Thursday, November 29, 2012

America's shale gas boom in a graphic

The recent discoveries and frenetic pace of exploration of shale gas reserves has prompted claims that it will usher in a renaissance in US manufacturing. Shale gas production in the United States has more than doubled since 2010 and natural gas prices have fallen steeply. This graphic captures this spectacular trend.

Whether it revives US manufacturing or not, these developments are certain to impact the global energy geo-politics.

It's the health care, stupid!

Amidst all talk of the looming fiscal cliff, the CBO has this excellent graphic (via Wonkblog) that captures the source of America's anticipated future fiscal troubles.

In fact, all the increases are going to come from health care. Social security is largely forecast to remain at the same level, while the rest (defense, education, infrastructure etc) are estimated to actually decline. The graphic assumes business as usual fiscal policy.

Sunday, November 18, 2012

Effect of central bank independence in a graphic

In light of media reports of deepening divide between the Reserve Bank of India (RBI) and the Finance Ministry, a reminder about the importance of independent central banks may be appropriate. A couple of years back, Ben Bernanke pointed to the example of UK's decision to grant independence to the Bank of England (BoE) to drive home the point.

In May 1997, the BoE's charter was revised and it was re-born as an independent central bank. The impact of this on the yields of UK's long term government securities was spectacular. It nearly halved over the year. Here is a graphic from the excellent Fred that captures this change.

This alone should be reminder to those at the North Block when they appoint the successor to Dr Subba Rao next year. The hard won credibility of the RBI can be squandered in one moment of madness.

Friday, November 16, 2012

More evidence of market failure in healthcare services

Health care is not broccoli. More evidence comes from this graphic that compares the cost of procuring hip replacement surgeries for public insurers and for those purchasing directly from the market place.

While some differential is to be expected between wholesale and retail purchases of broccoli, there is little justification for a 150% mark-up in the private (read competitive and free) market.

Update 1 (19/3/2013)

Excellent graphics from Time highlighting the state of health care in the US. Two graphics stand out.

Wednesday, November 14, 2012

The moral hazard with a Greek debt write-down

As the severity of Greece's solvency crisis looms large, calls for writing off atleast a part of the Greek public debt, three-fourths of which are now held by sovereign creditors, has been mounting. Any decision to write off Greece's public debt, especially from sovereign creditors, is likely to have strategic implications at multiple levels. It is not a simple case of a one-time financial write-down, but has moral hazard and expectations forming consequences. There are three immediate implications that come to the fore.

1. How will Greece itself respond to the write-down? More specifically, will it reduce the pressure on Greek politicians to undertake the harsh structural adjustment decisions that are necessary to complement any debt write-down and get the growth back on sustainable path? Greece's is a democracy and its commitment record, even in the past three years, to push ahead with these bitter measures is questionable.

2. How will this be interpreted by the other countries similarly placed and by those who face debt crisis in future? In particular, Ireland, maybe even the other PIIGS? Will this encourage them into following the Greece path? How will this be interpreted by developing countries, atleast some of whom are likely to face similar circumstances in the foreseeable future? The expectations formed by this decision will have consequences for a generation.

3. Most importantly and with immediate implications, what message will sink into the bond markets? In particular, since the longer term prospects of existing debt improves with a partial sovereign debt write-off, will bond markets react by increasing the pressure on the bonds (widening spreads and increasing prices of CDS) of other similarly placed countries, thereby precipitating a deep enough liquidity crisis that would force the EU into another partial write-down. The fact that Italy and Spain, both stand at the precipice, makes this possibility calamitous.

In the final analysis, the strong moral hazard concerns associated with such decisions, make any debt write-downs a deeply strategic decision. Germany's desire to drag the strategic bargaining game with Greece and its creditors as long as possible in the hope of squeezing out as much restructuring commitments (from Greece) and concessions (from investors and creditors) as possible while simultaneously minimizing the moral hazard consequences is therefore understandable. Those criticizing it as mindless is doing more out of despair and hope than after weighing its strategic consequences.

Sunday, November 11, 2012

Greece's "shadow economy" problem

One of the biggest challenges for the Greek government is to uncover its massive "shadow economy", which forms nearly a quarter of the GDP. Addressing this is critical for increasing tax revenues that are essential for Greece's recovery from a crisis that threatens to ruin a generation. 

Friday, November 9, 2012

Is Bangladesh the most impressive social development story of the last two decades?

