Causation or correlation, institutional deliveries are a step in the right direction.

Karthik has provoked me sufficiently with his comment on my last post on NRHM and reference to this older post by Jeff Hammer and Jishnu Das. And the article is a teachable exhibit. 

First, let's get some facts out of the way. The Das-Hammer observations are till the 2008 period and this is for the 2005-06 to 2015-16 period. The IMR outcomes do not seem to have tapered.

Be that as it may, even if this were not true, I still have several problems with the blogpost. I think it takes theory and the quest for evidence to some extremes. Just a few that pop out egregiously are as follows

1. C-sections get done in the bigger institutions, community health centres (CHCs) and above, rarely in Primary Health Centres (PHCs). While they are undoubtedly a big concern in general, they cannot be the reason for any relative stagnation in the decline in mortality rates due to deliveries in PHCs. 

2. I agree with the logic of the marginal cost/returns and that is a part of the larger state capacity issue itself - state is trying to address a vastly increased scope of its activities with pretty much the same set of institutional, human, and financial resources. 

But I am not sure whether the marginal cost curve has reached the diminishing returns part in case of PHCs and institutional deliveries. My guess would have to be that the average monthly institutional deliveries in PHCs would be 15-20 (and very few would have, say, more than 75). In any case, what is the authors' basis for making their own assumption about the marginal cost argument? It appears to be only a hypothesis? It would have been useful to engage with this hypothesis if it was backed by more evidence of the like I just mentioned.

3. Surely the standards on promotion of institutional delivery and drugs validation process cannot be equated! Do governments need to wait for evidence before promoting institutional deliveries? Or should governments wait to fix state capacity before they promote institutional deliveries? Or should governments stand aside and ask local communities to iterate on institutional deliveries? 

4. Again the author's argument about respecting the decisions of the poor is as much as their thought exercise as the practitioner's explanation of their theory of change. Does it mean that we now question the narrative about people not delivering in hospitals because of ignorance, customs, social norms, religious beliefs, and so on? Do we need evidence on that? In remote areas, and these are very large swathes, transportation is a big constraint on institutional delivery. Do we need evidence to show that this is indeed a constraint?

In all such examples, there are no one or two "starting points" to explain trends and behaviours. There are many, and it varies from region to region. And trying to figure that out on a context basis is obviously ideal, but of no practical relevance in our Bayesian world. 

5. Some other arguments are plain baffling (italics mine),  

Government encouragement of institutional deliveries is based on the idea that poor people choose to deliver at home either out of ignorance or an inability to make the right decisions or due to cultural norms and the exercise of (male) power. But an alternate starting point is that people were not using institutions to begin with precisely because quality was low, and that increasing quality would also bring more people in. In fact, this is the most obvious explanation for the correlation between increasing institutional deliveries and lower child mortality. To base policy on the belief that we can make better decisions over the lives of those who are about to be born than their parents is a stand that minimally requires the onus of proof to be on those who claim such knowledge.

How can we say with any degree of certainty that which of the two, supply or demand sides, are the bigger constraint on institutional delivery? Further, the answer could vary widely across regions, rural-urban, and so on. In fact, there is most certainly no one constraining factor across the general population. Frankly, not only do we not have answers to many of these issues, nor are we likely to ever have satisfactory enough answers to them. 

Right now, we know that given the context in these developing countries, it is a good thing to encourage institutional deliveries. But we need to be simultaneously cognisant of the systemic weaknesses and try to address them. The NRHM has certain institutional features which tried to make some (obviously limited) attempts at this. As a counterfactual, Sarva Siksha Abhiyan allocates nothing to the school to improve learning outcomes (apart from a meagre annual grant to the teacher to make teaching materials). 

Look, I hold no brief for India's health care system, which I will emphatically say is broken and needs fixing big time. But try coming up with a politically acceptable and administratively feasible action agenda (a program to address maternal and child health issues, leave aside a policy for healthcare), conditional on the world as it exists, for scaled up implementation across India!

Let us dispense criticism with some realism. I can understand some academics critiquing other academics for the latter's unquestioning embrace of some models like the NRHM or Chiranjeevi voucher scheme. In fact, this blog has consistently questioned the obviously inflated claims of many government programs. But I cannot understand academic critiques of governments for focusing on institutional deliveries. 

If critiques are to be constructive, it would have to focus on more practical issues. Conditional on the focus on institutional deliveries, what additional resources are required to support the PHCs? What is a reasonable number of deliveries an institution can perform and is there some mechanism to support institutions where they exceed this number? 

May be they are not amenable to academic research publications. Instead, if we disown any priors and open up all boundaries, we are left with idle critiques of no relevance to practitioners. Of course, it is fair to say why should academics be held to that test. Well, that is a different matter and for a latter post.

Is NRHM the most successful healthcare program in the world?

In the dismal world of pervasive program failures in development, India's National Rural Health Mission (NRHM) should stand out as a heartening positive deviance. While it is undeniable that there are fundamental problems like poor quality of health care, which need systemic reforms that go beyond a single program, the NRHM has helped achieve significant improvements in a broad spectrum of health outcomes (maternal and child mortality) and outputs (immunisation, ante-natal care, institutional deliveries etc). 

The most striking indicator is the near doubling of institutional deliveries over a ten year period.

Given the importance of this single intervention of promoting safe delivery, I cannot recollect an achievement of similar scale on any similarly important indicator in any other sector. The contrast with Sarva Siksha Abhiyaan in school education cannot have been starker. Granted the nature of challenges are different. 

