Instinctively, I am inclined to say state capability, though on reflection, I believe that law and order management stands out in splendid isolation.
I am not aware of the statistics. But it is undoubtedly true that law and order failures have been a major cause of people's dislocation (riots), weak and ineffectual governance (local thugs controlling economic activities in slums), inefficient markets (inadequate protection of property rights), perpetuation of deprivation (social and political disenfranchisement in rural areas), violation of civic rights (crimes against women), and so on, all of which contribute in no small measure to constraining the development process. Further, law and order failures affect the functional efficiency of other organs of the government.
Despite such overwhelming evidence, law and order reforms and policing have remained outside the mainstream discourse on development. I can speculate on a few possible reasons for this trend.
1. We tend to see law and order problems as representative of more fundamental underlying causes with roots in social and economic factors. But this overlooks the reality that these problems have an undeniable law and order dimension, whose enforcement is critical to make any progress with addressing the underlying factors themselves. There are many cases where enforcement of basic law and order is enough to create conditions which facilitate addressing the underlying social and economic factors.
We need to look no further than the success of the current government in Bihar. Its initial success was not so much in the traditional development sectors, but in aggressively pursuing law and order management, which in turn played an important role in creating the conditions for promoting investments and economic growth. Bihar is today the fastest growing state in India, a dramatic improvement from the bottom rung it occupied five years back.
2. We also use law and order inter-changeably with civil strife. Since civil wars are complex issues, not readily amenable to simple solutions, we tend to think much the same for law and order. But basic law and order management is just about assuring rule of law and basic civil rights protection. It is a fundamental duty of the state, one not disputed by even the most hardline neo-liberal.
3. Whenever law and order issues are discussed, it is generally as part of the larger issue of state capability. This conflation with state capability misses the point about the critical importance of law and order maintenance in itself. A failure on this front also erodes the credibility of the state in other areas. This assumes great significance in many developing countries where the police is the symbol of the state presence, and its weakness reflects on the credibility of other institutions of the state.
What can be done to bring policing to the door-step of citizens? How do we increase access to a police station? How do we streamline and increase transparency in the process of filing complaints, their registration, and investigation? How do we increase accountability at each of these levels within local police units? What can be done to increase the linkages between the police and the judiciary so that cases registered in a police station can be expeditiously tried and justice awarded?
Thursday, February 28, 2013
Thursday, February 21, 2013
CAG and the Delhi Metro Rail
The Times of India reports that the CAG has found fault with the DMRC for causing loss to the public exchequer in the execution of the contract for construction of the Delhi Airport Express Metro Link (DAEML). The project was executed on PPP mode through a consortium of Reliance Infrastructure and Construccionesy Auxiliar de Ferrocarriles, SA (CAF) of Spain. I have mixed views on the CAG's latest exposure.
1. The CAG points out instances of non-contract concessions and dilution of statutory regulations in the contract provisions which benefited the concessionaire over and above that allowed in the original tender. For example, it points to the concessionaire benefiting by about Rs 30 Cr through customs duty concessions on capital equipment worth Rs 990 Cr imported for the project. It also points out that the project was awarded despite the concessionaire arranging only 46.17% of the total cost through its equity and debt and the government financing the rest, whereas the PPP guidelines mandate a 40% cap on government spending.
If, as appears to be the case, these two concessions were given outside the scope of the original tender, then it would constitute a clear financial benefit for the concessionaire. Furthermore, despite the contractual stipulation of 70:30 debt:equity ratio for the concessionaire, the ratio was 4,3218:1, 230,907:1 and 275,205:1 for three financial years between 2009-12. This clearly benefited the concessionaire by boosting its return on equity. More importantly, it leaves the concessionaire with too little skin in the game and sets the conditions for engendering moral hazard, especially when the project runs up against market risks induced commercial viability problems. This moral hazard gets amplified by the fact that most of the lending would have come from public sector banks as project finance loans.
These findings highlight the moral hazard created by the attraction of non-contractual gains and the possibility of contract re-negotiations in large infrastructure projects. Contractors bid aggressively to bag the project in the firm assurance that they can make handsome profits by using their influence to either skirt around contractual obligations or re-negotiate provisions that adversely affect them. I have blogged about this pernicious trend here, here, here, and here.
2. But the CAG's observations about failure to levy penalties (or liquidated damages) for construction delays may be questionable and is certain to contribute towards further policy paralysis. Construction delays, especially those involving short time periods, while theoretically objectionable, most often tends to get condoned due to practical implementation issues. Such delays occur mostly because of site handing over and other problems, which are more likely beyond the control of contractors.
Further, the execution of any large contract is accompanied by several operational decisions, some of which involve financial implications (though only a minuscule proportion of the contract). Requests for time extensions and non-imposition of liquidated damages for failure to meet pre-defined milestones are commonplace in large contracts. Similarly, all projects involve repeated invocation of cost escalation provisions. All such decisions are judgement calls, made on the basis of appreciation of some evidence which cannot be easily quantified, by field engineers. If we examine all such decisions post-facto from the narrow lens of financial costs and benefits, without appreciating the context in which the decision was taken, most of these decisions will end up as audit objections.
If this precedent is established, it will adversely affect the progress of all major projects. Engineers and officials will play safe and simply refuse to take operational decisions. This will in turn affect the contractor's commercial viability and create undesirable incentive distortions.
