Friday, December 30, 2016

Mid-week reading links

1. The world according to Trump

2. Buoyed by cheap capital, bond market capital raising hit a new high of $6.62 trillion in 2016, with corporate bonds contributing nearly half. 
Eight of the ten largest bond offerings this year were by corporates, who competed to take advantage of the cheap borrowing to finance a wave of mergers and acquisitions. 

The flip side to this is the risks it engenders as interest rates appear to be one the cusp of an upward cycle. Reflecting this, US 10 year bond yields have surged from a record low of 1.36 per cent in July to 2.57 per cent. The impact of a steep enough rise on the indebted corporate balance sheets can be devastating. 

3. Another study finds no evidence of link between executive compensation and company performance. The FT has a report on the study commissioned by the CFA Society of UK and done by the Lancaster University Management School. 
In a study of more than a decade of data on the pay and performance of Britain’s 350 biggest listed companies, Weijia Li and Steven Young found that remuneration had increased 82 per cent in real terms over the 11 years to 2014. Much of the increase was the result of performance-based pay. But, the report’s authors say, the metrics used to assess performance — such as total shareholder return and earnings per share growth — are unsophisticated and short-termist, acting against the interests of long-term investors. The research found that the median economic return on invested capital, a preferable measure, was less than 1 per cent over the same period... A separate research study, by Vlerick Business School’s Executive Remuneration Centre earlier in December found that the median UK chief executive earned €6.175m last year, 50 per cent more than the average counterpart in Germany, the next best paying country.
This really is getting so egregiously embarrassing in a world which increasingly claims to be evidence-based. The brazenness with which such claims are made is shocking. Worse still, instead of being stamped down on, the world continues to be tolerant of the evidence-free claims of the supporters of corporate compensation.  

4. Gavyn Davies has got this spot on. This will be one of the dominant themes of economic and political debates not just in 2017 but in the years ahead. 
How should we compensate the losers from globalisation?
Maurice Obstfeld, the IMF Chief Economist, has called for "trampoline policies" that act as springboard to new jobs as against just the conventional "safety net" policies. 

It is also a teachable moment in intellectual dishonesty and duplicity among the so called "economists" and "public intellectuals" in the west like Mr Davies. For at least three decades, developing markets, or at least significant population groups there, had been at the receiving end of the trade liberalisation agenda. Though the country as an aggregate may have gained, trade liberalisation and globalisation have destroyed local markets and livelihoods, disrupted their social fabric, and engendered political instability. Now, with the shoe in their feet and "economic nationalism" threatening to disrupt social and political status quo, the same worthies in developed economies who then insensitively waxed eloquent about the benefits of unfettered free-trade, have now suddenly turned sceptics. They argue for policies that protect local communities from cheap Chinese exports. 

Worse still, this revisionism cannot be construed as a matter of late realisation due to a mistaken analysis. The same people still support harmonisation of policies especially in labor standards and environment, despite its same consequences on developing country markets. 

Anyways, the issue by itself assumes equal or greater significance for developing countries, where population categories adversely affected by trade are even bigger and public resources required to mitigate much higher proportion of public spending. The challenge is compounded by the weaknesses in markets and state capacity to effectively administer such redistribution.

5. After this, Manas Chakravarthy swings to the other extreme in urging caution on informality. He's as much spot on this time as he was off the mark last time. He writes,
A 2014 paper by Rafael Porta of the Tuck School of Business and Andrei Shleifer of Harvard University, published in the Journal of Economic Perspectives, concluded thus: “we are skeptical of all policies that might tax or regulate informal firms. Rather than encourage informal firms to become formal, such policies may have the effect of driving them out of business, leading to poverty and destitution of informal workers and entrepreneurs. The recognition of the fundamental fact that informal firms are extremely inefficient recommends extreme caution with policies that impose on them any kind of additional costs.”
In other words, shock therapy such as demonetisation could very well turn out to be counter-productive. Instead, Porta and Shleifer say the cure for informality is economic growth. The evidence shows that informality declines, albeit slowly, with development. An 2009 OECD paper on Informality and Informal Employment also came to the conclusion that policies that make it more difficult for informal firms to carry out their activities and stricter enforcement of laws and regulations “have contributed to increased poverty and vulnerability by pushing already vulnerable groups of people into even more difficult situations.” What the government should instead aim for is expanding the formal sector, by making it easier for firms to operate there.
I am in complete agreement. To repeat, my concern with the debate on informality is that it is mistakenly seen through the lens of tax evasion. That is completely missing the point, since informality and tax evasion are inevitable because firms cannot become formal and stay competitive in an extremely price sensitive market where the vast majority of consumers are very poor.

