A "re-negotiations policy" for road projects?

I have blogged extensively on the moral hazard that have been unleashed with the widespread trend of re-negotiations that have gripped the infrastructure sector. Private infrastructure developers have internalized the norm that they can bid aggressively and irresponsibly, as many have done, with the assurance that they can always go back to re-negotiate the terms. India's pernicious culture of crony capitalism encourages the trend.

In this context, the Roads Ministry has proposed to break the gridlock with stalled National Highway Authority of India (NHAI) road projects by restructuring them. There are currently 48 road project developers who are renegotiating the restructuring of premium payments with the NHAI. However, instead of re-negotiating on a project-by-project basis, newspapers report that the Roads Ministry has effectively proposed a blanket policy (I am not aware of the details though) for restructuring premium payments owed by developers. It proposes that the premium payments of developers whose projects are stressed, mainly due to traffic shortfalls, be restructured in accordance with a general policy. The Mint reports on the crux of the Ministry's restructuring policy,

In principle, the roads ministry’s recommended restructuring involves back-ending the agreements with developers to reduce their payments to the government in the initial years of the contract—a move that could help them complete the projects. The ministry and its arm, NHAI, are worried that if projects are stuck on account of financing troubles, developers could start walking out of projects—resulting in a delay in building required infrastructure and losses on account of unpaid premiums. These projects will also have to be re-bid.

It immediately raises the question about why the same internal restructuring of its cash-flows cannot be done by the developers themselves. It needs to be borne in mind that most road developers have a portfolio of projects, with varying levels of profitability, which would facilitate the process of such re-balancing. In fact, the very objective of firms specializing in infrastructure and accumulating a portfolio of projects with a diverse risk-profile and cash-flow patterns, is to leverage their overall balance sheet and mitigate their individual project risks. GMR and the like have clearly internalized the norm that they will view each project as a stand-alone entity, and transfer commercial risks on to the government through the process of re-negotiations.

In simple terms, the Ministry is effectively proposing a re-negotiations policy for all road projects. It is a virtual fait accompli that developers will internalize this policy into their bids, thereby distorting the process of efficient price discovery in the forthcoming tenders. The tendering process would then become just a transit point in the process of arriving at the final contract conditions.

I have been thinking for sometime that, given the inevitability of re-negotiations with many infrastructure projects, it may be an efficient second-best approach, to transparently outline the principles that would define any process of re-negotiations. But we should be careful that it does not become codified into some policy, which would take away from the process of competitive bids that allot these projects. Re-negotiations should be done on a project-by-project basis, and not through a routine application of rules to qualify projects and renegotiate their terms.

Further, in order to discourage any moral hazard, the process has to be accompanied with prohibitive enough haircuts on equity holders. Promoters who bid irresponsibly or with other, less than transparent, considerations have to pay with their capital, and that too a prohibitive enough amount. It will be interesting to see what the Rangarajan Committee, entrusted with formulating a restructuring policy, comes out with. 

NGDP targeting and escaping the ZLB

Much of the innovations in monetary policy in the aftermath of the Great Recession have been driven by the compulsions of monetary accommodation when the interest rates are at the zero-lower bound (ZLB). It started with direct credit injection through unlimited liquidity auction windows, lowering collateral requirements and so on. Then, the quantitative easing policies sought to leverage the central bank's balance sheet by purchasing securities, private and government, undertaking maturity transformations in government securities etc, thereby "rebalance portfolios" to lower real interest rates. Finally, central banks are now, through forward guidance, seeking to shape market expectations through credibly committing to remain accommodative over a long-time horizon so as to restore normalcy in the economy.

The net result of all these policies is that we have had five years of ultra-cheap money and sustained recovery does not appear to be any closer. More worryingly, these policies have induced several distortions in the financial markets. Furthermore, any exit from the accommodation, before recovery has taken firm hold, threatens to destroy both the gains so far as well as trigger off a contagion across the emerging markets.

Amidst all this, the ZLB continues to bind, and looks set to do so for the foreseeable future. This, by itself is severely limiting on the effectiveness of monetary policy, and demands an exploration for new monetary policy frameworks. In this context, a new paper by economists at the US Federal Reserve Board argue that a revised monetary policy framework, like NGDP targeting, may be effective at overcoming the ZLB constraint. It has raised commentaries here and here in Free Exchange.

