Municipal governance sans economic growth focus?

Cities are the acknowledged engines of economic growth. But what if important determinants of economic growth, like new investments and job creation, are not the focus of city administrators? The contrast between India and China could not have been starker. 

In a recent presentation, Stanford economist Chang Tai Hsieh pointed to the incentive compatibility in China's local governments. The Mayor in Chinese cities spend a significant amount of their time engaging directly with investors - meetings, dinners etc - and courting them to invest in the city. It does help that their promotion within the Party is closely linked to their success with economic growth in their jurisdiction. 

The Mayor then develops a personal interest to help cut through local government bureaucracy (or skirt around) and ease the path to facilitate investments. However forbidding the bureaucratic layers and corruption, and they are not any significantly better in China than in India, this was a powerful force for good.

But this also meant that the Mayor could potentially misuse his powers and fuel crony capitalism. Here it helped that there was one important lever that was outside the Mayor's control - Finance. This meant that the investor had to pass a form of "market test" in accessing capital. Not only did this keep egregious cronyism in check, but also ensured that the firms which came up were competitive enough. Another example of "capitalism with Chinese characteristics". 

One would imagine that this is exactly what Indian cities need. Whereas Chinese Mayor's incentives are aligned towards attracting investments to achieve growth, for Indian Mayors or Municipal Commissioners, economic growth is almost never a priority. It does not help that they get bogged down by the weight of routine administration - tax collection, sanitation, and public works. I cannot think of any city courting investors with summits and road shows. Even in the largest cities, investment promotion is invariably a state government responsibility. In the rare case of Urban Development Authorities being involved, it is largely confined to making ring roads and developing layouts for industrial parks. 

In fact, in India, Municipal Commissioner or Mayor dining with investors and industrialists is most likely to be viewed with suspicion and strongly discouraged. Taking personal interest in the troubles faced by an investor or business enterprise, howsoever genuine the grievance, is more likely to be seen as an attempt at cronyism than as an effort to increase economic growth. This paranoid caution is seen across all levels of government. 

Leave aside dining, officials in infrastructure ministries in both state and centre, try to even avoid direct engagements with businesses, who are their primary stakeholders. Remember, one of the central points in CBI's case to establish "criminal conspiracy" against the former Coal Secretary, Mr PC Parakh, was the official meeting between the Coal Secretary and Mr Kumar Mangalam Birla in the former's office before the coal block allotment was made. 

Given the country's notorious history of corruption and cronyism, such social conditioning may not be that bad. Unlike the disciplining presence of the Chinese Communist Party, there are no equivalent effective institutional deterrents in India. But that is no excuse for completely ring-fencing off arguably the most important urban development objective from the canvas of municipal government responsibilities. 

It is a different matter that in 2009, the Chinese government liberalised rules (not clear about the details) and allowed Mayors to influence financing too. This, potentially, contributed to an increase in cronyism among local governments!

In any case, the issue again highlights the importance of reforming the country's current municipal governance system. I had blogged earlier about the close resemblance in work practices of Chinese Mayors and Indian Municipal Commissioners, but with with very different outcomes. 

It is unlikely that the current city leaders, bureaucratic Municipal Commissioners will be able to perform such roles. For a start, growth promotion and the relationship building that accompanies it requires a much longer duration than their typical two year tenures. Second, the incentives of Municipal Commissioners are aligned towards more bureaucratic achievements - increasing tax revenues, completing projects, getting cleanliness awards etc. Third, decisions involving investment promotion are largely political in nature and not amenable to bureaucratic processes. For example, giving a concession of whatever kind to one investor is a judgement call to further a relationship, which would not pass the typical bureaucratic test of "why this and not others?". Fourth, howsoever public spirited, transferable Municipal Commissioners are unlikely to have the same commitment and passion for a city's long-term growth as local residents like a Mayor. 

This blog has argued with increasing vehemence about having empowered executive Mayors for Indian cities, assisted by Municipal Commissioners. In such an arrangement, the Mayors would lead the city's long-term growth focus, with the Municipal Commissioner responsible for effective administration. The former would engage very closely with the Urban Development Authority and State industrial promotion agencies to plan the city's long-term development and attract investments. The latter would provide all requisite administrative support in that regard.

Cronyism and corruption are inevitable with such industrial promotion activities, and instead of the state and national governments, the same set of transactions now get devolved to local governments. Further, it may not be an entirely bad idea to have such delegation because the accountability channels are likely to be much stronger between the Mayors and their electorate than for the Chief Ministers with their electorate.

Africa industrialisation fact of the day

From Project Syndicate,

But Africa has not managed to take part fully in industrialization, a failure that has caused it to lag behind the rest of the developing world since the 1970s. In 2015, all of Sub-Saharan Africa exported only as much apparel as tiny El Salvador.

Given that textiles offers the most commoditizable employment for large-scale manufacturing labor, this is deeply disturbing. 

Expanding India's tax base

Praveen Chakravarty makes the point that India's very high income tax threshold, one of the highest in the world at 2.5 times the country's per capita income, is a major contributor to the country's low tax base. For the record, only 3 per cent of Indians and just seven out of 100 voters file tax returns!

Without getting into the merits of this proposition, I would argue that this is unlikely to make much dent on the problem of low tax base. 

Even assuming a 10 per cent tax on all income above Rs 1 lakh (i.e. 1 to 2.5 lakh) and assuming everyone one of the 10 million (assesses with income below Rs 2.5 lakh) have an income of Rs 2.5 lakh, we are left with an increment of 0.1 per cent of GDP to the tax-to-GDP ratio. This is a rounding error!

This goes back to the point that Ananth and I tried to make here.  Any which ever combination of policies (base expansion, forensics, agricultural income, higher income tax rate etc) to expand the tax base are most likely to be orders of magnitude off from the 3-5 percentage points increases that one would expect from a country of comparable economic development. We should do all of them for sure, but expectations should be tempered.

When we make inferences based on anecdotal and our own life experiences (the apparently countless people around us who have cars, go for vacations, and own expensive houses) and feel aghast at the low tax compliance, we may be overlooking the fact that the representative sample is misleadingly small. For sure, we can triple or quadruple that wth better compliance etc. But even that would be marginal. 

We could also look at several urban proxies of consumption - aspirational food like burgers/pizzas from global chains, vehicle ownership, consumption of services like vacations and cosmetic procedures, retail purchases of consumer durable brands etc - in comparison with others at similar stages of growth and my guess is that we would find that the real "consuming" middle class is relatively narrow. No wonder that fast food chains are already hitting a growth plateau, just a few years into their full-growth phase. Given our representative sample One would have thought that these things should have comfortable double digit growth for atleast 10-15 years.

More reliable quantitative measures can be obtained from an analysis of e-commerce transactions and comparing trends in other similarly placed countries and China. I would be very surprised if they contradict these trends. 

