India Middle Class fact of the day

This blog has persistently hammered away at the possibility that India's much discussed middle class may after all be far smaller than estimated. One more data point is from this assessment from the India Human Development Survey conducted by the National Council of Applied Economic Research (NCAER) in 2011-12. 

Just 3% of Indians, or about 7-8 million households, own all the five things generally associated with middle-class status! In fact, nearly 65% of Indians own either none or just one (most likely a television) of the things, and 80% just two. As Livemint writes, the scale of transformation required is simply staggering. And the vast majority of discussion just don't realise this. 

Update 1 (16.05.2020)

About the Indian consumption class,

According to the Azim Premji University’s state of working India report of 2018, about 85% of India’s workforce earns less than Rs 10,000 a month. About 50% earns less than Rs 5,000 a month, or less than Rs 166 a day.

Weekend reading links

1. Nick Bloom has this explanation for increasing inequality,

The real engine fueling rising income inequality is “firm inequality”: In an increasingly winner-take-all or at least winner-take-most economy, the best-educated and most-skilled employees cluster inside the most successful companies, their incomes rising dramatically compared with those of outsiders. This corporate segregation is accelerated by the relentless outsourcing and automation of noncore activities and by growing investment in technology... studies now show that gaps between companies are the real drivers of income inequality. Research I conducted with Jae Song, David Price, Fatih Guvenen, and Till Von Wachter looked at U.S. employers and employees from 1978 to 2013. We found that the average wages at the firms employing individuals at the top of the income distribution have increased rapidly, while those at the firms employing people in the lower income percentiles have increased far less. In other words, the increasing inequality we’ve seen for individuals is mirrored by increasing inequality between firms. But the wage gap is not increasing as much inside firms, our research shows. This may tend to make inequality less visible, because people do not see it rising in their own workplace. This means that the rising gap in pay between firms accounts for the large majority of the increase in income inequality in the United States.

2. Fascinating series of graphics in Citylab that captures the evolution of urban planning.

3. The Economist has a nice graphic from the work of Zhang Qiang et al which tries to capture the deaths due to global air pollution arising from physical transport of particles and trade of goods and services. 

The headline takeaway,

Rich countries are exporting air pollution, and its associated deaths, as they import goods.

Countries like India are importing air pollution related deaths as they export products! Or when Trump talks next time about what other countries should do to reimburse America, he should be asked what US will pay to compensate the victims from its consumption.

4. Fascinating study by Wendy Williams and Stephen Ceci about how perceptions cloud opinions, in the context of the liberal opposition to a speech by Charles Murray (of "Bell Curve" fame) at Middlebury College, Vermont,

So we transcribed Mr. Murray’s speech and — without indicating who wrote it — sent it to a group of 70 college professors (women and men, of different ranks, at different universities). We asked them to rate the material on a scale from 1 to 9, ranging from very liberal to very conservative, with 5 defined as "middle of the road"... American college professors are overwhelmingly liberal. Still, the 57 professors who responded to our request gave Mr. Murray’s talk an average score of 5.05, or "middle of the road"... No one raised concerns that the material was contentious, dangerous or otherwise worthy of censure. We also sent the transcript to a group of 70 college professors who were told that the speech was by Mr. Murray. The 44 who responded gave it an average rating of 5.77. That score is significantly more conservative, statistically speaking, than the rating given by the professors unaware of the author’s identity (suggesting that knowing Mr. Murray was the author colored the evaluation of the content). Even still, 5.77 is not too far from “middle of the road.” Finally, we divided Mr. Murray’s speech into 10 portions and got ratings on each portion from a paid sample of 200 American adults via Amazon’s Mechanical Turk, an online marketplace for jobs and tasks. These participants identified themselves as having an average political orientation of 4.21, or leaning slightly liberal. When their ratings for the 10 sections were averaged, they too gave the talk a centrist score: 5.22. (Average ratings for the 10 portions ranged from 4 to 6.)

5. So the "build and they will come" approach to opening bank accounts may after all have been an effective strategy. A new paper disaggregates various confounders and find evidence of rising active transactions (cash deposits or ATM withdrawals as against interest debits or DBT transfers) for the period Aug 2014 to Nov 2016,

We find that the number of active transactions per account transacted by PMJDY account holders starts off slow but increases with the age of the account... Active transactions initiated by account holders represent nearly 45% of all transactions... account balance grows steadily with time. This shows that PMJDY accounts are also used for accumulating savings... Finally, in line with the national numbers, we find a steady decline in the number of zero-balance accounts... Simply opening the gates of the formal sector seems to bring in the excluded.

The low baseline access surely helps. But instead of sitting on the laurels, the challenge now is to increase utilisation.

6. The extend and pretend continues with the stalled projects, and things are getting worse. Livemint reports that while the proportion of stalled private sector projects climbed to a 52 quarter high of 20.2% in the March quarter, the growth of new project announcements hit a 10 quarter low.

The breakup of the reasons for stalling show this.

But, as I blogged earlier, these stats conceal more than they reveal. A very significant proportion of these projects are fundamentally unviable projects which need to be scrapped and losses apportioned among all concerned. Extend and pretend will only keep increasing the final cost.

7. How about something similar to this for India?

The Paperwork Reduction Act in the US requires the government to justify any information it seeks, explain how it will be used, and to estimate how much effort it would take for a person to provide this. No form can be introduced until it has been approved by a specialist agency with expertise in process design. The US government publishes an estimate of the total time required by citizens to fill its forms and strives to reduce this.

At the least a first order costs-benefits analysis before any form is notified or issued by a government agency?

8. Livemint has a very good story of why increased production of tur dal in 2015-16 has led to demand for farm loan waivers for farmers in Maharashtra. While the two preceding years were drought hit, it led to central drought relief measures as well as loan reschedules, the combined effect of which significantly mitigated the suffering. In contrast, in 2016-17, the distress has been market-driven,

Both the centre and state appealed farmers to plant more pulses, oilseeds, and move away from sugarcane and cotton. Farmers responded by producing a bumper crop of pulses, especially tur... Maharashtra is estimated to have produced 1.1 million tonnes of tur this year as compared to only 440,000 tonnes in 2015-16. The MSP for tur has been fixed at Rs5,050 per quintal but farm activists and experts say farmers are being forced to sell for Rs3,000-3,500 to traders since the government procurement agencies claim they do not have the infrastructure to store tur on this scale. An official at the state’s agriculture marketing department said the various government agencies had managed to procure only 340,000 tonnes so far for Rs1,600 crore, of which dues worth Rs300 crore are yet to be paid to farmers. Farmers don’t have holding capacity and so, they are forced to sell to traders at a lower price if the state procurement agencies refuse to buy.

