Weekend reading links

1. MR points to Ruchir Sharma's very bleak assessment of the Brazilian economy. He paints the picture of an economy intimately tied to the global commodity cycle and dynamism smothered by a massive bureaucracy and public spending,

Brazil’s GDP growth rate has fallen from 7.5% in 2010 to minus 3.5% last year. This decline followed the collapse in commodity prices that began in 2011... Today the average Brazilian income is about 16% of the U.S. average, with basically no gain for 100 years... Even more striking, since the mid-1980s Brazil has seen its GDP growth rate track commodity prices more closely than any other nation in the world. Brazil’s fortunes are so closely tied to the global commodity cycle in part because so little works inside the country. The private economy does produce some internationally competitive companies in auto parts, aerospace and other industries, but they thrive by dodging a growing bureaucracy that smothers the rest...

The country appears to be a classic example of a country entrapped in commodities and an over-generous welfare state, 

Spending by local, regional and national governments amounts to 41% of Brazil’s GDP, the largest for any country in its middle-income class, and a scale close to those of much richer European welfare states such as Germany and Norway. Brazilians face the heaviest tax burden of any emerging country, with collections amounting to 35% of GDP... The budget is very rigid, most of it going to salaries and legally mandated social entitlements, which are growing. Over the past 15 years, public pensions have increased from 3% to 7% of GDP. Brazilian men typically retire at age 54 and women at 52, earlier than in any major European country, drawn into the golden years by generous benefits. On average Brazil pays pensioners 90% of their final salary, compared with an average of 60% in developed countries.

The basic issue for Brazil is that heavy state spending tends to push up interest rates and borrowing costs, depress private investment and defer any shift away from commodities. Under Lula and Ms. Rousseff, Brazil has grown more reliant on soybeans, with commodities now accounting for 67% of exports, up from 46% in 2000. Brazil’s manufacturing industries remain anemic, representing only 11% of the economy, near the bottom of emerging-economy rankings.

2. Ed Morse, the head of Citi's commodities research, talks of a new oil order, where the rise of US has rendered OPEC "irrelevant",

The US is now arguably the world’s largest oil liquids producer in the world, if you take into account crude oil production and other supply like liquefied petroleum gases (LPGs), biofuels output and the incremental volumetric gains from having the largest refining system in the world. On paper the US might produce 9.3m barrels a day against Russia’s 11.1m b/d and Saudi Arabia’s 10.3m b/d. Add everything that looks and smells and is used as oil and the US is the biggest of the lot, producing 14.8m b/d versus the kingdom’s 11.7m b/d, versus. Russia’s 11.5m b/d.

And the basis for his conclusion,

US has production based on competitive decisions of hundreds of independent producers, which now, unshackled, can sell oil at home or abroad. That makes an enormous difference, especially when considering the nature of marginal production in the US, which comes from shale resources. These rocks are not only superabundant, but they can be exploited at a relatively low cost. Just compare an offshore well at $170m with a vertical shale well that costs under $5m, with a five-year payout for a successful deepwater well versus a mere five-month payout for a shale play. And multiply a single, individual shale well by hundreds of wells and hundreds of decisions and you get a new world order.

Shale, for sure, has changed the global oil market dynamics. But I am not sure that it is wise to draw too sweeping conclusions from events of recent memory. If any analyst says that an incremental 5-6 mbd in a 95-96 mbd global market has rendered OPEC "irrelevant", then I would be inclined to discount that source of research.

3. WSJ has interesting news on India's pharmaceutical companies, which are aggressively pursuing niche treatment areas, apart from generics,

Close to a third of all FDA applications in the nine months through September were by India’s multibillion-dollar pharmaceutical industry, which accounts for 40% of generic drugs sold in the U.S. That figure, the latest tally available, is up from 19% during the same period a year earlier.

For all the bad press that the pharma industry gets from US FDA actions, it ranks on par with IT as corporate India's most remarkable world-class achievements.

4. FT has a report which appears to indicate that Sun Edison's woes are likely to affect its Indian operations. The report talks of a cash transfer from the account of one of the company's yieldco TerraForm Global into its own account to pay off a margin loan in November 2015, which is now part of a lawsuit filed against the company,

It approved an $150m advance against some unfinished solar plants in India that TerraForm was planning to buy from SunEdison at a future date. The money pinged from TerraForm Global’s bank account to SunEdison’s to pay off the margin loan “mere minutes before the 3pm payment deadline”, according to the lawsuit.

In any case, given the close links between Sun Edison and its yieldcos, it is unlikely that the latter will be able to avoid being dragged into the bankruptcy process by creditors.