6. Ajit Ranade makes a very strong case for raising income tax rates on capital gains. He advocates treatment of short-term capital gains as similar to regular taxes and taxing long-term capital gains, especially given the Government's decision last year to amend the Mauritius tax treaty.
(This) was a relatively unsung but revolutionary tax reform. Opponents had warned that there would be hell to pay as foreign investors would flee India if deprived of the freebie Mauritius route. Nothing of that sort happened... The amount of tax foregone because of tax-free LTCG can be gauged from data released by the tax authorities this year. In assessment year 2014-15, the total amount that escaped the tax net due to LTCG was Rs 64,521 crore. A recent research report published in the Economic And Political Weekly estimates the loss to the exchequer due to capital gains tax exemption at Rs 45,000 crore. Just by way of comparison, in the US, all short-term gains are taxed as regular business income, and long-term gains are taxed at a rate of 15%. It must also be remembered that most foreign investors (FII) who come into India are long-only funds, with a minimum time horizon of three years. So for these investors, gains made in one year are immaterial. Hence it is inconsequential to them if gains beyond one year are made tax-exempt. It, of course, matters a lot for the exchequer. So, ideally, the LTCG tax exemption should kick in after completing three years. Anything shorter, the capital gains should be like regular income. Such a non-discriminatory and transparent tax regime will do away with arbitrage between gains in listed versus unlisted stocks and also foreign versus domestic investors.
7. Finally, the foreign policy victor of 2017, Vladimir Putin and Russia. Consider this from David Gardner,
The Kremlin seems to be getting away with its cyber intervention in the US election. It is having some success in dividing Europe and erecting an illiberal democratic pole inside the EU. And President Putin has a new admirer in US president-elect Donald Trump. President Recep Tayyip Erdogan of Turkey and President Abdel Fattah al-Sisi, the former army chief who rules Egypt, are already Putin fans. Benjamin Netanyahu, Israel’s rightwing premier, has cultivated the Russian leader. Mohammed bin Salman, the young deputy crown prince in de facto charge of Saudi Arabia, has developed what one Arab official calls “a functional relationship” with Mr Putin.

Wednesday, December 28, 2016

The Great Stagnation

MR points to a new paper by Nick Bloom, Charles Jones, John Van Reenan, and Michael Webb which finds declining ideas TFP (research productivity per researcher, or number of new ideas per researcher) across sectors. They write,
Our robust finding is that idea TFP is falling sharply everywhere we look. Taking the U.S. aggregate number as representative, idea TFP falls in half every 13 years — ideas are getting harder and harder to find. Put differently, just to sustain constant growth in GDP per person, the U.S. must double the amount of research effort searching for new ideas every 13 years to offset the increased difficulty of finding new ideas.
They claim that the relatively stable economic growth in recent decades has been the result of increased research effort (number of researchers), which has off-set the declining ideas TFP. They find the signatures everywhere. In the economy on aggregate,
Across agriculture crops,
Even in semiconductor chips, despite the much acclaimed Moore's law,
In pharmaceuticals research for new molecular entities,
And in medical research
But their conclusion has interesting implications for growth theories,
The only reason models with declining idea TFP can sustain exponential growth in living standards is because of the key insight from that literature: ideas are nonrival. And if idea TFP were constant, sustained growth would actually not require that ideas be nonrival... fully rivalrous ideas in a model with perfect competition can generate sustained exponential growth in this case. Our paper therefore clarifies that the fundamental contribution of endogenous growth theory is not that idea TFP is constant or that subsidies to research can permanently raise growth. Rather it is that ideas are different from all other goods in that they do not get depleted when used by more and more people. Exponential growth in research leads to exponential growth in At. And because of nonrivalry, this leads to exponential growth in per capita income.
This raises questions about the prevailing intellectual property rights regime.

Saturday, December 24, 2016

India "missing middle class" graph of the day

We had argued here that India suffers from a "missing middle class". More evidence comes from the ICE 360 survey (The whole Mint series on this is informative). Globally the middle class are overwhelmingly composed of salaried workforce. In India though, less than 20% of the entire workforce is composed of salaried employees. Take out the nearly 30 million public sectors employees, and the share drops to very low single digits!
This is a strong reminder of the fact that India needs more formal jobs. This, in turn, links up with the "missing middle" in the distribution of business enterprises. Jobs get created when firms start formal and grow into middle-sized entities. Unfortunately, India has millions of enterprises which start informal as gnomes and dwarfs and remain so. Filling the "missing middle" in firm distribution therefore appears to be the path to raise the "missing middle class"!

Friday, December 23, 2016

Thomas Schelling insight of the day

From this obituary by Henry Farrel,
The U.S. stationed a small garrison in Berlin, which was embedded deep in East German territory, and indefensible against any serious attack. As Schelling described it, these soldiers’ job was not to defend the city but to die if it were attacked. This would then trigger a large scale U.S. response, since no U.S. president could tolerate the USSR killing American soldiers and not retaliate. Hence, by the logic of credible threats, the USSR would not attack Berlin, since it knew that the U.S. would have to punish it harshly, since it had effectively bound itself to deliver on the implied threat. Similarly, Schelling argued that the loss of thousands of American soldiers in the Korean War was a small price to pay if it preserved the U.S. reputation for resolve.
This explanation of Schelling's chessboard experiment, one of my favourite economic concepts, is brilliant.  A DIY version here. The exposition of such counter-intuition is a genius at work!