9. The defeat of AAP in the Delhi municipal election results have ensured that property taxes will not be abolished in the City. Important, because of this,

Property tax is the single most important source of revenue for municipal corporations and municipalities. It accounts for 30 per cent of “own” municipal revenues in India... Total municipal revenues in India declined from 1.08 per cent of the GDP in 2007-08 to 1.03 per cent in 2012-13, the latest year for which this information is available. The same ratio is 6 per cent in South Africa and 7.4 per cent in Brazil. What is more, the transfers from the state governments in India are neither guaranteed nor predictable. In South Africa, the transfers are determined and announced at the time of the annual budget.

10. FT reports that emerging markets have overtaken developed economies in filing of patents.

The 12 leading EM nations applied for 1.49m patents in 2015, outstripping the 1.48m in developed market countries, according to figures from the World Intellectual Property Organisation, collated by Comgest, a Paris-based asset manager... The figures are a far cry from 2004, when the 12 emerging market countries, which account for the vast majority of developing world filings, made just 372,000 applications, 29 per cent of the 1.3m made by the advanced world.

11. The latest in urbanisation from China is the announcement of the development of Xiongan New Area as a greenfield city in Hebei province, two hours from Beijing, with the objective of decongesting the capital. The project is backed by President Xi Jinping. It is expected that this sleepy backwater with agriculture will house many universities and other institutions to be relocated from Beijing, 

It’s also intended to ease the pressure on Beijing, the capital city that plans to cap its population at 23 million by 2020. Morgan Stanley expects the investment in infrastructure and relocation to run about 2 trillion yuan ($290 billion) in the first 15 years... It spans three counties. The infrastructure build-out will cover 100 square kilometers initially, expand to 200 square kilometers and eventually occupy a space of about 2,000 square kilometers, similar to Shenzhen in the south now, the government says. It will have 5.4 million people in 15 years and boost China’s investment growth by 0.33 percentage point and its gross domestic product by 0.13 percentage point to 0.19 percentage point per year, according to Morgan Stanley’s base-case estimate.

12. Finally, good FT report on London property market which points out that it is cheaper to buy than rent, as reflected in the lower mortgage payments. But any significant dent on the affordability problem can come only from freeing up more land for construction,   

According to a 2015 report from the Adam Smith Institute, building on just 3.7 per cent of London’s greenbelt would free up enough land for 1m new homes — supply which could end the affordability crisis for many young Londoners.

India power sector graph of the day

The Achilles Heel of India's power sector is distribution, in particular the under-recovery of cost of service. The graphic below captures the problem.

For all the talk surrounding tariff increases as part of UDAY reforms, its political economy was always going to be a challenge. Given the difficulty of raising residential tariffs, discoms have preferred the easy way out and increased industrial tariffs. States have levied exorbitant cross-subsidy surcharge on their industrial consumers, thereby further exacerbating the already inverted tariff structure. The result, yet more erosion in the country's industrial competitiveness.

These distortions are secondary to the bigger challenge with distribution loss reduction, something this blog had pointed out as to possibly why UDAY may be no different. A good starting point for any serious attempt at power sector reforms is outlined here. 

Resolving information and trust deficits with technology solutions

Consider the persistence of market failures in markets like that for low-skill labor, agricultural produce, medical services, rental housing and so on despite the introduction of technology solutions. 

In all these cases, it is theoretically possible to use modern technologies to facilitate the matching of buyers and sellers, either by removing matching frictions or easing access barriers. But, as we have seen from across developing countries, these markets remain naggingly impervious to technology solutions. What gives?

It helps to understand that these market failures arise from a combination of information and trust deficits. Accordingly, a household looking to hire a cook or house-help is looking for both information about the available choices as well as some validation of the antecedents (and sometimes the quality) of of the candidates. Similarly, a trader in Tamil Nadu venturing to buy onions from a farmer in Maharashtra seeks both basic information (price, quality etc), as well as the contractual commitment and intentions of the farmer selling those onions. And the home owner willing to rent out her property seeks information about the credit-worthiness as well as the credibility of the lessee. 

In all these cases, and similar others, technology can help bridge only a part of the twin deficit, the one that deals with information asymmetry - choices, prices, credit-worthiness etc. The other part - the one about validation of antecedents, intentions, and credibility - is largely a function of trust. It would take very invasive and complex interventions, with doubtful costs-benefits balance and often distortionary unintended consequences, to address trust deficits using technology.

The alternative is to have human presence on the ground, engaging deeply with the stakeholders, developing social capital, and becoming trust bridging agents. In other words, such markets are likely to respond only with a combination of technology and human engagement. But such engagement takes time and persistent efforts.

But unfortunately, far too many of start-up entrepreneurs, with their quest for instant gratification, prefer to focus on the former and overlook the importance of bridging trust, resulting in still-born markets.

India hospitality industry fact of the day

From the FT, highlighting yet another dimension of India's very small capital base, this time with hotel rooms,

Despite its population of 1.3bn, India has only 79,567 licensed hotel rooms — nearly the same number as Singapore, which has 63,580 but a population of 5m, according to data from the countries’ respective tourism bodies.

State capacity and resource constraints

State capacity weakness in developing countries is a favourite topic of this blog. An important, but less discussed, dimension of weak state capacity is that public systems run on very thin human, physical and financial resources. The scale of disproportionality would become evident if we match the time-task-effort to the available resources. And once we have such deficiencies, the other dimensions of state capacity weakness (corruption, incompetence, apathy etc) invariably follow. 

And this is no less true in developed countries. From a Times story on the hell-hole that is the over-crowded St Clair Correctional Facility, one of the six maximum security facilities in Alabama,

Mr. Dunn, the corrections commissioner, points to this as support for his conviction that the root problems at St. Clair and in the Alabama prison system lie in the numbers. “I still believe that the fundamental, systemic problem is a combination of lack of staff and overcrowding,” he said... The construction of modern prisons, he said, is the important first step to making changes that will last, allowing for safer facilities and more rehabilitative programming.

Whether it is fundamental or not, I cannot disagree with the Commissioner. And he echoes correctional officials in many developing countries. 

St Clair is acutely under-resourced - physical infrastructure, correctional man power etc. But St Clair is an exception to the norm of well-resourced correctional facilities in developed countries. 

Instead, St Clair is the norm in many developing countries. In fact, St Clair (at least from the photos) would even be considered one of the better endowed ones in many of these countries. And despite acute resource scarcity, most often far greater than St Clair, many correctional facilities in countries like India are run no worse than St Clair. 

This scenario of resource deficiency would repeat with building inspectors, bill collectors, surveyors, citizen charter counter operators, teachers, doctors, extension officers, police constables, clerks, and so on, and at all levels. 

