Sunday, April 27, 2014

Inequality fact for the day

In the context of the landmark US Supreme Court decision (see interactive graphic here) to uphold the right of Michigan's voters to ban racial preferences in college admissions, one which is certain to trigger calls for a roll-back of affirmative action policies in the US, The Century Foundation has a nice report on the striking levels of inequality in college admissions in the US. It writes,
While Asians attain a greater share of seats in four-year colleges than their proportion of population of 18 year-olds, African Americans and Hispanics constituted just 6 percent of the freshman classes of the 146 "most" and "highly" selective four-year colleges. African Americans and Hispanics were 15 and 13 percent, respectively, of all 18 year-olds in 1995. So blacks and Hispanics were considerably under-represented at these top schools even with affirmative action. 
There is even less socioeconomic diversity than racial or ethnic diversity at the most selective colleges. Seventy-four percent of the students at the top 146 highly selective colleges came from families in the top quarter of the socioeconomic status scale (as measured by combining the family income and the education and occupations of the parents), just 3 percent came from the bottom socioeconomic status quartile, and roughly 10 percent came from the bottom half of the socioeconomic status scale. If attendance at these institutions reflected the population at large, 85000 students (rather than 17000) would have been from the bottom two socioeconomic quartiles. 
The findings of student distribution among the four different categories (classified on the SAT or ACT scores based admission criterion) of four-year colleges are shown in the table.
The figures are a graphic demonstration of why birth matters more than ever in determining life outcomes. If you have not been blessed by the ovarian lottery of taking birth in a richer family, then your likelihood of getting into one of the top colleges drops dramatically. 

Saturday, April 26, 2014

The ripening inequality debate

I agree with this,
I remember white South African liberals bemoaning apartheid while the maid served supper. I grasped only recently (after reading Mark Gevisser’s excellent new book Dispatcher, about Johannesburg) that most of them didn’t want to end apartheid. They just liked talking liberal talk. It made them feel virtuous, and set them above peasants who actually believed in apartheid. In fact, apartheid liberals resemble liberals today who bemoan climate change while flying everywhere and not voting for parties that would tackle the problem (I know: I’m guilty too). As climate change gets forgotten, the latest fake liberals are the Davos types who bemoan inequality at billionaire-sponsored cocktail parties... Apartheid ended partly for the same reason why communism collapsed in 1989, and why inequality may yet diminish: the ruling class became ashamed. 
There is a form of similar cognitive dissonance, even sheer hypocrisy, that underlines current liberal thinking on issues like inequality. The displacement of entrenched ideas happens through a slow process of ripening of the anti-thesis. It is of course difficult to estimate whether the anti-thesis has acquired enough traction (or breached a threshold) in the minds of the collective (say, ashamed them enough) to over-throw the extant ideology. Interestingly, history shows that once the dialectic is in motion, as is surely true of the debate on inequality, reversals can happen very quickly.

Has Obama's "inequality as the defining challenge of our time" campaign and Thomas Piketty's "serious" book provided the triggers, especially the United States, for "complicit" liberals to become "activist" liberals? I think it may have. 

India food wastage fact of the day

From FT, about the magnitude of food wastage in India,
According to estimates by the UN’s Food and Agriculture Organization (FAO), about 40 per cent of India’s fresh fruit and vegetables – worth an annual $8.3bn or so – perishes before reaching consumers. Each year, some 21m metric tonnes of wheat, especially grain – an amount almost equal to Australia’s total annual production – rots in India because of improper storage in the custody of the government-controlled Food Corporation of India.
And about the logistics required to establish a more efficient farm-to-fork model,
According to a recent study by the Indian Institute of Management in Kolkata, cold storage facilities are available for just 10 per cent of India’s perishable produce – and are mostly used for potatoes – to meet India’s robust demand for chips. The study estimates that India needs storage facilities for another 370m metric tons of perishable produce.