Thursday, December 22, 2016

Why doesn't India have its Internet sensation?

Sample this about Tencent,
Tencent, a $225bn internet company whose social platforms have become a part of the very fabric of Chinese lives... It is, says one banker, “a social enterprise powerhouse”: under one roof, it has amassed China’s answer to Facebook, WhatsApp, Spotify, Kindle and ApplePay. Chi Tsang, internet analyst at HSBC, says Tencent has “the most killer apps in the world”. Weixin, along with the WeChat app outside China, has 846m active monthly subscribers.

Tencent also has a huge multibillion investment portfolio, ranging from stakes in Didi Chuxing, China’s biggest ride-sharing company, through to start-ups. It dabbles in artificial intelligence, electric cars and bike sharing. Its posse of champion hackers managed to gain remote control of Tesla’s Model S, forcing the US carmaker to roll out a security patch... The company employs 30,000 workers, more than half of whom are in research and development. While its home market is by far and away the largest, Tencent has an overseas presence in many sectors — its WeChat payments app can even be used at Caesars Palace in Las Vegas. “They are everywhere, the US, Europe — especially among Chinese speakers because if you want to contact business or family in China there is only one way to contact them, and that’s WeChat,” says Elinor Leung, a research analyst at CLSA...
And it has been more innovative, restrained, and principled, than their Silicon Valley peers,
"Tencent has a better corporate governance than Google or Facebook,” says Richard Windsor, founder of independent research company Radio Free Mobile, pointing to its spurning of the dual-class shareholding allowed in the US but banned in Hong Kong... Like Alibaba, Tencent “has gone well beyond copying [the west],” adds another banker. “They are inventing and reinventing what their businesses should be”. Tencent’s Moments feed on WeChat prefaced Facebook’s addition of Messenger and the $22bn acquisition of WhatsApp. Payments are another case in point. China’s online third-party smartphone payments market dwarfs that of the US: iResearch estimates it to be worth Rmb15.7tn in 2016 — 28 times the $62.5bn forecast by eMarketer for the US in 2017 — and Rmb28.5tn in 2018... 
Tencent favours a cautious approach to monetising its database of active monthly users. Rather than blitz Moments with ads and risk the sort of backlash dished out to Facebook, Tencent has restricted itself for now to a maximum of one ad per user each day. UBS estimates WeChat Moments’ ad load at about 1 per cent of non-advertising content, compared with 7-10 per cent for Facebook, leaving big scope for growth. In 2015, online advertising made up 17 per cent of revenues. China’s mobile ad market was worth Rmb90bn in 2015, according to iResearch, up 178 per cent year on year, and is forecast to grow at a compound annual rate of 54 per cent from 2015 to 2018. Yet monetising the subscribers — and its database — offers the real keys to the kingdom for China’s BAT contingent and their global peers.
The market valuation of Baidu, Alibaba, and Tencent (BAT) is more than a quarter of India's GDP. I just can't put my finger on why India struggles to produce even any local social enterprise (or any internet space) brands. And each one of its me-too e-commerce sites run the risk of being gobbled up their global competitors.

If I am to stick out my neck and make a prediction, then I will hazard one potential area where India can lead the global race and Indian companies emerge as global pioneers. The Unified Payments Interface (UPI) and the RuPay payment gateway has the potential to unlock India's internet champions. Specifically, if UPI moves ahead quickly to embrace third party payments (as it should), given the Aadhaar identify layer, it could disrupt the cards-based payments eco-system. And the identity layer opens up possibilities that go beyond that offered by online payment services like Paypal or Alipay. 

But this can happen only with a revision of the way India's government looks at catalysing markets. The Indian state has played an exceptional and far sighted role in developing public goods platforms like Aadhaar, RuPay gateway, and the UPI. It now needs to put in place a light-touch regulatory regime (with strong privacy and data security protocols) and step back to let the internet entrepreneurial eco-system play itself out with digital disruptions. Some of them, like Paytm, will surely make windfall gains, piggybacking on the public good platforms. 

But we need to have the political maturity and bureaucratic guidance to allow this market catalysis. And, given the relatively small middle-class, fragmented and largely informal market, entrepreneurs should have the vision and patience to build the platforms and play the long game. And, more importantly, they should eschew the temptation to play on things like regulatory arbitrage and crony capitalism, a characteristic feature of much of corporate governance in India.  

For a country that spares no effort to follow China, it is a great opportunity to emulate how the country created its own payment gateway, Union Pay, and let its internet champions emerge. 

Tuesday, December 20, 2016

IMF's prudent assessment of globalisation

IMF continues the post-crisis revisionism of some of the central tenets of economic orthodoxy in its latest edition of F&D magazine. 