Update 1 (1/7/2013)
The tortured relationship between Reliance Infra's SPV DAMEPL and the DMRC finally ended with the DMRC taking over operational control on the 22.7 km long Delhi Airport metro link. This followed the DAMEPL's unilateral termination of the concession agreement in October 2012 citing the DMRC's failure to repair the substantial defects in the civil structure designed and built by DMRC.
DAMEPL claims that it had given adequate notice to DMRC to rectify the defects. It argues that the terms of the concession agreement obligates DMRC to pay DAMEPL a termination payment equal to 130% of the adjusted equity and 100% of the debt due for the project, as the termination has arisen owing to DMRC's event of default. This could amount to an estimated Rs 2800 Cr.
1. The CAG points out instances of non-contract concessions and dilution of statutory regulations in the contract provisions which benefited the concessionaire over and above that allowed in the original tender. For example, it points to the concessionaire benefiting by about Rs 30 Cr through customs duty concessions on capital equipment worth Rs 990 Cr imported for the project. It also points out that the project was awarded despite the concessionaire arranging only 46.17% of the total cost through its equity and debt and the government financing the rest, whereas the PPP guidelines mandate a 40% cap on government spending.
If, as appears to be the case, these two concessions were given outside the scope of the original tender, then it would constitute a clear financial benefit for the concessionaire. Furthermore, despite the contractual stipulation of 70:30 debt:equity ratio for the concessionaire, the ratio was 4,3218:1, 230,907:1 and 275,205:1 for three financial years between 2009-12. This clearly benefited the concessionaire by boosting its return on equity. More importantly, it leaves the concessionaire with too little skin in the game and sets the conditions for engendering moral hazard, especially when the project runs up against market risks induced commercial viability problems. This moral hazard gets amplified by the fact that most of the lending would have come from public sector banks as project finance loans.
These findings highlight the moral hazard created by the attraction of non-contractual gains and the possibility of contract re-negotiations in large infrastructure projects. Contractors bid aggressively to bag the project in the firm assurance that they can make handsome profits by using their influence to either skirt around contractual obligations or re-negotiate provisions that adversely affect them. I have blogged about this pernicious trend here, here, here, and here.
2. But the CAG's observations about failure to levy penalties (or liquidated damages) for construction delays may be questionable and is certain to contribute towards further policy paralysis. Construction delays, especially those involving short time periods, while theoretically objectionable, most often tends to get condoned due to practical implementation issues. Such delays occur mostly because of site handing over and other problems, which are more likely beyond the control of contractors.
Further, the execution of any large contract is accompanied by several operational decisions, some of which involve financial implications (though only a minuscule proportion of the contract). Requests for time extensions and non-imposition of liquidated damages for failure to meet pre-defined milestones are commonplace in large contracts. Similarly, all projects involve repeated invocation of cost escalation provisions. All such decisions are judgement calls, made on the basis of appreciation of some evidence which cannot be easily quantified, by field engineers. If we examine all such decisions post-facto from the narrow lens of financial costs and benefits, without appreciating the context in which the decision was taken, most of these decisions will end up as audit objections.
If this precedent is established, it will adversely affect the progress of all major projects. Engineers and officials will play safe and simply refuse to take operational decisions. This will in turn affect the contractor's commercial viability and create undesirable incentive distortions.
Update 1 (1/7/2013)
The tortured relationship between Reliance Infra's SPV DAMEPL and the DMRC finally ended with the DMRC taking over operational control on the 22.7 km long Delhi Airport metro link. This followed the DAMEPL's unilateral termination of the concession agreement in October 2012 citing the DMRC's failure to repair the substantial defects in the civil structure designed and built by DMRC.
DAMEPL claims that it had given adequate notice to DMRC to rectify the defects. It argues that the terms of the concession agreement obligates DMRC to pay DAMEPL a termination payment equal to 130% of the adjusted equity and 100% of the debt due for the project, as the termination has arisen owing to DMRC's event of default. This could amount to an estimated Rs 2800 Cr.
Sunday, February 17, 2013
The challenge with participatory development initiatives
I am inclined to agree with Ghazala Mansuri and Vijayendra Rao's controversial scepticism about the effective scalability of community participation based development programs. However, this should not be taken as a rejection of this approach to delivering development. Instead, it should form an important plank of any development program. But we need to be cautious against the enthusiastic and unqualified optimism that accompanies much of the support for programs that revolve around this strategy.
The most important features of such programs are community-based project identification, design, implementation, and audit, apart from direct transfer of funds to the local community. Its attraction lies in the unexceptionable logic that community participation - by ushering in transparency, stakeholder participation, and accountability - is likely to increase targeting efficiency, program governance, and its delivery effectiveness. Its success is built on rigorous efforts to develop capacity in the local community on project design and supervision, and financial management. Most often, this has turned out to be its Achilles heel in scaled up implementation.
My concern arises from the fact that scalability introduces a dynamics that often runs contrary to the requirements of such tightly knit, bottom-up, quality-focused programs. The success of a small-scale implementation is enormously facilitated by the focus and intensity of guidance and supervision of the program's committed leadership. But once scaled up, a more conventional bureaucratic guidance and monitoring, which cannot adequately capture the qualitative aspect of the program, becomes inevitable.