In fact, I will not hesitate to argue that under the same same resource conditions and challenges, the State in developed countries would fare far worse than those in many developing countries. 

The problem with targeting outcomes in development

Outcomes-based payments has been a trend in international development for more than a decade-and-half, though with limited results to show. In fact, except for the deforestation programs, there may be no example of a pure outcomes project. Even the totemic examples skirt around outcomes and end up focusing, at best, on poorly specified outputs. In short outcomes-based financing itself has shown little evidence of outcomes. 

The fundamental premise with outcomes based approach to addressing development problems is the assumption that a financial incentive, adequate and appropriately structured, can force systems to get their acts together and achieve outcomes. The financial structure, it is believed, can help vault past inputs, processes, and outputs, to realize outcomes. 

Here is a listing of three important failings with this approach (assuming the focus being on outcomes and not outputs)

1. The assumption that a financial incentive is sufficient to overcome antecedent deficiencies and achieve outcomes betrays a very high degree of ignorance. In simple terms, the assumption is that financial incentive can ensure that processes are put in place, processes get adhered to, complementary inputs can be and are brought to bear, and execution is reasonably assured. And all this happens in scale. Take a break!

While it may be logical to target outcomes, in practice, the financial incentives alignment alone may not be sufficient to help leapfrog the process compliances that may be necessary to help achieve the objective. In most environments (places and sectors), just process compliance requirements (simple things like teacher attendance or individual student learning tracking, which are critical to achieving the objective) can be daunting enough, even if they are targeted directly. Now achieving them as an incidental benefit from an outcomes-based contract, may be expecting too much. 

2. The other assumption is that governments can afford to pay for outcomes. This, in turn, assumes that the same set of resources can be redeployed more efficiently to achieve the desired outcomes. 

But what if the real cost of achieving outcomes is much greater than the current expenditures? And what if the principles of government budgeting conflict with the requirements of outcomes-based budgeting? 

Answers to these can be found in the way government budgets are made. Logic would have it that allocations be made based on an objective assessment of the cost required to achieve the goals. But in the real world, allocations are made with another consideration as the foremost priority – balance and equity (in the coverage of geographies, sectors, and populations). 

The result is extensive skimping on the allocations, especially on maintenance, consumables, procedural compliances, newer types of activities, discretionary spending, and new investments. Nothing is sacrosanct except the salaries of employees and long-term contractual obligations. Spreading the limited fiscal butter thin, often to the point of being imperceptible (or seriously detracting from the objectives), becomes inevitable. 

Now imagine an outcomes-based project where procedural compliances, maintenance schedules, quality of engagement, rigour of monitoring, and so on are critical to its success. All this inflates the price tag for the actual achievement of outcomes. Governments will find the increment fiscally unsustainable. The option of a phased expansion, apart from raising several practical problems, would also be politically unacceptable. 

3. Finally, in case of private production, the assumption that the supply side is large enough to support outcomes based contracting in scale is most likely to be unrealistic. Forget education or health, try calling tenders for outcomes based water treatment facilities and, in most developing countries, within only a handful of tenders the no-response bids start to bind.

So, the argument would go that the markets take time to mature. We only need to catalyse it and will develop. But, as the far simpler and easier to contract market for infrastructure services has shown, such markets are more likely to remain elusive for a very long time. And, even plain simple outcomes contracts like long-term road concessions are rife with renegotiations and attendant moral hazard which distort contractual obligations. 

So, is it futile to target outcomes in development? It is realistic to target outcomes in at least two areas. One, logistics based activities, especially infrastructure services, are amenable to outcomes targeting. This is largely because, there is little difference between outputs and outcomes. Two, where there is private production and public provisioning of services, and where outcomes can be quantified without any of the standard challenges, it should be possible to hold private providers accountable and demand outcomes. Skill trainings linked to placement is an example.

Yet with even these limited areas, the aforementioned three problems will bind to varying degrees, hampering the achievement of outcomes. 

Similarly, it is unrealistic to target outcomes in cases of public production involving engagement intensive activities. I would define engagement intensive activities as those where outcomes depend intimately on the quality of engagement. Education and learning outcomes is the best example. In all such cases, especially when done in scale in developing countries, state capacity becomes the binding constraint.

How should we manage urbanisation?

Far too often debates on urbanisation has focused on supply-side measures that encourage growth of cities. Accordingly, we have policies to expand city boundaries, incentivise businesses and skilled migrants to locate to cities, and so on. 

But as Edward Glaeser and Wengtao Xiong write, we may be focusing on the wrong set of policy instruments,

If urbanization can play an important role in abetting economic growth, then one question is whether public policies should do more to increase city size. There are many reasons to be wary of explicit spatial policies that encourage migration to one region or another. Most obviously, it is unclear whether encouraging urbanization would enhance welfare overall. On average, workers in cities earn more, but they also pay more for housing and suffer other costs. The standard economic model of migration assumes a spatial equilibrium, so that the marginal migrant is indifferent between the city and the rural hinterland, which implies that there is no direct welfare benefit from encouraging migration. Certainly, there may exist externalities from moving to cities, but these can be both positive and negative and we currently cannot tell whether those external benefits on net favor cities.

Moreover, accepting a role for spatial bias in policies sets an uncomfortable precedent. Spatially biased policies may well be used to favor politically powerful regions, rather than regions that should be subsidized. Loud voices will clamor for support for poorer regions, even if economic development suggests that people should leave such areas. A principle of spatial neutrality would seem to be the safest course, which would force regions to compete for capital and workers rather than relying on largesse from the national government.

A more sensible policy alternative is to focus on reducing artificial barriers to urban growth and improving the quality of urban life. If cities have benevolent economic effects, then it can be quite costly to impose land use regulations that stymie urban construction, such as the stringent floor-area requirements that Mumbai has had for most of the past 50 years. In some cases, including Mumbai, these land use controls were imposed to limit the growth of the city. Often, they have only prevented legal, safe housing and left a back door for the growth of sprawling slums.

City governments can also bring urban growth by becoming more effective at improving urban quality of life. Most of the downsides of density, such as contagious disease and congestion, are negative externalities that become magnified when people live close to one another. By reducing these externalities, developing-world cities can attract immigrant entrepreneurs and allow more people to enjoy the added productivity in cities...

First, growing cities need infrastructure, but to get infrastructure right, we need to get institutions right. Second, incentives must accompany infrastructure. Third, property titling and the protection of private property are extremely valuable in urban contexts. Fourth, infrastructure, incentives and institutions must be adapted to local conditions.

This is a very profound insight, very easily missed. In simple terms, ease the demand-side constraints to urban growth and let cities grow on their own, rather than directly targeting urban expansion. Address the regular deficiencies - restrictive regulations, inadequate infrastructure, and poor governance - and allow cities to grow organically.

