Weekend reading links

1. An MGI article draws attention to the digital disruption of the banking industry from platform companies which dominate the distribution end of multiple businesses,

Consider Rakuten Ichiba, Japan’s single largest online retail marketplace. It provides loyalty points and e-money usable at hundreds of thousands of stores, virtual and real. It issues credit cards to tens of millions of members. It offers financial products and services that range from mortgages to securities brokerage. And the company runs one of Japan’s largest online travel portals—plus an instant-messaging app, Viber, which has some 800 million users worldwide. Likewise, Alibaba is not just an enormous e-commerce company; it is also a large asset manager, lender, payments company, B2B service, and ride-hailing provider. Tencent is making similar advances, from a chat-service base. And Amazon continues to confound rivals with moves into the cloud, logistics, media, consumer electronics, and even old-fashioned brick-and-mortar retailing—and lending and factoring for small and medium-size enterprises... 

We found that “manufacturing”—the core businesses of financing and lending that pivot off the bank’s balance sheet—generated 53.0 percent of industry revenues, but only 35.0 percent of profits, with an ROE of 4.4 percent. “Distribution,” on the other hand—the origination and sales side of banking—produced 47 percent of revenues and 65 percent of profits, with an ROE of 20 percent. As platform companies extend their tentacles into banking, it is the rich returns of the distribution business they are targeting. And in many cases, they are better positioned for distribution than banks are.

A greater potential threat for Indian banks may not be from the private sector banks, which too has not come out too favourably from the NPA problems, but from the fintech companies. Like the great Chinese companies, are the Indian fintech companies going to seize the moment?

2. It is the annual smog and odd-even vehicle season time in Delhi. Two excellent articles from Harish Damodaran and Mridula Ramesh unpacks the complex nature of the challenge arising from farmers in W Uttar Pradesh, Haryana and Punjab burning their post-harvest waste. 

The central challenge is that farmers have a limited 15-20 days to prepare their fields for the Rabi wheat season, making burning of the harvest waste as the easiest and cheapest option. One solution, which Damodaran explores is to use machines which are able to mulch and evenly spread both the loose straw residue (top-part of the crop cut by combined harvesters) and the standing stubble. Facilitating the provision of these machines through custom hiring centres, even with subsidies, may be a very good idea.

Ramesh suggests encouraging the collection and composting of the harvest materials. The compost, can in turn, be used by farmers as fertilisers or to produce biogas. She advocates a "straw-harvest" subsidy, as a Direct Benefits Transfer (DBT), to farmers based on verification of whether harvested fields have been burnt or not. 

3. A Livemint story on Bharatmala project has a graphic which captures arguably the biggest economic growth challenge - continuing weakness in private sector capex cycle, especially in the infrastructure sector. 

And it is not the traditional problems like land acquisition or financing constraints that is holding back stalled projects, but fuel/input supply and government clearances

4. The one area where work-flow automation, facilitated by technologies like blockchain, can be very disruptive is in the logistics management of global trade. Sample this,

To quantify the documentation involved in ‘business as usual’, Danish shipping giant Maersk tracked a shipment of flowers from the Kenyan port of Mombasa to Rotterdam. The process generated dozens of documents and nearly 200 communications involving farmers, freight forwarders, land-based transporters, customs brokers, governments, ports and carriers. Maersk’s blockchain-based approach, developed with IBM, puts all documents into a single, template-based workflow, kicked off when the farmer submits the packing list. As each step is completed, documents are captured and shared so participants can see what has been submitted, when, and by whom. No one party can modify, delete or even append any record without the consensus from others on the network.

5. Edmund Phelps follows Olivier Blanchard in holding on the natural unemployment rate hypothesis and their "structural" explanations,

The structuralist perspective on macroeconomic behavior led to the concept that came to be called the “natural” rate of unemployment, borrowing from the notion, which arose in Europe during the interwar years, of a “natural” interest rate. Yet the term “natural” was misleading. The basic idea of the structuralist approach is that while market forces are always fluctuating, the unemployment rate actually has a homing tendency. If it is, say, below its “natural” level, it will rise toward this level – and the rate of inflation will pick up... The “natural rate” itself may be pushed up or pulled down by structural shifts. Moreover, shifts in human attitudes and norms may also have an impact... What explains the paradox of low unemployment despite low inflation (or vice versa)? So far, economists – structuralists as well as diehard Keynesians – have been stumped. The answer must be that the “natural rate” is not a constant of nature, like the speed of light. Certainly, it could be moved by structural forces, whether technological or demographic. It is possible, for example, that demographic trends are slowing wage growth and reducing the natural rate.

The low interest rates and low inflation have been on a secular decline for more than three decades. There are real forces, not structural ones, behind these - globalisation (global production and supply chains), trade liberalisation (and global markets for goods and services), weakening of trade unions (and the erosion of employee bargaining power), skill-biased technological changes (concentrated wage increases to the top of income ladder) and so on. Ignoring them on the face of overwhelming evidence and refusing to yield ground on theoretical constructs like "homing tendency" of unemployment rate is one more example of what makes economists lose credibility. 

6. The period of regulatory arbitrage may be coming to an end for the internet superstars. A British employment tribunal, ruling on a petition by a group of 19 drivers, has rejected Uber's plea that its drivers are self-employed as independent contractors and therefore there was no need for it to pay employment benefits. The ruling means that Uber drivers will have to be given benefits like a minimum wage and paid time-off. 

The European Court of Justice is also expected to rule soon about whether Uber should be regulated as a taxi service, subjected to rigorous safety and employment rules, or as a digital platform connected independent contractors and passengers.

7. The events in Middle East, centered around the actions of Prince Mohammed Bid Salman of Saudi Arabia, and the diplomatic response to them from the US, both motivated by the desire to contain Iran, are surely fuelling the flames of a new set of crisis in the region. The forced resignation of Lebanese Prime Minister Saad Harari is clearly an attempt to weaken the power exercised in Lebanon by Iran through the Hezbollah. But this may be a bad miscalculation for a regime which is already mired with botched adventures fighting the Houthi rebels in Yemen and escalated diplomatic face-off with Qatar. And all this in the midst of a massive internal drive to round-up dissidents, ostensibly in the name of an anti-corruption campaign. Add in the Israeli dimension and you have a deadly cocktail.

8. Times captures the one area where Trump's legacy can be more far-reaching than that of any other President - judicial appointments. Sample this,

Mr. Trump is poised to bring the conservative legal movement, which took shape in the 1980s in reaction to decades of liberal rulings on issues like the rights of criminal suspects and of women who want abortions, to a new peak of influence over American law and society.

Talking of judiciary, not a pretty picture across in India on an extraordinary day in the Supreme Court on Friday. Fortunately enough, the Indian Supreme Court has managed to survive with credibility intact despite its leadership in the recent past, though it is not clear whether the same can be repeated now. If we are splitting hairs about an obvious case of conflict of interest and acceptance of recusal, then matters are clearly at a crisis point. 

9. Fascinating graphic on the evolution of container ships from a new MGI report on the future of container ship.          

10. Finally, some figures from Alibaba's record breaking Single's Day haul,

Alibaba shuttered the tills on its biggest Singles Day shopping festival to date — a $25.4bn haul that saw Chinese shoppers snap up more than $1bn worth of mobile phones, shoes and lipsticks every hour. More than 777m parcels were shipped out in what has become the biggest day by far in the global retail calendar... Nine out of 10 purchases were made via mobile phones... Alibaba has turned Singles Day — numerically written as 11.11 — into an event many times bigger than any US shopping day sales... 140,000 brands, including 60,000 international names, offered 15m items for sale.