Sebastian Mallaby makes the most prudent assessment of globalisation and free trade. He decomposes cross-border capital flows and shows that cross-border lending has declined dramatically since 2007. 
To some extent—indeed, probably to quite a large extent—the retreat from cross-border lending represents a healthy correction... there has been a reappraisal of the case for cross-border finance. For one thing, some of its theoretical advantages appear to be just that: theoretical. In principle, financial globalization allows savers in rich countries to reap high returns in fast-growing emerging market economies, thus easing the rich-country challenge of paying for retirement. Meanwhile, it supplies foreign capital to emerging market economies, allowing them to invest more and thereby catch up faster with the rich world. But in reality, many large emerging markets have grown by mobilizing domestic savings, exporting capital rather than importing it. The textbook case for financial globalization exists mostly in textbooks.

If the upside of financial globalization has been elusive in practice, the downsides have grown more obvious. First, global capital tends to rush into small open economies during good times, aggravating the risk of overinvestment and bubbles; it flees in bad times, exacerbating recession. That has led middle-income nations to experiment with capital controls. Second, cross-border banking involves large, complex, and hard-to-regulate lenders, which poses risks to society that became evident during the 2008 bust. Because of those risks, regulators in the rich world have discouraged banks from foreign adventures, which has added materially to deglobalization. Forbes, Reinhardt, and Wieladek (2016) show that, in the case of Britain, regulatory discouragement of foreign lending can be remarkably powerful, accounting for about 30 percent of the attrition in cross-border lending by U.K. banks during 2012–13.
Although there is no denying that finance is less international than it used to be, it is debatable whether this retrenchment is best described as “deglobalization,” with its connotations of retreat, or as something more positive—“sounder global management.” After all, the new regulatory restrictions are at least partly a response to the risks of cross-border financing, which suggests a desirable level of flows considerably lower than the 9.9 percent of global output during 2002–04. If the optimal ratio were, say, around 5 percent, today’s degree of financial globalization might be just about right.
He argues that the apparent slowdown in global trade since 2008 may be due to statistical illusion (lower dollar price of commodities like oil), shifts in supply chains (China makes more intermediate goods itself instead of importing them), increased consumption of services as against manufactures as economies develop, and shrinking current account balances. To that extent, he finds that the decrease may not be something to be alarmed about. 

Maurice Obstfeld makes a long delayed case for having policies that redistribute the gains from trade to cushion those adversely affected. However, the focus on safety nets seems to be confined to developed countries, whereas one would argue that developing countries need them more. He also makes the distinction between safety nets (which protect those subject to job loss) and trampoline (which offer a springboard to new jobs, through trainings etc), and favours the former. 

But Paul Krugman is disappointing in his assessment. Two examples. The first is a benign assessment of international trade till eighties,
And for a long time—from the 1940s into the 1980s—trade liberalization proceeded remarkably smoothly. The losers from growing trade didn’t seem that obvious or numerous, largely because much of that growth took the form of intra-industry flows between similar countries, which had minimal effects on distribution.
I think the fundamental reason why there is a backlash against trade liberalization now is because the shoe (in terms of being at the receiving end of terms of trade) is on the feet of the developed economies. When unfettered free trade was critiqued in the eighties and nineties by those in developing countries as being detrimental to their economies and societies, the very same people used to mock the critics as marxists and socialists!

On the more prudent response to anti-globalisation sentiments, he writes,
The best attitude might well be to treat globalization as a more or less finished project, and turn down the volume on the whole subject.
Really! What about the third wave of globalisation, in terms of migration? 

Sunday, December 18, 2016

Weekend reading links

Wolfgang Amadeus Mozart beat Drake, BeyoncĂ© and Adele to become the year’s biggest-selling artist, according to Billboard, shifting 1.25m CDs in five weeks.T
This, thanks to Universal’s recent 200-CD compendium Mozart 225, released to mark the anniversary of his death at 35 in December 1791. 

2. Who is the most successful business leader of our times? In the real world, the choice would be a struggle between the likes of Lee Iaccoca, Jack Welch, Bill Gates, Steve Jobs, Jaime Dimon, and Mark Zuckerberg. In an ideal world, the choice is simpler. Arguably, Amancio Ortega, the founder of Inditex, the owner of Zara, and with a personal worth of nearly $80 bn! 

He defies all the conventional moulds of successful business leaders and went against the grain of outsourcing and off-shoring, and Inditex has been the standout performer among its competitors for many years now. I had blogged earlier about the firm's strategy of iterative adaptation. Surprising that management gurus who swoon over Jack Welch's ruthlessness or Steve Jobs' disruptiveness gloss over the profound wisdom of iterative adaptation. 

3. Talking about management theories, Economist does a brilliant take down. It shows that the four basic ideas that underpin management theories - business is more competitive than ever, we live in an age of entrepreneurialism, business is getting faster, and globalisation is both inevitable and irreversible - stand on clay foundations.

4. The recapture of Aleppo from rebel hands after four years of very violent fighting should count as a seminal moment in global geo-politics. Even as the US was busy grappling with Donald Trump, Russia, Iran, and Turkey have proceeded to carve out a historic diplomatic achievement, and entrenched themselves as important arbiters in the region for the foreseeable future. It may be the beginning of a truly multi-polar global order. 