Monday, April 21, 2014

Piketty, Balzac's Vautrin, and "positionally privileged" elites

Lots of reviews of Thomas Piketty's new book. Paul Krugman in his review of Capital in the 21st Century writes about Piketty's description of wealth distribution in Europe's Belle Epoque starting from third quarter of nineteenth century using a Balzac novel, 
Nineteenth-century novelists were obsessed with inheritance. Piketty discusses at length the lecture that the scoundrel Vautrin gives to Rastignac in Balzac’s Père Goriot, whose gist is that a most successful career could not possibly deliver more than a fraction of the wealth Rastignac could acquire at a stroke by marrying a rich man’s daughter. And it turns out that Vautrin was right: being in the top one percent of nineteenth-century heirs and simply living off your inherited wealth gave you around two and a half times the standard of living you could achieve by clawing your way into the top one percent of paid workers.
And Krugman has this to say about 
If Rastignac were alive today, Vautrin might concede that he could in fact do as well by becoming a hedge fund manager as he could by marrying wealth.
Interestingly, and apparently running counter to Piketty's central thesis that ownership of capital drives inequality, the massive income earnings of a certain very "positionally privileged" elite - especially those in the financial sector and those occupying the highest echelons of big business - should definitely count as a trend that breaks with the historical pattern of income patterns. These individuals enjoy a "positional" privilege - be it as part of an organizational hierarchy or as part of a sector that is now, socially and economically, the most attractive one - over their similarly or more capable peers.

There is a widespread belief, although not held by the likes of Krugman, that these extraordinary income returns are a genuine reflection of their inherent abilities. But a deeper analysis suggests that these incomes are in turn built on "first-order" birth outcomes - the ovarian lottery that you are born in a family that can afford you the best available elite up-bringing, education, and access to these "positional" opportunities at the most appropriate entry-points. In this respect, returns that arise from "first-order" birth outcomes, a biological inheritance, are itself a proxy for capital.

Update 1 (10/5/2014)

The Institutional Investor's Alpha Magazine's annual list of the 25 highest paid hedge fund managers for 2013 is out. The 25 men made a combined $21 bn, with David Tepper, founder of Appaloosa Management maintained his top position, raking in $3.5 bn to add to his $2.2 bn in 2012. Matt Yglesias points to this striking fact,
Well, it's about 0.13 percent of total national income for 2013 being earned by something like 0.00000008 percent of the American population. Another way of looking at it is that this is about 2.5 times the income of every kindergarten teacher in the country combined.
The year 2013 was the fifth consecutive year average hedge fund performance was below the stock market performance. The average return by a portfolio of 2200 funds was 9.1% compared to S&P 500's 32.4% return after accounting for dividends.

In this context, Matt Levine in Bloomberg analyzed the sources of the return for these fund managers and found that the returns of the top fund managers were amplified by the returns on their own personal investments in the fund. In fact, he finds that the major share of their returns came from the increases in their personal investments (or capital accumulated) rather than from the fees (2/20) of their actively managed fund. He writes,
If you have money, and you put it in your hedge fund, and your hedge fund has a positive return, you will make money. If you start with a ton of money, and/or your hedge fund has really good returns, you will make a lot of money. Notions of fair compensation for your labor, or appropriate pay for performance, just don't enter into it. Money begets money, lots of money begets lots of money, and skill in the begetting is a nice bonus.
He has this graphic of the dis-aggregated returns.
This reinforces Piketty's central argument that capital begets more capital, thereby widening inequality. 

Friday, April 11, 2014

Political change - the role of information and popular waves

There is a very strong, if not dominant, belief among development researchers that lack of adequate information and awareness is responsible for holding back reforms that could have improved development outcomes. 

Accordingly, they believe that if the poor quality of student learning outcomes or care delivered by government doctors are appropriately highlighted it could trigger the reforms required to address these deficiencies. Similarly, a credible demonstration (say, empirically or through rigorous field experiments) of the effectiveness of cash transfers or technical solutions to eliminating an inefficiency in a public service delivery system would lead to its adoption. Even the more prudent among them believe that it would go a long way towards achieving the reforms.

This betrays an inadequate understanding of the dynamics of political change. Political change is and has always been about ideological or populist waves anchored around a problem or felt-need that galvanize the public (or stakeholders) mood into demanding action. In fact, as Lant Pritchett has argued, development itself is a faith-based movement. Knowing about a problem is not the same thing as having the urge to address the problem. Change happens not when stakeholders become aware of some problem but when they are triggered into action. And there is some distance to travel between knowing and acting.