Far too often governments, at all levels, end up favouring the more immanent and tangible supply-side policies and ignore the more diffuse and deep-rooted demand-side ones. For sure, there are compelling political economy and administrative reasons for such distortions. But the result is the choking and sprawling cities that characterise much of the developing world.

A pivot towards improving urban governance, encouraging vertical and transit-oriented development,  simplifying the doing business regulations, investments to expand and increase the quality of human capital formation, general initiatives that enhance the quality of urban life, and plugging the deficiencies in infrastructure should be the agenda for city managers as well as provincial and national governments. Cities will then take care of themselves. 

Shenzhen and learnings for India

From Economist's fantastic survey on the Pearl River Delta (PRD), consider the trajectory of Shenzhen's emergence as an innovation hub,

Between 1980 and 2016 Shenzhen’s GDP in real terms grew at an average annual rate of 22% and today stands at 2trn yuan. The city’s Nanshan district, home to about 125 listed firms with a combined market value of nearly $400bn, has a higher income per person than Hong Kong... Shenzhen spends over 4% of its GDP on research and development (R&D), double the mainland average; in Nanshan the share is over 6%. Most of the money comes from private firms. Companies in Shenzhen file more international patents (which are mostly high quality, unlike many of the domestic Chinese ones) than those in France or Britain.

Local entrepreneurship, innovating both in products and services as well as their business processes in a closed economy, was critical to this success,

Early reformers pushed ahead with unauthorised investment deals with non-mainland companies and retroactively developed the legal framework needed to protect foreign firms. Time and again, grassroots innovators hit on better ways of doing things, even though strictly speaking they were not permitted. When their risk-taking proved successful, communist leaders typically took the credit... The common perception that China is incapable of innovation needs re-examining... a recent study by Britain’s University of Sussex and others for the European Commission... calculate that the average value China adds to its exports is 76% (the EU’s is 87%). The PRD’s companies, which account for a huge chunk of China’s innovation, have been moving up the value chain... Today, Shenzhen is attracting many entrepreneurs keen to develop new ways of making things. The innovators are transforming the entire delta into an advanced manufacturing cluster. Many multinationals have a listening post in the city to stay close to the latest trends... Shenzhen has become the world capital for hardware and manufacturing entrepreneurs.

The cluster effect has been a powerful force for PRD's success and will also be a reason why even with rising wages, not too many of these firms will relocate especially their more value added activities,

Another way Shenzhen is rewriting the rules is by embracing open innovation. In the West, corporate innovation has generally been a secretive, top-down affair. Many factories in the city started by making clever imitations of Western goods, which led foreigners to dismiss the locals as mere copycats. That was a mistake. David Li of Shenzhen’s Open Innovation Lab argues that the copycats have since morphed into a powerful ecosystem of collaborative, fast-learning suppliers and factories. “Anybody can come to Shenzhen with an idea and get it prototyped, tested, made and put on the market at a decent price,” he says. Silicon Valley is obsessed with rich-world problems, he thinks, but China’s open innovators work on affordable solutions for the masses on everything from health care to pollution to banking... 

One of Shenzhen’s most daring startups, Royole, is expanding its output of an extraordinary product: the world’s thinnest foldable full-colour touchscreen display. Liu Zihong, a mainlander, earned his doctorate in electrical engineering at Stanford University, where he dreamt of radical new ways for machines and humans to interact. When he started Royole, he says, he knew it had to be based in Shenzhen. Getting from early-stage research to manufactured product would require a massive amount of what he calls integrated innovation: “Materials, process, device design, circuit design—all needed to be innovated…if you changed one material, you had to change the process.” His team had to develop entirely new materials and factory tools, including custom-built robots, to make his screens, accumulating over 600 patents along the way. He insists this could not have been done even in Silicon Valley, because California cannot match Shenzhen’s ecosystem of “makers”...

Navi Cohen is the co-founder of Revols, a Canadian startup developing affordable, custom-fitted headphones. His firm raised a fortune on Kickstarter, a crowdfunding site. When it tried to develop its product in Montreal, it found things slow and expensive, so it moved to Shenzhen, where supplies were cheap and factories made prototypes quickly. It is now in production. Another promising startup that moved to Shenzhen is Wazer, an American firm. A conventional metal-cutting machine on a factory floor costs $100,000 or more. Shenzhen’s know-how helped Wazer perfect a way to cut any material precisely with pressurised water. Its desktop cutter costs about $5,000 and will disrupt the industry when it comes to market later this year.

It is surely not appropriate to compare Gurgaon and Shenzhen on many dimensions, especially given the locational advantages enjoyed by the latter. But the roles of government and local entrepreneurship may be worth examining. 

Like Shenzhen, Gurgaon emerged from nothing, maybe even around the same time. Unlike Gurgaon, Shenzhen flowered to become an innovation hub thanks to its enterpreneurs and governance. Farsighted local politial leadership contributed to the growth by providing world-class infrastructure and logistics facilities and by not interfering with the typical heavy handedness of government bureaucracies. Gurgaon had the exact opposite in both infrastructure provision and government bureaucracies.

Indeed Chinese bureaucrats are not immune from all the traditional failings of governments. In the context of a new plan to build a 2000 sq km greenfield satellite city, Xiongan, south of Beijing, to decongest the capital, the Economist writes,

Over the years China has tried to build numerous new cities, several of which have been costly failures. More than a decade ago the government declared that the Binhai New Area, a vast development in Tianjin, would be north China’s answer to Shenzhen and Pudong. It has never taken off. Another stillborn project was Caofeidian, an “eco-city” in the Bohai Gulf.

But governments cannot be reflexively blamed for everything. Unlike the spectacular success of companies like Foxconn, Huawei, BGI, Mindray and so on highlighted here, India's hardware entrepreneurial eco-system has not produced global champions. Chinese firms are today at the forefront of areas like consumer electronics, renewables, transportation, telecoms, and construction equipments, and are not far away from dominating markets like those for battery storage, electric cars, medical devices, drones, robotics, cloud computing, machine learning, and so on. 

Consider the example of India's software industry. It is difficult to refute the argument that the likes of TCS, Infosys, Wipro, Cognizant etc missed a great opportunity to build on their platform of success to establish themselves as leaders in emerging markets like artificial intelligence and cloud computing. It is even worse that they may have altogether missed the bus on these emerging technologies. 

Instead, there may have been a resource misallocation towards real estate and IT start-ups, in terms of physical and human capital and entrepreneurial talents. Here too while Baidu, Alibaba and Tencent have adapted western models and innovated to develop new features and services which are now becoming hits in developed markets, India's e-commerce firms have remained just copy-cats of well established western counterparts with little or no meaningfully significant innovation to address any of the country's several development challenges.