The Janani Suraksha Yojana, initiated in 2005, has been instrumental in the success with maternal and child health interventions. It is the world's largest conditional cash transfer program, and makes payments to mothers to undertake institutional deliveries and to community health workers for ante-natal and post-natal visits, institutional deliveries, and immunisations. 

The NRHM's success (as evident from the graphics here) can be traced back to its unique focus on implementation flexibility, untied resource allocations, local accountability, demand-side incentives, and outcomes-based payments. In fact, the NRHM may also be the only example of Payment by Results (PbR) financing that has worked in scale in social sectors anywhere in the world.

India's campaign finance reform journey

The recently passed amendments to the Finance Bill 2017 by the Lower House of the Indian Parliament includes a provision to remove the caps on undisclosed donations to political parties. Critics are right in questioning the wisdom of pushing through such an important decision as part of a Money Bill. And it is most likely that this would be litigated and stuck down by the Supreme Court. 

But their critique that this would weaken campaign finance reforms is arguable. In fact, I am inclined to argue that lifting the cap on corporate donations may be a prudent compromise, though the government may have ended up overreaching with its other elements. 

The conventional wisdom on campaign finance reforms advocate a simultaneous pursuit of transparency (limiting cash donations), competition (capping of donations), and deter cronyism (making their disclosure mandatory). 

While logically unexceptionable and intellectually laudable, I am inclined to believe that this is impractical given the political economy and the scale of transformation that it would entail. Given the prevailing nature and scale of campaign financing, the massive gap between the actual and permissible amounts, and the difficulty of cobbling political consensus on such issues, it is surely unrealistic to expect a simultaneous targeting of all dimensions with one comprehensive strategy. 

A more realistic approach to addressing campaign finance may be to take a few steps at a time. Between the three, it may be prudent to address transparency initially by squeezing out channels of cash donations and ensuring that only clean money enters the political arena. While the decision to dispense with the cap on donations may actually be a practical response, the waiver of disclosure requirements is a retrograde step. The latter becomes all the more so since maintaining the current disclosure requirements would have been politically feasible. 

Instead of the current proposal, it would have been more appropriate and practical to have a much higher cap than the (now amended) 7.5 per cent of the average net profit over the past three years and either retain the current disclosure requirement or link disclosure to the revised cap. A progressive reduction of that cap would then have become the natural phasing of campaign finance reforms. Now, anonymous corporate donations have been given a complete free pass. And future reforms have to battle insertion of the caps on both donations and disclosure requirements.  

The credibility of government's commitment to campaign finance reforms will be measured by complementary measures to strengthen the rigour of audits and tax filings of political parties as well as enforceability of their violations. 

In any case, as already mentioned, I feel that the last word on this enactment may yet come from the Supreme Court, and it is here that some of the aforementioned suggestions can be considered.

Oil industry automation fact of the day

From the Times on the new labor market normal in oil drilling in the US, 

Roughly 163,000 oil jobs were lost nationally from the 2014 peak, or about 30 percent of the total, while oil prices plummeted, at one point by as much as 70 percent. The job losses just in Texas, the most productive oil-producing state, totaled 98,000. Several thousand workers have come back to work in recent months as the price of oil has begun to rise again, but energy experts say that between a third and a half of the workers who lost their jobs are not returning. Many have migrated to construction or even jobs in renewable energy, like wind power... 

Indeed, computers now direct drill bits that were once directed manually. The wireless technology taking hold across the oil patch allows a handful of geoscientists and engineers to monitor the drilling and completion of multiple wells at a time — onshore or miles out to sea — and supervise immediate fixes when something goes wrong, all without leaving their desks. It is a world where rigs walk on their own legs and sensors on wells alert headquarters to a leak or loss of pressure, reducing the need for a technician to check. And despite all the lost workers, United States oil production is galloping upward, to nine million barrels a day from 8.6 million in September. Nationwide, with a bit more than one-third as many rigs operating as in 2014, production is not even down 10 percent from record levels. Some of the best wells here in the Permian Basin that three years ago required an oil price of over $60 a barrel for an operator to break even now need about $35, well below the current price of about $53...

Pioneer Natural Resources, one of the most productive West Texas producers, has slashed the number of days to drill and complete wells so drastically that it has been able to cut costs by 25 percent in wells completed since early 2015. The typical rig that drilled eight to 12 wells a year just a few years ago now drills up to 16. Last year, the company added nearly 240 wells to its Permian Basin inventory without adding new employees.

The start-up story clarification

This is in continuation to this earlier post. Let me clarify. No body can have a problem with start-ups. After all business creation has been a feature of economic life much before Amazon and Uber.

I see three narratives around the start-up story. One, start-ups allow the expression of entrepreneurial talents and energies of the youth. Two, start-ups create jobs. Three, start-ups innovate to create new products and services that enable more efficient utilisation of resources and solve development challenges.

The problem with the first is one of glorification of entrepreneurship, almost to the marginalisation of all else. This trend overlooks the fact that India needs not more entrepreneurship, but more productive jobs. Just as human resource misallocation towards the financial sector has been a problem in the US, it cannot be denied that the best and the brightest could end up being seduced by the hype and glitz of the get-rich-quick narrative associated with the world of IT start-ups. The best and the brightest find even the most high quality jobs unattractive and lose out on the invaluable experience of acquiring the skills and expertise that come with starting a career in good organisations. 