It is estimated that the five year civil war has displaced more than half the country's 21 million population, nearly 5 million as refugees, and left over 450,000 dead. 
It is all too easy and tempting to denounce President Obama for not intervening decisively to bomb Bashar Al-Assad's forces even when they crossed the red-line and deployed chemical weapons against the rebel held areas. If the US had intervened more forcefully, it would only have played into the ISIS hands, strengthening them and hastening their progress. Apart from mutilating Syria and Iraq, it would also have left President Obama with no choice but to embrace the politically suicidal option of having boots on the ground to prevent an even more toxic brand of barbarism. 

When all possibilities are equally bad, it is not a bad idea to stand aside. It may be slightly easier, when, on relative barbarism at least, Assad comes out better, if only slightly. The brilliant Robert Fisk has this excellent article that highlights the duplicity associated with the mis-concieved angst at the recapture of Aleppo.

5. India's export engine is in reverse gear. Ajay Shah points to this,
From Q4/2013 onwards, the compound average growth rate of exports (of non-finance non-oil listed companies) has been minus 17.5% per year.
The FTP with the target of doubling trade to $900 by 2019, clearly unrealistic ab-initio, is in shambles. 

The new PISA report

The Economist has a summary of the sixth round of PISA rankings of 15 year olds from 2015 here. Singapore tops in all the three subjects - Math, Reading, and Science - and Qatar, Argentina, and Israel have seen the biggest rise since 2006.

Interestingly, beyond a certain level, possibly necessary to assure minimum facilities, additional spending does not lead to any increase in outcomes. To this extent, Russia, Poland, and Estonia have the most efficient school systems. 
Finally, at a time when non-profits like Pratham are promoting Teaching at Right Level (TaRL) by grouping children by ability within schools, PISA results, atleast in Science, appear to indicate that this is associated with decrease in scores. Granted the different dynamics associated with such grouping in better school systems compared to the very poor ones, it is still worth keeping in mind while we pursue TaRL. Interestingly, in contrast, the use of adaptive instruction is associated with a significant increase in learning outcomes, equivalent to an additional one-third of a year of instruction. 
The results find that while public school children fare worse than private school kids in science, this difference disappears once their economic and social backgrounds are accounted for. 

And for countries like India which are intensely promoting vocational education, a note of caution comes from the finding that it is associated with a widening of the gap between the learning outcomes of rich and poorer children. Another note of caution should be on the efforts to restore the practice of detentions - school systems that follow such policy are associated with a decrease in score by 50, equivalent to more than one-and-half years of schooling.

This year, the PISA authorities have generated a model that explains 85% of the variations in scores across countries. The Times has this summary of the model,
Generally speaking, the smartest countries tend to be those that have acted to make teaching more prestigious and selective; directed more resources to their neediest children; enrolled most children in high-quality preschools; helped schools establish cultures of constant improvement; and applied rigorous, consistent standards across all classrooms.

Saturday, December 17, 2016

Book Review and Extract on state capacity

Karthik has a review of our book here in his excellent blog. And I agree with most of his observations and critiques. 

Swarajya has an extract from our book on policy prescriptions to improve state capacity. This is a pet theme for me and I am convinced that it significantly diminishes the effectiveness of every other reform. Governance or reform in a weak state setting is almost like running a sprint while carrying a very heavy backpack. Heck, even Swachh Bharat requires state capacity!

The crisis in healthcare quality

The mirror to the learning outcomes deficiency in India is the medical treatment quality crisis. In a just released paper highlighted in Marginal Revolution, Jishnu Das and Co draws attention in an empirically rigorous manner on something which is not very salient in mainstream debates,

We sent standardized (fake) patients to rural primary care providers in the Indian state of Madhya Pradesh, and recorded the quality of care provided and prices charged in each interaction. We report three main findings. First, most private providers lacked formal medical training, but they spent more time with patients and completed more essential checklist items than public providers and were equally likely to provide a correct treatment. Second, we compare the performance of qualified public doctors across their public and private practices and find that the same doctors exerted higher effort and were more likely to provide a correct treatment in their private practices. Third, in the private sector, we find that prices charged are positively correlated with provider effort and correct treatment, but also with unnecessary treatments. In the public sector, we find no correlation between provider salaries and any measure of quality. We develop a simple theoretical framework to interpret our results and show that in settings with low levels of effort in the public sector, the benefits of higher diagnostic effort in the private sector may outweigh the costs of market incentives to over treat. These differences in provider effort may partly explain the dominant market share of fee-charging private providers even in the presence of a system of free public healthcare.
They write,
Private providers spent 1.5 minutes more with patients (62 percent more) and completed 7.4 percentage point more items on a checklist of essential history and examination items (47 percent more) than public providers. They were equally likely to pronounce a correct diagnosis (only 4 percent of public providers do so), to offer a correct treatment (27 percent of public providers do so), and to offer clinically unnecessary treatments (provided by 70 percent of public providers)... The rate of correct treatment is 42 percent higher (16 percentage points on a base of 37 percent), the rate of providing a clinically non-indicated palliative treatment is 20 percent lower (12.7 percentage points on a base of 64 percent), and the rate of antibiotic provision is 28 percent lower (13.9 percentage points on a base of 49 percent) in the private practice relative to the public practice of the same doctor.
As can be seen, reflecting the higher quality of public sector doctors, they perform the best with checklist completion. But I am not sure whether I agree with the tone (and possible headline takeaways) from this,