Are batting collapses becoming more common?

From a very good analysis of the surge in batting collapses at a time when batsmen are piling on the runs, these statistics stand out

Test teams are scoring huge totals much more often than they used to. Between 1960 (more or less the start of the current era of covered pitches) and the end of 1999, one in 18 innings would see a team rack up 500 or more. Since the start of 2000, that rate has almost doubled to one in ten. Last year, teams amassed 500 or more on 19 occasions: one in nine... sub-100 totals have also become much more frequent. From 1960 until 1999, the dreaded double-figures dig happened roughly once every 70 innings. Since 2000, that figure has jumped to one in 47... In the 1950s, the average sub-100 innings lasted 293 deliveries. Since then, the carnage has accelerated. In the 1960s, the average rout lasted 255 balls; in the 1990s, 221. Since 2010 it has taken an average of just 184 balls to end the misery. That's a full 18 overs fewer than 60 years ago.

Tim Eaton appears to trace the failing to the technical weaknesses of the No 6 batsmen (bully instead of being a bulwark, as he writes), especially for Australia and South Africa, the two countries surprisingly vulnerable to such collapses. The dominance of seam bowlers in the list of those responsible for such collapses is interesting and highlights the effectiveness of late movement. 

While those may be contributors, I am inclined to the argument that the defensive technique and temperaments of modern batsmen may be responsible. One way to statistically verify it may be to see how many of these wickets fell to defensive and attacking shots respectively over the different periods. My hunch is that getting out attacking the ball would predominate in recent years.

Also, we need to discount the much more number of tests being played in recent years, with more tours and more teams. It is now not uncommon to have players playing 100 tests over a 7-10 year career, something which would have taken twice that many years before the millennium. 

It may also be useful to do an examination of whether batting collapses in general have increased in recent years. If we assume losing 5 wickets for an addition or 10 runs or 8 wickets for an addition of 30 runs as collapses, is there an increasing trend of such collapses?

The failings of the best and the brightest

Behavioural psychologists point to certain cognitive biases that afflict human mind and spares none. Even among the smartest people I have interacted, there is at least one of the following three biases that deeply cloud their perceptions. Just a handful of people manage to escape this trap, being cognisant of these impulses and having the resolve to overcome them. I will call them genius. 

1. Induction bias

Human being are fundamentally inductive beings, prone to draw generalisable conclusions from their specific experiences. It is very difficult to recalibrate the lens of logic when applying inductive reasoning. Important dimensions get glossed over, most often because the context and its structure varies, often very widely. And without having been in that context, it is very difficult to appreciate the nuances. 

The most classic such inductive reasoning bias comes from those working in the private sector who tend to apply similar set of operational principles to public sector issues. They see outsourcing services, aligning incentives of agents, defining targets and efficiency parameters, making payments based on outcomes, work-flow automation and so on as natural accompaniments in the public sector. Truth to say, public sector could do with all of these, in varying degrees. But there is some distance between "could" and "would". 

Similar failings apply to other generalisations, especially when they involve tackling complex public policy challenges. And in most of these cases, difficulty in appreciation of the context is the major contributor to the difference in perceptions. 

2. Anecdote bias

Human beings suffer from representative and anchoring biases, which make us crystallize our views on an issue from a few personal experiences and the limited examples that immediately come to our mind while discussing that issue. Such biases prevent us from realizing that our exposure is but just one data point and the particular outcome may have been deeply influenced by its specific context.

People who travel widely and engage with experiences during these travels or who are integrated to the global seminar/conference circuits are especially vulnerable to this bias. Politicians belong to the former and international development cosmopolitans to the latter. An innovative approach or idea to overcome a supposedly intractable problem that you have seen either directly or in a presentation is likely to stick deep and long in our memory. 

Unfortunately, most often such success is circumscribed in place, time, supervisory effort, and context. In case of presentations, especially on complex public or social issues, they are most often half-truths. It may be presumptuous to generalize from such experiences.

3. Achievement bias

It is a common feature that people are strongly attached to their perceived personal ‘achievements’. It means that their comprehension of the particular issue is very deeply influenced, or clouded, by their prior experience. 

Two cognitive biases amplify the attachment to personal experiences. The availability bias anchors human mind to evaluate a topic based on the examples available and entrenched in our memory. The over-estimation bias makes us repose far higher subjective confidence on our own judgements (in this case of the 'achievement'), than their objective accuracy would suggest. Accordingly, in any such achievement, the ‘success’ elements get amplified even as the ‘failing’ dimensions are underplayed.

Policy makers and practitioners, especially the successful and competent ones, are vulnerable to this. Even the most successful ones are likely to have only a handful of 'successes' from among the several initiatives that they would have tried over a career. They invariably advocate either its particular replication or generalise inferences for application in other problems. Almost always, the contribution of the specific individual (the extraordinary 'personal' energy, unavailable in business as usual contexts) and confluence of favourable environmental factors to its success gets glossed over. The median public system is most likely to struggle to get the initiative past the post. 

While there is some overlap among the three biases, there are also subtle differences as reflected in the categories afflicted by each.

Weekend reading links

1. Amidst all the negative news that surrounds Europe, we overlook the real successes. Spain's recovery from the binge growth of the last decade is outstanding. Even more impressive has been its resolve to push ahead with reforms to labour market, banking systems, and corporate bankruptcies. The wage restraint and flexibility given to companies under the 2012 labor market reforms have ensured that the country's unit labour costs have fallen by 14 per cent since 2010, thereby enhancing the country's external competitiveness.

But the chronicle of the  construction boom that built up the excesses is worth remembering,

That boom coincided with the arrival of millions of migrants from Latin America, eastern Europe and north Africa, fuelling demand for homes that eventually reached fantastical proportions. In 2007, Spain accounted for more housing starts than Germany, France, Britain and Italy combined and 2.7m Spanish workers were active in the construction sector — equivalent to 13 per cent of the national workforce.

In Valencia, the boom was even more pronounced, helped by two factors that had nothing to do with central bankers in Frankfurt. One was the decision by the regional and local government to sink billions of euros into one-off events and pharaonic architectural designs. The other was the proximity between political leaders and the cajas, or regional savings banks, under their control. Poorly run and poorly supervised, the cajas provided the rocket fuel for Spain’s housing boom, dutifully funding one unviable project after another... Local politicians had little incentive to urge restraint, if only because so many of them stood to benefit personally from the boom... But the combination of mismanagement, hubris and greed, coupled with a banking system that lent according to political not financial criteria, proved disastrous. As the bubble continued to inflate, it touched on the lives of more and more people: teenagers left school without any qualifications to work on building sites. Orange farmers pulled up their groves to build apartment blocks. Owners of family companies abandoned them to sell real estate. A region that once prided itself on its manufacturing industry succumbed to the dream of dinero fácil or easy money.