The second and third are even more complicated, with potentially adverse secondary effects. In case of the second, there is the strong likelihood that start-up activity may be crowding-out other activities. Are scarce savings being misallocated towards specific sectors, those which run on IT platforms, at the cost of other more important ones? Would the median entrepreneur have been better served by seeking a job employment? Would the economy have benefited more in the aggregate with a less exuberant start-up environment by channeling top class talent into medium sized firms engaged with making stuff? Would the aggregate job creation been greater with a greater share of wage employment? It is difficult to answer these questions either ways with any degree of certainty.

It is on the third issue that I am least convinced. I will say no more than what has been written here.

The need for regulation in e-commerce

In an earlier post I had raised the issue of how internet firms benefit from regulatory arbitrage. The competitive advantage of the sharing economy firms over their brick and mortar counterparts can be traced to their very low regulatory compliance costs, in terms of entry standards, labor protections and different categories of taxes. 

It was not that any of the externalities from such activities disappeared. But instead of being internalised, as with the case of brick and mortar enterprises, they were socialised away from the internet firm and borne by the tax payers. 

Consider two features of the ride-on-demand (RoD) market in India as against developed markets. One, unlike the US and developed countries where Uber drivers complement their incomes, those in India are largely full-time workers. Second, instead of enabling a more optimal utilisation of an already owned vehicle, Uber drivers here either lease or purchase vehicles or are doing part time with (mostly) informal taxi operators. 

Both these features mean that RoD market in India is not the classic "sharing" economy. In fact, they are often indistinguishable from a regular business with employees and a management. The only difference between a registered taxi operator and Uber is that the former pays all the taxes and adheres to all regulatory compliances. Uber, Ola and Co manage to shift the entire burden away to the tax payers. By using drivers who work for informal taxi operators, likely to be one of the largest categories of drivers, RoD firms are formally leveraging an informal economy platform. 

And the regulatory vacuum encourages perverse incentives,

In India, Uber leases vehicles to drivers through Xchange Leasing — a challenging proposition in a country with no centralised credit score system. “To us, creditworthiness is not a criteria, our goal is to give out leases and give out cars to as many people as possible,” says Amit Jain, president of Uber India. Several thousand cars have been leased through the programme, he said, which uses background checks rather than traditional credit checks. “If somebody cannot pay the monthly amount, they can simply return the car,” he added.

Don't be surprised if a significant portion of those "subsidised" Mudra loans, which the government is promoting to encourage entrepreneurship, is ending up financing Uber and Ola's expansion. And the risk is that when the powder runs short, as it should, and the price sensitive Indian customers inevitably retreat when prices rise to reflect commercial considerations and likely forthcoming regulatory burdens, these loans could end up adding to the already big pile of non-performing assets. 

What is happening in large parts of the e-commerce market is resource misallocation on a fairly significant scale. This is true as much of the so-called "sharing" firms like Uber/Ola and Oyo, as of the broader e-commerce market itself. Amidst this euphoria over start-ups and me-too firms, with their undoubted entrepreneurship (starting and doing a business of any kind in India requires some entrepreneurship!), I struggle to spot the fundamental rationale, innovation.

In this context, greater regulation assume significance. The problem when governments do regulation is that they tend to be excessive. But the problem with no regulation may be worse still!

China update

China's alarming obsession with debt is arguably the biggest concern regarding the country's economic growth prospects. Morgan Stanley's Chetan Ahya puts the scale of the problem in perspective,

China’s debt has risen from 147 per cent of GDP in 2007 to 279 per cent of GDP in 2016. Last year, China added 21 percentage points to its debt-to-GDP ratio, or the equivalent of $4.5tn. In effect, China needed almost six renminbi of new debt to grow its nominal GDP by one renminbi... only two economies which have a population of above 20m have been able to escape the middle income trap, in which rapidly growing economies stagnate at middle-income levels, over the past 30 years. Those were South Korea and Poland.

But, despite this, there is a rising tide of opinion that China may have done enough to overcome the worst fears. A recent Morgan Stanley China report clearly came out bullish on China. Its arguments for macroeconomic stability focus on Chinese debt being funded domestically, its very big external balance sheet with net international investment position of 16% of GDP, low inflation effect due to credit allocation being used to fund investment, political acceptance of lower growth going forward, potential for rebalancing towards consumption, reforms to transition away from low value manufacturing, and the sure signs of moving towards high value added manufacturing. 

This blog has been inclined to the view that China's growth momentum was built on strong enough foundations and, coupled with its unique size and fairly enlightened government unencumbered by the troubles of democratic politics, meant that the country could potentially tide over these problems without a hard landing. It has built everything that India does not have - human, physical, financial, and institutional capital - to sustain a high (relative to its income levels) growth trajectory. 

However, there are two concerns. The size of debt is massive and these numbers do not accurately reflect the non-bank sector debts. For corporates and local government entities, an orderly deleveraging cannot be taken for granted. Apart from the economic contagion from lurking potential too-big-to-fail dangers, there is also the likelihood of social disruptions from job losses and so on.  

Further, despite its net positive external investment position and foreign exchange surpluses, that channel may not be as secure as we believe. In a couple of years, a trillion has been wiped off from the reserves, and a significant proportion is not liquid enough to be drawn for use. In case of external and, more critically, internal events, if the renminbi becomes a one-way downward bet, then the flight of domestic savings capital from China itself and efforts to prop up the currency could end up rapidly eating up the reserves buffer. And then we could have a different scenario.

I am therefore not surprised that Michael Pettis holds the view of a "gradual decline in GDP growth to below 3 percent by the end of this decade, or shortly thereafter". 