Furthermore, the scale-up of any such program, by assuming its universal take-up, invariably ends up diluting the critical demand-driven dimension of the program. There are inherent limitations to the effective transfer of information and instructions across multiple levels and over large geographical jurisdictions. The nuances of a qualitative program are most often lost in the quantitative norms and components that characterize scaled up implementation of any government program. Finally, we need to keep in mind that this ambitious agenda has to be implemented through the same seriously flawed administrative system of the state governments.
So here is the formidable challenge with the scale up of a participatory development program. Any sustainable development intervention, especially one which revolves around qualitative improvements, has to be demand-driven. But the dynamics of any reasonably short time-frame scale-up runs contrary to the requirements of a demand-driven bottom-up program. Much the same challenge applies to other qualitative programs like improvement in student learning outcome.
In the circumstances, second-best models of community participatory development, with a realistic agenda and a longer time frame, may be a more appropriate alternative. A decentralized implementation strategy that allows for local initiative and control and simultaneously builds local capacity in planning and monitoring, all within a broad guiding framework coupled with strong top-down monitoring, may be the most practically effective strategy for the implementation of such programs. The challenge though will be with getting the details of the program design and its implementation strategy right.
The most important features of such programs are community-based project identification, design, implementation, and audit, apart from direct transfer of funds to the local community. Its attraction lies in the unexceptionable logic that community participation - by ushering in transparency, stakeholder participation, and accountability - is likely to increase targeting efficiency, program governance, and its delivery effectiveness. Its success is built on rigorous efforts to develop capacity in the local community on project design and supervision, and financial management. Most often, this has turned out to be its Achilles heel in scaled up implementation.
My concern arises from the fact that scalability introduces a dynamics that often runs contrary to the requirements of such tightly knit, bottom-up, quality-focused programs. The success of a small-scale implementation is enormously facilitated by the focus and intensity of guidance and supervision of the program's committed leadership. But once scaled up, a more conventional bureaucratic guidance and monitoring, which cannot adequately capture the qualitative aspect of the program, becomes inevitable.
Furthermore, the scale-up of any such program, by assuming its universal take-up, invariably ends up diluting the critical demand-driven dimension of the program. There are inherent limitations to the effective transfer of information and instructions across multiple levels and over large geographical jurisdictions. The nuances of a qualitative program are most often lost in the quantitative norms and components that characterize scaled up implementation of any government program. Finally, we need to keep in mind that this ambitious agenda has to be implemented through the same seriously flawed administrative system of the state governments.
So here is the formidable challenge with the scale up of a participatory development program. Any sustainable development intervention, especially one which revolves around qualitative improvements, has to be demand-driven. But the dynamics of any reasonably short time-frame scale-up runs contrary to the requirements of a demand-driven bottom-up program. Much the same challenge applies to other qualitative programs like improvement in student learning outcome.
In the circumstances, second-best models of community participatory development, with a realistic agenda and a longer time frame, may be a more appropriate alternative. A decentralized implementation strategy that allows for local initiative and control and simultaneously builds local capacity in planning and monitoring, all within a broad guiding framework coupled with strong top-down monitoring, may be the most practically effective strategy for the implementation of such programs. The challenge though will be with getting the details of the program design and its implementation strategy right.
Friday, February 15, 2013
Observations on inequality in the US
John Judis in The New Republic points to an interesting debate between Paul Krugman and Joseph Stiglitz on whether economic inequality is contributing to keeping recovery on hold. Stiglitz has argued that "our middle class is too weak to support the consumer spending that has historically driven our economic growth" and that the loss of middle income is "holding back tax receipts".
As Judis points out, since the rich have much less marginal propensity to consume, an economy where the income gains are concentrated at the top is not likely to "provide sufficient demand to boost the economy". Despite Krugman's scepticism, I find this logic compelling. In this context, there are two observations.
1. In recent weeks the growing cash piles of corporates in the US and elsewhere has attracted great interest. The twenty largest technology firms in the US, led by Apple, have been sitting on half-trillion dollar cash pile. Some investors have suggested share buy-backs to boost share values and transfer wealth to share-holders. But tax problems - the majority of these shares are held outside the US and bringing them back would attract the 35% US corporate tax - are likely to come in the way of large scale buy backs.
As Paul Krugman points out, it is not just tech firms, but there has been a surge in overall corporate profits as a share of GDP since the recession struck.
It therefore does appear that corporations are taking a much bigger slice of total income, mostly at the cost of labor. Its contribution to the widening income inequality in the US cannot be underestimated. Furthermore, despite this cash pile, corporations appear reluctant to either redistribute back to investors or invest in business expansion.
2. The second point comes from this graphic that shows the contribution of taxes and transfers to the reduction of inequality. It is strikingly evident that the Anglo-Saxon economies fare badly in the use of taxes and transfers in the reduction of income inequality.
In this context, I had blogged earlier about Lane Kenworthy's superb disaggregation of the respective contributions of taxes and transfers to the reduction of economic inequality. As this graphic shows, it is transfers, and not taxes, however progressive, that reduces inequality.
But then, a pre-requisite for the required transfers is availability of large enough tax revenues!
Both these observations resonates with the situation in India. Here too corporate profits have grown, though economic growth is weak and investment activity anemic. Furthermore, though tax revenues have been growing, it has not been accompanied with increase in the effectiveness of the delivery mechanisms for welfare transfers.
