Saturday, March 24, 2018

Weekend reading links

1. The persistence of the belief in the use of Public Private Partnerships (PPPs) to address acute problems in health and education, despite overwhelming evidence to the contrary universally from across the world, is an example of why development is a faith-based activity. This is the latest attempt to use PPPs to solve deep structural deficiencies in health care. 

The problem with PPPs in Indian context, apart from the inherent challenges associated with contracting and contract management in these sectors, is that of supply-side constraints with the market itself. PPPs are not going to attract specialist doctors into small town district hospitals. There are unlikely to be more than just a few providers across the country with the attitude and expertise to deliver faithfully and effectively on such contracts. 

The belief that the likes of Apollos and Fortises will step forward to deliver healthcare while also keeping the social equity objectives in mind is misplaced. Forget doing PPPs, these corporate chains do not seem to have the resources and management capacity to even expand by much in their own urban terrains and are now having to fight off foreign takeover attempts. 

2. Livemint points to disturbing signs from India's labour-intensive industries. Since the introduction of GST, exports have been declining, imports rising, production falling, and rural wage growth slowing when compared to the capital intensive industries. 
3. A Livemint analysis of a sample from the Prowess database of over 27000 listed and unlisted firms from both industrial and services sectors provides empirical evidence that the heavy lifting with respect to job creation is done by the small firms. As the graphic shows, the smallest quartile of firms in terms of sales revenues have consistently created more jobs than those in the biggest quartile. 
Further, the largest firms were net job destroyers in recent years. This is in accordance with trends in the developed countries and elsewhere.

4. More labour market news, as Livemint reports of a steep increase in the share of contract labour in organised manufacturing. The graphic shows the share of contract labour from ASI data
To put this in perspective,
In the 17 years between 1997-98 and 2014-15, the compound annual growth rate (CAGR) of directly employed workers was a piffling 0.55%. In stark contrast, the CAGR of contract workers over the same period was 6.79%... In the manufacture of motor vehicles, for example, workers employed as contract labour are now 45.9% of total workers employed. In 1997-98, contract labour was 10.9% of total workers directly employed.
This trend is likely to accelerate as the government has just issued revised rules expanding fixed tenure of contract labour across all industries. 

5. Fascinating comparison of the fates of Martin Shkreli and Elizabeth Holmes, two people who rose to prominence as pharmaceutical entrepreneurs and who have been convicted/admitted of white collar crimes to defraud their investors.

The former gained notoriety for acquiring the rights to generic drugs for rare diseases before jacking up their prices, was convicted for fraud involving $10 million (though he did finally repay the investors, all of whom were wealthy people) for his activities at two hedge funds he ran. The latter becoming a darling of the VC world - appearing on the cover of Forbes, becoming a member of the Board of Fellows of Harvard Medical School, and receiving the Horatio Alger Prize - before being documented to have lied copiously to boost the valuation of her blood-testing start-up Theranos and thereby defraud investors, including public pension funds, to the tune of $700 million. While the former was convicted and jailed for 8 years, the latter settled with the SEC without admitting or denying them and with a fine of $500,000 and a ban on being an officer or director of any public company for ten years.

What explains the grossly disproportionate nature of punishments given the fraud perpetrated by Holmes being orders of magnitude higher?
John C. Coffee Jr., a professor at Columbia Law School who teaches classes on white-collar crime, said, “Typically you get more sympathy from the criminal justice system if you’re an attractive young woman than a brash, arrogant young male”... In comparison to Mr. Shkreli’s fraud, the Holmes allegations “are really a different order of magnitude,” Ms. Apps said.
Their respective reactions after being charged too appears to have played an important role. While Holmes kept a low profile, Shkreli constantly provoked the Court with his public comments about the case.
Mr. Shkreli repeatedly defied Mr. Ben Brafman’s (his defence lawyer) admonitions to keep quiet and avoid the limelight. He smirked through his trial, taunted prosecutors as the “junior varsity,” called the case a “witch hunt” and was suspended by Twitter after he threatened to have sex with a freelance journalist who covered him. His bail was revoked and he was imprisoned after he offered a $5,000 bounty in a Facebook post for a strand of Hillary Clinton’s hair — a “solicitation to assault,” Judge Matsumoto ruled. In theory, Mr. Shkreli’s well-publicized bizarre antics, both in and out of court, should have had no bearing on his guilt or sentence. As Mr. Brafman put it in his opening statement, Mr. Shkreli shouldn’t be found guilty for being “odd,” “weird,” or having a “dysfunctional personality.” But prosecutors cited his behavior to assert in closing arguments that he “had no respect for the law.” At his sentencing, Judge Matsumoto suggested his actions called into question whether his purported remorse was genuine. 
“I’ve never had a client who did more to hurt his own standing with the court than Martin Shkreli,” Mr. Brafman said. His behavior and comments “probably added several years to his sentence.”
While we all get caught up with the minutiae of legal stuff, ultimately we, including the judges, are all human beings. The cases highlight the critical importance of perceptions and prejudices in determining the fates of court cases.

6. Three very good articles by Anjan Basu, a former official of a public sector bank in India, that shines light on possible distortions that crept into the PSU banks over the years. The first is on the corporate culture of these banks. The second is about the progressive liberalisation of credit appraisal processes - elimination of the credit consortium approach of lending to large projects, which would require all the banks to approve the appraisal and terms negotiated by the lead bank, and its replacement with the multiple banking arrangement where the large company could independently negotiate separate terms with different banks so as to encourage swifter disbursals; removal of the minimum long-term margin requirement stipulations for borrowers; and relaxation in norms for identifying stressed assets whereby if a loan by one bank to a borrower had become NPA then all others too had to classify the same loan account as NPAs. The result was a competitive race to the bottom among PSU banks in lending to and retaining large clients.

