest economy is expected to spend €62bn on debt interest this year, roughly equivalent to combined spending on defence and education, excluding pensions. In the UK, 30-year government borrowing costs reached their highest levels since 1998 this year amid investor concerns over the growing debt pile and ministers’ lack of headroom against their self-imposed fiscal rules. Even Germany, a historically reticent borrower with much lower debt levels, is planning to increase Bund issuance. In Japan, where the central bank’s ultra-loose monetary policy kept long-dated yields below 1 per cent for years, a brutal sell-off has taken them to record highs. The 30-year yield on Japanese government bonds is hovering around 3 per cent.

This has come on the back of record sovereign debt issuance after the pandemic.

18. Finally, the epic fallout between Donald Trump and Elon Musk was always on the cards. The US government is itself now finding out the perils of relying on Musk in particular and on one individual in general, as the example of NASA's reliance on SpaceX shows. A more powerful latent enemy who could inflict greater pain on Musk is Steve Bannon. 

Some observations. One, Elon's firms will feel squeezed in multiple ways, and Tesla, Starlink and Space X will be the biggest impacted. Two, the competitors to these firms will get a leg up. Kuiper in particular will be a big beneficiary. Three, will this be the beginning of the end of Musk's China relationship? Four, what message does this send to governments worldwide who had been rolling out the red carpet to Musk's companies? Finally, we may have seen Peak Musk, and the decline could be very steep and terminal if a few things play out. 

Given his drug addiction and other skeletons, in normal times it would have been a safe bet that if the US Government put its mind to it, Musk could come out of all this seriously damaged and diminished. But it's also possible in these times that the plutocrats and moneyed influencers in the Trump coalition could get both people together for a compromise to keep the gravy train running.  

Anyways, last word to Paul Krugman, whose verdict on the public spat is spot on.

Musk believes that he delivered the presidency to Trump, and may well be right. He gave Trump and his allies a lot of money; he helped Trump regain confidence after his disastrous debate; he brought in the bro vote. And Musk clearly believes that this entitles him to receive special favors from the White House — not policies he likes in general, but contracts and specific actions that benefit him personally. He even seems to have imagined that he was effectively co-president. That is, he simply assumed that U.S. policy was for sale, and thought he had bought it. Trump, for his part, hasn’t responded by saying “How dare you suggest such a thing?” Instead, he has threatened retaliation — again, not in the form of general policies Musk won’t like but in the form of specific actions aimed to hurt Musk’s bottom line...

The point is that both men start from the presumption that the U.S. government is an entirely corrupt enterprise, with the president in a position to hand out personal favors or engage in personal acts of vengeance. And everyone takes it for granted that both men are right. Musk’s only mistake was in underestimating the depths of Trump’s lack of principles, imagining that he was the kind of corrupt politician who stays bought, as opposed to a guy who always breaks his promises the moment it seems expedient to do so. In short, we no longer have rule of law, just rule by the Leader’s whims. We have abandoned everything America was supposed to stand for.

Observations on the rare earth metals trade

Very few industries have generated as much discussion as the rare earth minerals and their extraction, processing, and refining. This post will consolidate the debate and offer some observations.

In response to the US reciprocal tariffs of April 2, the Chinese government imposed export restrictions on six heavy rare earth elements that are refined almost entirely in China and magnets made from them, of which 90% are made in China. Their exports are now licensed, and obtaining these licenses has become the point where leverage is being exercised. Further, reaffirming its intent, Beijing has also been cracking down on illegal trade. 

Rare earth metals are used for making permanent magnets for electric vehicles, wind turbine motors, factory robots, drones, spacecraft, etc.; catalytic converters for cars; in defence technologies like laser guidance systems, radars, sonars, etc. Heavy rare earths are essential for making magnets that can resist the high temperatures and electrical fields found in cars, semiconductors and many other technologies. The NYT writes

The so-called heavy rare earth metals covered by the export suspension are used in magnets essential for many kinds of electric motors. These motors are crucial components of electric cars, drones, robots, missiles and spacecraft. Gasoline-powered cars also use electric motors with rare earth magnets for critical tasks like steering. The metals also go into the chemicals for manufacturing jet engines, lasers, car headlights and certain spark plugs. And these rare metals are vital ingredients in capacitors, which are electrical components of the computer chips that power artificial intelligence servers and smartphones… Carmakers need the magnets for the electric motors that run brakes, steering and fuel injectors. The motors in a single luxury car seat, for example, use as many as 12 magnets. 