The paper explores various scenarios of monetary policy over the medium-term and finds that interest rates are not likely to rise beyond 4%, even by 2019. The likelihood of the US economy tipping to the next cycle of recession by then is very strong, thereby leaving the Fed with limited space to cut rates and adopt an accommodative stance with its monetary policy. In other words, the problem of ZLB is here to stay with us, ironically as a result of the global success with taming the high inflation trend. This raises the issue of how to design a monetary policy framework that can be responsive even when faced with the ZLB.

This has the potential to be very relevant for monetary policy debates in the coming years. Nominal interest rates remain low and will continue to be so for the foreseeable future. Further, deflationary pressures remain strong on both sides of the Atlantic. Even with economic recovery taking hold and interest rates rising, there is the strong likelihood that many developed economies will move into the next recessionary trough with far lower rates than would be enough to sustain the necessary monetary accommodation to recover from the recession. Inflation Targeting is likely to be a blunt instrument. An NGDP target is more likely to generate the thrust required to restore economic growth.  

Public services contracting woes in UK

Even as Britain grapples the legacy of its Thatcherite privatizations, the National Audit Office (NAO) has an excellent report that questions the way public services are contracted out in UK. The report was commissioned by the government in the aftermath of several scandals of mis-reporting, over-billing, and fraud.

Two of the largest outsourcing contractors, Serco and G4S have been found guilty of over-charging and fraud (by way of billing dead individuals) in their contracts for electronic tagging of offenders. Another, Atos entrusted with the responsibility of testing whether disability living allowance claimants are entitled to a government benefit, was found to have denied benefits to large numbers of people with terminal cancer and other serious illness.

The NAO report looks at the market for outsourcing public services, valued at £93.5bn last year, by examining four largest public contractors in UK. It raises concern at the concentration of public contracting in a few large firms and also at whether the money is being well-spent and desired outcomes are being delivered. 

In particular, the report examines three questions - whether public contracting market is sufficiently competitive; whether contractors profits reflect a fair return; and whether contractors are delivering services to the desired standards. It writes, 

First, it raises questions about the way public service markets operate. This includes the need for scrutiny over whether public service contracts are sufficiently competitive and whether the rise of a few major contractors is in the public interest. Secondly, it highlights the issue of whether contractors’ profits reflect a fair return. Understanding contractors’ profits is important to ensure that their interests are aligned properly with that of the taxpayer. But transparency over rewards that contractors make is at present limited.

Thirdly, the report asks how we know that contractors are delivering services to the high standards expected. In particular, government needs to ensure that large companies with sprawling structures are not paying ‘lip-service’ to control and that they have the right culture and control environment across their group. This requires transparency over contractors’ performance and the use of contractual entitlement to information, audit and inspection. This should be backed up by the threat of financial penalties and being barred from future competitions if things are found to be wrong.

The FT has this to say about the state of many outsourcing contracts,

Recent research by the Institute for Government think-tank has raised questions about the capacity of civil servants to ensure this money is well spent. “Gaming” of contracts is far too common, with departments too rarely checking whether providers are hitting the targets but missing the point... Competition is often non-existent...

Contracts, meanwhile, are too long and inflexible. Providers offer big discounts in return for guaranteed income over a longer period - and ministers and officials are often tempted by this deal, knowing they are unlikely to be there five years later. Policy, demand for services and technology all change frequently, however. Nine-year tagging contracts looked good value when they were signed in 2005 but not once the price of tagging technology plummeted. Taxpayers are still paying the price of 25-year public finance initiative deals to build and maintain hospitals and other essential infrastructure.  

An FT editorial hits the nail on its head in its assessment of what is wrong with public sector outsourcing in UK,

First, there is too little competition. Ministers must do more to allow smaller providers to grow. Second, Whitehall needs to be smarter about how it bargains over contracts, especially those where quality of service is as important as price. Ministers often sign up for deals merely on the grounds that they save money. They also need to be more savvy about monitoring subsequent performance. Third, more transparency is needed. Taxpayers need to see in much greater detail how these companies make profits and who their suppliers are... the pace of outsourcing has far outstripped Whitehall's ability to manage it properly. 

