Weekend Reading Links

1. Insightful analysis by Dani Rodrik on why liberal democracies are so scarce,

Liberal democracy rests on three distinct sets of rights: property rights, political rights, and civil rights. The first set of rights protects owners and investors from expropriation. The second ensures that groups that win electoral contests can assume power and choose policies to their liking – provided these policies do not violate the other two sets of rights. Finally, civil rights guarantee equal treatment before the law and equal access to public services such as education. 

Property rights and political rights both have powerful beneficiaries. Property rights are of interest primarily to the elite – owners and investors. They may be comparatively few in number, but they can mobilize material resources if they do not get their way. They can take their money elsewhere, or choose not to invest – imposing substantial costs on the rest of society. Political rights are of interest primarily to the organized masses – the working class or ethnic majority, depending on the structure and cleavages in society. Members of the majority may be comparatively poor, but they have numbers on their side. They can threaten the elite with uprisings and expropriation.

The main beneficiaries of civil rights, by contrast, are typically minorities that possess neither wealth nor numbers. Turkey’s Kurds, Hungary’s Roma, Russia’s liberals, or Mexico’s indigenous population ordinarily command little power within their countries. Their demands for equal rights therefore do not have the potency that demands for property and political rights have.

Theories that purport to explain the historical origins of democracy have overlooked this asymmetry among claimants for different types of rights. These theories revolve largely around a bargain between the propertied elite and the working classes: faced with the threat of revolt, the elites expand the franchise and allow the masses to vote. In return, the masses – or their representatives – agree not to expropriate the elite... But these democratic bargains, by their very nature, produce electoral democracies rather than liberal democracies. The dispossessed minorities who have the strongest stake in civil rights play no role during the democratic transition for the simple reason that they cannot normally bring anything to the bargaining table. So the democratic bargain yields property and political rights, but only rarely civil rights as well.

The full paper is here.

2. Even as trade between China and Latin America surged from $12 bn in 2000 to $285 bn in 2014, the Chinese embarked on a "railroad diplomacy" in the continent. This has now hit a roadblock, 

China has sought to build a “dry canal” in the form of a railway across Colombia, linking the Caribbean to the Pacific. Chinese investors announced another huge venture in Honduras, two ports and a 375-mile railroad from sea to sea. Then this June, China announced yet another megarailway — nearly 10 times as long — across Brazil and Peru, stretching from one coast of South America to the other. But across the region, one large Chinese rail venture after another has come crashing against the hard realities of Latin American politics, resistance from environmental groups, and a growing wariness toward China... Still, political leaders, farmers and environmental activists are eyeing China’s difficulties in completing railroads elsewhere in Latin America. They point out Brazil’s particularly nettlesome bureaucracy, its laws prohibiting China from hiring its own laborers, a web of auditing courts, and the capacity of dozens of different prosecutors to cripple megaprojects with lawsuits... Powerful political and business figures, whose river ports and soybean processing centers could be threatened by the railway, are already blasting the Chinese venture. 

3. Paul Theroux laments the decline of America's Deep South, which he blames on globalization and the off-shoring of manufacturing,

Take a Delta town such as Hollandale, Miss. Two years ago, the entire tax base of this community of around 3,500 was less than $300,000. What the town had on hand to spend for police officers, firefighters, public works, outreach, welfare and town hall salaries was roughly the amount of a Bill or Hillary one-night-stand lecture fee; what Tim Cook, the chief executive of Apple, earns in a couple of days. When Hollandale’s citizens lost their jobs in the cotton fields to mechanization they found work nearby, in Greenville and elsewhere, in factories that made clothes, bikes, tools and much else — for big brands like Fruit of the Loom and Schwinn. They are gone now.

4. John Tierney has a contrarian take on the conventional wisdom that promotes recycling of all waste, and argues that it makes sense to recycle only cardboard, some paper, aluminium cans, and some plastics,

To offset the greenhouse impact of one passenger’s round-trip flight between New York and London, you’d have to recycle roughly 40,000 plastic bottles, assuming you fly coach. If you sit in business- or first-class, where each passenger takes up more space, it could be more like 100,000. Even those statistics might be misleading. New York and other cities instruct people to rinse the bottles before putting them in the recycling bin, but the E.P.A.’s life-cycle calculation doesn’t take that water into account... if you wash plastic in water that was heated by coal-derived electricity, then the net effect of your recycling could be more carbon in the atmosphere. To many public officials, recycling is a question of morality, not cost-benefit analysis.

According to the E.P.A.’s estimates, virtually all the greenhouse benefits — more than 90 percent — come from just a few materials: paper, cardboard and metals like the aluminum in soda cans. That’s because recycling one ton of metal or paper saves about three tons of carbon dioxide, a much bigger payoff than the other materials analyzed by the E.P.A. Recycling one ton of plastic saves only slightly more than one ton of carbon dioxide. A ton of food saves a little less than a ton. For glass, you have to recycle three tons in order to get about one ton of greenhouse benefits. Worst of all is yard waste: it takes 20 tons of it to save a single ton of carbon dioxide. Once you exclude paper products and metals, the total annual savings in the United States from recycling everything else in municipal trash — plastics, glass, food, yard trimmings, textiles, rubber, leather — is only two-tenths of 1 percent of America’s carbon footprint.