As Judis points out, since the rich have much less marginal propensity to consume, an economy where the income gains are concentrated at the top is not likely to "provide sufficient demand to boost the economy". Despite Krugman's scepticism, I find this logic compelling. In this context, there are two observations.
1. In recent weeks the growing cash piles of corporates in the US and elsewhere has attracted great interest. The twenty largest technology firms in the US, led by Apple, have been sitting on half-trillion dollar cash pile. Some investors have suggested share buy-backs to boost share values and transfer wealth to share-holders. But tax problems - the majority of these shares are held outside the US and bringing them back would attract the 35% US corporate tax - are likely to come in the way of large scale buy backs.
As Paul Krugman points out, it is not just tech firms, but there has been a surge in overall corporate profits as a share of GDP since the recession struck.
It therefore does appear that corporations are taking a much bigger slice of total income, mostly at the cost of labor. Its contribution to the widening income inequality in the US cannot be underestimated. Furthermore, despite this cash pile, corporations appear reluctant to either redistribute back to investors or invest in business expansion.
2. The second point comes from this graphic that shows the contribution of taxes and transfers to the reduction of inequality. It is strikingly evident that the Anglo-Saxon economies fare badly in the use of taxes and transfers in the reduction of income inequality.
In this context, I had blogged earlier about Lane Kenworthy's superb disaggregation of the respective contributions of taxes and transfers to the reduction of economic inequality. As this graphic shows, it is transfers, and not taxes, however progressive, that reduces inequality.
But then, a pre-requisite for the required transfers is availability of large enough tax revenues!
Both these observations resonates with the situation in India. Here too corporate profits have grown, though economic growth is weak and investment activity anemic. Furthermore, though tax revenues have been growing, it has not been accompanied with increase in the effectiveness of the delivery mechanisms for welfare transfers.
Thursday, February 14, 2013
Piketty-Saez update
Emmanuel Saez and Thomas Piketty have updated their famous mapping of income inequality trends for the US. Their earlier findings showed that in 2010, the first year of economic recovery after the 2009-10 recession, 93% of all pre-tax income gains went to the top 1 per cent, or households making more than $358000. Their updated findings to include 2011, is even more dramatic,
From 2009 to 2011, average real income per family grew modestly by 1.7% but the gains were very uneven. Top 1% incomes (those making more than $367000) grew by 11.2% while bottom 99% incomes shrunk by 0.4%. Hence, the top 1% captured 121% of the income gains in the first two years of the recovery.
How did the top one percent capture more than the entire pre-tax income gain? By simple accounting identity, their gains came at the cost of the rest. In other words, the rest simply transferred their own gains to the one percent!
Wednesday, February 13, 2013
Public trust in government and American Presidents
Wonkblog has an excellent graphic that captures the plummeting trust in government among American public.
It's no surprise that George W Bush's tenure was associated with near halving of the trust in government, comparable only to the infamous Nixon administration. Two observations
1. It is commonly held that incumbents see war mongering as good politics in the build up to re-election. But managing the consequences of international interventions may not be as beneficial. The graphic appears to suggest that not only does it affect the electoral fortunes of the President's party, but also contributes to erosion of public trust in government. Johnson, Nixon, Carter, and the Bush father-son, who all led the US into external military interventions, presided over steep declines in public trust as the country started facing the fiscal, social, and political repercussions of the engagement.
2. Bill Clinton, despite all his personal controversies, appears to have presided over a period of striking increase in public trust in government. Was Clinton one of the great President's of the United States or was he just damn lucky to be the President at one of the most opportune moments in American history?
It's no surprise that George W Bush's tenure was associated with near halving of the trust in government, comparable only to the infamous Nixon administration. Two observations
1. It is commonly held that incumbents see war mongering as good politics in the build up to re-election. But managing the consequences of international interventions may not be as beneficial. The graphic appears to suggest that not only does it affect the electoral fortunes of the President's party, but also contributes to erosion of public trust in government. Johnson, Nixon, Carter, and the Bush father-son, who all led the US into external military interventions, presided over steep declines in public trust as the country started facing the fiscal, social, and political repercussions of the engagement.
2. Bill Clinton, despite all his personal controversies, appears to have presided over a period of striking increase in public trust in government. Was Clinton one of the great President's of the United States or was he just damn lucky to be the President at one of the most opportune moments in American history?
Monday, February 11, 2013
Interesting graphics on manufacturing
Insightful report from the MGI on the state of global manufacturing. Here are some excellent graphics. The MGI report identifies five broad groups of manufacturing industries, classified based on cost (capital, energy, and labour intensity), innovation (R&D intensity), and tradeability (trade and value intensity).
Global innovation for markets category forms the largest share of manufacturing value added across the world.
Regional processing groups contributes the largest share to employment in advanced economies, while global innovation for local markets is the largest employer in developing countries.
Manufacturing's importance to the world economy is highlighted by its disproportionate contribution to exports, innovation, and productivity growth.
An interesting finding is that service type jobs take up an increasing share of manufacturing activity. Service inputs (everything from logistics to advertising) make up an increasing amount of manufacturing activity. Depending on the segment 30-55% of manufacturing jobs in advanced economies are service type function, and service inputs make up 20-25% of manufacturing output. In the United States, every dollar of manufacturing output requires 19 cents of services. And in some manufacturing industries, more than half of all employees work in service roles, such as R&D engineers and office-support staff.
The economic multiplier of additional jobs on output is higher for services than for manufacturing.