In fact, following the outbreak of the scandal, the government has put on hold a wave of contracts, worth an estimated  £500m a year, to outsource management of prisons and lowering of recidivism among prisoners. Outsourcing prisoner probation work had become almost a fad following some boutique experiments on lowering recidivism through social impact funding based business model.

There is nothing surprising about UK's experience with public contracting. In a matter of two decades, public services contracting has grown from virtually nothing to nearly £100 bn a year market. Public systems, especially those at the cutting edge, barely have the capacity to manage complex contracts. This problem gets amplified when they are dealing with large contractors with the capability to 'game' the contracts. 

This assumes great significance for countries like India where too public services contracting has grown rapidly without public systems being equipped with the capacity to manage these contracts. A classic example of an activity which runs the risk of losing credibility is independent third party quality control contracts entrusted to monitor the quality of engineering works. It is commonplace to today find many routine services contracts like that for cleaning and sanitation in public institutions like hospitals having degenerated into being indistinguishable from their previous publicly managed avatars.

Update 1 (10/1/2014)
The UK Civil Aviation Authority (CAA) has proposed cutting the user charges collected by the operators of the three private airports at Heathrow, Gatwick, and Stanstead in real terms over the next five years. While Heathrow had proposed that the user charges should increase by inflation plus 4.2 percentage points over the next five years, the CAA has awarded an increase of inflation minus 9.8 percentage points. The operator claims that the CAA award would cut its return on investment from 5.6% to 5.35%. Apart from this, the CAA has also imposed a more rigorous monitoring framework. The operators have criticized the decision. 

Securitizing electricity revenues

The Times reports of the first ever securitization of solar electricity payments,

Standard&Poor’s has given its preliminary blessing to the first offering of this kind, rating a set of notes intended to raise $54.4 million for the fast-growing installation company SolarCity... it gave a rating of BBB+, a low investment-grade designation, to the notes. SolarCity plans to sell the bonds, which are secured by a bundle of residential and commercial power contracts, privately this month... Many of the power contracts are with individual residences and businesses, which have increasingly turned to leasing solar systems to avoid the upfront costs. Under those terms, SolarCity pays for installing and maintaining the system in return for monthly payments for the electricity generated. The deal will help finance the rapid expansion of SolarCity, which has become a leading installer of solar systems in the United States... It has signed up more than 82,000 customers so far...

Theoretically contracts backed by tariff payments by consumers should be attractive given that people will continue to use electricity and bill default rates are very low. However the lack of standardization of contracts and the lack of any performance history increases the risks associated. The prevailing market conditions have undoubtedly played a role in the issuance,

The bonds are expected to have a yield of around 4.8 percent, which, in a time of low interest rates, is a relatively high rate that compensates investors for buying such an untested security. The offering is also relatively small and will be sold only to select institutional investors.

As solar and other renewables sector expands, developers are already facing financing constraints. In the circumstances, they have to rely on such innovative approaches to mobilize the resources required to finance their investments. But such investments are not likely to be readily forthcoming in normal times. Further, there is the associated danger that the promoters, many with only a handful years of existence, may disappear leaving investors saddled with massive loans. Finally, there is the ever-present danger associated with securitization when it goes beyond its first stage into transactions that are far removed from the original contract.     

On secular stagnation and the quest to lower real interest rates

Larry Summers' speech at the IMF conference, where he hints at the possibility of a long-period of post-1991 Japan-style stagnant economic growth in US and Europe, has generated great interest.

Briefly, the economy is stuck at the zero lower bound, where the equilibrium real interest rate is negative. Conventional policies become ineffectual. More worryingly, this may not be an aberration, but the new normal. In fact, but for a series of equity and asset market bubbles, this should have started binding since atleast the early nineties. In this period, despite fairly loose monetary policy and a steep rise in household borrowings, there have been very few signatures of aggregate demand overheating. Inflation has remained consistently low. Summers conjectures that the short-term real interest rate consistent with full employment has fallen to negative territory, and therefore the economy needs the financial excess from bubbles to sustain full employment. He invokes Alvin Hansen to describe this as a "secular stagnation" - permanent as against cyclical. He leaves us with a summary of the problem,

It is not over until it is over…We may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back, below their potential.