Consider the two examples of poor quality of education and health care delivered by public institutions across India and many developing countries. It is now exhaustively documented, by both public audits and third party assessments, that student learning levels in government schools across India are shockingly low. Every year, for nearly a decade, the annual ASER reports, through quantified metrics on learning achievements, tell us that less than a half of Class V children have achieved even Class II competencies. Furthermore, learning levels have been worsening. The same reports have also consistently shown that private schools achieve better results at a fraction of the cost of public schools. It is also well documented that teacher truancy is a major problem in government schools. Conventional wisdom would have it that learning outcomes should occupy the center of the education agenda. 

Similarly, a number of studies have exposed the poor quality of care in primary health centers (PHCs). In fact, the Planning Commission itself estimates that PHCs account for less than one-fifth of all first contact in the referral chain. The remaining are with private care providers, mainly the unqualified rural medical practitioners (RMPs). Numerous studies have shown widespread unauthorized absenteeism among nurses and doctors. Recent studies have also shown that compared to even RMPs, PHC doctors spend less time per patient and mis-diagnose more frequently. Again conventional wisdom would have it that primary health care reforms, including integration of RMPs, should be a no-brainer. 

Many of these findings come from rigorous studies like randomized control trials conducted by very reputed agencies and researchers. In any case, none of them have been disputed by any of the stakeholders. Further, most of them have cognitively striking headline numbers, which presumably should unsettle any rational audience. However, in reality, the impact of such research findings has been remarkably marginal. Researchers blame governments and express incredulousness at its unwillingness to take action to change the order.

India is not alone in being afflicted by this trend. One only needs to look at public debates in the United States to understand the persistence and hold of ideological and other prejudices on the face of overwhelming evidence. Arguments in favor of lowering the marginal income tax rate, despite unambiguous evidence of dramatic concentration of wealth and declining returns to labor income, dominate conservative thinking. Climate change deniers and opponents of gun control are not amenable to conclusive evidence and well-reasoned arguments that contradict their views.

But I am not one bit surprised by this. Paradigm re-defining reforms rarely happen because someone comes up with striking figures that reveal something completely new and deeply unsettling, forcing governments into action. Almost always those insights are widely known and have been deeply internalized by most stakeholders, though not necessarily quantitatively. It is just that the changes - in terms of re-orienting values as well as accommodating losses of various stakeholders - required are much more daunting than could be achieved with mere revelation of facts, however unsettling. They require upending of well-established political and administrative orders and social values, which would cause loss to powerful and entrenched vested interests and destabilize the passive tolerance (for whatever reasons) of poor quality service by its intended beneficiaries (or now losers!). 

The debates on these issues have a dynamic of their own, and needs to accumulate the importance and urgency that generates the demand for immediate and decisive action. They need some long enough period of deep personal engagement by those immediately affected with the problem. But unfortunately a mere dissemination of information about ground realities is unlikely to, by itself, result in the deep engagement required. It would need careful strategic communication to get the stakeholders to face up to the reality and demand change. People are too cognitively ensconced, despite the obvious failings of the existing arrangement and their resultant losses, to come out and fight for change.

This is not to say that such research has no role in addressing such issues. But research findings, while undoubtedly important to the public debate on these issues, are just one of the contributors to change. The most important trigger for action on such issues is the realization and internalization of the need for change among atleast the most important stakeholders.

It is one thing to legislate rules that promise good quality education or health care, but entirely another thing to actually create the conditions that will enable its realization. In fact, in areas like education and health care, we may already have enough information and insights to stop worrying about them and get down to the business of actually creating the conditions required for change. Advocates of change need to realize this and work to create the conditions for change. Merely providing more information or insights alone may already be into the phase of diminishing returns.

Monday, April 7, 2014

On China's shadow banking risks

Quartz has two graphics that explain the much discussed Chinese shadow banks. Briefly, the Chinese government caps the interest payable on savings accounts to 3% and impose a very high 20% cash reserve ratio on bank deposits. The former, coupled with capital controls and the lack of alternative investment opportunities for a nation of ultra-high savers, encourages the search for higher yields among savers. The latter, coupled with the search for capital for riskier investments among various market participants, incentivizes the creation of channels to funnel savings that can bypass the formal banking sector.