Government support plays a very important role in promoting innovation.
Industrial Policy takes different forms across the world and is pervasive.
Automotive sector has the highest incidence of government support.
High global raw material prices may have contributed to a hollowing out of the manufacturing sector by shifting value upstream to commodities producers.
Global innovation for markets category forms the largest share of manufacturing value added across the world.
Regional processing groups contributes the largest share to employment in advanced economies, while global innovation for local markets is the largest employer in developing countries.
Manufacturing's importance to the world economy is highlighted by its disproportionate contribution to exports, innovation, and productivity growth.
An interesting finding is that service type jobs take up an increasing share of manufacturing activity. Service inputs (everything from logistics to advertising) make up an increasing amount of manufacturing activity. Depending on the segment 30-55% of manufacturing jobs in advanced economies are service type function, and service inputs make up 20-25% of manufacturing output. In the United States, every dollar of manufacturing output requires 19 cents of services. And in some manufacturing industries, more than half of all employees work in service roles, such as R&D engineers and office-support staff.
The economic multiplier of additional jobs on output is higher for services than for manufacturing.
Government support plays a very important role in promoting innovation.
Industrial Policy takes different forms across the world and is pervasive.
Automotive sector has the highest incidence of government support.
High global raw material prices may have contributed to a hollowing out of the manufacturing sector by shifting value upstream to commodities producers.
Friday, February 8, 2013
The Age of Robots?
Whether robots will displace large numbers of workers and create a labor market crisis or not is one of the great Malthusian debates of our time. Edward Luce points to this example of a Chinese restaurant which has started using robots as waiters.
This concern assumes even greater significance given a confluence of several trends. Globally, even in developing countries where economic growth is robust, manufacturing growth is increasingly accompanied by disproportionately low job creation. There is also growing evidence that most new jobs require higher skills and of pervasive skills mismatches within economies. In fact, an MGI survey found that in 2011, when US unemployment exceeded 9 percent, 30 percent of US companies had positions open for more than six months that they could not fill. And all this is accompanied by an increased use of robots to automate away low skill, repetitive jobs. This trend will undoubtedly gather momentum in the years ahead.
In the circumstances, there is a strong likelihood that a number of people without the required skills will remain without access to the labor market. Programs to equip them with required skills will obviously form an important part of the public policy agenda in the years ahead. But this has to be complemented by national social safety nets which cushion people against such uncertainties and provide their basic necessities to sustain a dignified existence. Such safety nets will be also useful to cushion against the various other economic uncertainties that have become pervasive in an interconnected world economy. The design of such safety nets, which while assuring the basic necessities does not disincentivize effort, will be one of the important social policy challenges ahead.
This concern assumes even greater significance given a confluence of several trends. Globally, even in developing countries where economic growth is robust, manufacturing growth is increasingly accompanied by disproportionately low job creation. There is also growing evidence that most new jobs require higher skills and of pervasive skills mismatches within economies. In fact, an MGI survey found that in 2011, when US unemployment exceeded 9 percent, 30 percent of US companies had positions open for more than six months that they could not fill. And all this is accompanied by an increased use of robots to automate away low skill, repetitive jobs. This trend will undoubtedly gather momentum in the years ahead.
In the circumstances, there is a strong likelihood that a number of people without the required skills will remain without access to the labor market. Programs to equip them with required skills will obviously form an important part of the public policy agenda in the years ahead. But this has to be complemented by national social safety nets which cushion people against such uncertainties and provide their basic necessities to sustain a dignified existence. Such safety nets will be also useful to cushion against the various other economic uncertainties that have become pervasive in an interconnected world economy. The design of such safety nets, which while assuring the basic necessities does not disincentivize effort, will be one of the important social policy challenges ahead.
Thursday, February 7, 2013
The development debate gone astray?
Why are some countries rich and some poor? Why do the poor countries continue to remain so? Why is there no convergence of incomes as theory and logic would predict? What, in general, is the secret to sustainable growth? These grandiose inquiries have agitated human minds for decades. In recent years, an array of distinguished researchers have pointed to specific explanatory factors - path dependency and institutions or Washington consensus or accumulation and distribution of productive knowledge - and particular approaches to policy formulation - human capital development coupled with enlightened industrial policy or release of binding constraints or randomized control trials - in an attempt to answer these questions.
I have two problems with both such inquiries and its underlying processes. One, I believe we are on the wrong track if we search for one comprehensive solution or strategy to explain growth and development. Even a very broad conceptual solution like any of the aforementioned explains only a small part of the problem. Further, assuming we accept any one of them as the predominant cause or determinant of growth, we are still no more closer to deciphering what needs to be done to address the deficiency. Leave alone being in a position to translate those prescriptions into action in the real world. The answers from this inquiry will invariably be skewed and not reveal the full dimensions of the the problem.
The search for magic pill solutions can have many other systemic distortions, apart from leading you nowhere in the search for solutions itself. For the researcher, it becomes a slippery slope, down which he slips ever so slowly and unknowingly. Once you become wedded to one particular narrative or agenda, you try to rationalize every other deviant, and there will be no dearth of deviants in any such complex systems which are not amenable to a particular line of analysis, by stretching the frames of reference and scope of the original hypothesis. Over time, you stretch it so much as to seriously compromise the internal consistency of that hypothesis. Correlations become causations history becomes predictor of future, sophisticated models become attractive
Two, I am inclined to the belief that the search for answers to the big questions of development should have a cross-disciplinary range, instead of being confined to the narrow confines of economics. Political science and sociology would have as much valuable contribution to answering these questions as economics itself. The field of economics may have an edge, but not monopoly, in contributing to this process if only because it has been more receptive to adopting techniques and areas of investigations from other disciplines as well as being the leader in using empirical techniques to study development processes.