5. The completely deregulated (prices are decontrolled) pharmaceuticals industry in the US has been witnessing a new trend of firms (floated by financial market executives) buying up existing drugs and steeply raising price to maximize their returns. In recent weeks, Turing Pharamaceuticals has taken flak for raising the price of anti-infection drug Daraprim from $13.50 to $750. Now comes Valeant Pharmaceuticals, which this year alone, has raised the prices of its brand-name drugs by 66%.

The Times writes about Valeant's version of predatory capitalism with attendant market failure,

Valeant is known for buying one company after another, and laying off their employees to achieve savings, while accumulating a debt of about $30 billion. It spends an amount equivalent to only 3 percent of its sales on research and development, which it views as risky and inefficient compared to buying existing drugs. Traditional big drug companies spend 15 to 20 percent of sales on research and development. Valeant also pays extremely low taxes because it is officially based in Canada...

But while more conventional companies do not typically triple or quadruple prices overnight, they do often raise them year after year at a rate far faster than inflation. Big pharmaceutical companies like Pfizer and Merck raised list prices an average of 13 percent in 2014 and 8 percent so far this year... smaller price increases on widely used drugs had a much bigger effect on health care spending than the larger increases by Valeant on drugs with small sales... insulin prices had risen so much in recent years that some patients were scrimping on groceries to pay for it. The price of a package of five Lantus injectable pens from Sanofi has gone from about $179 in 2010 to $372 last year and insurance will often cover only one package at a time.

6. The big story of the week was the conclusion of the Trans-Pacific Partnership Trade deal between 12 Pacific-rim countries who make up 40% of world GDP and a third of global trade. The importance of the deal, the biggest after the 1994 GATT, is not so much in reduction in tariffs but in its quest at regulatory harmonization of environmental, labor, intellectual property, subsidies to state-owned enterprises, legal systems, and investment protection standards; facilitation of unimpeded data flows (including the requirement that servers be not located within the country to conduct business there); easing nationality requirements and restrictions on investing in services sector,;and competitive neutrality with respect to state-owned businesses. Fundamentally, it frames the agenda and sets the rules for the next phase of international trade liberalization, focused on regulatory harmonization, and is therefore a major victory for the United States foreign policy. See also this from Pratap Bhanu Mehta on the choice facing India.

7. Chiara Criscuolo (via MR) has an interesting article in HBR which discusses this OECD study which finds vast variations in productivity across firms in both manufacturing and services. Most strikingly, as the graphic below shows, even as average productivity growth has slowed down, a small group of the most productive firms, those at the "global productivity frontier", are experiencing robust productivity gains

The study attributes this trend, which appears to debunk the notion of stagnation in innovation, to constraints on innovation diffusion. They include restrictive patenting regime, and the possibility that innovations are embedded in capital thereby requiring new investments (which are not readily forthcoming) for innovation diffusion. Drawing similarity with the fact that only a small percentage of firms export, Tyler Cowen points to the possibility that increasing returns to scale and fixed costs to trade abroad contributes to a bifurcation of firm productivity outcomes. His argument is that "only a small percentage of firms export"  and the "only a small percentage of firms are on the productivity frontier" may be used inter-changeably.

8. Larry Summers proposes pandemic bonds, similar to catastrophe bonds, to finance relief and rehabilitation in case pandemics strike. The bonds would be issued by some public entity, like a multilateral agency, "to investors and would be deemed to default in the event of an epidemic, thereby assuring the availability of resources to respond before the epidemic takes on pandemic proportions". Such bonds, uncorrelated with normal business cycle turns, are attractive for investors seeking risk diversification. The implementation question he raises is

Experience with hurricane and earthquake bonds suggests that in order to accept a 1 per cent chance of default, investors require about a 3 per cent yield premium. The same is probably true of epidemic or pandemic bonds... As an aid agency concerned with, say, health in sub-Saharan Africa, is it better to pay $3 m to support the issuance of a bond that will with 1per cent probability pay off $100 m, or is it better to give the $3 m to support improvements in local health care.

9. As domestic demand slumps, Chinese manufacturers are increasing their exports. Chinese steel exports have surged to a record high of 11.3 mt in September 2015. 

10. Fascinating set of graphics about start-ups in India. Though the country boasts 4200-4400 start-ups, the third highest in the world after US and UK, and is estimated to see $5 bn flowing into them this year, the total employment in these firms is just 80000-85000. While e-commerce, consumer services, and aggregators make up nearly 40% of all startups, there are number of them exploring ways to address various social and public policy challenges.