China’s control over these metals is near complete 

Until 2023, China produced 99 percent of the world’s supply of heavy rare earth metals, with a trickle of production coming out of a refinery in Vietnam. But that refinery has been closed for the past year because of a tax dispute, leaving China with a monopoly. China also produces 90 percent of the world’s nearly 200,000 tons a year of rare earth magnets, which are far more powerful than conventional iron magnets. Japan produces most of the rest and Germany produces a tiny quantity as well, but they depend on China for the raw materials.

The graphic below illustrates its dominance of the rare earth value chain.

And rare earth minerals refining.

The restrictions on rare earth elements must be seen as a brilliant move by the Chinese.

Rare earth magnets make up a tiny share of China’s overall exports to the United States and elsewhere. So halting shipments causes minimal economic pain in China while holding the potential for big effects in the United States and elsewhere.

The US produces practically no rare earth metal, though successive governments in recent years have tried to restart the industry. But there are daunting challenges.

The sole American rare earths mine, located in Mountain Pass, Calif., stopped producing in 1998 after traces of heavy metals and faintly radioactive material leaked from a desert pipeline. Chinese state-controlled companies tried three times without success to buy the defunct mine before it was acquired by American investors in 2008. A $1 billion Pentagon-backed investment program followed in 2010 to improve environmental compliance and expand the mine and its adjacent refinery. But the costly complex was unable to compete when it briefly reopened in 2014, and closed again the next year. 

MP Materials, a Chicago investor group that included a minority partner company partly owned by the Chinese government, bought the mine in 2017. The mine reopened the next year, but shipped its ore to China for the difficult task of separating the various kinds of rare earths. Only in recent months has the mine become able to chemically separate the rare earths in more than half its output. But this loses money because processing in China is so inexpensive. MP Materials built the new factory in Texas that will turn separated rare earths into magnets.

A considerable bottleneck lies in transforming separated rare earths into chemically pure metal ingots that can be fed into the furnaces of magnet-making machines. A New England start-up, Phoenix Tailings, is addressing that shortcoming, but its small scale underlines the challenge. Phoenix Tailings has taken over much of the staff and equipment of Infinium, a start-up that had tried to do the same thing. Infinium ran out of money in 2020, when American policymakers were more focused on the Covid-19 pandemic than rare earths. With Chinese rare earth minerals hard to get, Phoenix makes the metal from mine tailings: leftover material at mines that has already been processed once to remove another material, like iron. 

Phoenix Tailings has four machines each the size of a small cottage at its factory in Burlington, Mass. Each one produces a 6.6-pound ingot every three hours around the clock. The operation’s overall capacity is 40 tons a year, said Nick Myers, Phoenix’s chief executive. He declined to identify the buyer but said it was an automotive company. Phoenix is installing equipment at a larger site in Exeter, N.H., to produce metal at a rate of 200 tons a year — still tiny compared with Chinese factories that produce more than that in a month.

There is an important reason why these efforts have struggled and largely failed to make much headway. 

But little has happened because of a gritty reality: Making rare earth magnets requires considerable investments at every stage of production. Yet the sales and profits are tiny. Worldwide sales of mined rare earths total only $5 billion a year. That is minuscule compared with $300 billion industries like copper mining or iron ore mining. China has a formidable competitive advantage. The state-owned industry has few environmental compliance costs for its mines and an almost unlimited government budget for building huge processing refineries and magnet factories. Processing rare earths is technically demanding, but China has developed new processes. Rare earth chemistry programs are offered in 39 universities across the country, while the United States has no similar programs.

In a clear demonstration of their intent, Beijing has been cracking down on illegal exports of rare earth metals. 