I have two problems with both such inquiries and its underlying processes. One, I believe we are on the wrong track if we search for one comprehensive solution or strategy to explain growth and development. Even a very broad conceptual solution like any of the aforementioned explains only a small part of the problem. Further, assuming we accept any one of them as the predominant cause or determinant of growth, we are still no more closer to deciphering what needs to be done to address the deficiency. Leave alone being in a position to translate those prescriptions into action in the real world. The answers from this inquiry will invariably be skewed and not reveal the full dimensions of the the problem.
The search for magic pill solutions can have many other systemic distortions, apart from leading you nowhere in the search for solutions itself. For the researcher, it becomes a slippery slope, down which he slips ever so slowly and unknowingly. Once you become wedded to one particular narrative or agenda, you try to rationalize every other deviant, and there will be no dearth of deviants in any such complex systems which are not amenable to a particular line of analysis, by stretching the frames of reference and scope of the original hypothesis. Over time, you stretch it so much as to seriously compromise the internal consistency of that hypothesis. Correlations become causations history becomes predictor of future, sophisticated models become attractive
Two, I am inclined to the belief that the search for answers to the big questions of development should have a cross-disciplinary range, instead of being confined to the narrow confines of economics. Political science and sociology would have as much valuable contribution to answering these questions as economics itself. The field of economics may have an edge, but not monopoly, in contributing to this process if only because it has been more receptive to adopting techniques and areas of investigations from other disciplines as well as being the leader in using empirical techniques to study development processes.
Wednesday, February 6, 2013
India's manufacturing sector paradox
Arguably India's biggest economic challenge is job creation, specifically in the transition of the current more than half of workforce working in agriculture. Across the world, such labor market transitions have been achieved through manufacturing.
The McKinsey Global Institute has a recent report which explores the state of global manufacturing. It shows that India's share of global manufacturing has been rising fast over the recent years.
Manufacturing share of GDP was around 13% in 2010.
The MGI report has a graphic of the typical trajectory of manufacturing share of GDP, growing as economy develops and declining as economy falls.
The graphic below shows the growth trajectories of manufacturing's share of total employment. But in India's case, is there a trend of the curve already starting to move downward.
The latest figures on the Indian economy shows that manufacturing share of both employment and gross value added has been declining. They averaged 11.1% and 15.5% in the 1999-00 to 2004-05 period, and declined to 10.5% and 15.3% in the 2004-05 to 2009-10 period. The compounded annual growth rate (CAGR) of employment and gross value added in manufacturing was minus 2.29% and 7.85% in the 2004-05 to 2009-10 period. In other words, even as manufacturing grew, its pace of employment creation fell. Answering this paradox is critical to satisfactorily addressing India's great jobs market challenge.
The McKinsey Global Institute has a recent report which explores the state of global manufacturing. It shows that India's share of global manufacturing has been rising fast over the recent years.
Manufacturing share of GDP was around 13% in 2010.
The MGI report has a graphic of the typical trajectory of manufacturing share of GDP, growing as economy develops and declining as economy falls.
The graphic below shows the growth trajectories of manufacturing's share of total employment. But in India's case, is there a trend of the curve already starting to move downward.
The latest figures on the Indian economy shows that manufacturing share of both employment and gross value added has been declining. They averaged 11.1% and 15.5% in the 1999-00 to 2004-05 period, and declined to 10.5% and 15.3% in the 2004-05 to 2009-10 period. The compounded annual growth rate (CAGR) of employment and gross value added in manufacturing was minus 2.29% and 7.85% in the 2004-05 to 2009-10 period. In other words, even as manufacturing grew, its pace of employment creation fell. Answering this paradox is critical to satisfactorily addressing India's great jobs market challenge.
Tuesday, February 5, 2013
Taking politics out of power
I've an op-ed in Indian Express today about the critical need to generate political consensus on power sector reforms.
India "skills deficit" fact of the day!
The FT has this striking stat about India's skills deficit,
There are no quick-fixes, irrespective of whatever the NSDC does, for making "unemployable" youth emerging from 10-12 years of schooling employable over a short period. The schooling system has to be fixed and structural problems in the labor market has to be addressed. Unfortunately, both, especially the former, are super-difficult problems. Sadly, I am not optimistic about much progress in this regard in the medium term. They hardly get a mention in mainstream debates which harp on improving investor confidence and restoring animal spirits.
Out of the 12.8m joining the workforce every year, only 8 or 9 per cent have any skills, while many can barely read having left school at 13.In simple terms, we have a double challenge if we are reap the "demographic dividend". There is a "skills deficit" crisis - unemployable youth coming out of a failing schools system - coupled with a "jobs" crisis - economic growth not accompanied by job creation.
There are no quick-fixes, irrespective of whatever the NSDC does, for making "unemployable" youth emerging from 10-12 years of schooling employable over a short period. The schooling system has to be fixed and structural problems in the labor market has to be addressed. Unfortunately, both, especially the former, are super-difficult problems. Sadly, I am not optimistic about much progress in this regard in the medium term. They hardly get a mention in mainstream debates which harp on improving investor confidence and restoring animal spirits.