Paul Krugman attributes this stagnation to declining investment and widening output gap caused by a mix of lower population growth and slower pace of innovation. Miles Kimball points to the negative feedback from the declining share of population working (the labor force is estimated to grow by 0.5% annually in the 2012-22 period, half the rate in previous decade). Whatever the case, Krugman advocates that in such circumstances prudence is folly and spending is virtuous and the way out is to either introduce negative rates for deposits or raise inflation, by whatever means, and keep it there.

The diagnosis of a secular stagnation comes out as being plausible. In fact economists like Robert Gordon and Tyler Cowen have been arguing that the low hanging fruits from technological innovations having been plucked, we may now be in a period of technological stagnation. The related decline in productivity (output per worker in business sector rose by 3.6% per year in the 1997-2003 period, whereas it declined to just 1.6% in the 2003-12 period) when coupled with the declining population growth lends strong credence to a secular stagnation hypothesis. These are important long-term trends whose effects are certain to be profound.

Given the secular stagnation hypothesis, I am not sure whether the policy goal should be to attain the Great Moderation era "full employment" by seeking to lower the real interest rate. That would require continuing for an indefinite period the regime of quantitative easing and further monetary accommodation, as Krugman suggests, or deepening financial de-regulation, as Summers (may) be alluding to. Both are fraught with serious dangers of resource mis-allocation, incentive distortions, and structural problems (widening inequality and workers dropping out of the labor force).

There appears to be a distinct reluctance to accept the reality of a secular stagnation. Fundamentally, a sustainable pre-crisis trend recovery can happen only through the aggregate demand channel. But the aforementioned long-term structural trends are certain to keep aggregate demand muted. Therefore, instead of asking how to restore growth and employment back to pre-crisis levels, a more relevant exploration would be that of managing the economy given this new reality of a lower potential output. And that surely is not about seeking to lower real interest rates.

Update 1 (12/22/2013)
Lawrence Summers on secular stagnation as the new normal in developed economies. He argues that the US economy has been facing inadequate demand (as evidenced by low inflation and limited signs of over-heating even when growth was high) for some time now, and that this was the new normal. Further, under such conditions, the economy can get close to full employment only when supported by asset bubbles and unsustainable borrowing, as was the case in the nineties and first half of last decade. See also Paul Krugman here.

Update 2 (1/9/2014)

In order to avoid secular stagnation, and given the "new normal" of low interest rate regimes, Larry Summers argues in favor of large scale investments in infrastructure to help raise demand. Willem Buiter too feels the same, as also FT Alphaville. See also John Cassidy's summary on the secular stagnation debate here.

Update 3 (29/7/2014)

Larry Summers explains secular stagnation,

The question that this account leaves open so far is why, if there is a tendency for savings to exceed investment, why can’t lower but still reasonable interest rates balance things out? Here I think there are a number of answers both on the savings side and on the investment side. On the savings side, there’s a tendency towards increased saving because of greater wealth inequality and a rising share of profits increased the share of income going to those with high savings propensities; because increased uncertainty and greater indebtedness encouraged savings to repair balance sheets; because an expectation of lower returns leads to people or pension funds needing to put aside more money to prepare for their retirement or to send their kids to college or whatever their savings target is. All of that tends to lead to an excess of savings.

On the investment side, you have a tendency for substantial reductions in the price of capital goods, particularly those associated with information technology. You have a change in the capital requirements for starting a business. Contrast WhatsApp, worth $19 billion, with 55 people in a big room with Sony, worth $18 [billion], and owning lots of factories and office buildings and the like. Or think about Google and Apple, major leaders in scale on the stock market, but with vast cash hordes. That operates to reduce investment.

Update 4 (26/11/2014)

In 1938, following the persistent slowdown after Great Depression, Alvin Hansen described secular stagnation as "sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment.” 

SS is a period of depressed growth due to a combination of weak demand and excess savings, coupled with slowing technological progress, which limits productive investment opportunities and makes conventional monetary policy blunt. An Economist article suggests another reason for the prolonged stagnation - demographics.

The primary channel through which demographics affects growth is by lowering potential output, which is dependent on both population growth and productivity. Now with both population growth and productivity stagnant or even declining, potential output has nowhere to go but down. Population patterns affect both investment and savings. The Economist writes,

Firms need a given capital stock per worker—equipment, structures, land and intellectual property—in order to produce a unit of output. If output growth is hampered by lack of workers, firms will need less capital. Ageing populations also mean that more people are saving heavily in order to fund their retirement, depressing consumption... businesses are buying less machinery because they have fewer workers to operate it and fewer technological breakthroughs to exploit.