China’s Ministry of Commerce now requires Chinese producers to submit elaborate documentation for each request to export restricted rare earths or magnets. To prevent resales, the application requires Chinese companies to certify not just who is buying the material but how it will be used in subsequent steps of production, sometimes including photos of products, three rare earth industry leaders outside China said. These documents may provide Beijing with a detailed map of how rare earths are used abroad, and could make it easier for China to target specific companies and countries in the future…

Before the Covid-19 pandemic, smugglers routinely moved large quantities of rare earths across the border with Vietnam. A tiny refinery in northern Vietnam was the only facility outside China that could undertake the complicated steps needed to chemically process so-called heavy rare earths. But China built an elaborate system of fences with motion detectors along its southern border during the pandemic, after a series of incidents in which infected people entered China. The fences have since proved an obstacle for smugglers. The small refinery in Vietnam closed more than a year ago because of a dispute with the country’s tax authorities.

Beijing has also not missed the opportunity to further increase dependence on Chinese manufacturers. 

Worrying still is a fresh insistence from Beijing that instead of sourcing magnets separately, carmakers buy entire electric motor assemblies from Chinese companies, or simply wait for the Chinese authorities to issue export permits to local rare earth magnet producers, as has been done, according to Reuters, for at least four magnet producers that include suppliers to Volkswagen… The problem with sourcing entire motors, as against just the magnets in them, is that carmakers would have to redesign their cars to accommodate the entire motor assembly, which comes in standard sizes. The ability to import magnets meant that manufacturers could calibrate the motor sizes to the design of their vehicles.

Some observations:

1. The near-complete dependence on China for rare earth elements was well known for years. Besides, given the restrictions imposed by China on exports to Japan in 2010 following a territorial dispute, there was always the strong likelihood, near certainty that China would weaponise its dominance if a need arose. In fact, at various times since Trump 1.0 initiated the trade war with China, it has dropped hints of its intent to use rare earth exports as a bargaining chip. There’s therefore nothing surprising about the Chinese decision on April 4.

2. Given the above, I’m surprised that the American auto makers and other users have not built up sufficient inventories of rare earths. It does not say much good about the risk mitigation strategies of these big multinational corporations if they are struggling just one month after China announced its export ban.

3. The shortage is also a manifestation of the problems with the model of American capitalism that not only elevates efficiency (and profits) maximisation above all else but marginalises resilience, fairness, and other considerations. A just-in-time inventory management approach is the exact opposite of resilient inventory management. 

4. The squeeze being felt by Western companies due to the Chinese export restrictions on rare earths is also an example of how the Chinese appear to have used their limited leverage to maximise pain. In contrast, the US appears unable to squeeze China as much despite its control over high-technology equipment used in semiconductor chip manufacturing, aeroplanes, and defence technologies. 

After all, the other side to the Western dependence on Chinese exports is the Chinese dependence on sales to Western markets to sustain jobs. While we hear so much about the former, there’s little that’s heard about the latter. Or is it likely that the effects on the Chinese firms and economy will start getting felt in the coming days? I am inclined. 

5. Unlike the Americans, especially but not only under the Trump administration, as the comprehensive mechanism put in place to track exports from sales to end-use demonstrates, the Chinese have thought through their export restrictions. 

Similar tracking mechanisms are now emerging in sectors like parts of the semiconductor manufacturing value chain. The US also face the challenge of coordinating with its allies who also make these critical equipment and technologies. In any case, as the Cold War between the US and China intensifies, such tracking mechanisms for critical materials and technologies are likely to become commonplace. 

6. US firms seeking to refine rare earth minerals and manufacture magnets must overcome a formidable combination of challenges - the small size of the global market that would deter large firms from investing, the moat created by the nearly two decades’ head start and dominance enjoyed by Chinese firms, the catch up necessitated by the absence of domestic expertise and the need to start afresh, the daunting challenge of acquiring expertise in refining technology, and the significant environmental externalities imposed by rare earth refining. In addition, any new entrant will face a massive price competitiveness gap. 