The Economist has this graphic that captures the stunning progress made by Bangladesh in improving its social indicators since 1990. The improvements in infant and maternal mortality rates, immunization, and female literacy should rank among the best improvements achieved by any large sized country in such a short period of time. The contrast with India, which experienced a quadrupling of its percapita income in the same period, but achieved far less progress with social indicators, is instructive. 

The Economist is spot on in its assessment,
The most dramatic period of improvement in human health in history is often taken to be that of late-19th-century Japan, during the remarkable modernisation of the Meiji transition. Bangladesh’s record on child and maternal mortality has been comparable in scale.
This is a very impressive achievement, especially given that Bangladesh with a population of more than 150 million is no small country. The fact that it was achieved without proportionate improvements in income levels and alongside extreme poverty runs contrary to much of mainstream thinking that social development follows economic growth.

The Economist points to the role of NGOs, in particular the iconic NGO BRAC (Bangladesh Rehabilitation Assistance Committee) in Bangladesh's progress,  
The real magic of Bangladesh, though, was not microfinance but BRAC — and NGOs more generally. The government of Bangladesh has been unusually friendly to NGOs... BRAC is now the largest NGO in the world by the number of employees and the number of people it has helped (three-quarters of all Bangladeshis have benefited in one way or another)... BRAC does practically everything. In the 1980s it sent out volunteers to every household in the country showing mothers how to mix salt, sugar and water in the right proportions to rehydrate a child suffering from diarrhoea. This probably did more to lower child mortality in the country than anything else. BRAC and the government jointly ran a huge programme to inoculate every Bangladeshi against tuberculosis. BRAC’s primary schools are a safety net for children who drop out of state schools. BRAC even has the world’s largest legal-aid programme: there are more BRAC legal centres than police stations in Bangladesh... 
BRAC is a sort of chaebol (South Korean conglomerate) for social development. It began with microcredit, but found its poor clients could not sell the milk and eggs produced by the animals they had bought. So BRAC got into food processing. When it found the most destitute were too poor for micro-loans, it set up a programme which gave them animals. Now it runs dairies, a packaging business, a hybrid-seed producer, textile plants and its own shops—as well as schools for dropouts, clinics and sanitation plants. 
Though the role and contribution of BRAC and other NGOs was huge, it is undeniable that such progress could not have been made without active role of the government. India, more than anyone else, has the most to learn from Bangladesh. Why has East Bengal, which is much more poorer and with a much more dysfunctional administrative system, managed to achieve so much more than West Bengal? What explains the massive differential in achievements, despite similar baseline figures, on both sides of the Indo-Bangladesh border?

Thursday, November 8, 2012

China - The construction contractor to the world?

Nothing exemplifies the spectacular rise of China better than its mega construction projects - roads and bridges, high speed railways, irrigation projects, and massive townships. In addition to being the factory of the world, China is rapidly emerging as the construction contractor to the world. Chinese firms have become extremely proficient in taking up large scale construction projects in infrastructure sectors like transport, electricity, and telecommunications at cheaper prices and completing them well within time.

It should therefore come as no surprise, as The Economist points out, that all the top three construction companies in the world are Chinese, a radical shift from 2003 when there was no Chinese firm in the top ten.

Predictably, Chinese firms are now aggressively bidding for construction contracts across the world. An important factor in the the success of China's strategic diplomacy in Africa, Latin America and the Caribbean, through offering them financial assistance to establish infrastructure facilities, has been the effectiveness of these large contractors. Once the agreement is signed, these contractors arrive with labour, materials and equipments, and execute the work in extremely challenging conditions in record time and at very low cost.

Evidently these Chinese firms have over a very short time managed to overcome the steep learning curve generally associated with managing the execution of large construction contracts in difficult conditions. In many respects, these large contractors have perfected a construction contractor model, which has striking similarities with its manufacturing sector. In both cases, Chinese firms have developed the capacity to mobilize large quantities of inputs and labour and manage them in the most cost-effective manner to meet highly ambitious targets and deadlines. It is something Indian firms would do well to learn and emulate.

Wednesday, November 7, 2012

Is the impact of NREGS on farm wages more nuanced?