India's digital opportunity to overtake China

The Economist has an excellent story about the spectacular growth of China's online financial intermediation market,

By just about any measure of size, China is the world’s leader in fintech. It is far and away the biggest market for digital payments, accounting for nearly half of the global total. It is dominant in online lending, occupying three-quarters of the global market. A ranking of the world’s most innovative fintech firms gave Chinese companies four of the top five slots last year. The largest Chinese fintech company, Ant Financial, has been valued at about $60bn, on a par with UBS, Switzerland’s biggest bank... Its fintech giants have shown what can be done. For emerging markets, the lesson is that with the right technology, it is possible to leapfrog to new forms of banking. For developed markets, China offers a vision of the grand consolidation—apps that combine payments, lending and investment—that the future should hold... For about 425m Chinese, or 65% of all mobile users, phones act as wallets, the world’s highest penetration rate, according to China’s ministry of industry and information technology. Mobile payments hit 38trn yuan ($5.5trn) last year, up from next to nothing five years earlier—and more than 50 times the size of the American market.

This carries the greatest relevance for India, where digital transactions market may be just about to explode. And it carries one advantage which even China cannot boast of, Aadhaar, the biometric identity which already covers more than a billion Indians.

I can foresee the potential of five disruptions in the retail payments market from the initiatives already underway. 

1. The RuPay payment gateway has, as I blogged earlier, the potential to break the oligopolistic stranglehold of Visa, MasterCard, and Amex on the payment gateways market. 

2. The Unified Payment Interface (UPI) supports immediate transfer of money between different bank accounts. It addresses the challenge of inter-operability among different banks and merges several banking features, seamless fund routing and merchant payments into one interface. It also dispenses with smart card based validation and provides competition for payment wallet services like PayTm. Users can download the respective bank UPI app. 

3. The BHIM app is a digital payments app based on UPI that is promoted by the National Payment Corporation of India (NPCI), and has the potential to disrupt the market for e-wallet services. It uses the Aadhaar number for transacting over the UPI, it also has the potential of becoming the go-to immediate payment interface, eliminating the need to have individual bank UPI apps. It overcomes the limitation of existing e-wallet providers who require transferring money into the wallet and closed loop nature of transactions (transfers only from one wallet account to another), and offers the same set of services by directly intermediating with your existing bank account.  

4. The Aadhaar Enabled Payment System (AEPS) potentially dispenses with the the need for intermediaries like wallet service providers by using Aadhaar to achieve single-click two factor authentication. 

5. The BharatQR Code is the world's only interoperable payment system across merchant outlets. It creates a single national standard for all QRCode based transactions. This interoperability means that it can potentially dispense with Point of Sales terminals. The BHIM app supports BharatQR code based transactions, thereby raising the possibility of all kinds of immediate payment transactions with Aadhaar validation, without any intermediary service providers between the bank and the user.   

In countries where trust in online payment mechanisms and private financial intermediaries is a major constraint, government intervention may be useful to catalyse the market. A rural user is far more likely to trust a government sponsored financial intermediation than a similar service offered by a private provider. The challenge for the government is to understand when and where to step back and let the market take-over. 

Interestingly, all these are focussed on the payments side. Unlike the Chinese market, none of these innovations cover the lending and investing parts of the intermediation market. That may be the next frontier. And this again from China assumes significance for India's financial inclusion campaign,

Until recently, Chinese savers faced two extreme options for managing their money: stash it in bank accounts, where interest rates were artificially low, but it was as safe as the Communist Party; or punt on the stockmarket, about as safe as playing baccarat in a casino in Macau. In the middle there was nothing... The biggest breakthrough was the launch of an online fund, Yu'e Bao, by Alibaba in 2013... promoted as a way for people to earn interest on the cash in their e-commerce accounts... Invested through a money-market fund... this meant that savers could get rates that were more than three percentage points higher than those banks offered. And risk was minimal, because their cash was still ultimately in the hands of banks. Yu’e Bao attracted 185m customers within 18 months, giving it 600bn yuan of assets under management... In 2014 Tencent launched Licaitong, an online fund platform linked to WeChat. Within a year, it had 100bn yuan under management... In the West people generally need deep pockets before they can afford to buy into products such as money-market funds. In China all it takes is a smartphone and an initial buy-in of as little as 1 yuan. WeChat, with 800m active accounts, and Ant, with 400m, can afford to be generous.

Weekend reading links

1. Livemint raises the important question of the negative network externalities that are likely to be engendered if the e-commerce firms go bust,

If Ola and Uber reduce their incentives further, what will be the impact on drivers who purchased cars using bank loans? How will banks deal with a high inventory of repossessed cars of similar make? What will be the effect on the public transport system when there is a sudden increase in passenger load? How smoothly will retailers navigate the journey from the brick-and-mortar channel to the online channel and back? How will retrenched employees convince prospective employers that they will remain committed and satisfied at a much lower salary? Will the concurrent failure of multiple businesses taint India’s reputation as an investment destination?

This draws attention to a less discussed fact about the e-commerce and a significant share of internet business - they have benefited enormously from regulatory arbitrage. The examples of a regular taxi business and Uber or a hotel and an AirBnB clearly highlight the regulatory advantages enjoyed by internet companies that help them maintain very clear competitive advantages over their brick and mortar counterparts. There is little doubt that this advantage is unsustainable and should go.

2. From a fascinating story in the Times about Dubai and its weak adherence to the rule of law in contracting and the treatment meted out to migrant workers,

Some eight million migrants reside in the United Arab Emirates, according to the United Nations, or roughly 84 percent of the population — the largest concentration on earth... “There is a huge dependence on migrant workers who have employment terms that are no different than indentured servitude,” said Sarah Leah Whitson, director of the Middle East and North Africa division of Human Rights Watch, an advocacy group that has documented abuses of migrant workers in the neighboring emirate of Abu Dhabi. “This is a system that’s put in place to entrap workers.”