Under the status quo, considerable attention has been focused on improving access and spending for publicly-provided healthcare. Our results suggest that enthusiasm for the public sector as the primary source of primary care services in resource poor settings has to be tempered by the extent to which administrative accountability is enforced in the system and that poor incentives for effort may be a binding constraint to quality in the public system of healthcare delivery.
It would be a shame if instead of spotlighting attention on the very poor quality of primary medical care, the main lesson drawn from this paper is that private production is the way forward, as Alex Tabbarok's suggestion is likely to be interpreted. This is all the more significant given that the policy takeaway from the context of the paper concerns primary health care and not general medical care. This "bottom line" from Tabbarok is not encouraging,
The bottom line is that the private market for health care is much bigger and less expensive than the public health regime in rural India and once we control for knowledge it’s of higher quality. These results have important implications for reform. In particular, much more effort should go into improving the knowledge of the private sector.
You cannot draw a simple public policy take away that the superior outcomes associated with private provision and their ubiquitousness implies relying on markets to deliver primary care. If we do so then we are merely revisiting the long settled debate on who should deliver primary health care. As the very rich historical experience of every major country shows, an affordable and sustainable primary health care can be delivered only through a strong public system, though private providers can be important complements.

The challenge with improving the effectiveness of primary care in India requires work in two directions. Strengthen a very weak public system with resources and appropriate incentives, and mainstream and leverage the services of a huge, mostly unqualified, and completely unregulated private market.

Thursday, December 15, 2016

More on crossing the river by feeling the stones...

The two less discussed characteristic features of China's spectacular economic growth have been its brute force state capacity as well as the strategy of innovative policy experimentation at the margins. The Economist has a nice article on the emergence of Shanghai as competitor to Beijing as the cultural capital of China in the space of less than a decade. It captures these two features,
The prospect of hosting Expo 2010 helped motivate Shanghai’s local government to encourage property developers to launch an ambitious urban-regeneration programme that would reframe the city as a cultural hub. At the heart of this renewal was West Bund, a 9.4km tract of Shanghai riverside, whose old industrial buildings and former airport were to be repurposed under the manifesto “Culture First, Industry Oriented”. The same year that Expo 2010 opened, the central government announced that it would build 3,500 new museums across the country within five years. It exceeded that figure three years early, in 2012. The call to action stimulated property developers to tag museums on to many of their projects in return for tax benefits and to curry favour with local authorities. West Bund was one of the most important beneficiaries of this policy. In 2014 two landmark contemporary-art museums opened there... 
The same year also saw the introduction of Le Freeport West Bund, a bonded warehouse built to help the tax-free import, export and storage of artworks. It allows collectors to sidestep the 17% value-added tax imposed on art and the customs duty on works brought into the country. A game-changer for freeing up the movement of artworks, it is a prime example of the city’s market-friendliness. 
The efficiency of a publicly directed museum construction and mobilisation campaign to generate world class outcomes is simply awesome. Similarly, the willingness to innovate at the margins with such disruptive tax concessions, similar to what preceded Shanghai's evolution as a financial market powerhouse, is worthy of emulation. 

These, rather than its brute force borrow and invest strategy, should attract the interest of policy makers elsewhere. 

Monday, December 12, 2016

The case for an "examined life"

Ananth points me to an absolutely fascinating conversation involving Princeton Professors Robert George and Cornel West which explores the merits of a liberal arts education. This from Robert George,
The point of liberal arts education is an examined life… The examined life is a life in which you are constantly questioning yourself. You’re subjecting yourself to self-criticism. Intellectual humility is a central virtue because in order to carry out the enterprise of self-criticism, you have to actually deal with the possibility that you might be wrong, and that’s hard, especially if changing your view would result in your being stigmatized, ostracized, isolated on your campus or in your community, whether your community is right, left, center, Protestant, Catholic, Jewish, Muslim — whatever your community is. Seeking the examined life can be a very dangerous thing if what you’re after in life is satisfaction and feeling good. It’s a probe. It’s a prod. It’s a disruptor.
And this from Cornel West,
And I think part of the problem with spiritual blackout these days in the United States, and it’s a kind of indictment in some ways of our educational system, is that we have not adequately prepared our fellow citizens, not just those who go to college. One reason why I’ve taught in prisons for 37 years is that the paideia that we’re talking about, this deep education that we’re talking about, has to be widely available. It can’t just be available to those that gain access to institutions of higher learning. About two-thirds of our fellow citizens never go to college. They’re going to get their education one way or the other. They turn on the television, not too high quality, listen to the music, and I listen to Stephen Sondheim. If they’d listen to Sondheim every day, it would be a different situation because that’s some serious paideia going on in his music. They listen to the flattened, narrow, parochial stuff for titillation and stimulation, not for self-examination.