A recent analysis of the Socio-Economic Caste and Census (SECC) data by the excellent folks at Credit Suisse gives a sense of the scale of rural deprivation. It found that 30% of rural households had cultivation as the source of income, but a large 51% do manual labour, indicating a small percentage of HHs controlled the majority of rural income. Only 17 mn, or less than 10 per cent households had salary income, of which nearly two-thirds were in government or government-owned firms. Only 6.5 mn (3.5 per cent of total rural households) had private salary income (and the vast majority would be those with annual incomes below Rs 2.5 lakh), indicating the limited reach of corporate India. 

Given that agriculture formed 29% of GDP in 2011 and just 30% of the 180 million rural households got their income from cultivation (and only a very minuscule proportion of them are likely to be anywhere close to contribute significantly to tax revenues), the scope of squeezing out significant tax revenues from even agriculture income is marginal. As a disclaimer, this is not to say anything about the merits of taxing agriculture income, but a reminder about the futility of significant tax base increases from such efforts.

So what should be done? Apart from the broader issue of more capital accumulation covered in our book, a more realistic and fruitful place to start, would be in plumbing issues. The Central Bureau of Direct Taxes (CBDT) should quickly establish professionally competent tax policy and data analytics divisions. They should develop an eco-system of data sharing, with appropriate safeguards, with various state and central government departments. The former should use data for better tax policy design, and the latter should use it to improve assessments, compliance and collection. 

Even initiating a debate on assessment of agriculture incomes, without any tax payment, would involve some idea of the numbers involved, currently lacking with the policy designers.

The evidencariat takes hold, and this too shall be no different!

I have blogged earlier arguing that the case for evidence based policy making was, like every other all encompassing ideas, slowly becoming an ideology. Its proponents, the evidencariat, disown all priors and prefer to leave policy and program implementation design questions on important development issues completely open-ended.

Accordingly, we have no idea of the education or healthcare production function and should leave design elements on any intervention to achieve learning or treatment outcomes to the discretion of the implementers, to be figured out by them on context-specific considerations by drawing on rigorously generated evidence.

Such evidencariat come from different directions. On the one side there are those advocating field experiments, the main object of the aforementioned blogpost, who seek to establish priors by trying to generate rigorous enough evidence. Then there are those who claim that it is not possible to have unified and universally-applicable solutions and therefore advocate a decentralised, iterative process of discovering solutions. There are others who go one step ahead with the second approach and argue in favour of using finance to align incentives and target outcomes. Different variants inhabit the space between.

This evidence-dogma has taken strong hold in influential global development circles. There is something logically very neat and attractive about such solutions that appears to overcome the complex challenge of making development happen. Its impact will be felt in an increasing degree in aid and other forms of external, public and private, spending in the years ahead. But like with all such cycles of development fads, and there have been several over history, this too will pass by as the earlier ones.

The incentives too are aligned favourably. The donors get the comfort of trying out something different and that too through an approach which revolves around the use of evidence and empowerment of the recipient governments. The latter will nonchalantly play along, with the firm conviction that given the multiple dimensions of what constitutes "evidence", they can game the process any which ever way. This is a conversation taking place in completely different worlds, two sides talking past each other and still comfortable with each other's positions. 

No government in any developing country has either the time or resources or capacity to do development as suggested by any of the different schools of evidencariat. Unlike the academia and intelligentsia, they inhabit the real world with short election cycles and bureaucratic tenures, impatient citizens and opinion makers, entrenched legacies, scarce resources competing for multiple unavoidable demands, and shockingly weak state capacity.

In the circumstances, the Bayesian approach is the only way forward. Conditional on the aforementioned constraints, what is the best approach to improving the effectiveness of development spending?

A prudent compromise may be required. Evidence based research should be a complement to a process of discovering latent institutional knowledge (or priors) through the standard toolkits of deep-dive problem solving. If we are able to do the latter with some reasonable degree of rigour, that alone would be sufficient to have a robust enough minimum viable product in policy design and implementation plan. The most cost-effective and context-specific approach of evidence generation should be used to figure out the remaining one or two uncertain elements in the design, if any. There is no need for a high standard of evidence when less would suffice. And any implementation should have a very rigorous monitoring system that feeds back credible information and the implementation design should allow for refinements and course corrections as required. A more detailed illustration of this is available here. 

And on the absence of a production function, this from S Africa is only the latest in evidence to the contrary,

Scripted lesson plans have great potential to improve teaching practice in resource- and capacity- constrained settings, but there are risks that they undermine teachers’ autonomy to cater teaching to the level of the child, especially if lesson plans require adherence to an overly-ambitious curriculum. Both programs provide teachers with scripted lesson plans and supporting reading materials, such as graded readers and flash cards, but they differ in the mode of implementation. In some schools (Training) teachers receive two two-day training sessions over the course of the year. In other schools (Coaching), teachers also receive monthly visits from specialized reading coaches. We find that after only 9 months of implementation both the Training and Coaching interventions had a positive impact on reading proficiency, by 0.13 and 0.14 standard deviations respectively. Teachers are also more likely to provide individualized assessment and assign pupils to reading groups within the classroom based on ability. Furthermore, there is substantial pupil-level heterogeneity, mediated by class size: Pupils who performed badly at baseline do not benefit from the program, but this trend is reversed in larger classes... 

The coaching treatment is twice as expensive... We can therefore conclude that scripted lesson plans can be more cost-effectively implemented through a traditional model of training, and need not be combined with ongoing monitoring and feedback from reading coaches.

However, the scalability of such approaches will be difficult given the limited success, for example, with training public school teachers to use the Pratham model of remedial instruction. This, is more a reflection of weak state capacity than the application of a wrong education production function. And the approaches advocated by the evidencariat demand far more intensive engagement of state capacity.

In the circumstances, for school systems entrapped at very low equilibriums struggling to move from the bad to satisfactory, scripting may not be a bad idea. After all, the much validated Pratham model is a  very minutely scripted model of instruction. However, for a system striving to move from satisfactory to good, much less from good to great, scripting is unlikely to work.

In the real world, with the challenge of working in a resource constrained environment with the objective of achieving scale in a reasonable period of time, we cannot afford not to have priors. We have to accommodate decidedly second-best approaches.

A proposal on urban transport management

Arguably the two biggest immediate constraints facing large cities in developing countries like India are the availability of affordable housing and acute traffic congestion. Unlike several other problems, including the availability of adequate utility infrastructure and jobs, these two are not easily mitigated and the costs on the typical urban resident can be huge. 

In the absence of affordable housing within a reasonable enough distance from the city centre to make you feel that you are living in the city, a reality in most Indian cities, immigrants are forced into  living in outer suburbs or squat on cramped illegal settlements. This amplifies workplace commute times and adds to the traffic congestion. The latter spares none, reducing peak-time travels to crawls, and leaves a toxic smog of air pollution. This post will focus on urban transport. 