Construction booms, especially those fed by real estate prices, should count as the most pernicious forms of resource misallocation. This story plays itself out with surprisingly high frequency, including in developing countries.

And its banking sector clean up was instructive,

“Spain did a textbook bank rescue,” says Angel Ubide, a managing director at Goldman Sachs and until recently a senior fellow at the Peterson Institute for International Economics. “It shut down the banks that couldn’t survive and recapitalised the ones that could. And then it moved all the bad assets into a bad bank.” The overhaul killed off the cajas, which were either folded into larger private banks or forced to become normal lenders, free from political influence. But it also meant that markets regained trust in the broader banking system relatively quickly. Balance sheets were cleaned up, bad loan ratios fell and loan loss provisions started to decline.

Unlike the misallocation problem, I don't think the banking sector clean up is relevant to India.

2. Martin Wolf explains the massive deleveraging and rebalancing challenge facing China.

Annual gross savings in the Chinese economy amount to 75 per cent of the sum of US and EU savings, at over $5tn last year. China’s gross investment, at 43 per cent of gross domestic product in 2015, was still above its share in 2008, even though the economy’s rate of growth had fallen by at least a third. To sustain such high investment, the ratio of credit to GDP soared from 141 per cent of GDP at the end of 2008 to 260 per cent at the end of last year... China saves more than it can profitably invest at home. In 2015, gross national savings were 48 per cent of GDP. World Bank data show that households contributed only a half of this. The rest came from corporate profits and government savings. International comparisons suggest that economic growth of 6 per cent warrants investment of little more than a third of GDP. This indicates that China’s surplus savings — surplus, that is, to domestic requirements — may be as much as 15 per cent of GDP.

3. India has one of the highest trade tariff barriers among all major economies,

4. On Uber's driver acquisition strategy,

UberEats launched in London in June, promising “the food you want, from the London restaurants you love, delivered at Uber speed”. In a bid to recruit self-employed couriers to ferry food from restaurants to customers, UberEats initially offered to pay £20 an hour. But as customer demand increased, the company began to reduce pay. By August, the couriers were on a piece rate with a fiddly formula: £3.30 a delivery plus £1 a mile, minus a 25 per cent “Uber service fee”, plus a £5 “trip reward”. Then, one day, the couriers woke up to find the app had been updated again. The “trip reward” had been cut to £4 for weekday lunch and weekend dinner times, and to £3 for weekday dinner and weekend lunch times. Outside those periods, it had been cut altogether.

Not only does e-commerce firms benefit from regulatory arbitrage, they also have the flexibility of changing the rules of the game at their choice.

5. Fascinating graphic in the Times that captures the scale and speed of urbanisation in China's Pearl River Delta. Guangzhou, Shenzhen, and Dongguan have become bustling economic centres in Guangdong province over the last 35 years from being small backwater townships. The rapid growth has encroached into the wetlands, reclaimed water courses, and destroyed mangrove forests, making the region vulnerable to recurrent floods and sea water ingress. So much so that Guangzhou has been classified as the city most under risk from climate change.

6. Incidentally Economist has a feature on the Pearl River Delta (PRD), comprising nine cities of Guangdong province and Hong Kong and Macau. Its significance,

The World Bank recently declared the PRD the world’s biggest megacity, surpassing Tokyo. With over 66m residents, it is more populous than Italy or, just, Britain... Its GDP, at more than $1.2trn, is bigger than that of Indonesia, which has four times as many people. It has been growing at an average of 12% a year for the past decade. As a global trading power the region is outranked only by America and Germany. For China itself, the PRD is crucial. Though it accounts for less than 1% of the country’s territory and 5% of its population, it generates more than a tenth of its GDP and a quarter of its exports. It soaks up a fifth of China’s total foreign direct investment and has attracted over a trillion dollars-worth of FDI since 1980... Most remarkably, a region once known for copycat products is emerging as a world-class cluster for innovation. 

7. City Lab has this nice video of how existing road patterns can be rationalised to squeeze in bike lanes and parking, without reducing vehicle volumes and carrying capacity and while increasing safety. 

Not sure of its relevance to developing countries like India where lane driving comes at a premium and bike usage unlikely to take-off for practical reasons. 

8. The latest version of inequality analysis by Piketty-Saez-Zucman is out. 

For the 117 million US adults in the bottom half of the income distribution, growth has been non-existent for a generation, while at the top of the ladder it has been extraordinarily strong... From 1980 to 2014, for example, none of the growth in per-adult national income went to the bottom 50%, while 32% went to the middle class (defined as adults between the median and the 90th percentile), 68% to the top 10%, and 36% to the top 1%...

Because the pre-tax incomes of the bottom 50% stagnated while average national income per adult grew, the share of national income earned by the bottom 50% collapsed from 20% in 1980 to 12.5% in 2014. Over the same period, the share of incomes going to the top 1% surged from 10.7% in 1980 to 20.2% in 2014... these two income groups basically switched their income shares, with about 8 points of national income transferred from the bottom 50% to the top 1%. The gains made by the 1% would be large enough to fully compensate for the loss of the bottom 50%, a group 50 times larger. To understand how unequal the US is today, consider the following fact. In 1980, adults in the top 1% earned on average 27 times more than bottom 50% of adults. Today they earn 81 times more.

9. A new paper points to the sustained and much faster economic expansion since the dawn of the 20th century to "less shrinking in recessions",

Stephen Broadberry of Oxford University and John Wallis of the University of Maryland have taken data for 18 countries in Europe and the New World, some from as far back as the 13th century. To their surprise, they found that growth during years of economic expansion has fallen in the recent era—from 3.88% between 1820 and 1870 to 3.06% since 1950—even though average growth across all years in those two periods increased from 1.4% to 2.55%. Instead, shorter and shallower slumps led to rising long-term growth. Output fell in a third of years between 1820 and 1870 but in only 12% of those since 1950. The rate of decline per recession year has fallen too, from 3% to 1.2%.

10. Finally, the best read comes from a fantastic article in the Economist about how parking norms influence the urban form and growth 

In 2004 London abolished minimum parking requirements. Research by Zhan Guo of New York University shows that the amount of parking in new residential blocks promptly plunged, from an average of 1.1 spaces per flat to 0.6 spaces. The parking minimum had boosted supply far beyond what the market demanded.

