Weekend reading links

1. Kishore Mahbubani has a nice article on Jakarta's popular Chinese Christian mayor, Basuki Tjahaja Purnama, popularly known as "Ahok". In 17 months, he has several achievements to show,

He has made some bold changes: closing down trendy but disruptive nightclubs, cleaning up red-light districts, evicting people from slums (while providing them with better housing) and dredging clogged-up canals. He has also demonstrated his willingness to make difficult policy choices, such as discontinuing a long-stalled monorail project in favour of a more cost-effective and efficient light rail system. Even more significantly, an underground railway, which had been held up by bureaucracy for more than 25 years, is going ahead. Mr Purnama also believes in transparency. The entire budget of the city of Jakarta is online. Citizens can scrutinise all spending. Even his mobile phone number is public, meaning that he receives a large number of text messages, many of which he responds to personally. The city’s inhabitants feel that their lives are improving.

2. On the same topic, FT points to the growing popularity of the municipal office among British politicians. It writes,

The modern world favours localism. Growing complexity and change, the clustering of the resources needed for innovation, and the diverse demands and expectations of modern citizens, all put a premium on getting decision-making closer to the people. Most national domestic policy fails. If this sounds like a sweeping statement, I offer in evidence decades of welfare reform, health reform, education reform, prison reform — and so on. Some local policy, in contrast, succeeds. Around the world, surveys show mayors to be more popular and effective than presidents and prime ministers. On the whole, local leaders are pragmatic dealmakers. Voters prefer politicians who are close to the action and keen to emphasise that geographical loyalty comes above political allegiance.

Where are India's city leaders?

3. The FT writes about China's creeping encirclement of India. And about its ambitious Central Asian interests.

This graphic captures all the investments planned in the region,

I agree with Samir Saran of Observer Research Foundation who says, "For every belt they create, and every road that we create, can we create a slip road that connects Indian opportunities to the larger global market rather than reject it outright? Can we . . . use their institutions to our own advantage?”

4. FT has an article on the woes facing the global steel market,

Over half of China’s major producers were loss-making in 2015, but rather than close or go bankrupt, these companies, the majority of which are state owned, continue to churn out more metal than the nation needs. Last year alone, China’s exports soared by a fifth to 112m tonnes — greater than the total output of Japan, the world’s second-biggest steel producing nation... In Europe, steel demand is 25 per cent lower than before the 2008 financial crisis. Despite painful closures and the loss of one in five steel jobs, some analysts say the continent still has excess capacity. When plants are underused, operators lose their ability to set prices and unit costs go up.

5. Fascinating Wilson Center report (pdf here) on production sharing and integration of supply chains between US and Mexico.

Mexico is the United States’ third-largest trading partner and second-leading destination for exports after Canada... A full 40% of the value of U.S. imports from Mexico is made of content produced in the United States... The number is 25 percent for Canada, which is part of many of the same supply chains, but is only 2 to 5 percent for the European Union, India, China and South Korea... Production sharing, also known as vertical specialization, occurs when two or more countries share in the manufacturing of a specific good... Since the United States is the supplier of such a large portion of the materials in imports from Mexico and Canada, an increase in regional imports actually increases U.S. exports, supporting local jobs and industry... The regional auto industry is a good example of the phenomenon of production sharing. The United States, Mexico and Canada each produce and assemble auto parts, sending them back and forth as they work together to build complete cars. Cars built in North America are said to have their parts cross the United States borders eight times as they are being produced, and between 80% and 90% of U.S. auto-industry trade with its North American partners is intra-industry, both of which signal an extremely high level of vertical specialization.

This highlights the impossibility of Trump's Presidential campaign rhetoric, one which is likely to remain just that even if he emerges the winner.

6. So Leander Paes has won his eighth Grand Slam mixed doubles title, becoming the second Indian after Mahesh Bhupati to win all the four Grand Slam titles in a career. In recent years, thanks to the likes of Paes, Bhupati, Sania Mirza, and even Rohan Bopanna, India has become a powerhouse in paired tennis events. But has this been necessarily a good thing?

As a celebration of global sporting success for a country with very few successes outside cricket, these victories are great. But as a celebration of tennis greatness, I am not sure. In fact, I am inclined to believe that their successes in paired events have had the result of crowding-out tennis talent from the "real" tennis of singles and engendering a resource misallocation problem. Given that none of the top singles players participate in these events and our own paired event superstars are unlikely to make the main draw of even non-Grand Slam events, these successes ring hollow.