I have written earlier arguing that cities need to embrace several complementary policies to address the challenge of traffic congestion. The main levers are four-fold - increase the cost of vehicle ownership (higher emission standards, higher vehicle taxes etc), vehicle usage (congestion charging, higher parking fees etc), extensive promotion of public transport, and focus on transit-oriented development (higher FAR on transit corridors and around stations). Addressing traffic congestion is an ongoing process, with no final destination in terms of policies, and cities will have to constantly play with all these levers.  

The problem suffers from a serious incentive alignment and jurisdictional problem. The city residents suffer the consequences and the local government has no power or role in the exercise of at least two of the four policy levers - vehicle ownership and public transport. Both are the domain of state governments, leaving policies to control vehicle usage and transit oriented development as the only available lever with cities. It is indeed scandalous that, outside of road infrastructure, very few Indian cities spend anything on urban transport. 

Unfortunately, both these run into challenges of the political economy. Higher parking fees and congestion pricing risk inviting the wrath of the middle class vehicle users. Higher FAR on transit corridors, as the example of Mumbai DP 2034 shows, generates opposition from existing land owners. Also, there is the realisation that any progress on these as isolated events may not suffice.

In the circumstances, the standard response of Indian cities to traffic congestion has been road widening and fly-overs. That has run its course in all the larger cities. Now it is left to the demand side policies of internalising the costs of vehicle ownership and usage and the supply side one of expanding public transport. I have argued here that the odd-even vehicle ban in Delhi may have a crossing of the Rubicon moment in India. So is there a way forward?

How about an initiative whereby Government of India volunteers to support cities who embrace an integrated approach that combines all these levers? To start with, it may be tried out in 3-5 cities over a 10 year period. Some of the cities where metro rail systems have been sanctioned may be the best places to initiate this approach. Based on initial learnings, it can be gradually extended to other cities.

The cities should develop an integrated transport plan, with focus on addressing effective transport management. This should be done differently from the current approach of semi-cooked, cookie-cutter transport plans made on shoe-string budgets that every city flaunts. The plan should bring together all the levers and integrate them with existing policies, and be supported by credible data and  rigorous enough quantitative analysis. It should seek to align incentives, institutional roles, and resource requirements.

State governments should commit to transition the responsibility of urban transport to the local government, with adequate financial and institutional support. They should also evolve mechanisms to impose surcharge or higher registration and annual taxes on vehicles registered in the city, while minimising tax arbitrage opportunities.

Cities should commit to a progressively rising schedule of internalising vehicle usage charges - higher parking and congestion pricing, and pedestrianisation of certain areas. Most importantly, they should accept the incorporation of transit-oriented development into their master plans, with a plan for phased rise in FAR and corridor coverage, starting with the densest travel corridors. And cities should commit an increasing share of resources to invest in urban transport.

GoI should make conditional all its investments in metro-rail and other urban transport systems to the adoption of transit-oriented development and value capture frameworks. It should support any city which volunteers with the aforementioned reforms with significant long-term resource commitment.

All sides, as well as opinion makers, need to realise that there are no short-cuts like PPPs that can substitute for large public investments in urban transport. And public support will have to cover even a significant share of operating expenditures. It is for this reason that all financing options should be explored, including value capture instruments that can help socialise at least some of the private windfalls from these measures.

The city, state, and GoI can negotiate a tripartite agreement to implement the first phase of this over a 5-8 year period, with reasonable milestones and timelines.  

This approach has several benefits. The most important is that it enables more effective realisation of the full benefits of investments like those on metro rail systems. Currently, in the absence of higher FAR and value capture frameworks, metro rail projects are set up to struggle for their viability and benefit none but rentier landowners. Or programs like Smart Cities make isolated transport investments, whose full potential remain unrealised without complementary measures. Or an Urban Mass Transport Authority gets established and ends up as powerless Committee. Or city master plans remain disconnected from policy levers, thereby limiting the impact of both.

Another benefit of an integrated approach is that it binds everyone together into a compact, allowing burden sharing, and attenuating the political economy challenges. A congestion pricing or higher vehicle taxes can become palatable when seen as part of a package that includes investments in public transport.

This also creates the demand side pressures to proceed with an integrated implementation. It then becomes largely an effort to effectively implement the plan. It should be hoped that these cities will have at least one or two very competent enough set of officials during the period to generate the thrust required to achieve the objective.

Paul Collier's on future of capitalism - social maternalism grounded on pragmatism?

Paul Collier (HT: Ananth) channels Jonathan Tepperman's recipe for successful national transformations from his book The Fix which chronicles ten case studies of national leaders,

eschew ideology; focus on pragmatic solutions to core problems, adjust as you go, but be as tough as is necessary.

The article is good in general, as Collier seeks to chart out a course of capitalism. He identifies "pragmatism" as the new ideology. He advocates the use of tax policies to generate growth - moving away from income-specific to context-specific taxes, that discriminates based on source of income (rents as against innovation), regulatory arbitraging (real economy versus sharing economy), resource misallocation (financial markets versus real economy), geographical privileges (cities as against suburbs and rural areas), etc. 

Consider the case of how cities privilege its residents and especially the high income earners among them,

A megacity is a powerful engine of inequality. Exceptional taxation is justified because only some of the high incomes generated in a megacity are attributable to the few who appear to earn them. The rest are attributable to everyone who contributes to the connectivity, including those who do not live in it. A straightforward example is land values. Since locating in the city enables firms and workers to be more productive, its land becomes valuable... London abounds in such “undeserving rich” because governments have been slow to use the tax system to offset them. Despite Brexit, London is a vast reservoir of unexploited tax potential: it is the new oil. The provinces are right to be angry. A metropolis differentially benefits the highly educated. The scope for specialization enables them to use specialist skills that become very valuable. Someone with the brains and opportunity to have fathomed the intricacies of finance will be hugely valuable within the City of London, and so will earn a fortune. But that productivity is in part due to advantages such as the integrity of English law and non-corrupt government, endowments from generations of national struggle. These super-returns from a London location accrue, by default and disproportionately, to the high-skilled worker; but there is a good normative case that they should be shared more evenly, and so highly educated Londoners are less deserving than they think. 

 And on resource misallocation,

Uncorrected, the market will generate too many asset managers and lawyers and too few innovators. What is needed instead is a redesign of corporate taxation... smart corporate taxation would shift resources from those activities where there are too many people to those where there are too few. It would become an instrument in delivering growth, not public services.

 On the sharing economy,

Those changes that cause major disruption, such as Uber and the impending switch to driverless vehicles, could be taxed, not so heavily as to prevent them but to ensure that they pay for the social costs that they inflict. Currently, tax systems are so antiquated that the same transaction is taxed more lightly in the “gig economy” than in a conventional business: in part, Uber, airbnb (and Amazon) are tax scams.