Japan and the monetary policy debate
The ongoing monetary policy debate has its origins in Japan and its extraordinary, nearly two-decade long deflationary conditions. Now that Japan-like conditions pervade economies on both sides of the Atlantic, the search for policies that can restore growth when a country faces deflationary liquidity trap conditions and interest rates have touched the zero-bound has become the central question in modern central banking.
Conventional monetary policy loses traction in these conditions, forcing central banks into following unconventional quantitative easing policies. They involve leveraging the central banks' balance sheet to purchase securities of varying types and maturities and thereby inject liquidity into the markets. Central Banks across developed countries have been following this script over the past four years. The BoJ has so far resisted pressures to join this monetary accommodation bandwagon.
The Bank of Japan (BoJ) finally bowed to political pressures and the prevailing conventional wisdom on monetary policy making in its latest attempt to pull the economy out of a deep deflationary trap. It has announced the revision of its short-term inflation target to 2% from 1% and pledged to buy government securities in increased quantities, by renewing and expanding a bond-buying program that expires at the end of the year, to achieve that target. As part of this, after its current Y 101 trillion asset purchase program ends in January 2014, the BoJ proposes to buy Y13 trillion ($146 bn) in short-term government securities each month till it meets its new inflation target
It therefore follows the path of the US Federal Reserve (Fed) and the European Central Bank (ECB) in engaging in quantitative easing to achieve nominal anchors. Though the other two have committed to undertake "limitless" QE, the BoJ has so far refrained from going down that path. Furthermore, as the FT wrote, the details of how it proposes to achieve the 2% target is vague and does not appear to be credible enough to achieve its inflation objective,
In fact, it looks increasingly certain that Shinzo Abe will have the last laugh, since the tenure of the current Governor and his deputies ends in April this year and will most certainly be replaced with more accommodative candidates. The markets will then perceive that the BoJ's autonomy has been compromised. But the BoJ will have none but itself to blame for not showing the minimal political nous necessary to acknowledge the reality that monetary policy, especially in such times, is a deeply political decision. Its intransigence left the Shinzo Abe government with no choice but to force the BoJ to fall in line.
This follows an aggressive push by the new Shinzo Abe government, which has already initiated a 10 tillion Yen ($112.8 bn) fiscal stimulus program. The program is aimed at boosting growth by 2 percent and runs the risk of aggravating Japan's already high debt-to-GDP ratio of 220%. The Japanese government has already spend 60 trillion Yen on stimulus programs till date. Since the funds for the latest stimulus program will have to come by issuance of government bonds, it is certain to weaken the yen against the dollar and thereby also contribute towards improving the competitiveness of Japanese firms.
In this context, long-time Japan expert, Adam Posen has raised doubts about whether Japan requires another round of fiscal stimulus. He argues that Japan's big problem is deflation and over-valued exchange rate, which can be addressed through higher inflation target and more aggressive quantitative easing, and more fiscal spending would only add to the country's public debt burden.
But Paul Krugman points to a recent paper by Paul McCulley and Zoltan Pozsar who argue that in Minsky-like cycles of leveraging and de-leveraging, monetary policy can be effective only when it is paired with fiscal stimulus. They write,
A weaker currency with its positive impact on exports is likely to provide governments with an irresistible temptation to indulge in competitive devaluations. In Japan, the appreciation of yen in recent years has caught the attention of the new Prime Minister Shinzo Abe, who has even called upon the central bank to target an exchange rate of 90 yen to a dollar. This has prompted Jens Weidmann, Bundesbank President, to caution against the trend of central banks losing autonomy and their decisions getting politicized. In particular, he warned about potential "currency wars", as governments force central banks into devaluing their currency to boost exports.
Conventional monetary policy loses traction in these conditions, forcing central banks into following unconventional quantitative easing policies. They involve leveraging the central banks' balance sheet to purchase securities of varying types and maturities and thereby inject liquidity into the markets. Central Banks across developed countries have been following this script over the past four years. The BoJ has so far resisted pressures to join this monetary accommodation bandwagon.
The Bank of Japan (BoJ) finally bowed to political pressures and the prevailing conventional wisdom on monetary policy making in its latest attempt to pull the economy out of a deep deflationary trap. It has announced the revision of its short-term inflation target to 2% from 1% and pledged to buy government securities in increased quantities, by renewing and expanding a bond-buying program that expires at the end of the year, to achieve that target. As part of this, after its current Y 101 trillion asset purchase program ends in January 2014, the BoJ proposes to buy Y13 trillion ($146 bn) in short-term government securities each month till it meets its new inflation target
It therefore follows the path of the US Federal Reserve (Fed) and the European Central Bank (ECB) in engaging in quantitative easing to achieve nominal anchors. Though the other two have committed to undertake "limitless" QE, the BoJ has so far refrained from going down that path. Furthermore, as the FT wrote, the details of how it proposes to achieve the 2% target is vague and does not appear to be credible enough to achieve its inflation objective,
But many analysts noted what it did not do: expand the scope of this year’s bond-purchase plans; raise the limit on the maturities of the bonds it buys beyond the current three years; or cut the interest rate it charges commercial banks for overnight borrowing. All had been suggested as steps it might take in pursuit of the new inflation objective... It left its forecast for rises in benchmark consumer prices in fiscal 2013, which begins in April, unchanged at 0.4 per cent. For the following year, it nudged its prediction up by one-tenth of a point to 0.9 per cent.All this means that the BoJ itself does not believe that its policies will achieve the revised inflation target. It also gives the impression of a central bank stonewalling the perceived assault on its autonomy, despite the apparent ineffectiveness of its policies and the dominant current sweeping central banks across the world. It makes further political pressure on the BoJ to do more to reflate the economy inevitable.