The cost of parking mandates invariably gets passed on across the economy,

Donald Shoup, an authority on parking economics, estimates that creating the minimum number of spaces adds 67% to the cost of a new shopping centre in Los Angeles if the car park is above ground and 93% if it is underground. Parking requirements can also make redevelopment impossible. Converting an old office building into flats generally means providing the parking spaces required for a new block of flats, which is likely to be difficult. The biggest cost of parking minimums may be the economic activity they prevent.

Free parking is not, of course, really free. The costs of building the car parks, as well as cleaning, lighting, repairing and securing them, are passed on to the people who use the buildings to which they are attached. Restaurant meals and cinema tickets are more pricey; flats are more expensive; office workers are presumably paid less. Everybody pays, whether or not they drive. And that has an unfortunate distributional effect, because young people drive a little less than the middle-aged and the poor drive less than the rich. In America, 17% of blacks and 12% of Hispanics who lived in big cities usually took public transport to work in 2013, whereas 7% of whites did. Free parking represents a subsidy for older people that is paid disproportionately by the young and a subsidy for the wealthy that is paid by the poor.

Natural gas market update

Excellent article that summarizes the global gas market which is likely to see a production glut and low prices for the foreseeable future, especially so with Qatar's decision to lift the production moratorium on the world's biggest natural gas field, the North Field. 

Four countries are vying to be the world’s biggest exporter: Qatar, the current leader, with 78 million tons per year capacity (10.3 billion cubic feet of gas per day), is likely to be overtaken by Australia this year. The U.S., awash with cheap shale gas, is building five projects totaling 74 million tons per year, and expansions could boost this further. On Thursday, Russian President Vladimir Putin said his country would become the top exporter, though that seems a distant aspiration... New supplies are also set to come from big fields off Mozambique and Tanzania. Gas is easy to find around the world; the tough part is getting it to market at a competitive price.

All these aspirants now realize the giant of the LNG world is back in the game. With its prolific reservoir, existing infrastructure and large scale, new Qatari LNG should again be the world’s cheapest to produce. Developing more at home will be lower-cost and less risky than searching for gas in Morocco and Cyprus, which QP recently entered. Qatargas may even be able to inexpensively de-bottleneck existing "trains" (LNG-producing units), rather than having to construct new ones at a cost of some $14 billion. So, this move is partly about deterring new LNG projects, with the threat of new ultra-competitive Qatari gas arriving around 2022, just when many observers expect the market to be tightening again.

A few lessons for India

1. All this coupled with the construction of terminals on US Gulf Coast means that fragmentation and index pricing in global gas market is soon likely to be a thing of the past. India's gas companies should therefore be cautious about long-term external contracts with index pricing

2. In an environment of low gas prices, the Government of India would do well to forget chasing foreign companies for gas exploration in/off India.

3. Instead, this is an opportunity to lock-in long-term purchase contracts, especially leveraging the LNG infrastructure of Qatar that is likely to come on line.

4. More of the existing model for producing fertilisers - cheaper to produce fertiliser in Qatar and bring them here rather than bring gas here and then produce fertilisers here.

5. I am not sure about this, but the economics of some of our RLNG terminals/FSRUs under construction will come under strain if gas stays low for too long.

Putting poverty in perspective

Manas Chakravarthy has this to say about India's wealth inequality problem,

The average value of assets held by a household in decile 10 in urban India, or the richest 10%, is Rs1.5 crore. That is 50,034 times the average value of assets held by an urban household in the lowest decile. It’s 18.7 times the average value of assets held by a household in the 6th decile. And it’s 4.1 times the average value of assets held by a household in the ninth decile, one rung lower than the top 10%... If we count the assets of the poor, we find the poor do not count... The household in the poorest decile — decile 1—will then have Rs291, the one in decile 2 assets worth Rs9,565 and so on. The richest household will then have assets worth Rs1.5 crore. But if we add up the total value of assets held by all the rest, that is the other nine households, that amounts to Rs82,90,418. In other words, the richest household’s assets are worth much more than that of all the others combined. 

To put this in perspective, with Rs 35,13,327, the average wealth of those in the 9th decile, it would not be possible to buy a two bed room house in any large city! Forget house, a family in the sixth decile would just be able to afford a decent car, and that too only if they mobilise all their assets!

This tallies with the findings of every survey, public and private. Poverty is far deeper and pervasive than we all believe. And the vast majority of those we consider above the notional poverty line are not much better off than their below poverty line counterparts. They are maybe one shock away from slipping back to poverty. 

It is for this reason that I am not a big fan of the current outsized focus on screening subsidy leakages. Yes, pilferage should be arrested. But inclusion errors are not exactly as bad as we think. And we haven't even got to this, this and this. 

Is this the worst of kritarchy?

If you thought that only politicians indulged in farm loan waivers, wait. The Hindu reports,

The Madras High Court... while allowing a petition by the National South Indian River Interlinking Agriculturists' Association... directed the Tamil Nadu government to waive loans of all drought-hit farmers and restrained cooperative societies and banks from recovering their dues. It noted that the state’s financial situation was grim and it was single handedly shouldering the debt burden in a drought year in which farmers were committing suicide and suggested that the Centre come forward to extend financial help to Tamil Nadu during this difficult situation... It directed the cooperation, food and consumer protection department and registrar of cooperative societies to extend the crop loan waiver scheme under two Government Orders of 2016, to all farmers, including those whose landholding was more than five acres.

I just can't see even one reason for a judicial intervention on this. It clearly is an exercise of a political judgement by a judicial institution. Such judgements seriously call into question the competence and intentions of those administering them. 

It puts both the state and central governments in a great fix. Neither can the state government appeal against the order nor can the central government refuse at least some assistance without risking being dubbed anti-farmer. 

And unlike farm waivers which are now baked into electoral cycles, the Court has set a precedent by wading into loan waivers during droughts. Even if the Supreme Court overturns this, the damage has been done. The Chief Justice of India needs to save the country's judicial system from his own irresponsible and trigger happy brethren!

Postscript

It gets even worse! A friend sends me links to the campaign launched by the Madurai Bench of the High Court to remove prosopis juliflora from all public and private lands in the state. Principal District Judges were directed to inspect the lands and report the progress of removal to the Court. 

It was apparently for the public good. These trees absorb all the moisture in the atmosphere and prevents rains. It also causes several other harmful things. The Court even started a parallel executive administration of advocate commissioners to implement the order, directed the legislature to pass law,  and finally has set up an independent treasury to fund the project.

The problem with urbanisation in developing countries

Excellent new paper by Edward Glaeser and Wentao Xiong that summarizes the case for urbanisation for developing countries. 

The authors examine the reasons for the wide income and productivity differentials observed between cities and rural areas, as well as within industries in the same city. They examine whether the income gaps are due to productivity differentials or due to other factors like labour regulations, high housing costs and disamenities in cities, or unobserved worker human capital. Their findings are summarised here. This post though critically looks at the deeper forces driving urbanisation. 