In corporate practices,

Currently, massive economic power is concentrated in the hands of chief executives, disciplined only by whether asset managers ditch their shares. This has led to two serious forms of abuse. One takes us back to rents: British CEOs virtually set their own pay, constrained only by City norms. As decency has eroded, their pay has risen 80 per cent in the past decade, with negligible evidence of enhanced performance. They are the highest-paid CEOs in Europe. The other abuse is that the bonus-driven short-termism of asset managers has made firms averse to long-term investment, not just in equipment but in their workforce. As labour markets have become more “flexible”, the low unemployment that flexibility has delivered has come at the price of reduced training.

Collier concludes,

I think of the pragmatic policies I have suggested as social maternalism. In this model the state would be active in both the economic and social spheres, but it would not overtly empower itself. Its tax policies would restrain the powerful from appropriating rents, rather than stripping income from the rich to help the poor. Its regulations would empower those who suffer from creative destruction to claim compensation, rather than attempting to frustrate the very process that gives capitalism its astonishing dynamic. Its inclusive nationalism would be a force for binding together, replacing the emphasis on the fragmented identities of grievances. Its social interventions would aim to sustain those families that are stressed, rather than assuming for itself the role of parent.

Capitalism and Mathew effect

One of the characteristic features of modern capitalism is a Mathew Effect or a form of accumulative advantage. In simple terms, this translates everywhere to a trend where the rich and powerful become ever more so and the poor and weak become more diminished. 

This is pervasive across both the market for businesses and labor, across sectors. Large firms get larger by getting cheaper credit, recruiting better employees, capturing a far greater share of consumers who are also likely to spend more,  generating more surpluses, attracting more investors, and benefiting more from regulatory regimes. Citizens who strike gold with the ovarian lottery get richer by accessing better education, acquiring superior non-cognitive skills, getting higher-paying jobs, being more successful professionally, assortative mating within social cohorts, and so on.

In both cases, the opposite set of trends apply with even greater force to smaller businesses and less fortunate people. Furthermore, the proportion of beneficiaries among both businesses and labor across sectors has been shrinking rapidly over time, leading to egregious concentration of market power and incomes at the top of the respective ladders. Amplifying these trends is the capture of political institutions and control over the process of laying down the rules of the game in all spheres public life by the same set of small group of beneficiaries. Worse still, this control over political institutions leads willy-nilly to the erection of entry barriers that add more layers to an already inhospitable environment for vertical mobility for firms and labor. The financial market regulation in the US may be one of the best examples of "extractive institutions" in our modern economy. There is an inexorable dynamic to to these rapidly widening inequalities. 

The combination of technological advances, globalisation, and financialization over the past quarter century or so that may have hastened this trend. 

The latest data point in this comes from the market for academic instructors in higher education institutions in the US (HT: Ananth). In this fantastic Truman Capote award acceptance speech, Kevin Birmingham highlights a sobering picture of the scale of 'adjunctification' of faculty positions in US universities, 

Tenured faculty represent only 17 percent of college instructors. Part-time adjuncts are now the majority of the professoriate and its fastest-growing segment... A 2014 congressional report suggests that 89 percent of adjuncts work at more than one institution; 13 percent work at four or more... An English-department adjunct at Berkeley, for example, received $6,500 to teach a full-semester course... According to the 2014 congressional report, adjuncts’ median pay per course is $2,700... Thirty-one percent of part-time faculty members live near or below the poverty line. Twenty-five percent receive public assistance, like Medicaid or food stamps... We cannot blame this professional anemia on scarce funding. The largest adjunct-faculty increases have taken place during periods of economic growth, and high university endowments do not diminish adjunctification. Harvard has steadily increased its adjunct faculty over the past four decades, and its endowment is $35.7 billion. This is larger than the GDP of a majority of the world’s countries.

He points to a market failure which is a feature in most labor markets,

The key feature of adjunctification is a form of labor-market polarization. The desirability of elite faculty positions doesn’t just correlate with worsening adjunct conditions; it helps create the worsening conditions. The prospect of intellectual freedom, job security, and a life devoted to literature, combined with the urge to recoup a doctoral degree’s investment of time, gives young scholars a strong incentive to continue pursuing tenure-track jobs while selling their plasma on Tuesdays and Thursdays. This incentive generates a labor surplus that depresses wages. Yet academia is uniquely culpable... New faculty come from a pool of candidates that the academy itself creates, and that pool is overflowing. According to the most recent MLA jobs report, there were only 361 assistant professor tenure-track job openings in all fields of English literature in 2014-15. The number of Ph.D. recipients in English that year was 1,183. Many rejected candidates return to the job market year after year and compound the surplus... From 2008 to 2014, tenure-track English-department jobs declined 43 percent. This year there are, by my count, only 173 entry-level tenure-track job openings — fewer than half of the opportunities just two years ago. If history is any guide, there will be about nine times as many new Ph.D.s this year as there are jobs.

And this is telling,

Universities rely upon a revolving door of new Ph.D.s who work temporarily for unsustainable wages before giving up and being replaced by next year’s surplus doctorates. Adjuncts now do most university teaching and grading at a fraction of the price, so that the ladder faculty have the time and resources to write. We take the love that young people have for literature and use it to support the research of a tiny elite... If you are a tenured (or tenure-track) faculty member teaching in a humanities department with Ph.D. candidates, you are both the instrument and the direct beneficiary of exploitation. Your roles as teacher, adviser, and committee member generate, cultivate, and exploit young people’s devotion to literature.

Yes, while things may not be as dismal across departments, the broad trends are similar, not just in academia but everywhere in the labor market. Mathew Effect dominates. 

We live in the age of "winner takes all" capitalism and with a declining share of winners.  In Rawlsian terms, it is minimax capitalism. This is arguably capitalism's biggest market failure. Its implications include declining business dynamism, shrinking labor market diversity, and erosion of the credibility of institutions that underpin modern economies.

And it may well carry the "seeds" of capitalism's own decline. Marx may well have been right, albeit with a delay of nearly two centuries! We need a version of "maximin capitalism", one where the rules of the game positively favour the less advantaged so as to counterbalance the inevitable Mathew Effect.

Ireland and aircraft leasing fact of the day

The Economist has this on Ireland's role as the global hub for aircraft leasing,

Previously, airlines owned all their aircraft. Leasing allows them to finance rapid expansion or contraction of their fleets without taking on debt. Only 2% of aircraft were leased in 1980. Now over 40% are... Irish firms manage in excess of 5,000 commercial aircraft, worth over $130bn, accounting for half of all leased planes and a quarter of the fleet globally... The industry in Ireland is now growing so fast, it is skewing the country’s economic data. Official GDP growth of 26% in 2015 was largely the result of lessors buying so many new planes; the rest of the economy probably grew only by about 5%.