In fact, it looks increasingly certain that Shinzo Abe will have the last laugh, since the tenure of the current Governor and his deputies ends in April this year and will most certainly be replaced with more accommodative candidates. The markets will then perceive that the BoJ's autonomy has been compromised. But the BoJ will have none but itself to blame for not showing the minimal political nous necessary to acknowledge the reality that monetary policy, especially in such times, is a deeply political decision. Its intransigence left the Shinzo Abe government with no choice but to force the BoJ to fall in line.
This follows an aggressive push by the new Shinzo Abe government, which has already initiated a 10 tillion Yen ($112.8 bn) fiscal stimulus program. The program is aimed at boosting growth by 2 percent and runs the risk of aggravating Japan's already high debt-to-GDP ratio of 220%. The Japanese government has already spend 60 trillion Yen on stimulus programs till date. Since the funds for the latest stimulus program will have to come by issuance of government bonds, it is certain to weaken the yen against the dollar and thereby also contribute towards improving the competitiveness of Japanese firms.
In this context, long-time Japan expert, Adam Posen has raised doubts about whether Japan requires another round of fiscal stimulus. He argues that Japan's big problem is deflation and over-valued exchange rate, which can be addressed through higher inflation target and more aggressive quantitative easing, and more fiscal spending would only add to the country's public debt burden.
But Paul Krugman points to a recent paper by Paul McCulley and Zoltan Pozsar who argue that in Minsky-like cycles of leveraging and de-leveraging, monetary policy can be effective only when it is paired with fiscal stimulus. They write,
What matters is not monetary stimulus per se, but whether monetary stimulus is paired with fiscal stimulus (otherwise known as helicopter money) and whether monetary policy is communicated in a way that helps the fiscal authority maintain stimulus for as long as private deleveraging continues. Fiscal dominance and central bank independence come in secular cycles and mirror secular private leveraging and deleveraging cycles, respectively. As long as there will be secular debt cycles, central bank independence will be a station, not a final destination.In any case, apart from the pursuit of inflation, such competitive debasement of currency will also affect have repercussions in the foreign exchange markets. Aggressive quantitative easing and resultant liquidity injections will inevitably put downward pressure on currencies. It is now widely accepted that the Fed's QE has contributed in no small measure to depreciating dollar and increased American export competitiveness.
A weaker currency with its positive impact on exports is likely to provide governments with an irresistible temptation to indulge in competitive devaluations. In Japan, the appreciation of yen in recent years has caught the attention of the new Prime Minister Shinzo Abe, who has even called upon the central bank to target an exchange rate of 90 yen to a dollar. This has prompted Jens Weidmann, Bundesbank President, to caution against the trend of central banks losing autonomy and their decisions getting politicized. In particular, he warned about potential "currency wars", as governments force central banks into devaluing their currency to boost exports.
Sunday, February 3, 2013
The Charter Schools Debate
Student learning outcomes achievement is arguably the toughest of development challenges. Experience from developing and developed world show that even when schools have good infrastructure, teachers are in place, teaching and learning materials are provided, and both teachers and students attend class regularly, teaching does not automatically translate into learning. Successful pilot experiments of the transactions in the black-box called classroom has proved near impossible to replicate on scale.
Charter Schools had gained prominence in the US over the past two decades on the belief that independently run, publicly financed schools, unleashed from regulatory fetters, and facing the threat of closure if they fail, would improve learning outcomes. But a recent Times editorial sums up the evidence so far,
Charter Schools had gained prominence in the US over the past two decades on the belief that independently run, publicly financed schools, unleashed from regulatory fetters, and facing the threat of closure if they fail, would improve learning outcomes. But a recent Times editorial sums up the evidence so far,
The charter advocates promised that unlike traditional schools, which were allowed to fail without consequence, charter schools would be rigorously reviewed and shut down when they failed to perform. With thousands of charter schools now operating in 40 states, and more coming online every day, neither of these promises has been kept. Despite a growing number of studies showing that charter schools are generally no better — and often are worse — than their traditional counterparts, the state and local agencies and organizations that grant the charters have been increasingly hesitant to shut down schools, even those that continue to perform abysmally for years on end.
A study of student performance in Charter Schools across 25 states in 2009 finds that only 17 percent of charter schools provided a better education than traditional schools, and 37 percent actually offered children a worse education. Another study finds that the standards used by the charter authorizers to judge school performance are terribly weak.
I not one bit surprised. Cynical as it may sound, I do not think that there is any one single strategy, however broad, to dramatically improve student learning outcomes. Such quality reform strategies may work or appear to work for sometime in smaller jurisdictions. But when scaled up, and systemically forced to generate positive outcomes, they are more or less certain to be exposed. Instead, I believe that sustainable improvements in learning outcomes are intimately linked with strong demand-side pressures and underpinned by cultural and social factors.