3. The marginal corporate tax rate is a very misleading indicator of actual tax incidence. Times points to this study which examined data on federal income taxes paid by those 258 Fortune 500 companies that did not suffer a loss for any year during the 2008-15 period,

Although the statutory corporate tax rate is 35 percent, collectively, these companies paid an average effective rate of 21.2 percent... 100 companies enjoyed at least one year in which their federal income tax was zero or less. 24 companies paid zero taxes in four out of eight years. 18 companies (including General Electric, International Paper, Priceline.com and PG&E) paid no federal income tax over the eight-year period. Collectively, the 258 corporations enjoyed $513 billion in tax breaks over the last eight years. More than half of those tax breaks, $277 billion, went to just 25 of the most profitable corporations.

Tax avoidance among multinationals by shifting revenues to off-shore entities in low tax havens and complex holding patterns make tax avoidance the most sought after part of tax advisory services of big consulting firms. Senator Bernie Sanders has this stunning factoid,

“The truth is that we have a rigged tax code that has essentially legalized tax dodging for large corporations. Offshore tax haven abuse has become so absurd that one five-story office building in the Cayman Islands is now the ‘home’ to more than 18,000 corporations.”

Apart from this companies benefit from accelerated depreciations and selling stock options to executives (Facebook saved $5.78 bn in taxes through this from 2010-15). 

In India too, corporate tax exemptions distort the tax incidence data. For example, in the 2016-17 assessment year, of the 5,97,884 tax returns filed, 43.17% reported losses, 3.01% nil profit, and just 53.82% reported profits of Rs 12.67 trillion. The effective tax rate was at a very high 28.24 per cent, among the highest in the world. The revenues foregone from all direct tax exemptions in 2015-16 was Rs 1.63 trillion. 

4. Even as India's cities expand placing ever increasing burden on municipal governments, their own source revenues have been declining.

5. The Economist captures the woes of the global shipping industry swimming on the back of over-capacity,

the Baltic Dry Index—a measure of bulk freight rates—has fallen by 93%. Prices for transporting containers have plunged by the same amount on some routes. In 2008 it cost $2,000 to send a 20-foot box from China to Brazil; now it costs $50.

The FT points to the scale of excess capacity,

VesselsValue, a company that monitors the value of the world’s ships, says 2,028 container vessels are currently valued at or below their value as scrap metal, with the other 3,242 vessels in the world valued at more than scrap. In volume terms, 7.3m teus (20ft-equivalent units), or nearly a third of the global fleet, is at or below scrap, with 16.2m teus above. The situation may be about to get worse. Alphaliner, a company that monitors ship construction, says total shipping capacity will grow by an average of 4 per cent a year in 2017 and 2018, on top of existing idle capacity of 7 per cent. The biggest problem is in mega-ships: more than 150 new ships with the ability to carry more than 10,000 teus at a time will be delivered by the end of next year.

6. India appears to have experienced the fastest increase in housing prices since 2010 as per the Economist house price index.

The reasons for the obsession with "evidence"

I had blogged earlier about the contrasting views of evidence in development. While the academia and funders in developed world are obsessed with evidence, their implementing counter-parties in the developing world, even the most perceptive ones, show far less interest. What explains this divergence?

I can think of three immediate concerns. 

1. One is a reaction to a long history of frustration in trying and failing to make development happen in these countries. The likes of William Easterly channel this as the latest version of the colonial conceit. The logical response to this frustration was to rationalise that we do not know the context and   therefore need to allow the primary stakeholders to experiment and figure out what is best for them. And an objective evidence dimension to that process of discovery, and a part in it, is possibly the only direct role for outsiders. In fact, given the priors, it can be the best "risk mitigation" instrument to avoid wasteful spending. 

2. The field of academic research in development economics today, for whatever reasons, is excessively aligned in the direction of field experiments. The logical neatness of the associated theory of change and the amenability to statistical rigour (with its aura of scientificity), makes field experiments and evidence generation very attractive. The requirements of paper publication contribute to and amplify this trend.  

3. Donors, private and public, are faced the same procurement challenge that governments have always grappled with. What is the baseline basis for their investment? Government procurements address this by establishing a price discovery mechanism. For donors, evidence has become the very convenient baseline. So, if there is a rigorous enough evidence, then other things being equal and given conformity with the broad investment criterion, the investment passes the most fundamental due-diligence test. It is therefore no surprise that like with governments trying to refine their bid parameters, donors try to hone their evidence base. 

I have no response to the second and third explanations since they are essentially structural incentive problems. They have nothing to do with the field challenges of making development happen in developing countries. The first one demands a response and I have tried to make a case here and here.

As a very strong disclaimer, lest this be misconstrued, this is no argument against evidence. Readers of this blog would doubtless appreciate my strong advocacy of the use of evidence and support for the iterative approach to program scale up. 

It is just that the obsession with evidence, bordering on developing first principles every time, is a frustrating digression. Unfortunately, it ends up detracting significantly from the likelihood of achieving the objective and is no less bad than the earlier version of micro-managed aid. 

China industrial policy - electric car battery edition

Forget Tesla, the disruption in battery market is more likely to come from Chinese companies like BYD and CATL. The FT has a nice article that highlights China's massive industrial policy push to promote battery makers for electric cards and dominate the global market estimated to reach $40 bn by 2025. The country is already the world's largest supplier of lithium-ion batteries.