When we mistake the real for the ideal world

In recent weeks I have blogged on multiple occasions (here, here, here, and here) about how  intellectuals, barring a few honourable exceptions like Dani Rodrik, have got completely wrong the interpretation of important global trends like free trade and globalisation, financial deregulation and capital account liberalisation, premature deindustrialization and automation, cross-border labor migration, and global citizenship.

It does not require too much exploration to realise that large numbers of people lose their jobs either due to premature industrialisation or automation or off-shoring or competition from migrants. Similarly, national businesses lose market share to multinationals and finally exit the market, and economies are ravaged at increasing frequency by the vagaries of cross-border capital floods and sudden-stops. And the corollary of global citizenship is most often an abdication of actual "citizenship" responsibilities. 

In all these cases, the intellectual argument is that market adjustments happen to mitigate these effects. This is despite ample evidence that such adjustments, like with most other market based adjustments, take an inordinately long time, long enough to cause irreversible pain and damage to people and their societies. And the fiction continues that public policy will somehow redistribute gains from the winners to compensate the losers despite not even a single instance of such explicitly targeted redistribution initiative in any country of note in recent times.

There are two explanations for such responses. The materialistic explanation is that these trends have limited adverse impact on those who call themselves middle class and above. It can even be said that these trends even enhance their economic and social prospects. In fact, the "global citizens" may be the biggest beneficiaries of all these trends. In contrast, the brunt of each of these trends is felt by those at the lower levels of the income ladder. 

There is also a deep psychological explanation. All of us who consider ourselves a liberal, feel compelled to be politically correct and be on the right side of the ideological orthodoxy, a view reinforced by intense peer pressure as well as an urge to be doing and supporting the 'good', which has become intimately linked with the liberal ethos. Therefore, in all these cases, we try to complicate and over-intellectualise trends whose proximate effects are egregiously disturbing for the vast majority of citizens. Sometimes, instead of searching for rigorous enough evidence, which is invariably elusive, we just need to put aside our ideological blinkers and be practical in observing and using judgement to draw conclusions about what is happening around us. 

Free trade, globalisation, automation, financial market liberalisation, open borders and liberal immigration, and global citizenships are unqualified positive ideas, intimately associated with the progressive ideal. Critics of these ideals are the antithetical straw-men, undesirable vestiges of a less progressive and anti-liberal bygone era. Accordingly, any scepticism about them is not only anti-liberal, but also a concession to, even appeasement of, the critics. As Rodrik has acknowledged himself, such political correctness is pervasive even at the highest levels of the academia.

Politicians, whose incentives are closely aligned towards responding to the concerns of actual people living in the real world, cannot be faulted if they perceive these trends and respond to the concerns. As intellectuals and opinion makers, with their largely unqualified and vocal support for these trends, have abdicated the debating space for an engagement on realistic terms, it is only natural that extremist opinions and forces gain traction and become platforms for political mobilisation. 

None of this is an argument to pitch our tents behind the critics of all these trends, but a plea to be more nuanced in our appreciation of them. We need to appreciate the world for what it actually is and likely to be so for the foreseeable future and not what the world ought to be in our ideologically coloured imagination. 

Weekend reading links

1. Times points to a new report that highlights the lack of dynamism in the US economy,

They cite federal data showing that in 1977, more than 16 percent of firms in the United States were less than a year old, a figure that had fallen to half that by 2014. New businesses have similarly done less to power new jobs than they once did, while the biggest, oldest firms account for a rising share of economic activity. Market concentration increased for two-thirds of industries between 1997 and 2012, the report found. That coincided with a steady rise in corporate profits as a share of gross domestic product, and in a decline in the share going to workers’ wages. The job market has become less fluid. The proportion of workers who change jobs in a given year has fallen from 12 percent in 2000 to 7 percent in 2015. Workers are also less likely to migrate within the country. In the 1970s, more than 3 percent of the population moved across state lines in a given year; since 2006, the number has hovered around 1.5 percent. Most startlingly, the creation of new companies has been concentrated in a small number of metropolitan areas: Dallas, Houston, Los Angeles, Miami and New York. From 2010 to 2014, those five regions created as many new businesses as the rest of the country combined. 

More evidence that the fundamental structure of the economy has changed significantly over the years and protectionist rhetoric that harp on returning manufacturing jobs may remain just that, rhetoric.

2. Yet more reminder that fixing complex challenges like improving farm incomes has to go far beyond elimination of middle-men through commodities exchanges and online trading platforms. This from the experience of Ethiopia Commodity Exchange (ECX), 

By connecting smallholder farmers to global markets, the exchange, launched with a fanfare in 2008, was supposed to help reduce hunger. The hope was it would reduce price volatility and incentivise farmers to plant crops. But staple foods such as haricot beans today account for less than 10% of its trade. Its annual turnover—worth about $1bn—is dominated instead by two export crops, coffee and sesame seeds. In 2015, despite a dire drought, Ethiopia did avoid famine, but the ECX played little role: its maize and wheat contracts had lapsed by then because of concerns that exports would jeopardise domestic food supplies. Cutting out middlemen seems not to have done much for smallholders: studies suggest that the share of international prices received by coffee farmers has barely budged over the past decade.

I had written earlier cautioning against excessive optimism with the electronic trading platform established in India with the objective of creating a unified national agricultural market.

3. Jayan Jose Thomas has a decomposition of the new entrants to India's work force,

They (NSSO and Census) suggest that between 2004-05 and 2011-12, the population in the age group of 15-59 increased at the rate of 16.2 million a year. During the same period, the population of students 15 years or older increased at the rate of 5.9 million a year. Students do not form part of the workforce. Therefore, if we subtract the growth of students from the growth of the working-age population, we obtain an estimate of the growth of the potential workforce. This is found to be 10.3 (that is 16.2–5.9) million a year for India between 2004-05 and 2011-12. During the same period, however, the workforce engaged in agriculture and allied activities declined at the rate of 4.4 million a year. Assume that the workers who shifted out of agriculture sought employment in industry and services. If so, the potential workforce in industry and services in India grew at the rate of 14.7 (that is, 10.3+4.4) million a year between 2004-05 and 2011-12.

4. Donald Trump is a master of shifting the frames of reference. He takes outrageous public positions with his tweets, be it abusing opponents, intimidating judges, maligning journalists, or indulging in naked nepotism. Once the dust settles down, he would have invariably shifted the terms of discussion on the issue the next time it crops up.

The first instance of such expressions (or tweets) would have shaken up the social conscience and aroused anger. But after two or three iterations of such abuse, intimidation, or nepotism, the moral indignation of the social collective becomes attenuated. They become the new normal!

The gradual social reconciliation with the massive conflicts of interest that is egregious is the perfect example. This is a teachable example of how public morals slip down the slope, most likely irreversibly.