And again from Prof George, this test of what is right or wrong,
If you want to figure out what you should be doing right now, imagine looking at your situation right now from the point of your death and look back on it. Will it look like this was worth your time and attention and effort from the perspective of your death? For many, many of our young people, especially our most gifted and advantaged young people, they care about what’s on their C.V. when they ought to be caring about what’s going to be on their tombstone. If you look at the question, what is going to be on my tombstone instead of what’s on my C.V., you might have a very different set of decisions. You might make very different decisions about what you’re going to do now and next week and next year and for the next five years.    
One of the problems with modern society is that prestige and desire for recognition (thymos), fundamental drivers of human nature, are intimately dependent on wealth and incomes. The individual’s access to any platform that helps satisfy these impulses are contingent on the outcome of the ovarian lottery. As a first order requirement, if somehow we could have a system where everyone has equal access to livelihood opportunities, then, maybe, the current tight relationship between money and prestige could be loosened. 

At a fundamental level, I think the elevation of the instrumental value of education, displacing its intrinsic value, is a reflection of the market’s incentive distorting features. In other words, it is a market failure. If we agree that the qualities imbibed with a liberal arts education (an examination of life that leads to an understanding of other people and different values) are valuable to society, a public good, and if we also agree that there is a market failure in its supply, then it is hard to deny that governments have to bear a share of the burden of higher education.

But as Prof West says, even this, if achieved, would cover only those who complete higher education. In a society where large numbers, even the vast majority, are unlikely to do higher education, the challenge of disseminating and internalising paideia is much greater. That would require a radical transformation from our present economic, political, and social equilibrium. 

Sunday, December 11, 2016

When intellectuals become apologists

I find Tyler Cowen's "economic" assessment (or rationalisation) of the impact of Trump's conflicts of interests appalling. Sample this (italics mine),
Standard political economy suggests that the worst forms of corruption usually are decentralized. If you have to pay off 13 different bureaucrats to get a project through, the chance that one of them will hold you up, or that the aggregate of the bribes is simply too costly, is pretty high. Conversely, a single payment at the top can be a way to grease the wheels for big projects, some of which may be beneficial for the nation as a whole (imagine simply passing cash to a president for him to fix the country’s airports). Or consider the value of domestic property as a potential source of conflict of interest. If Trump really put the value of his hotel properties before the national interest, that might encourage a lot of policies to foster urban growth, travel, and tourism. Those policies might not spread their benefits efficiently, but they are hardly the worst outcome imaginable... Note that congressmen currently hold stock and other asset portfolios and they are not required to put them into blind trusts. Maybe that’s not the best system, but it has not brought national ruin, and it is not responsible for most of the ailments facing our legislative branch, such as polarization and gridlock.
Does this mean that a corruption involving paying off just the President is to be condoned since it "may be beneficial for the nation as a whole"? Should we tolerate Trump's rational self-interest in promoting his hotel properties any more because it "might encourage a lot of policies to foster urban growth, travel, and tourism"? And should we not be any less concerned with Trump's conflicts of interest just because many Congressmen face similar conflicts and that has "not brought national ruin"? 

This is a slippery slope and the article is a very good illustration of intellectual compromises that contribute to the downward movement. Five years back, it would have been unthinkable, even looked upon with horror, that an American President could be a crony-capitalist-in-chief. Yet, now, as the moment has arrived, a leading economist uses economic logic to make this benign assessment of Trumpism's effect on US domestic politics and the economy. 

This is the problem when economists start using their rational calculus to offer judgements that are completely divorced from historical and ethical considerations. Sometimes, when facts are strikingly evident, and let's face the reality that Trump engenders shocking levels of conflicts of interest, it is best to acknowledge the same and get on with doing what can be done to address the contributors instead of seeking out silver-linings. 