Another possible contributor to SS is the rising inequality and stagnant wages. This assumes significance since the richer people are more likely to save and less likely to spend than those less well off. This would dampen consumption and therefore growth.

Its signatures are everywhere - cash hoarding by businesses, declining long-term bond yields, lowest net investment (gross investment minus depreciation) as a share of capital stock, slowing potential output growth, and so on. 

QE in 12 graphs from MGI

The MGI have a excellent report on the effects of the quantitative easing programs across the world. Here is a graphical summary.

1. An extraordinarily long period of ultra-low interest rates was pursued so as to help recover from the Great Recession and enable financial institutions, businesses, and households to repair their debt-laden balance sheets.

2. The low interest rates were complemented with aggressive balance sheet expansion by all the major central banks in developed economies.

3. Apart from purchases of government securities, the US Fed and ECB intervened aggressively in credit markets, purchasing private assets like mortgage backed securities and commercial paper, and opened unlimited liquidity facilities to keep banks from being credit squeezed.

4. This extended period of monetary accommodation has had large-scale distributive consequences. Corporate borrowers and banks have been the biggest beneficiaries, whereas pension funds and households have been the losers. Non-financial firms in US, UK, and eurozone have saved an estimated $710 in 2007-12 on their debt service costs.

5. The bond markets have been the biggest beneficiaries.

6. Interestingly, its impact on equity markets, despite the recent surge, has been mixed.

8. The biggest beneficiaries though have been governments. By the end of 2012, governments have collectively benefited $1.4 trillion in reduced interest costs over the 2007 rate. To that extent, it has provided the fiscally constrained governments in these countries with the resources to finance their stimulus programs.

9. As the central banks start deleveraging, the biggest concern will be about its impact on the real economy, especially when economic activity remains weak and most countries are yet to recover fully their lost output and employment. The MGI report estimates that a 100 basis points increase in rates will increase household debt payments in US and UK by 7% and 19% respectively. In fact, households across US and Europe have lost a combined $630 bn as the lower interest on fixed income savings have more than outweighed the lower cost of borrowing.

10. Emerging economies too have not been spared. The Fed's balance sheet expansion has coincided with surge in capital inflows into emerging economies. In the Q2 2009 to Q4 2012, $700 bn of portfolio capital flowed into emerging market debt. In fact, in 2009-12 Mexico experienced seven times bond inflows as 2005-08, and Turkey five times.


11. So when the Fed unwinds its balance sheet, it is natural to expect a reversal in flows. And we have already had a sneak preview of that possibility, with its adverse economy-wide consequences.

12. The adverse external account of many emerging economies makes them vulnerable to the risks associated with the exit from the quantitative easing programs.

More discussion on the report in FT and Economist. 

India's Household Debt Graph of the Day

Even as government and corporate indebtedness has been mounting, the one silver-lining for the Indian economy comes from its low and declining household debt, which is the lowest among all major economies.

Second generation issues in infrastructure

I have this op-ed with Dr TV Somanathan on the second generation issues in infrastructure. 

Measuring global inequality

Late on this insightful paper on global inequality by Branko Milanovic. This graph of change in real incomes among people at various percentiles of global income distribution in the 1988-2008 period has received considerable attention.



About the winners and losers from this period, he writes,

The top 1% has seen its real income rise by more than 60% over those two decades. The largest increases however were registered around the median: 80% real increase at the median itself and some 70% around it. It is there, between the 50th and 60th percentile of the global income distribution that we find some 200 million Chinese, 90 million Indians, and about 30 million people each from Indonesia, Brazil and Egypt. These two groups—the global top 1% and the middle classes of the emerging market economies— are indeed the main winners of globalization...

But the biggest loser (other than the very poorest 5%), or at least the “non-winner,” of globalization were those between the 75th and 90th percentile of the global income distribution whose real income gains were essentially nil. These people, who may be called a global upper-middle class, include many from former Communist countries and Latin America, as well as those citizens of rich countries whose incomes stagnated.

The paper has a very interesting representation of the progress made by some emerging economies...