5. Times has this story of Foxconn's largest factory in Zhengzhou which makes nearly half of all iPhones,

Zhengzhou, a city of six million people in an impoverished region of China. Running at full tilt, the factory here, owned and operated by Apple’s manufacturing partner Foxconn, can produce 500,000 iPhones a day. Locals now refer to Zhengzhou as “iPhone City.” The local government has proved instrumental, doling out more than $1.5 billion to Foxconn to build large sections of the factory and nearby employee housing. It paved roads and built power plants. It helps cover continuing energy and transportation costs for the operation. It recruits workers for the assembly line. It pays bonuses to the factory for meeting export targets...

Foxconn receives a bonus when it meets targets for exports. Those subsidies, according to the government records, totaled $56 million in the first two years of production, when the factory was exclusively dedicated to the iPhone. The bonus is small on each of the tens of millions of iPhones produced during that period. But the subsidies add up: The government records list more than a dozen other forms of financial aid at the Zhengzhou operation. The Zhengzhou government eliminated corporate taxes and value-added taxes that Foxconn pays for the first five years of production; they are half the usual rate for the next five. The city lowered Foxconn’s social insurance and other payments for workers, by up to $100 million a year. The customs operation is also in a so-called bonded zone, an area that China essentially considers foreign soil, subject to different import and export rules. This setup allows Apple to sell iPhones more easily to Chinese consumers.

Foxconn is clearly able to have its way with national governments, even in China. No wonder its similar expectations from state governments in India.

6. The always excellent Dani Rodrik takes aim another holy cow among liberals, the "global citizen". He questions what global citizens do, 

Real citizenship entails interacting and deliberating with other citizens in a shared political community. It means holding decision-makers to account and participating in politics to shape the policy outcomes. In the process, my ideas about desirable ends and means are confronted with and tested against those of my fellow citizens. Global citizens do not have similar rights or responsibilities. No one is accountable to them, and there is no one to whom they must justify themselves. At best, they form communities with like-minded individuals from other countries. Their counterparts are not citizens everywhere but self-designated “global citizens” in other countries.

Despite its apparent simplicity, most intellectuals fail consistently to grasp this insight,

We have to live in the world we have, with all its political divisions, and not the world we wish we had. The best way to serve global interests is to live up to our responsibilities within the political institutions that matter: those that exist.

I cannot agree more and it is amazingly ubiquitous.  

7. Talking about Dani Rodrik, see this nice profile. And this captures the essence of the difference between conventional economists and people like Dani,

THERE ARE ECONOMISTS who teach the well-known postulate that free trade improves global well-being. There are other social scientists and popular critics who contend that laissez-faire trade can be bad for equality, for social stability, and even for economic efficiency, just as pure laissez-faire is not optimal at home.

And then there is Dani Rodrik.

This applies to not just free trade, but as I have blogged earlier automation, capital account liberalisation, migration, global citizenship etc.

8. Economist has a good article which once again highlights the implications of big data on privacy and why it has to be dealt with extreme care,

But critics fear too much data-crunching could actually increase financial exclusion. The riskiest customers, and those offline, might be priced out. The more the industry relies on complex—and proprietary—algorithms, feeding machines that keep learning, the harder it will be for customers, and regulators, to untangle why they were rejected. And algorithms can be wrong. A bilingual speaker’s search-engine entries could look erratic; a social-worker’s location-tracker could imply a risky lifestyle. And since it is unclear how judgments are made, says Frederike Kaltheuner, from Privacy International, “you could get stuck in a Kafkaesque situation where you’re put in a certain box and can’t find out why, and can’t get out.”... People give uninformed consent to all sorts of things online. But users can feel tricked and spied on if they learn their data have been sold or used in unexpected ways... 

Regulators have a role to play, particularly in dealing with questions of discrimination and exclusion. If using someone’s browsing history to exclude them from an offer for a cheap flight is OK, is it also reasonable to use those data to lock them out of health insurance (eg, by assuming that someone who Googles doughnut shops is a bad risk)? Now that Amazon sells loans, Alibaba has a payments business and Facebook has patented a credit-rating system, regulators should be at least as worried about non-traditional financiers and fintech startups, which sometimes escape regulation. 

9. On the increasingly relevant subject of whether internet companies, especially on e-commerce side, should be regulated like regular entities performing similar services. As the Economist writes, currently "they are not legally responsible, either for what their users do or for the harm that their services can cause in the real world". Accordingly, Airbnb and Uber have disclaimed any liability from their services and been spared the more rigorous standards followed by their brick-and-mortar counterparts. But as this market expands problems are emerging,

Airbnb’s inventory of 2.3m rooms makes it bigger than the three largest hotel chains—Hilton, Marriott and InterContinental—combined. Incumbents are demanding that online rivals obey rules that constrain everyone else... Airbnb stands accused of reducing the supply of affordable housing in big cities. Uber is said to worsen traffic problems and to weaken public-transport systems by luring away passengers. Facebook and Twitter are accused of enabling the spread of fake and biased news during America’s election. Such services have also become favourite hangouts for bullies and trolls...

It is also becoming exceedingly hard to maintain that platforms are—like telecoms networks—“neutral”. The argument that they do not interfere in the kind of content that is shown was a key rationale for exempting them from liability. But they are starting to resemble regulators themselves, which makes it odder still that they act outside legal limits. Facebook’s algorithms determine what members see in their news feeds. Uber’s software decides what drivers get paid. It is getting easier to police platforms, too, thanks to artificial-intelligence techniques which can recognise and predict patterns of bad user behaviour.

10. Finally, the popular narrative on migration is largely confined to the refugees and migrations from South to North. As the Economist writes, a much larger migration happens in Asia. Consider this, 

China has long been able to satisfy its demand for labour by moving rural citizens to cities. Over the past 30 years around 150m Chinese have left the countryside to staff factories, cook in restaurants and clean homes. But with China’s population ageing, foreign workers have begun filling the gap: as many as 50,000 Vietnamese illegally cross the border into the southern province of Guangxi each spring to help harvest sugar cane. In 2015 the provincial government started a programme to bring Vietnamese workers into local factories in one city. Off to a good start, it is being introduced in other parts of Guangxi.

China remains a net exporter of labour, but the balance is shifting quickly. Over the next 30 years its working-age population will shrink by 180m. How China handles this fall will play a large role in shaping Asian migration patterns. Manufacturers can move factories to labour-rich countries, or invest in automation. Other industries lack that option. The ILO forecasts that China will need 20m more domestic workers as it ages.

The impending collapse of the workforce is not an exclusively Chinese problem. To keep the share of its population at working age steady, East Asia would have to import 275m people between the ages of 15 and 64 by 2030. South-East Asia would have to attract 6m... South Asia, meanwhile, could afford to lose 134m workers—India alone could send more than 80m abroad—without worsening its dependency ratio. China’s projected shortfall in 2030 is equivalent to 24% of its current working-age population; in Bangladesh the likely surplus is 18%.