The result has been the growth of intermediaries called trust companies that are not allowed to accept deposits or make loans, but can manage money. These firms have established Wealth Management Products (WMP), which yield higher returns and are marketed by formal banks for a commission. The money raised through WMPs are invested in higher risk projects. Real estate firms, local government entities, and commodity companies have relied heavily on these trusts to raise relatively short-term (2-3 years) capital to finance their aggressive investments. This capital circulation is in the "shadow" in so far as it does not sit on the balance sheets of banks that market them. Neither does it show up on the balance sheets of the end-borrowers too, as they invariably invest in high-risk projects through special purpose vehicles.

The lending cycle of a typical WMP looks like this.
The circulation of capital in the shadow banking system, as highlighted below, generates a much higher money multiplier than with bank lending, leading to excessive credit growth.
The problem with such exuberant lending cycles (the value of WMPs have doubled to nearly 10 trillion yuan in two years since Q4 2011) is that they are invariably associated with excessive risk taking. The lending cycle was sustained by the prolonged period of investment driven economic growth, especially fueled by government investments in massive infrastructure projects, which inflated both real estate and commodity bubbles. This naturally exposes the lending counter-parties to the risks posed by declining investments - fall in the underlying real estate and commodity prices. 

Two issues here. 

1. While one could rationally argue, with numbers showing that the share of risk exposure is within manageable limits, nobody can be certain about how things will pan out once a cycle of defaults get triggered. It is almost certain that not even the Chinese government has any idea about the degree of riskiness associated with all the massive investments undertaken by its local governments and real estate firms. 

2. Two, till now the Chinese government's ability to impressively manage various emergent challenges has been, in large part, due to the momentum created from rapid economic growth. Rapid growth not only papers over the adverse effects of distortions, but also creates the space for calibrated reforms. And some of the challenges are truly formidable - eg, the transition from the current investment spending of 48% of GDP to a lower path, and the increase of private consumption from an ultra-low 36% of GDP to something more normal like 55-65%. Most importantly, and especially important in an authoritarian polity, growth is often a pre-requisite to contain social and political tensions.    

Update 1 (12/6/2014)
Commodities lending has been one of the large sources of the Chinese shadow banking system. In a typical commodities loan, copper (or any other commodity) is imported using letters of credit, warehoused in duty-free zones and pledged as collateral for cheap bank loans. The loan proceeds are used by the importer to speculate in higher-yielding, short-term investments. When the letter of credit comes due, the importer then either sells the commodity or the investment product. Goldman Sachs estimates that more than $160 bn has flowed into China through commodity backed loans since 2010. 

This market has been disrupted by recent news that multiple loans may have been made on the same collateral, copper and aluminium stockpiled at the Qingdao Port in northeast China. Several global banks including Citigroup have lent to borrowers against this collateral. While this route of raising capital was remunerative when commodity prices were rising, the recent declines in commodity prices have also raised questions about the potential failures from this market. One company, Decheng Mining was suspected by the authorities of having pledged the same stocks of the metals — about 100,000 tons of aluminum and 2,000 to 3,000 tons of copper — as collateral for multiple loans, amassing bank debt exceeding 1 billion renminbi ($160 million). 

Sunday, April 6, 2014

The top 0.01 percent

Amidst all talk about the 1%, we overlook the fact that there exists considerable variation in the trends among them. While incomes shares of the 1-0.1% have been relatively stable, the real surge has been in the share of the top 0.1%, in particular the top 0.01%.
The near quadrupling of the wealth share of the top 0.01% has come mainly from ownership of equity and fixed income security assets, or in other words from returns on capital. 
But for the bottom 90%, the share of equities and fixed income securities is virtually zero.  
Expectedly, this trend has paralleled a near doubling of corporate profits as a share of GDP over just the last decade. 
Even as the share of income going to labor has been declining, not just in US, but across the world. In America, labor's share of income has fallen 3.9 percentage points over the last quarter century. Trade, globalization, technology, and labor market deregulation have all contributed to this trend. 

Friday, April 4, 2014

Irrational Exuberance, Tesla Edition!