In 1988, a person with a median income in China was richer than only 10% of world population. Twenty years later, a person at that same position within Chinese income distribution, was richer than more than one- half of world population. Thus, he or she leapfrogged over more than 40% of people in the world. For India, the improvement was more modest, but still remarkable. A person with a median income went from being at the 10th percentile globally to the 27th. A person at the same income position in Indonesia went from the 25th to 39th global percentile. A person with the median income in Brazil gained as well. She went from being around the 40th percentile of the global income distribution to about the 66th percentile. Meanwhile, the position of large European countries and the United States remained about the same, with median income recipients there in the 80s and 90s of global percentiles.

.... and the losers in Africa, Latin America, and East Europe,

So who lost between 1988 and 2008? Mostly people in Africa, some in Latin America and post-Communist countries. The average Kenyan went down from the 22nd to the 12th percentile globally, the average Nigerian from the 16th to 13th percentile. A different way to see this is to look at how far behind the global median was an average African in 1988 and twenty years later. In 1988, an African with the median income of the continent had an income equal to two-thirds of the global median. In 2008, that proportion had declined to less than one-half. The position of a median-income person in post-Communist countries slid from around the 75th global percentile to the 73rd. The relative declines of Africa, and Eastern Europe and the former Soviet Union confirm the failure of these two parts of the world to adjust well to globalization, at least up to the early years of the 21st century. 

Another interesting insight is the increased contribution of location or citizenship on people's income determination. He writes,

More than fifty percent of one’s income depends on the average income of the country where a person lives or was born (the two things being, for 97% of world population, the same). This gives the importance of the location element today. There are of course other factors that matter for one’s income, from gender and parental education which are, from an individual point of view externally given circumstances, to factors like own education, effort and luck that are not. They all influence our income level. But the remarkable thing is that a very large chunk of our income will be determined by only one variable, citizenship, that we, generally, acquire at birth. It is almost the same as saying, that if I know nothing about any given individual in the world, I can, with a reasonably good confidence, predict her income just from the knowledge of her citizenship... Around 1870, class explained more than 2/3 of global inequality. And now? The proportions have exactly flipped: more than 2/3 of total inequality is due to location.  

Finally, the paper also captures the differences in economic positions of people from different countries. It divides the population of all countries into groups of 5% or ventiles and maps their position in the global income distribution.

Update 1 (2/1/2014)
The International Business Times has this nice graphic of the changes in global inequality.

India's savings chart of the day

Few graphs can present a more striking illustration of the distortions in Indian economy as this one showing how Indian households allocate wealth along different asset categories.


Land and gold together make up 71% of all household assets. Given the limited market for housing mortgages and gold funds, these savings contribute very little to our investment needs. The share of equity and other non-bank financial investments is marginal. This is in sharp contrast to global trends, where a major part of savings are invested directly in financial assets.

We seem to be entrapped in a low-level equilibrium. Problems of access, volatility in equity markets, limited liquid enough fixed income savings instruments, and a grossly under-developed insurance market, have served to keep investors away from financial markets. Further, the inflation tax has been a big disincentive to investing in financial assets. In contrast, thanks to recurrent booms, land and gold have appeared to be relatively attractive investment options. Its allure is amplified by the attraction of being safe conduits to stash away black money as well as avoid taxes. In turn, this self-reinforcing savings-investment channel is a formidable deterrent to the emergence of a deep and broad financial market.   

Bubbles, Bubbles Everywhere!

A friend pointed me to this superb graphic from John Mauldin's weekly newsletter. The graphic below, in particular, looks ominous. This video is simply spectacular.



The Fed has a problem similar to what the historical character Abhimanyu in the Hindu epic Mahabharath faced - it broke conventional wisdom and monetary policy frontiers through its balance sheet expansion policies, but exiting the chakravyuha of quantitative easing is proving one heck of a challenge. The real risk is that the cheap-credit inflated foundations of balance sheet repair (of banks, firms, and households) and economic recovery may collapse dramatically. And with massive collateral damage in emerging economies to boot!

Anyways, even in the doomsday gloom, as the perceptive Tyler Durden writes, John Mauldin offers a silver-lining - how to make/save money in a bursting asset bubble! 

The distortions of an income-poverty paradigm

The standard definition of poverty is in the form of an income level, below which people are classified poor. Its simplicity, especially in targeting poverty elimination interventions, has proved irresistible. However, our excessive focus on poverty as income deprivation may be becoming detrimental to global poverty eradication efforts.