Jeff Sachs on foreign policy and international development

Ananth points to this fine, fine Jeff Sachs interview which should count as among the most prudent assessments of global geopolitics and international development. At a time when political correctness and ideological biases are commonplace among the intelligentsia, this comes out as a refreshing acknowledgement of the reality. 

He attributes populism to rising nationalism, weakening of US Foreign Policy, refugee crisis, and the crisis on the centre left. Sample this on immigration,

All of the Scandinavian countries, and their neighbors in northern Europe, have right-wing populist parties, with some approaching power... For me, the most pertinent fact is that populist Scandinavians are calling for a social-democratic order, but one for Danes or Swedes or Norwegians alone. They like their society; they just don’t want newcomers. So, it’s explicitly anti-migrant – essentially a demographic and cultural reflex... I think people really like their social order – again, I don’t think we know how to make economies work better than those countries do. What many of their people apparently don’t like is Muslims living in their country. They don’t want mosques in their neighborhoods. That’s not true of everybody, of course, but that’s what the backlash reflects. 

And on the challenge facing Africa,

Africa’s demographic trajectory is deeply worrisome because it is built on an extremely high fertility rate that will hinder its own sustainable development. In Sub-Saharan Africa, the average fertility rate remains more than five children per woman, and the resulting population trajectory is roughly a quadrupling of the continent’s population by the end of this century. That means about four billion people in Sub-Saharan Africa, compared to a European population that might be around 500 million at the end of the century... the bottom line is that Africa will never achieve successful development if it reaches four billion people at the end of this century. That trajectory would lead to unbearable environmental stress, hunger, war, water depletion, and destruction of remaining biodiversity. It would be a disaster first and foremost for Africa.

This assessment of "regime change" foreign policy is spot on,

In my opinion, it is a US-Saudi-Turkish war of regime change that is essentially stupid and against international law. The reason we have a refugee crisis is not because of Syrian President Bashar al-Assad, but because the US, the Saudis, and the Turks said in 2011 that Assad should be overthrown. It was a stupid idea – just as stupid as the idea of overthrowing Libya’s Muammar el-Qaddafi in 2011 and Iraq’s Saddam Hussein in 2003... Assad wasn’t such a danger from 2000 to 2010. Syria was a normal country with autocratic rule. It wasn’t a global humanitarian disaster. It became a disaster in the spring of 2011, and especially on August 18, 2011, when Barack Obama said that Assad must go. That was Obama’s worst foreign-policy blunder, and we’re still living with the consequences. Why would a US president say that another country’s president must go? The idea that the US can choose who should lead other countries has been a complete failure.

And on the surprisingly less discussed concern that Russia rightfully harbours with the presence of NATO in its "near abroad",

SS: Then why did Russia invade Ukraine, annex Crimea, and back the separatists in Donbas?

JS: I think that the US made a huge mistake in trying to flip Ukraine to NATO.

SS: Ukrainians wanted to join NATO.

JS: I know, but the US should say: “No way.”

SS: Why?

JS: Because that’s geopolitics.

SS: What should these countries do? Must they be subordinate to Russia?

JS: Imagine that Mexico’s leaders, having decided that Trump poses a grave threat to their country’s security, formed a military alliance with China. As far as I’m concerned, it would be their choice to make. But US policymakers – Republicans and Democrats alike – wouldn’t see it that way. I don’t know what would happen the next day, but I wouldn’t want to be in Mexico City, or perhaps anywhere in the world (which would all be threatened). This is reality. And it’s why a sensible US leader would say to the Ukrainians: we care for you, we love you, but we don’t want you in NATO, because we don’t want to provoke a conflict with the major power on your border.

Standardizing "citizen feedback services"

Another example of "crossing the river by feeling the stones" comes from China's experiment with collecting citizen feedback on public services delivered by local governments. Since the early eighties, Beijing has allowed local governments to experiment with feedback systems. This had resulted in the proliferation of large numbers of such systems, with most local government departments having their own dedicated feedback channels. 

The Economist has a nice article on the feedback systems,

There are mayor’s mailboxes on the websites of every municipal government, usually indicated by a button next to a biography of the official with an exhortation to “write me a letter” (or, in practice, send an e-mail). The hotlines allow people to be put through to a local bureaucrat. The first one was set up in 1983. Since then they have proliferated, creating an unco-ordinated tangle. But the past few years have seen rounds of consolidation. Shanghai announced a single hotline in 2013. Guangzhou, in the south, did so in 2015. The unified ones all use the same number, 12345... A survey last year by Dataway Horizon, a consultancy in Beijing, found wide variations in the quality of service. In Beijing, Shanghai and Chongqing, which are among the richest cities, all hotline calls were put through right away. In Yunnan, Tibet, Shaanxi and Qinghai—less-developed provinces in the west—only a fifth of calls were even answered on the first attempt.

Once these "million flowers" bloomed, positive deviances emerged and Beijing then stepped in to facilitate more orderly development, 

In recent months state media have been promoting what they call a model example—the 12345 hotline in Jinan, capital of the coastal province of Shandong. It was launched in 2008, has about 60 operators on duty and gets nearly 5,000 calls a day, rising to 20,000 on busy ones... Before it was set up, the city had 38 hotline numbers for contacting different departments. That was “chaos”, the administration said... In an attempt to improve widely varying levels of service, the central government recently laid down rules for running 12345 hotlines. Starting in July, calls must be answered within 15 seconds, at least one person on duty should be able to speak a language other than Mandarin and the line should be open 24 hours a day.

The contrast with India is stark. Such feedback or "grievance redressal" systems have been functioning in districts and cities for decades. There is very little standardisation of process protocols, service levels, and reporting formats among the tens of hundreds of software applications, online and offline, that are used across the country. 

The vast majority of these software are leaky and inefficient variants, developed on shoe-string budgets by the local officials of the National Informatics Centre. Further, most often, incoming officials tinker ad nauseam whimsically with these systems, preventing the institutionalisation of any one software. To the best of my knowledge, even today, no state government has a unified "grievance redressal" mechanism that covers all its agencies. 

A simple but robust web-enabled application that collects grievances from multiple sources, networks officials from different agencies, consolidates action taken, and analyses and renders appropriate reports to officials at different levels can be a very strong systemic effort to improve state capacity. A few state governments could initiate efforts to develop and stabilize such an application over a 2-3 year period.

In a separate context, such feedback systems are a very useful entry point to being the inculcation of accountability in countries with very weak state capacity.

Competition and Chinese Capitalism

A feature of the tech industry in the US has been the prolonged dominance of industry leaders like Microsoft and Intel earlier, and Google and Apple or Facebook and Twitter or Amazon and Uber now.

As Marianna Mazuccato has shown, all these companies ride on products built on pre-existing innovations, with largely incremental innovations. Once they become entrenched, despite the much-vaunted market promoting institutions, competitors struggle to make a mark. The incumbents accumulate massive cash surpluses, preferring to payout dividends or buy up firms instead of re-investing in product development. The Economist reports that for "every dollar of cash the tech industry makes, it reinvests 24 cents; that compares with 50 cents for other non-financial firms." 