Saturday, December 10, 2016

Weekend reading links

1. Martin Wolf captures Europe's lost decade starting first quarter of 2008,
In the third quarter of 2016, the eurozone’s aggregate real GDP was a mere 1.8 per cent higher than in the first quarter of 2008. Remarkably, real domestic demand in the eurozone was 1.1 per cent lower in the second quarter of 2016 than it had been in the first quarter of 2008... In the second quarter of 2016, eurozone nominal demand was only 6.9 per cent higher than in the first quarter of 2008. So what should it have been? Assume the trend rate of real growth is 1 per cent, while the inflation target is close to 2 per cent. Then nominal demand ought to grow at about 3 per cent a year. If policymakers had achieved that, nominal demand would have risen by about 28 per cent between the first quarter of 2008 and the second quarter of 2016... According to the Conference Board, a research group, between 2007 and 2016 real GDP per head at purchasing power parity rose 11 per cent in Germany, barely changed in France, and fell 8 per cent in Spain and 11 per cent in Italy... In the third quarter of 2016, Italy’s aggregate real domestic demand was 10 per cent lower than in the first quarter of 2008, while Spain’s was still close to 11 per cent lower, as it recovered from its post-crisis fall of nearly 19 per cent. Germany’s real demand has risen by 8 per cent over the same period. But its current account surplus has risen from 7 per cent of GDP in 2007 to a forecast of just under 9 per cent in 2016.
2. Latest work of Thomas Piketty, Emanuel Saez, and Gabriel Zucman finds that since the seventies, even as the US economy doubled and despite more than $5 trillion in annual transfers, the net incomes of those in the lower half have hardly grown. Their findings,
Since 1980, the share of total income going to the top 1 percent of earners has doubled, while the bottom half’s share has narrowed. Stagnant wages for many Americans are a major culprit. In three and a half decades, their incomes have barely changed while those at the top have tripled. The source of that income gain has also shifted at the top; more is coming from returns on investments rather than wages. That makes it harder for the bottom half, with much less capital, to catch up. 

The three graphics below capture the declining shares of pre-tax incomes of the bottom half, trends in real average pre-tax income, and the share of the income of the top 1% coming from wages and capital. The last one in particular underlines the importance of low capital gains taxes and how it disproportionately benefits the richest. 

3. Fascinating analysis by Upshot folks on Donald Trump's twitter activity. 
Their analysis of over 14000 tweets over the past two years finds that one in nine was an insult of some kind. They point to a two-pronged strategy. The primary focus is on identification of one or two main targets and vilifying them till they are no longer threatening enough. The second prong is a series of background attacks directed at a wider range of subjects.

4. Kritarchy in India is continues its disturbing march. The latest to attract the scarce time of an overburdened Supreme Court, the Chief Justice no less, is the government's demonetisation scheme. The government has rightly resisted the Supreme Court's over-reach claiming that fiscal policy is beyond judicial review. These queries and comments of the bench headed by the Chief Justice are, by any yardstick, hardly justiciable,
Can you put what you had estimated when you took the decision to scrap Rs 500 and Rs 1,000 notes? Did you make any estimation at all? Was there a plan? Or, did you take the decision just like that? If you had thought notes worth Rs 10 lakh crore would come back to the banks, did you take steps to urgently put in that much of new currency+ back in circulation? Can you produce the Cabinet note before the decision was taken... When you fixed the cap at Rs 24,000 per week on your own, you must have checked if the system can take that burden, haven’t you. See if you can fix a limit below, which the bank manager can’t send you away or ration currency. 
5. Niranjan makes an interesting point about the very low number of Indians who pay taxes and its consequence for India's democracy.
Around 48 million people file income tax returns in India; the actual number of people who pay tax is lower because of those who report zero tax liabilities. The number of people who were eligible to vote in the 2014 national election was 815 million. In other words, India has one direct tax payer for every 16 voters. The imbalance between the number of people who pay income tax on the one hand and the number of people who can vote on the other hand has profound implications for the Indian social contract. It creates political incentives for successive governments to borrow money to buy votes rather than build an effective tax system that will spur economic growth. Citizens are also less likely to put pressure on governments to spend wisely on public goods. 
Interesting given that democratic politics is intimately related to taxation. While liberals may decry this, the positive incentive effects of being part of a tax base and perverse incentives from not being part of the same should not be under-estimated.

6. Greg Ip has this on the plateauing of productivity improvements, 
The number of new drugs approved in the U.S. per dollar of research and development has fallen by half every nine years between 1950 and 2010. Approvals have risen since, though 40% are for “orphan” drugs which address diseases that afflict fewer than 200,000 people. The declining payoff to medical research is starkly illustrated by a new study by Charles Jones of Stanford University and three co-authors. It found that in the decade before 1985, years of life saved through breast cancer treatment rose steadily each year, along with the volume of research. But since 1985, improvements in mortality slowed. They calculate that each new published trial added 16 years of life per 100,000 people in 1985, and that fell to less than one year by 2006. They found the same pattern across agriculture and semiconductors: steadily declining productivity per researcher.
7. Finally, even as the debate rages on the merits of demonetization, oblivious to the difficulty of making credible judgements on such complex issues, the only thing definitive may be that it may have redefined the narrative surrounding black money. It has drawn attention to the role of black money and informal economy and their close intersection, benefits of financial inclusion, the potential of digital cash, and the need to stem the generation of future black money. And it has definitely provided a massive impetus in potentially ushering in a structural shift in the economy, in moving towards a less cash economy and shrinking the informal economy.

As far as I see there could potentially be three important debates about the scheme. Could the same benefits have been achieved without demonetization? Could the post-announcement planning and actions have been swifter and better co-ordinated? Finally, will the government follow up with the complementary measures to limit the future flow of black money? Unfortunately, none of the three have received the amount of attention and interest that they deserve.