Backed by aggressive government policies —ranging from subsidies for electric vehicles to restrictions on foreign rivals — China’s battery companies are beginning to dominate an industry which has been led for three decades by South Korean and Japanese manufacturers such as Panasonic, which makes the battery cells for Tesla cars. Beijing last week called for companies to double electric vehicle battery capacity by 2020 and encouraged them to invest in factories overseas... China’s approach has echoes of the one it took on solar power a decade ago. It dominated the industry by lowering costs and driving prices down by 70 per cent and could do the same for batteries...

Beijing released a list of companies allowed to supply batteries in the country. Not a single foreign company was included. Separately Beijing released draft guidelines at the end of last year that said car battery manufacturers would need to have at least 8 GWh of production capacity in China to qualify for subsidies — a target that only BYD and CATL can meet... China seeks to acquire world-class foreign battery technology while keeping overall Chinese ownership and control... It has been very careful to cultivate local battery champions while using licensing procedures to hold foreign companies at bay... Because the Chinese have artificial government protection they are able to grow scale that’s bigger than the Koreans..

And the scope of industrial policy goes far beyond the conventional use of such policies,

Even more than the subsidies or barriers to foreign operators, the greatest advantage for Chinese battery manufacturers over rivals such as Tesla is access to raw materials. Chinese companies have been making inroads over the past year into the lithium-ion supply chain, buying up mining assets from cobalt to lithium to help cut costs. This year Ganfeng Lithium, one of the country’s largest producers of the battery chemical, bought a 19.9 per cent stake in an Argentine lithium project. The deal followed on the heels of a purchase last year of a 2.1 per cent stake in Chile’s SQM, the world’s largest lithium producer, by Tianqi Lithium. Similarly in cobalt, China Molybdenum, a mining company partially owned by a Chinese local government, paid $2.65bn last year for the Tenke mine in the Democratic Republic of Congo. The mine contains one of the world’s largest concentrations of cobalt and offers “security of supply of a critical battery material for decades to come”.

When India pursues industrial policy, it would do well to look beyond the likes of Apple and Amazon and promote the likes of battery cars and artificial intelligence. 

The problem with first right of refusals

The Tata-owned Indian Hotels Co Ltd (IHCL), whose 33 year lease on New Delhi's Taj Mansingh Hotel expired in 2011, had moved the Supreme Court of India to stall the auction of the hotel property by its owners, the New Delhi Municipal Corporation (NDMC). IHCL demands the right of first refusal in the auction. The Supreme Court's verdict will be critical for the future of infrastructure concessions in India. 

It does appear that the original concession did not have a right of first refusal. The NDMC, dictated by the Government of India's policy to divest stakes in hotels, was therefore well within its right, to pursue this course of action. Even if available, a first right of refusal would have obviously deterred competition and benefited IHCL just as much as it would have caused loss to NDMC. Why would any serious bidder spend non-trivial amounts and significant time and effort to bid for a project where the bid structure heavily favours the incumbent whose stakes in winning the bid are, in most cases, likely to be far higher than that of any bidder? No structuring, including reimbursing costs for the highest bidder, will mitigate this incentive problem. It is apparent that while giving concessions, all sides underestimate the challenge of re-possession. 

Thousands of long-term concessions of assets ranging from land to utilities have been given to private providers through PPP contracts across India. The bulk of these concessions have been given in the last decade and half. Local government and parastatals have been the biggest participants. Many of them will be expiring over the coming decade. The Supreme Court's decision will strongly influence and set expectations in all these cases. 

This also raises questions about the appropriateness of the concept of first right of refusal. Most concessions, especially on land assets, accord first right of refusal to the concessionaire. But as we know, first right of refusal effectively kills competition and prevents fair price discovery. So why should there at all be the first right of refusal?

After all, governments do such concessions with the financial calculation that they will earn royalty or lease revenues and be able to repossess the property with a depreciated asset (typically a building in case of land or a utility network or facility). The concessionaire makes the bid with an assessment that it will recover the cost of investment and make an acceptable profit. The concession is a self-enclosed financial transaction, one which equilibrates the returns of both parties. 

In the circumstances, given its strong likelihood of deterring competitive price discovery, a first right of refusal distorts incentives and favours the concessionaire. 

The argument in favour of the first right of refusal is, assuming the continuation of the activity, that the incumbent is best positioned to do it most efficiently. But what if the government does not wish to continue the activity? Or what if there are equal or more competent alternatives? 

In any case, I struggle to find a compelling case for the first right of refusal in long-term concessions.

The return of bad loans resolution debate

Arguably the biggest obstacle to India's medium term economic growth prospects is the twin-balance sheet problem. It is therefore unfortunate that it has not received the sort of attention that it deserves. 

The new deputy governor of the Reserve Bank of India, Viral Acharya, has re-ignited the debate with a comprehensive proposal involving a two-track approach. He proposes the establishment of a Private Asset Management Company (PAMC) and a National Asset Management Company (NAMC) as private and quasi-government entities to resolve assets categorized based respectively on short-run and long-run economic value realisation. 

This broad contours syncs well with the proposal laid down by Ananth and me here. See also the blogposts here, here and here. The details of the proposal is here. The only differences being that instead of direct sales to ADCs or other buyers, he suggests a PAMC route to manage resolution and sales, and he also proposes the establishment of a new NAMC instead of leveraging an existing institution like the NIIF or IIFCL. In fact, this blog's proposal goes beyond what the Deputy Governor suggests and offers two more alternatives - sale of some assets to PSUs like NTPC, and bundled auctions of certain other types of assets like steel facilities. These two are potentially easier to tackle and can be the trigger points to catalyse the process. 