The third article refers to business practice reforms for the worse driven by consultants - business process reengineering (BPR) which split loan processing functions into marketing, evaluation and assessment, and supervision and monitoring functions and scattered them across multiple layers within the bank, thereby losing critical synergies and accountability; and treatment of banks as a financial supermarket offering a bouquet of products and financial incentivisation of cross-selling by employees, which in turn enraged customers. The result was erosion of accountability mechanisms within banks and distorted incentives among employees.

This is one more example of the problem with deregulation in financial markets as well as the mindless acceptance of business practice fads that consultants peddle to make a living. 

7. A new IMF working paper explores the distribution of income gains from globalisation. Its summary,
In a panel of 147 countries during 1970-2014, we apply a new instrumental variable, exploiting globalization’s geographically diffusive character, and find differential gains from globalization both across and within countries: Income gains are substantial for countries at early and medium stages of the globalization process, but the marginal returns diminish as globalization rises, eventually becoming insignificant. Within countries, these gains are concentrated at the top of national income distributions, resulting in rising inequality. We find that domestic policies can mitigate the adverse distributional effects of globalization. 
The figure shows that in countries with low level of globalisation, increasing globalisation is associated with a greater income growth and the effect tapers off with increase in level of globalisation. 

8. Staying with globalisation, it may be incorrect to blame Trump alone for the rise in protectionism. Trade as a share of world GDP, which doubled over the 1993-2008 period, has since plateaued off over the last decade and has even been declining since 2013 or so.
Cross-border financial flows too have undergone the same trend. They peaked at 22% of world GDP in 2007, but has since fallen to just 6% in 2016, the same as in 1996! See the graphic below from this MGI report.
Come to think of it, I am inclined to believe that this rise in protectionism is exactly what may be appropriate for China. It is already moving away from the lower end of exports and, given its own large enough domestic market, even dependency on trade itself. But for the American exporters, salivating at the growing and very large Chinese market, this is the wrong time for Trump to be pulling the plug. Now that protectionism has gone global, Beijing no longer needs any excuse to indulge in its version of protectionism! And the Chinese makers now have their market all for themselves.

9. Gaurab Aryal, Federico Ciliberto, and Benjamin Leyden find evidence of anti-competitive collusive behaviour by legacy airlines in the US. They parsed transcripts of quarterly earnings calls for 11 airlines for the 2002-16 period for mentions of "capacity discipline" (restricting the number of offered seats and flights to keep prices high enough). They write,
In recent years, airline executives have been discussing capacity discipline frequently, with the topic coming up in 54 percent of the quarterly earnings conference calls of legacy carriers since the end of 2002... we find evidence that legacy airlines used discussions of capacity discipline in their quarterly earnings calls to coordinate capacity reductions in competitive (non-monopoly) routes. In particular, we found that when all of the airlines serving a particular airport-to-airport market discussed capacity discipline in their most recent earnings call, they reduced the number of seats offered from 1.25 percent in large markets up to 4.21 percent in smaller markets, even after controlling for a rich set of factors that affect airlines’ capacity choices. In other words, legacy carriers used public communication (the discussion of capacity discipline) to collude with their competitors in order to reduce the number of seats that they as a group offered for sale.
An example of how too much information sharing can result in counter-productive outcomes. 

10. Finally, Times has a nice graphical feature on the latest empirical analysis by Raj Chetty, Nathaniel Hendren et al on social trends in the US. They track the anonymise data of virtually all Americans in their late thirties to find,
Black boys raised in America, even in the wealthiest families and living in some of the most well-to-do neighborhoods, still earn less in adulthood than white boys with similar backgrounds... White boys who grow up rich are likely to remain that way. Black boys raised at the top, however, are more likely to become poor than to stay wealthy in their own adult households. Even when children grow up next to each other with parents who earn similar incomes, black boys fare worse than white boys in 99 percent of America. And the gaps only worsen in the kind of neighborhoods that promise low poverty and good schools... Gaps persisted even when black and white boys grew up in families with the same income, similar family structures, similar education levels and even similar levels of accumulated wealth...

According to the study... income inequality between blacks and whites is driven entirely by what is happening among these boys and the men they become. Though black girls and women face deep inequality on many measures, black and white girls from families with comparable earnings attain similar individual incomes as adults.
The authors point to racist attitudes being faced by black males as explanation for this,
If this inequality can’t be explained by individual or household traits, much of what matters probably lies outside the home — in surrounding neighborhoods, in the economy and in a society that views black boys differently from white boys, and even from black girls... Other studies show that boys, across races, are more sensitive than girls to disadvantages like growing up in poverty or facing discrimination. While black women also face negative effects of racism, black men often experience racial discrimination differently. As early as preschool, they are more likely to be disciplined in school. They are pulled over or detained and searched by police officers more often. It’s not just being black but being male that has been hyper-stereotyped in this negative way, in which we’ve made black men scary, intimidating, with a propensity toward violence... this racist stereotype particularly hurts black men economically, now that service-sector jobs, requiring interaction with customers, have replaced the manufacturing jobs that previously employed men with less education.

1 comment:

Abhinav Mehrotra said...

You are absolutely right about the stall of globalization. Paul Krugman in a recent Rising India speech focused on how we take globalization for granted but it has its own cycles. It is dependent on the relationship between the rate of growth in manufacturing technology vs rate of growth in transportation technology. Even Bruce Greenwald had a similar take on it. The benefits of transportation technology have been largely captured and in some cases, they have been overdone with the same product crossing seas multiple times in the entire production process. He said, manufacturing outsourcing in labor-intensive parts of production will go on but recent advancements manufacturing technology are pushing back on gloabalization.