Commentators rationalise these apparent contradictions with free market principles on aspirational values, network effects, intellectual property rights, and the nature of modern internet economy itself. Apple has positioned itself as an aspirational symbol and is therefore able to steer consumers towards its suit of products. Google and Amazon benefit from vertical and horizontal network effects. And in any case, all these firms have to fight the inevitable forces of Schumpeterian creative destruction. So why should we be worried?

Only that this argument is being upended in product after product in China. The entry barriers that are blamed for market concentration appear less applicable. Even without the Schumpeterian dynamics of new market creation, firm turnover in the same product market is surprisingly high. 

There is something about China that brings out the competitive juices of capitalism. The latest example comes from the rise of new competitors to the likes of Apple in the smart phones market in China,

OPPO, and its sister firm, Vivo, also a child of BBK, started out in 2004 and 2009 respectively, making cheap and cheerful phones like plenty of other obscure Chinese manufacturers. They probably didn’t even register on Apple’s radar. Xiaomi was the Chinese handset-maker to watch; urban sophisticates, enticed by viral marketing, flocked to its slick devices. But in June 2016 OPPO’s R9, which costs around $400, overtook the iPhone, which is priced at twice that, as China’s best-selling handset. Vivo, which targets younger consumers with lower prices, is also surging... Two years ago they were struggling to join China’s top five smartphone-makers; now they are among the biggest five globally. One out of every three smartphones sold in China in the third quarter of 2016 carried one of their brands; in 2012 their combined share was below 3%.

Apart from developing excellent products, their success has owed to very insightful appreciation of the market,

It took discipline not to be waylaid by the striking (though short-lived) success of Xiaomi’s hype-fuelled internet strategy. Many other companies tried to copy it. From 2011 to 2013, insiders say, OPPO looked hard at expanding its online sales channels, but decided against it... Instead, OPPO became still more expert at incentivising its physical retailers. It has shown itself willing to share some of its profits with local stores. It uses a sophisticated system of subsidies that vary by model and season. One retailer in a small town in Sichuan says that although he sells many brands of smartphones, OPPO’s generous subsidies make him extra-eager to peddle its wares.

And the result, 

Fat profits are hard to come by in China’s giant smartphone market. Because it is simple for firms to outsource almost every aspect of phonemaking, from designing components and chipsets to contract manufacturing, the barrier to entry is low (the physical networks that OPPO and Vivo have built will be far harder to replicate than an online presence). Teeming firms means vicious price competition, especially for cheaper phones. The price of a Chinese smartphone may drop to as little as $50, analysts reckon.

Competition has encouraged firms to share a greater part of profits with their retailers, spawned a large and vibrant eco-system of suppliers, lowered entry barriers, and dramatically reduced prices for consumers. 

Isn't it ironical that Chinese capitalism has generated outcomes similar to those taught in Econ 101, whereas American tech industry has spawned monopolistic behemoths? 

Labor markets and automation

1. The Executive Office of the US President has an excellent report on how technological changes affect the labor market, “Artificial Intelligence, Automation, and the Economy”.

It has recommended a slew of policies - raising the minimum wage, strengthening union bargaining power, providing cheaper housing to improve labour mobility, shifting taxes from labour to capital, and massively increasing funding for job training and re-education. It identifies three broad categories of policies to address this - invest in and develop AI for its many benefits; educate and train Americans for jobs of the future; and aid workers in the transition and empower workers to ensure broadly shared growth.

Its broad findings,

Because AI is not a single technology, but rather a collection of technologies that are applied to specific tasks, the effects of AI will be felt unevenly through the economy. Some tasks will be more easily automated than others, and some jobs will be affected more than others—both negatively and positively. Some jobs may be automated away, while for others, AI-driven automation will make many workers more productive and increase demand for certain skills. Finally, new jobs are likely to be directly created in areas such as the development and supervision of AI as well as indirectly created in a range of areas throughout the economy as higher incomes lead to expanded demand... Research consistently finds that the jobs that are threatened by automation are highly concentrated among lower-paid, lower-skilled, and less-educated workers. This means that automation will continue to put downward pressure on demand for this group, putting downward pressure on wages and upward pressure on inequality.

2. Carl Benedikt Frey and Michael Osborne have an assessment of the total share of jobs in different countries which are at "high risk" from automation. They find that the share of jobs at risk increases with decreasing per capita incomes, and the share for India and China stood at 69% and 77% respectively.

Techno-optimists like Erik Brynjolfsson and Andrew Mcafee argue that such automation will be accompanied by the creation of newer categories of jobs. While that is entirely likely, the concern is that those newer jobs may be only a small proportion of the jobs that have been destroyed or displaced. The concern arises from the fact that manufacturing - which has been the single biggest category of productive jobs, with clear pathway of gradual labor market mobility, across countries which have traversed the development trajectory - would be the worst affected by automation.

In any case, automation is not the only challenge facing labor today. In the years ahead, labor markets across the world, including developed economies, will have to navigate four headwinds in the years ahead - premature de-industrialization, stagnating global trade, rising automation, and the declining influence of the multinational corporation. None of the current thinking provides a satisfactory enough answer to addressing them. 

Another headwind for EMs - end of age of multinationals?

From an article in The Economist which predicts that the age of the multinational corporations may be over and the "infatuation with global companies will come to be seen as a passing episode in business history", 

In 2016 multinationals’ cross-border investment probably fell by 10-15%. Impressive as the share of trade accounted for by cross-border supply chains is, it has stagnated since 2007 (see chart 2). The proportion of sales that Western firms make outside their home region has shrunk. Multinationals’ profits are falling and the flow of new multinational investment has been declining relative to GDP. The global firm is in retreat... In 2000 every billion dollars of the stock of worldwide foreign investment represented 7,000 jobs and $600m of annual exports. Today $1bn supports 3,000 jobs and $300m of exports.

As to why is this happening,

That is because a 30-year window of arbitrage is closing. Firms’ tax bills have been massaged down as low as they can go; in China factory workers’ wages are rising. Local firms have become more sophisticated. They can steal, copy or displace global firms’ innovations without building costly offices and factories abroad. From America’s shale industry to Brazilian banking, from Chinese e-commerce to Indian telecoms, the companies at the cutting edge are local, not global. The changing political landscape is making things even harder for the giants.

This is yet more disturbing news for countries like India that are seeking to emulate China's growth path, which rode on manufacturing and foreign direct investment (FDI). Not only is manufacturing, the largest source of commoditized middle-skill jobs, on the decline, now FDI too seems on the wane.   

It may be time to move from courting foreign firms to "make in India" to encouraging local firms to "make in India". Improving the ease of doing business assumes critical significance.