Therefore, this endeavour requires not only a very active industrial policy with large and long-drawn support, but also possibly direct engagement by the government. It appears that either the government should get one or two of the large mining companies to make a large investment, or a government-owned entity must enter the market. And these, in turn, highest level political resolve and capability to act. 

7. Even with supply-side industrial policy and direct government role in refining and manufacturing, given the price competitiveness gap, domestic market uptake will be limited unless it’s complemented with demand-side initiatives. Besides, investors will hold back in committing money to any investments. 

While tariffs are one way to bridge the gap (when the Chinese supply becomes available), it would require steep tariffs, given the size of the gap. Another response would be for governments to actively coordinate with the large users and have them commit to long-term purchases from domestic refiners and manufacturers. This form of industrial policy may need to be employed more effectively to counter the specific Chinese threat of cheap exports. 

Given the ever-present geopolitical risks, if buyers of rare earth metals were rational, they would have diversified their sourcing of rare earth elements, even if it meant paying higher prices. But the market failure necessitates government intervention to nudge buyers of rare earth metals to pay the higher prices required to sustain a resilient supply chain for these critical minerals. 

This is one more example of how the complex interplay of real-world factors invariably ends up distorting the markets and making government intervention necessary.

Insights from development - WB takeaways

Some time back, the World Bank published a compilation of useful insights that have emerged from its development work over the decades.

Berk Ozler on conditional and unconditional cash transfers, 

A systematic review of CCT and UCT programs finds that the effect sizes on school participation increase as the conditions are made more explicit, monitored, and enforced... while CCT programs may be more effective than UCTs in obtaining the desired behavior change, they can also undermine the social protection dimension of cash transfer programs... While there are few long‐term studies of unconditional cash transfers, the available evidence suggests that their short‐term effects are not sustained.

Deon Filmer and Adam Wagstaff draw attention to the importance of service delivery quality,

In both education and health, poor quality of service delivery is the key reason why service coverage does not necessarily translate into better outcomes... One study found that going from having a teacher in the bottom quality decile to one in the top is equivalent to a full additional business‐as‐usual year of learning for students. Another study compared mortality in high‐income countries and mortality in low‐ and middle‐income countries (LMICs), and concluded that of the 8.6 million excess deaths in LMICs that were amenable to medical care, the bulk (5.0 million) were due to receipt of poor‐quality care rather than non‐receipt of care.

They also discuss the pros and cons of the three approaches of paying for public service delivery - fee-for-service, capitation (according to the number of characteristics of people served), and budget-salary. They argue in favour of some combination, depending on the sector and context, with a pay-for-performance element.

In this context, I recently came across a J-PAL meta-study of 17 preventive health products, including mosquito nets, deworming pills, and water-purifying chlorine tablets, which found that "offering them for free makes it far more likely that people actually get and use them, benefiting themselves and others."

Roberto Fattal, Hiau Looi Kee, and Sergio Schmukler points to the constraints faced by small firms and business formation in general.

The overall functioning of financial markets is important, the allocation of credit across firms matters for economy‐wide growth. Small firms as well as young that create novel products and technologies but that lack the financing to scale up tend to be harmed the most by misallocation of credit. In countries where credit is expensive and hard to access, firms typically are small, leading to a misallocation of credit. Large firms that are relatively less productive end up producing a significant share of the output, while smaller more productive firms are unable to grow and to contribute as much as they could.... just developing financial markets might not be enough to generate growth – ensuring that credit flows to the firms that have growth potential is as important... The regulation of entry, for instance, should consider the incentives for low‐scale entrepreneurship to become informal. Similarly tax policy should anticipate distortions to firm growth that happen when firms of different sizes face differential enforcement.

Norman Loayza and Michael Woolcock draw attention to the importance of complementary measures and state capability.

Policy implementation can fail for two broad reasons: (1) the absence of complementary measures needed to make the chosen policy effective; and (2) the inadequate capability of prevailing institutions and administrative systems... without a supporting institutional framework and capable public sector organizations to implement them, even technically sound policies and programs are likely to fail... Children do not learn if they are hungry, so educational and nutritional policies should go hand in hand. Parents do not vaccinate their children if they are struggling to survive, so immunization campaigns should target the poor and provide pecuniary benefits to families that participate. Farmers do not adopt new crops and technologies that are potentially more profitable but also riskier, so introducing new farming practices should be accompanied by improved insurance mechanisms and access to markets... Trade openness cannot promote competitiveness if domestic industries are burdened with excessive regulations, so international openness should be accompanied by streamlining regulations and improving public infrastructure.