Consider the case of India. Most of the policies that seek to address poverty involve measures to either directly increase poor people's incomes through various income generating activities like self-employment or provide for social safety supports through various subsidies and cash transfers. I find this approach restrictive for atleast three reasons.

1. This approach has an all encompassing targeting focus. It is as though there is some line above which people become less poor or that moving people above this line achieves reduction in poverty. Lant Pritchett makes compelling arguments here and here questioning the "poverty-line" based development policy making. In any case, the current poverty line of $1.25 or even $2 per day is too low to live a dignified life.

2. It assumes that poverty is an exclusively income deprivation phenomenon. This argument assumes that once people manage to increase their incomes, they will be able to access opportunities. And if opportunities become accessible, they will grab it and ease their way out of poverty. I find this a gross simplification of a complex problem. Here is why.

Poor people suffer from a deprivation of personal and environmental endowments. Though poverty is most commonly associated with deprivation of personal endowments - wealth, income, health, education etc - poor people are also deprived from access to environmental endowments like infrastructure and various other public goods. Taken together, these twin deprivations deny them the enabling pre-requisites to live a dignified life and achieve sustainable income mobility.

Consider the example of rural areas in many developing countries. A vast majority of these villages lack even the basic public goods - roads, water and sanitation, electricity, good quality schools and hospitals, etc. Even if people living in these villages are supported with large and continuous income transfers, the absence of basic infrastructure and public goods will leave them without the capability to meaningfully access the opportunities in the modern economy. In the extreme, this argument is similar to the example of a rich man in a very poor country. There is a limit to how much money can achieve in such environments in the realization of his full potential.

So how does the poor people in urban areas, which have all these public goods, compare? This illustrates the challenge with actually realizing opportunities even when access is addressed. Poor people, living in the slums, have access to a much greater range of infrastructure and public goods than their rural counterparts. But their ability to utilize those endowments and realize the opportunities that come their way is limited. In this context, the recent research in behavioral psychology, which claims that poor people are cognitively taxed due to scarcity of money, time, and effort, holds important lessons.

3. It distorts everyone's incentives and entraps the development process in a low-level equilibrium. Governments, non-profits, and civil society at large advocate policies that seek to address poverty through augmenting poor people's incomes. All other dimensions of poverty gets relegated to the background. Individual-based policies play to the immediate urges and cognitive biases of both the recipients and politicians, and it is simpler to administer. Given the scarce resources available, it consumes most of that available and leaves little for anything else.

I am inclined to the belief that this narrow poverty line based approach has, in no small measure, albeit along with a few other factors, been responsible for the persistence of poverty. And unless we go beyond it, we are no more likely to address poverty even if we are able to achieve the new goal of eliminating poverty by 2030.

Obamacare visualization

An example from Kaiser Foundation of how excellent visualization and video can very effectively communicate complex legislations is this video that explains the impact of the Affordable Care Act (its portal troubles notwithstanding) on how Americans will purchase health coverage.

The Washington Post has this nice FAQ link on Obamacare. Such graphic videos are powerful instruments to bridge the last mile gaps that often come in the way of effective implementation of important legislations or reform measures. Its greatest impact would be in informing stakeholders, in a cognitively striking manner, about how it would impact them.   

Update 1 (2/2/2014)

Good visualization of the possible impact of Obamacare across various US regions. 

Labor market reforms

My latest Governance Agenda column in Pragati is about one of the most important pillars of India's second generation reforms - labor market reforms.

Update 1 (8/6/2014)

Rajasthan government takes the plunge with labor market reforms. The state cabinet has cleared state-level amendments to Industrial Disputes Act, Contract Labor Act, and Factories Act. The changes to the ID Act increases the threshold for government permission for firing labor from 100 to 300 workers. The Indian Express reports,

The Rajasthan Cabinet has also introduced a three-year time limit for raising disputes and increased the percentage of workers needed for registration as a representative union from 15 per cent to 30 per cent. In the context of politicisation of trade unions, this raises the bar. As far as the Contract Labour Act is concerned, the amendments raise the applicability of the Act to companies with more than 50 workers from the current 20. In the Factories Act, currently applicable to premises with more than 10 workers with power and 20 without power, the amendments raise these numbers to 20 and 40, respectively.