The story about beneficial agglomeration effects goes like this. Firms and workers prefer to concentrate geographically. For firms, the economies of scale and network effects increases the likelihoods of access to suppliers, service providers, partnerships, skilled workers, distribution and marketing, and consumers. For workers, the same effects increase the likelihood of more opportunities, ideas sharing, partnerships, social amenities, similar friendship networks and so on. These locations then become attractive entry points for external technologies and ideas. Finally, there is the positive feedback loop associated with such locational equilibriums - the Mathew effect of agglomeration. 

But are these agglomeration effects real? Or they are because of the confounding effects of unobservable migrant and firm characteristics - the more skilled and enterprising workers and the more dynamic and productive firms (and industries) self-select themselves and locate in cities? Or is the concentration driven by the spatial attributes of the geography - ports, geographic proximities, special zones etc? This is a big research challenge. And it would be a very high value endeavour. 

If it is the latter two, then the agglomeration benefits may only be secondary and the real benefits accrue from having higher quality self-selected workers and firms moving into cities or specific locational advantages of the area. In that case, we may actually be ending up with something more closer to a zero-sum game, or one where the more skilled or competent vote with their feet to certain geographies (urban areas here). This potentially leaves the remaining areas, especially villages, less likely to be able to benefit from exactly the same set of dynamics (enterprising workers and productive firms) that drive the growth of the cities.

The most extreme and disturbing form of this dynamic is the one happening within cities, in the form of gentrification. See this, this, and this. If the current trends play themselves out, it is not unlikely that in the general equilibrium, the city cores will become affordable only for those above the upper middle-class. We would then have massive doughnut sprawls, with deficient infrastructure and poor quality of living even within the urban agglomeration. And, as is happening, if political power gets captured by the rich and (therefore) those who reside in the core, these trends will be accentuated and then urbanisation itself start hitting its limits.

It is for this reason that I am increasingly inclined to the view that housing and transportation are going to be the two most important determinants of the future of urbanisation, and, therefore, national economic growth itself. A time may have come to view gentrification (as we perceive it, a blighted area becoming upmarket) as a negative externality. We may no longer be able to afford leaving this to the dynamics of markets. Public policy may have to play an increasingly important role in moderating the gentrification effects, even with the risk of potential excesses.

How to promote entrepreneurship?

One of the buzzwords in international development is entrepreneurship promotion. Governments in countries like India have hitched their growth wagons behind the energy and spirit of entrepreneurship. 

Public policies have been formulated to support entrepreneurs. Entrepreneurship training programs abound. Start-up incubators and accelerators are being established by governments across cities with policies to encourage their establishment. And the major driver of improving the ease of doing business may be unlocking of entrepreneurial energies. 

But what is the evidence that such policies promote entrepreneurship? Edward Glaeser and Wengtao Xiong's excellent summary on urbanisation and agglomeration in developing countries has this to say regarding public policy on entrepreneurship,

The public role in generating entrepreneurship is less clear. It seems quite reasonable to believe that local regulations can stymie entrepreneurship, although there has been little research using U.S. data documenting such a relationship. While local governments do occasionally try to increase entrepreneurship by supporting specific “innovation clusters,” we know little about whether such clusters are really effective or whether other local policies, like entrepreneurship training programs, will bear fruit....

The U.S. literature does indicate that local entrepreneurship has been important for local economic growth. There is not yet any comparable literature for developing-world cities, and there is little hard evidence – in either the U.S. or elsewhere – on how public policy can potentially encourage local entrepreneurship. There are at least three public policy strategies aimed at increasing local entrepreneurship: training, clusters and deregulation. Business schools have tried to train entrepreneurs for decades, yet there is little rigorous evidence that such training works. There are cheaper programs that try to provide disadvantaged youths, such as “The Possible Project” in Cambridge, Massachusetts, but they have not yet been evaluated with randomized control trials. It consequently remains an open question whether cities can actually teach entrepreneurship.

A second approach focuses on the generation of entrepreneurial clusters, which presumably allow entrepreneurs to learn from each other. Boston’s Innovation District is one such public initiative. Private initiatives, such as co-working spaces for small start-ups, also provide scope for sharing entrepreneurial knowledge. In a sense, markets filled with small, individual merchants in the developing world, either with or without explicit public support, represent yet a third form of entrepreneurial cluster. Again, we have little firm empirical evidence on whether the formation of such clusters materially increases the overall level of entrepreneurship within a city.

A third approach starts with the view that at least some entrepreneurs are deterred by various regulations. Many U.S. cities, for example, forbid food trucks to provide meals on city streets, which appears to deter at least one form of urban entrepreneurship. In the developing world, really small-scale entrepreneurs typically ignore labor- and product-market regulations, so deregulation seems unlikely to increase the number of really tiny firms. However, it seems more likely that these regulations prevent the growth of such firms, especially when they reach the point to employ non-family members. Such regulations may explain the dominance of small firms in the firm-size distribution in the many developing countries. Small firms can’t grow into larger firms because they would then have to follow the rules.

In India's case, the concern should not be about whether the country needs more entrepreneurs or not, but that it may be having too many. So the concern should be about promoting the right kind of entrepreneurs. An even bigger challenge!   

Amazon fact of the day

The Economist has some staggering numbers about Amazon, 

Since the beginning of 2015 its share price has jumped by 173%, seven times quicker than in the two previous years (and 12 times faster than the S&P 500 index). With a market capitalisation of some $400bn, it is the fifth-most-valuable firm in the world. Never before has a company been worth so much for so long while making so little money: 92% of its value is due to profits expected after 2020. That is because investors anticipate both an extraordinary rise in revenue, from sales of $136bn last year to half a trillion over the next decade, and a jump in profits. The hopes invested in it imply that it will probably become more profitable than any other firm in America. Ground for scepticism does not come much more fertile than this: Amazon will have to grow faster than almost any big company in modern history to justify its valuation.

To meet this valuation, Amazon's task is extraordinary and unprecedented, 

Morgan Stanley, a bank, expects Amazon’s sales to rise by a compound average of 16% each year from 2016 through to 2025: that is higher than its estimates for Google or Facebook. That is a slower pace than Amazon managed over the past decade; but the bigger a company is, the harder it is to keep growing. Amazon’s annual sales of $136bn are almost 50% more than those of Alphabet, Google’s parent, and over four times Facebook’s. Credit Suisse, another bank, calculates that only ten firms with sales of more than $50bn have managed to grow by an average of 15% or more for ten years straight since 1950; no company with sales of more than $100bn has done so. If Amazon were to pull it off, it would be the most aggressive expansion of a giant company in the history of modern business.