Vijayendra Rao and Michael Woolcock write about the role of local accountability.

There is an increasing realization that better development outcomes are delivered within institutional systems where citizens and communities matter... Elections are one mechanism of accountability, but they are not enough because they are held infrequently and can be captured by elites. Elections need to be complemented by citizen bodies – institutions for collective and deliberative decision‐making where the voices of citizens can be heard and where they are able to monitor the performance of governments.

They also dwell on the importance of process legitimacy.

How difficult and contentious social outcomes (such as elections, judicial rulings, or even the extent of inequality) are reached has enormous bearing on their legitimacy and the extent to which they are accepted, especially by those who would have strongly preferred a different outcome. Political parties that lose close elections can accept this outcome if they believe that votes were cast and tallied impartially; citizens tolerate higher levels of inequality to the extent the wealthy are perceived as having gained their riches by diligence, innovation and prudence (not theft, deception or corruption)... Securing and sustaining legitimacy is likely to be deeply context‐specific, varying considerably between and within countries. Even professional ‘best practices’ (fiscal rules, meritocratic hiring) and scientifically verified ‘solutions’ (immunizations, fertilizers) must earn local legitimacy and credibility before they will be embraced, at scale. Creating public spaces within which such practices and solutions can be identified, adapted to the local context, and/or be improved is a key way in which legitimacy is acquired.

Robert Cull and David McKenzie write about the challenge of scaling programs,

Even when pilots and local development interventions have proven very successful, they have often been difficult to scale up in a cost‐effective way to achieve development impact on a large scale. Conversely, several development interventions that have managed to achieve impressive scales at relatively low costs are increasingly under scrutiny for their lack of transformative impacts on the lives of the poor... A recent meta‐analysis of more than 600 research papers covering 20 different types of development interventions found that the larger the study, the smaller the size of the effect, and that programs implemented by governments tend to have smaller effect sizes than academic or NGO‐implemented programs.

They list out a few reasons - small‐scale pilots may concentrate efforts on those who benefit most; implementation and political economy issues can arise as programs grow; general equilibrium effects can further reduce some impacts; cost issues can make scaling prohibitive.

Sergio Schmukler, Michael Toman, and Adam Wagstaff use examples from early childhood education, financial crises, and environmental degradation to highlight the cost-effectiveness of early policy interventions at scale. 

Education and health interventions in early childhood have large returns... The period over which returns accrue is therefore very long. By contrast, the costs of early childhood interventions occur over just a few years. But even after discounting to present values, the benefit‐cost ratio is large... preschool interventions... make these later investments more productive. Empirical work supports this idea that early investments enhance the productivity of (i.e., are complementary to) later investments... Recognizing that financial crises are costly, governments around the world have moved to implement measures to act early in order to prevent them... Preventive measures include financial regulation and supervision, macroprudential policies, and even capital controls. By minimizing currency and maturity mismatches, obtaining high capitalization and liquidity buffers, adopting flexible exchange rate regimes, and introducing sand‐in‐the‐wheel types of measures, the financial system can be less prone to boom‐and‐bust scenarios.

Finally, Bob Rijkers and Erhan Artuc write about international trade.

The negative distributional impacts of international trade are large, localized, and long‐lived... Workers who are adversely affected by trade liberalization face high moving costs and are often not able to leave to find better jobs in other regions. The adverse effects of trade liberalization are consequently concentrated in particular regions, while the benefits are widespread throughout the whole economy. These negative localised effects persist in the long run and the affected regions take a long time to recover, if at all.

The compilation is also a good example of how a body of knowledge can be built through long-drawn and institutionally guided research efforts. It can play an important role in changing narratives and may be a bigger and more important legacy of the World Bank than the various development programs it has financed.