This blog feels that using existing institutions may be better than the creation of new institutions. For a start, new institutions will take time. For example, the NIIF, despite its creation more than a year back is yet to have a full-fledged team and the appointment of its CEO took more than six months. Creation of another PAMC will duplicate expertise currently available with IIFCL and NIIF, both of which are themselves sorely under-utilised. 

On the private side too, existing AMCs, ARCs, PE, and private infrastructure funds can be invited to  participate in the auctions and manage these assets. This is all the more relevant since the PAMC will also end up floating several funds or special purpose entities to resolve and revive the vast portfolio of such distressed assets. Further, establishing one or more PAMCs, as fully private entities, and allocating assets to them will raise its set of problems of price discovery etc. Finally, mobilisation of skilled resolution and revival professionals for these new AMCs may take inordinately long times.  

As with all such grand plans, the devil is in the details. Some of them will doubtless emerge as thorny issues - credibility of the credit ratings, stripping and removing existing management, co-ordination problem among banks, avoiding promoters sneaking back as buyers etc. Consider the following,

Haircuts taken by banks under a feasible plan would be required by government ruling as being acceptable by the vigilance authorities. Sustainable debt would be upgraded to standard status for all involved banks. The promoters, however, would have NO choice as to what restructuring plan is accepted, and may potentially get replaced and/or diluted, as per the preference of and depending on the price at which the new managing investors come in.

This is all fine to say. Government can always lay down the process and decision criteria. The vigilance findings will generally revolve around some process details. But it is not possible to cover all contingencies. Post-facto, with the benefit of hindsight, some omission, always likely, will get packaged as part of a criminal conspiracy. And even if the vigilance authorities are kept out, PILs and Courts cannot be. And about prohibiting promoter's choice, it is always likely that they will raise some interpretation of a procedural lapse, again difficult to avoid, and litigate.

In any case, what ever be the details of the process adopted, there will be two critical challenges. 

1. The biggest challenge to the whole process will have to be in figuring out the most (likely to be) acceptable mechanism for price discovery. After all, nothing about the process will be more scrutinised and more critical to the success of the proposal than the degree of haircuts. In such cases, there are no fair valuations, howsoever objective, since judgements on such valuations are always made on post-facto considerations. A haircut arrived at through a professional approach of evaluating alternative resolution plans is no guarantee against post-facto scrutiny. Procedural lapses and process vitiations are always round the corner. Given the size of the problem, as the process proceeds, auctions are likely to generate single bids or no bids, thereby necessitating revised bids, again only to generate single bids. Further, a handful of asset managers could corner the vast proportion of the best assets and make handsome gains down the line.   

Therefore, we may need to make prudent compromises. A Committee headed by a very credible retired judge of the Supreme Court (Justice Sri Krishna?) can be given the mandate to approve the haircuts. This will both ease the vigilance fear as well as possibly limit excessive judicial trespass. 

2. Then there is the issue of recapitalisation. There is only so much that can be raised for recapitalisation through equity dilution upto 51%. Even this will run into political difficulties. Dilution below 50% is a political taboo and may not be desirable too given the distressed valuations. Therefore, the vast majority of recapitalisation will have to come from the government. It will be a few times more than the proposed Rs 70,000 Cr over the 2014-19 period. And there is also the additional capital required to meet the Basel III norms. 

In the circumstances, the banks may need at least a 0.5% of GDP annual recapitalisation for the coming 4-5 years.

Finally, apart from the Deputy Governor's caution on cherry-picking parts of the proposal and ignoring others, it would be necessary to complement this proposal with the provision of real operational autonomy so as to increase valuations and set the stage for phased divestments. 

The US-Russia relationship is a hostage to Trump-bashing

Arguably one of the two most important international strategic relationship, between the US and Russia, has become a hostage to US domestic politics. 

Even liberals, who otherwise would have supported efforts to improve relations, are now blinded by their hostility to the President and are likely to see red in anything that is conciliatory and aimed at improving relations. Egged on by the media, all sides in the debate have boxed themselves into corners from where compromise looks very difficult. As President Trump has himself said, it is now virtually impossible for his administration to make any effort to improve relations. Or as Edward Luce writes, "Donald Trump is never likely to emerge from the Russian shadow". 

The debate has now degenerated into one where even the mere contact with designated Russian diplomats, a normal course of activity, has come to be viewed with extreme suspicion. The travails of Sergey I Kislyak, the Russian Ambassador in Washington, is symptomatic,

He has told associates that he will leave Washington soon, likely to be replaced by a hard-line general... For Mr. Kislyak, Washington is no longer the place it once was. It has become lonely, and he has told associates that he is surprised how people who once sought his company were now trying to stay away.

This is really unfortunate. It is difficult to not get the impression that Kislyak is a victim of his own success. He has done exceptionally well what every diplomat ought to be doing, expand your country's influence by cultivating important contacts in your host country. 

I am certain that Russia tried to influence the elections. But is there anything odd about that? Russia must have tried to influence every US election and vice-versa. It is no secret that US has supported the likes of Anatoly Chubais and Yegor Gaidar and theirs and other dissident political formations for years. Just recently, President Obama lent his weight behind the No campaigners in the Brexit vote in UK. The CIA has a very long history of trying to influence elections across the world from Philippines to Iran to Panama. Other countries do the same in countries with strategic interests. Real politik dictates that there is nothing unusual about this. 

