Weekend Reading Links

1. Quietly, Barack Obama, the reluctant foreign policy President, has made it a landmark year for US foreign policy,

In reality, the climate change accord brings to an end a year of landmark breakthroughs in international diplomacy by the Obama administration. As well as the climate agreement, this year has brought a diplomatic pact on Iran’s nuclear programme, a major trade accord in the form of the Trans-Pacific Partnership and the reopening of US diplomatic relations with Cuba. All four of these achievements have been many years in the making.

2. Livemint has the latest dismal news on the Indian banks stressed assets problem which comes from Nomura Research,

The banking industry is sitting on around Rs.5-6 trillion of stressed assets. The brokerage further says that the loss resulting from default on these assets could be as much as Rs.1.7 trillion. Put another way, these Rs.6 trillion of assets are as high as three-fourths of the current stock of stressed assets (declared non-performing assets, or NPA, plus restructured assets) in the system.

Clearly, for metals and infrastructure, two of the drivers of investment cycle, there is no light at the end of the tunnel.

3. Livemint captures the declining share of corporate profits as a share of economic output.

In this context, Jahangir Aziz makes the point that even the mid-2000s rise in corporate profits were driven by exports rather than increased domestic demand,

In the golden years of 2003-08, when growth in India averaged almost 9 per cent, much of it was driven by corporate investment, which tripled from 6 per cent of the GDP to 18 per cent. Who consumed most of the goods produced by the increased investment? Not residents, as domestic consumption fell from 61 per cent of the GDP to 58 per cent. Instead, much of the newly created capacity was absorbed by foreigners, with exports surging from 15 per cent of the GDP to 24 per cent. With foreign demand accounting for more than 50 per cent of India’s manufacturing in the pre-crisis year, the relentless decline in exports since 2011 has, more than anything else, driven the weak industrial growth and languishing corporate investment.

This goes back to my argument that tries to make the distrinction between making in India for exports and for local market, with the trade-off being one between quality and price. Given the anemic global economy and the 12th straight month of decline in exports, the case for orienting make in India for the domestic market appear compelling.

4. Bhupesh Bhandari makes the case for industrial policy to encourage mobile handset makers to print their circuit boards in India, so that a value addition of eight to nine per cent takes place here. Currently manufacturers import everything as semi knock down (SKD) kits and then assemble them here, creating a value addition of no more than one to two per cent. Instead, he advocates imposing a countervailing duty of 12% on imports of PCBs so as to encourage phone makers to import the components as completely knock-down (CKD) kits and then print the circuits in India. This would be first step in designing and fabricating chips in India, which together make up nearly 40% of the phone cost.

This may be a good example of actually picking winners by guiding the development of a market. The duty could potentially set the industry in the path of an escalator from printing the circuit board, to designing the chip, to finally manufacturing it.

5. Whatever spin you try to give to the US health care market, one cannot but come away with convinced that it is the best example that free markets do not work in health and regulated prices are necessary. The Times points to a new study which examined US insurance data for the 2007-11 period and found,

First, health care spending per privately insured beneficiary varies by a factor of three across the 306 Hospital Referral Regions (HRRs) in the US. Moreover, the correlation between total spending per privately insured beneficiary and total spending per Medicare beneficiary across HRRs is only 0.14. Second, variation in providers’ transaction prices across HRRs is the primary driver of spending variation for the privately insured, whereas variation in the quantity of care provided across HRRs is the primary driver of Medicare spending variation. Consequently, extrapolating lessons on health spending from Medicare to the privately insured must be done with caution. Third, we document large dispersion in overall inpatient hospital prices and in prices for seven relatively homogenous procedures. For example, hospital prices for lower-limb MRIs vary by a factor of twelve across the nation and, on average, two-fold within HRRs. Finally, hospital prices are positively associated with indicators of hospital market power. Even after conditioning on many demand and cost factors, hospital prices in monopoly markets are 15.3 percent higher than those in markets with four or more hospitals.

6. The Lancet has an article calling for an integrated national health care system for India built around a strong public primary care system supported by private and indigenous providers. Livemint has a graphical summary of the report, from which two stands out. One, the personnel deficiency, especially of paramedical staff is staggering.

In a country with very high out-of-pocket spending, health care costs have been rising across the board. 

7. In a week the Fed finally took the plunge and reversed monetary accommodation by raising the Federal funds rate by 25 basis points, Larry Summers points to the work of Luckaz Rachel and Thomas Smith, who find that a 450 basis points decline in the global neutral real interest rate over the past 25 years. Summers points to the authors finding that factors other than slowing global growth being responsible for more than 75 per cent of the decline in real rates,

They note that since the global saving and investment rate has not changed much even as real rates have fallen sharply, there must have been major changes in both the supply of saving and demand for investment. They present thoughtful calculations assigning roles to rising inequalityand growing reserve accumulation on the saving side and lower priced capital goodsand slower labour force growth on the investment side. They also note the importance of rising risk premiums associated in part with an increase financial frictions.

This from Mervyn King and David Low captures the declining real rates

 8. At a time when politics is increasingly characterized by extreme caution bordering on paralysis, parochialism and short-sightedness, Angela Merkel's embrace of the Syrian refugees has rightfully earned her FT's acclaim as the Person of the year. I feel this assessment is spot on,

Her response to the refugee crisis has shaken Europe profoundly. Germany will never be the same again. For better or for worse, the cautious Ms Merkel is boldly transforming a continent. Even if she fails, she has left an indelible mark.

To put that in perspective, by end-November the country received 965,000 refugees, more than five times the figure last year. Who cares whether she succeeds or fails, this is the stuff of great leadership. This profile by George Packer is a classic.