5. Livemint points to the newly released data from the Global Consumption and Income Project (GCIP), which suggests that the official figures may be understating the true extent of poverty in India. The poverty rate for 2011-12, at Rs 38 per day (or $2.5 per day on PPP terms), would be 47% against the 22% Planning Commission figures (for Rs 27 and Rs 33 per day in rural and urban areas respectively).

Other than the high rate, the other disturbing fact is the slow pace of decline.

6. The New York mayor has an ambitious affordable housing goal, the development or preservation of 200,000 units over the next ten years. The City Council kickstarted it in 190 blocks of Brooklyn, the first of 15 neighborhoods across the city,

The city’s tools are powerful: a new mandatory inclusionary housing law that requires developers in rezoned areas to set aside up to 30 percent of units in new buildings for lower-rent apartments. That’s a minimum — the administration also plans to use subsidies and tax breaks to extract even deeper levels of affordability from new construction. In East New York, it promises to break ground in the next two years on 1,200 “deeply affordable” apartments. Forty percent of them will be rented by families earning $38,850 or less. Ten percent will be rented by families making $23,350 or less.

India's metropolitan cities, where land valuations are astronomical, similar aggressive mandates should be associated with all land use conversions.

7. Nice article in Times on the market for the super-rich, the top 1%, where businesses are focussing an increasing share of their innovation and resources to provide premium services. To get a sense of the top 1%,

Emmanuel Saez, a professor of economics at the University of California, Berkeley, estimates that the top 1 percent of American households now controls 42 percent of the nation’s wealth, up from less than 30 percent two decades ago. The top 0.1 percent accounts for 22 percent, nearly double the 1995 proportion... From 2010 to 2014, the number of American households with at least $1 million in financial assets jumped by nearly one-third, to just under seven million, according to a study by the Boston Consulting Group. For the $1 million-plus cohort, estimated wealth grew by 7.2 percent annually from 2010 to 2014, eight times the pace of gains for families with less than $1 million... Spending by the top 5 percent of earners rose nearly 35 percent from 2003 to 2012 after adjusting for inflation, according to a study by Mr. Fazzari and Barry Z. Cynamon of the Federal Reserve Bank of St. Louis. For everyone else, spending grew less than 10 percent.

From jumping ques to exclusive zones and timings, the richest are able to purchase their convenience.

8. And staying with inequality, and its impact on life expectancy, new research by Raj Chetty and Co find a 15 year difference in life expectancy among American males at the top and bottom 1 per cent.

It is difficult to establish contributors and causal factors. Apart from wealth buying better health care, wealthier people also lead healthier lifestyles. Further, the cause and effect may go in both directions - healthier people can work more and productively and increase their incomes. And one of the implications of this life expectancy gap is that the richer people benefit more from various social security programs.

9. As the wheels are coming off the emerging markets story, with minus four per cent growth in Brazil and Russia in 2015, Dani Rodrik questions the merits of the original story itself,

Scratch the surface and you found high growth rates driven not by productive transformation but by domestic demand, in turn fueled by temporary commodity booms and unsustainable levels of public or, more often, private borrowing.

The article has this about the India story,

In a sense, all of the major emerging markets – with the revealing exception of India, where economic growth is not dependent on commodity exports – are reliving the lesson of the 2008 global financial crisis. As Warren Buffett famously summed it up: “Only when the tide goes out do you discover who’s been swimming naked.” For much of the last generation, buoyant commodity prices served as a fig leaf for emerging markets’ profound governance failures. Now the fig leaf has been stripped away, and their leaders must face the beach.

It is true that India benefits from not being a commodity exporter and having a fairly diversified economy. But the problem is that it, like all others, has not done enough on the productive transformation front, thereby raising questions about the sustainability of economic growth, especially at high rates.

10. Business Standard refers to a paper by KC Zachariah and Irudaya Rajan which puts in perspective the importance of remittances to the Kerala economy,

(Kerala) receives 40 per cent of remittances that come to India... Remittances finance as many as 20 per cent Kerala households, or 2.4 million families. Assuming a family size of three, remittances directly affect 7.2 million of 35 million Keralites... Remittances, at Rs 70,000 crore, accounted for 36.3 per cent of the net state domestic product (NSDP) in 2014. Remittances constitute a fourth - Rs 22,689 of Rs 86,180-of the per capita income of Kerala in 2014. Remittances were 1.2 times the revenue generated by the Kerala government in 2014... The number of Keralites working abroad had jumped to 2.4 million by 2014... a majority, 86 per cent , work in the Gulf countries.