7. More evidence that you need a much broader middle-class consumption base than what India currently has to support the high growth assumptions that underlie many sectors comes from e-commerce,

Online retail sales in India have been sluggish so far this year and start-ups across the board are struggling to make money from ads, content and sales of products and services, raising concerns whether Internet companies can attract enough new paying users to support the rosy projections of investors who have pumped billions of dollars into them. According to a report on Thursday by Kleiner Perkins Caufield Byers, a Silicon Valley venture capital firm, the number of Internet users in India grew by 40% in 2015 to 277 million. While the number of Internet users is growing rapidly, that of those transacting (or online shoppers) isn’t increasing at the same rate... The large Internet base in India looks attractive but making money from users is another matter altogether.

8. The Ministry of Power proposes to instal Supervisory Control and Data Acquisition (SCADA) systems on rural feeders to monitor in real time the power supply. I have blogged extensively about the difficulties associated with the use of technologies like SCADA and GIS in electricity distribution sector. Instead of unimplementable fancy solutions which are most unlikely to work in these environments, the sector needs rigorous feeder level energy audits, for which smart meters more than suffice. All that can be said is that this is a terrible idea.

9. FT has an excellent series on the future of cities. This is more evidence strengthening my firm belief that the biggest challenge facing the future of cities is gentrification and the crowding-out of affordable housing. This applies to cities in developing countries with even greater effect. The narrative is straight forward.

The scarce vacant lands available, coupled with restrictive zoning regulations and the practical difficulties associated with slum redevelopment makes housing within the city unaffordable for all but those at the very top of the income ladder. Housing costs take up an increasing share of household incomes for everyone. This leaves people with lower disposable income which hurts consumption and business investment. Worse still, businesses are forced to provide a wage premium, all of which in turn affect their competitiveness. Finally, with vertical growth constrained, cities spread out to accommodate the migrants. This, in turn, increases commute times, decreases productivity and lowers the quality of life. This is a very bad equilibrium with all round bad outcomes.

10. There is growing evidence that institutional investors like pension funds have been paring down their exposures to hedge funds, who are battling to deliver high returns in a low interest rate environment and face outrage at their exorbitant management fees even as their returns have declined. 

According to Chicago-based Hedge Fund Research, pension funds and other big institutions now account for only 43.1 per cent of hedge funds’ assets, from 47 per cent three years ago.

11. My favorite fish is being hit by a severe toxic algae bloom in Chile.

12. Finally, as the Government of India invites private participation in defence manufacturing, there may be a danger that this industry will take over from infrastructure as the preferred operating ground for crony capitalists. Is it any more a coincidence that one of the ten most indebted groups in the country, one without any experience in defence manufacturing and a history of not delivering on promises in its projects, but with deep expertise in deal making in opaque environments, is also at the forefront of the private sector engagement in the industry? Watch this space.

13. Praveen Chakravarthy and Ajit Ranade have an excellent article which chronicles the cascade of unintended distortionary policies engendered by the India-Mauritius Tax Treaty, an 'original sin', as they call it, 

India signed a tax treaty with Mauritius in 1983 that gave Mauritius the sole right to tax investment gains made by investing in India. Mauritius’ tax rate on such gains was zero. Needless to say, a large majority of investments into India chose this attractive route... Investments in publicly listed shares were granted exemption from long-term capital gains tax in 2004. The rationale for that decision was to provide a “level-playing field” to domestic investors vis-à-vis Mauritius’ investors. A new tax called the securities transaction tax was imposed on stock market transactions to offset any loss of revenues from the exemption of capital gains. This higher transaction tax on shares triggered a massive shift by investors to investing in risky derivatives vis-à-vis shares. The budget of 2016 increased transaction tax on derivatives to create a “level-playing field” with shares. 

Not to be left behind, investors in real estate through real estate investment trusts want a “level-playing field” with equity investments... In January 2016, a committee constituted by the Securities Board of India (SEBI) under the chairmanship of Narayana Murthy recommended exemption of long-term (more than a year) capital gains tax on investments made in shares of private (not listed on stock exchanges) companies. The rationale was the need for a “level-playing field” for such private equity investors on par with investors in shares of publicly listed companies...

This treaty has led to a long tail of arbitrages across various asset classes (private vs public shares), types of investors (Mauritius vs non-Mauritius), types of income (capital gains vs dividends) etc. This treaty has hampered India’s ability to garner enough tax resources through progressive direct taxes. While it is true that this treaty provided an opportunity for illegal round tripping of domestic money, the most damaging impact has been the cascading effect on India’s tax structure.

The original sin having been washed away, it is now time to roll back the entire cascade of policies that it engendered.

14. The week also saw the inauguration of the Gotthard Base Tunnel, at 57.1 km, the longest and deepest railway tunnel in the world. The twin rail tunnel has cost $12 bn and taken 17 years to build.