Fledgling electric car maker Tesla's outrageous stock market valuation is clearly driven by irrational exuberanceQuartz has two graphics that highlight this. Surely, nothing in the world merits a spurt in valuation as spectacular as this. Did we invent tele-portation?
Screen Shot 2014-04-01 at 12.32.46 PM
Especially when the fundamentals behind the valuation is so clearly off-sync from that of anyone else, including the best competitors in the market.
Screen Shot 2014-04-01 at 12.41.09 PM
So what drives such valuations? Even assuming the firm being at the cutting edge of innovation in electric vehicles and would therefore be the target of inflated take-over bids as the technology's commercial prospects increase, there are too many uncertainties in the market to warrant anything remotely close to such valuations. Clearly Tesla occupies the echo chamber among stock market investors. 

Wednesday, April 2, 2014

India's "bloated" bureaucracy?

Critics reflexively blame India's "bloated bureaucracy" for governance failures. So how "bloated" is it?

As on 2011, India had 18.5 million governments employees - 3.4 million with central government, 7.2 million with state governments, 5.8 million with PSUs, and 2.1 million with local governments. As a share of total employment (around 400 million) it was just 4.6%. However, as a share of organized sector employment, it stood at 62.2% in 2010. In contrast, in the US, governments now employed 15.9% of all Americans with jobs. The relevant statistical comparisons are 4.6% and 15.9%, which is itself a deceptively favorable comparison and with wide variations across states and departments. Consider this excellent analysis reported in Hindu, 
Data compiled from multiple sources, including a 2008 official survey, Right to Information applications, media reports and the 2011 census show, India has 1,622.8 government servants for every 100,000 residents. In stark contrast, the U.S. has 7,681. The Central government, with 3.1 million employees, thus has 257 serving every 100,000 population, against the U.S. federal government's 840. This figure dips further if the 1,394,418 people working for the Railways, accounting for 44.81 per cent of the entire Central government workforce, are removed. Then, there are only about 125 central employees serving every 100,000 people. Information technology and communications services account for another 7.25 per cent of the Central government's staff...
For the most part though, India's relatively backward States have low numbers of public servants... Bihar has just 457.60 per 100,000, Madhya Pradesh 826.47, Uttar Pradesh has 801.67, Orissa 1,191.97 and Chhattisgarh 1,174.62. This is not to suggest there is a causal link between poverty and low levels of public servants: Gujarat has just 826.47 per 100,000 and Punjab 1,263.34. The data could explain, though, why even well-off States like these have found it tough to ensure universal primary education and eradicating poverty.
I have always considered this alarming deficiency as an important contributor to our state capability deficit. An illustration of this deficit is that New York with 3500 eateries has 180 food inspectors whereas Hyderabad with atleast a few times more eateries has just 4! Much the same is common across cutting edge activities - school inspectors, outreach nurses, agriculture extension officers, town planning inspectors, engineering supervisors, and so on. It is impossible to systemically deliver effective outcomes when the jurisdiction of the official is massively stretched functionally, geographically, and population-wise. Even a cursory matching of time and task to responsibilities would reveal that we would need to have a few times more functionaries.

And, as the report highlights, these deficiencies span across all levels. It is as much incorrect to say that Indian bureaucracy is top heavy as it is to say it bottom heavy. Or overstaffed at the center and understaffed at the states. It is understaffed at all levels. 

None of this should be taken to presume that once we have them in place, state capability will improve. Far from it. Personnel deployments have to be complemented with other administrative reforms that increase transparency and local accountability, improve supervision and monitoring capacity, build capacity, and prevent the politicization of bureaucratic functioning. None of these are easy. But to mindlessly blame "bloated" bureaucracy for our governance failures will not get us anywhere.

Update 1 (17.06.2015)

From Business Standard,
Total government sector employment declined by two million to 17.6 million during the period 1995-2011. Today, close to half or 43 per cent of government employees are temporary and as many as 3.5 million government jobs have been outsourced to the private sector during 2000-12. The government sector accounts for 58 per cent of formal sector jobs, but a good 44 per cent (for the private sector this figure is 75 per cent) of these are temporary in nature.
Update 2 (15.08.2015)
From Livemint, an excellent description of how programs are launched with limited acknowledgement of state capability constraints.