Livemint points to an interesting finding from a study of farm wages and farm productivity that questions the conventional wisdom that the National Rural Employment Guarantee Scheme (NREGS) has increased rural wages and affected agriculture production. Kanika Mahajan writes,
The annual wage growth rate for men working in agriculture being 3.1% in the most recent period (2004-09) compared with just 1.8% in the previous period (1999-2004). The difference is even starker for women at 5% annual growth for 2004-2009 and a meagre 1.2% for 1999-2004... But these figures cannot be analysed in isolation. They must be looked at under the light of changing agricultural conditions across the two periods... the increase in foodgrain yield in 2004-2009 of 2.5% per year, while it was at a record low level of 0.1% per year during 1999-2004... The net increase in men’s agricultural wages (subtracting the foodgrain yield growth rate from real agricultural wage growth rate) stands at 1.7% for the period of 1999-2004 and 0.6% for 2004-2009. Thus, 2004-2009 effectually experienced a lower rate of increase in agricultural wages once the growth rate in yield is netted out... at the all India level, growth in net female agricultural wages is a modest 2.4% in 2004-2009 in comparison with the 1.1% in the 1999-2004.

So what is the story? Why has agriculture productivity increased during the latest period? What's the contribution of NREGS to this, if any? Is the increase in farm wages concealed somewhere? A satisfactory assessment of these trends will require more data and their analysis.

But as the author herself indicates, one plausible mechanism would be through the assets created under the NREGS. A large share of NREGS works were irrigation related ones like water harvesting structures and field channels. These works, even if semi-permanent and of poor quality, are certain to have increased the water availability for significant acreage. Is this showing up in the productivity figures?

In any case, if this is true, it only means that farm productivity has increased due to better inputs and not increased labour productivity. In fact, the lower increase in wages in the latest period could even point to a slowdown or even reduction in labour productivity. Is there a causal role for NREGS in this trend? Is it the case that the more productive workers have preferred the more remunerative NREGS work to farm labour?  Further, the figures also does not say anything about the non-farm rural wages, leave alone wages in other areas.

Update 1 (1/12/2013)

Livemint has this nice graphic on rise of rural wages across India.

While it is difficult to draw causal relationship with NREGS, its impact is undoubted. Will be interesting to examine the correlation between the penetration of NREGS (say, in terms of average mandays of rural jobs created per person) and the rise in wages. 

Thursday, November 1, 2012

The TBTF subsidy and banking economies to scale

Andrew Haldane has put a figure on the "too-big-to-fail subsidy" - the cheap borrowing costs of the world's largest financial institutions in view of the widespread belief among investors that, even with clear resolution and bankruptcy regulations, their governments will not allow them to fail. The subsidy, he says, amounts annually to a whopping $700 bn.

He, like many others - Vickers Report in UK, Volcker Rule in US, and Liikanen Report of the EU - believe that proposals to ring-fence economically crucial activities, like deposits and payments, from riskier trading and investment banking activities are not likely to have the desired stabilizing effect. They point to the complex nature of these activities and the difficulty of regulators being able to enforce safeguards and restrictions. In the circumstances, they argue that nothing short of complete segregation of the two retail and commercial banking and investment banking activities would suffice. They also advocate overall assets-capital ratio, far higher than the 3% suggested by the Basel III Committee, for deposit taking financial institutions.

However, there are others like Simon Johnson (also here), who argue that even the re-introduction of the Glass-Steagall Act will not suffice and call for an end to universal banking. They feel that the only way out is to break up the TBTF institutions, even arguing that the social and private benefits of TBTF banks are illusory. Rejecting the findings of certain studies that there are scale economies associated with banks, Andrew Haldane says,

But this finding is based on estimates of banks’ funding costs which take no account of the implicit subsidy associated with too-big-to-fail. Removing this subsidy raises banks’ funding costs, lowers estimates of bank value-added and thereby reduces measured economies of scale. Once an allowance is made for the implicit subsidy, the picture changes dramatically. There is no longer evidence of economies of scale at bank sizes above $100 billion. If anything, there is now evidence of diseconomies which rise with bank size, consistent with big banks becoming “too big to manage”.

Former Citigroup Chief Executive Sanford Weill too recently called for separating investment banking from deposit taking banking. Haldane has been among those suggesting an overall cap on bank size as a share of GDP.

Update 1 (28/3/2014)

An IMF study finds that the overall funding cost advantage of systemically important financial institutions (SIFIs) was 80 basis points in 2009. Another study by New York Fed finds that the five largest US banks paid on average a third of a percentage point less on top rated debt than smaller rivals.