Where the story can become poisonous is if the influence was used to campaign for their preferred candidate, the attempt succeeded, and the successful candidate is now willing to do Russia's bidding. In other words, Russia used its influence to instal their proxy in the White House. 

This means that despite candidate Trump's low electoral prospects, the Russians had enough conviction and backed him to pull it off. And that Trump is effectively a Russian stooge, at the least willing to compromise US interests in return for personal factors or succumb to blackmail. Even with Buzzfeed and other salacious stuff going around, I am not yet willing to buy this story.

I am inclined to believe that only a small proportion of people go this far, in suspecting their President of being a stooge. The vast majority feel indignant at Russian attempt to influence the elections. These two are qualitatively different positions, though lumped together and conflated by media characterisation. This is unfortunate since the latter, indignation, while understandable is ill-informed, and ought not to be a cause for holding the Russia-US relationship hostage.

Performance contracting in roads fact of the day

From an EBRD study of performance based contracting of maintenance in roads sector,

Every 1 euro/dollar of deferred maintenance today results in 3 euro/dollars needed in rehabilitation tomorrow.

This is evidence as clear as it gets. But governments, both in developed and developing countries, skimp on O&M despite knowing fully well that delayed maintenance or lack of preventive maintenance (say, for utility networks or motors) is only increasing the ultimate repair costs. 

The only solution to this is to outsource maintenance with a performance contract that lays down standards or service levels. In order to meet contractual obligations, the private contractors have to perforce do preventive and pre-emptive works. Another reason for outsourcing the maintenance of infrastructure assets. 

Academic research and development

Consider the big development challenges of our times. What can be to done to achieve learning outcomes or equip youth with skills development? How do we address the pervasive weaknesses of health care systems at all levels? What initiatives can enhance state capacity? How do we address two of the most debilitating sources of corruption and erosion of state capacity in all developing countries, public procurements and personnel deployments? How to improve urban governance? What can other developing countries learn from China's success? 

Unfortunately, none of these questions are amenable to neat field experiments and empirical analyses with focus on big micro-data. But focus of academic research and exploration in these areas have largely been confined to these approaches. In fact, most often, the enquiry does not even start with these problems, and instead focus on marginal dimensions and considerations. 

The occasional forays are confined to documenting best practice models. The large multi-lateral organisations, given the nature of their processes and incentives, are the only ones interested.

But unfortunately, a long history of bad experiences with the transplantation of best practice models has stigmatised even the mention of best practices. I would argue that an analysis of a best practice (or positive deviance) and its iteratively adapted implementation is far more valuable than the findings from realms of research that get generated every year as field experiments.

The demands of academic publication mean that ethnographic studies that examine systems and processes have become marginalised. Further, these approaches look unsexy without any math. The result has been a crowding out of academic effort away from such invaluable qualitative studies. This, I believe, has been a big (and most unfortunate) casualty of the obsession with evidence. 

It also draws attention to the excessive "economisation" of development, at the cost of insights from other disciplines. I have not come across any compelling argument that the theories and methodologies of economics should supersede those of sociology or political science and claim more wisdom in being able to address any of the aforementioned questions. It is of course a different matter that the purveyors of these other disciplines have largely stayed away from engaging with such real world challenges.

NIMBYism, community participation, market failures, and slum redevelopment

Conventional wisdom would have it that information asymmetry increases higher you move from the cutting edge. In economics, this translates into the belief that individuals know what is best for them and individual choices are reflected in the market mechanism. In case of governments, this underpins the case for decentralisation. 

Richard Florida highlights the challenge of NIMBYism in easing zoning regulations and expanding housing supply in cities. The prevailing institutional mechanisms give an effective veto to local residents in such land-use decisions. He points to a new paper by Paavo Makkonen that, among other things, has this to say

The paper joins a growing chorus of urban economists and urbanists who call for shifting land use decisions away from the local level and toward the metropolitan or even the state level. This would make it more possible to design a policy that encourages an increase in overall density—but would also require checks and balances to prevent abuses of less-advantaged neighborhoods.

This is clearly an example of a failure of excessive community empowerment. Local land owners privately appropriate most of the benefits of the city's development, for which their contribution is marginal or negligible. And they are sufficiently empowered to oppose any efforts to socialise even a share of these benefits. 

This reminds me of one of the less discussed problems of the current model of urbanisation, one this blog has raised on several occasions. As cities grow, the scarcity of buildable land intensifies driving up property prices, forcing redevelopment and gentrification of blighted and more affordable localities. In fact, the entire urban core becomes gentrified, with those who cannot afford housing being marginalised to the suburban doughnut. Even the affordable housing mandates in all these cities are only marginally useful since the rents are so high that such units are affordable to only the middle class. This is a serious market failure in the prevailing models of urbanisation in developed countries. 

Interestingly, the politics of urban areas in developing countries like India may have, unwittingly, become good antidotes to the wholesale gentrification of Indian cities. Slum-dwellers, collectively, form influential political constituencies. In other words, the frustrating failure to progress with slum-redevelopment on Public Private Partnerships (PPPs) in India may after all be a blessing in disguise. 

It is perfectly plausible, even most likely, that if these slums get redeveloped with a combination of good housing units for slum dwellers and commercial developments, then its gentrification is almost inevitable, only a matter of time. Even with all the regulatory restraints on resales,  it is impossible to fight the inexorable dynamics of market forces, dictated by rocketing prices in the city's central areas. The incumbents are most certain to sell off and be displaced further away from their livelihoods.