Weekend reading links

1. Economist has a nice article that shines light on the rising entry barriers faced by start-ups in the digital economy from incumbent platform companies, especially Amazon, Facebook, and Google. He said,

Venture capitalists... now talk of a “kill-zone” around the giants. Once a young firm enters, it can be extremely difficult to survive. Tech giants try to squash startups by copying them, or they pay to scoop them up early to eliminate a threat... Venture capitalists are wary of backing startups in online search, social media, mobile and e-commerce. It has become harder for startups to secure a first financing round...

It has never been easy to make it as a startup. Now the army of fearsome technology giants is larger, and operates in a wider range of areas, including online search, social media, digital advertising, virtual reality, messaging and communications, smartphones and home speakers, cloud computing, smart software, e-commerce and more. This makes it challenging for startups to find space to break through and avoid being stamped on. Today’s giants are “much more ruthless and introspective. They will eat their own children to live another day,” according to Matt Ocko, a venture capitalist with Data Collective. And they are constantly scanning the horizon for incipient threats. Startups used to be able to have several years’ head start working on something novel without the giants noticing, says Aaron Levie of Box, a cloud and file-sharing service that has avoided the kill-zone (it has a market value of around $3.8bn). But today startups can only get a six- to 12-month lead before incumbents quickly catch up, he says.

As I have written on countless occasions, it is perplexing that these companies do not face anything close to the level of anti-trust focus they ought to.

3. Dani Rodrik places the China-US trade spat in perspective,

China plays the globalization game by... the strategy is to open the window but place a screen on it. They get the fresh air (foreign investment and technology) while keeping out the harmful elements (volatile capital flows and disruptive imports). In fact, China’s practices are not much different from what all advanced countries have done historically when they were catching up with others. One of the main US complaints against China is that the Chinese systematically violate intellectual property rights in order to steal technological secrets. But in the nineteenth century, the US was in the same position in relation to the technological leader of the time, Britain, as China is today vis-à-vis the US. And the US had as much regard for British industrialists’ trade secrets as China has today for American intellectual property rights. The fledgling textile mills of New England were desperate for technology and did their best to steal British designs and smuggle in skilled British craftsmen. The US did have patent laws, but they protected only US citizens. As one historian of US business has put it, the Americans “were pirates, too.”

3. Deepak Nayyar makes a compelling argument in favour of bringing back development banks, calling for the establishment of a National Development Bank for India,

Between 2000 and 2010, the outstanding loans of development banks as a percentage of gross domestic product dropped from 7.4% to 0.8% in India, but rose from 6.4% to 9.7% in Brazil and 6.2% to 11.2% in China, and declined from 8.6% to 6.8% in Korea, while this proportion rose from 8.5% to 15.9% in Germany and from 3% to 7.2% in Japan.

I agree.

4. A J-PAL analysis of ten evaluations of the use of weather index insurance (payouts based on rainfall) has this graphic on the insurance uptake and price.

Clearly large premium discounts are necessary to achieve significant uptake. In fact, an uptake of over 50% necessities discounts in the range of 70%. Given that the bottom half will consist predominantly of very poor farmers, the target for publicly subsidised crop insurance programs, it raises questions about the efficacy of index insurance. 

In the circumstances, an alternative proposal suggested by one of the NITI Aayog members, Ramesh Chand, is to avoid the transaction costs associated with an insurance and make pre-defined direct compensation payments to farmers who suffer crop damage from deficient rainfall. Sometimes we complicate public policy.

5. John Mauldin's weekly newsletter carries this graphic which highlights the financing challenge facing the burgeoning US government debt.

Foreign central banks stopped net purchases of US government debt five years back. In the circumstances, the only way for the US government to finance its rising deficits is higher interest rates to attract investors. And the consequences of that can be very painful.

6. NYT has a good story on the impact of fiscal austerity on public services in UK. The impact of such cuts are felt the most by local governments.

In the eight years since London began sharply curtailing support for local governments, the borough of Knowsley, a bedroom community of Liverpool, has seen its budget cut roughly in half. Liverpool itself has suffered a nearly two-thirds cut in funding from the national government — its largest source of discretionary revenue. Communities in much of Britain have seen similar losses.

The aggregate impact on welfare spending too has been very significant,

By 2020, reductions already set in motion will produce cuts to British social welfare programs exceeding $36 billion a year compared with a decade earlier, or more than $900 annually for every working-age person in the country, according to a report from the Center for Regional Economic and Social Research at Sheffield Hallam University. In Liverpool, the losses will reach $1,200 a year per working-age person, the study says... Local governments have suffered a roughly one-fifth plunge in revenue since 2010, after adding taxes they collect, according to the Institute for Fiscal Studies in London. Nationally, spending on police forces has dropped 17 percent since 2010, while the number of police officers has dropped 14 percent, according to an analysis by the Institute for Government. Spending on road maintenance has shrunk more than one-fourth, while support for libraries has fallen nearly a third. The national court system has eliminated nearly a third of its staff. Spending on prisons has plunged more than a fifth, with violent assaults on prison guards more than doubling. The number of elderly people receiving government-furnished care that enables them to remain in their homes has fallen by roughly a quarter... Virtually every public agency now struggles to do more with less while attending to additional problems once handled by some other outfit whose budget is also in tatters.

This is a fairly accurate description of how Britain got to this pass,

London bankers concocted a financial crisis, multiplying their wealth through reckless gambling; then London politicians used budget deficits as an excuse to cut spending on the poor while handing tax cuts to corporations. Robin Hood, reversed.

Conservative commentator Scott Sumner examines the aggregate UK government spending data and blames these problems not on austerity but on "progressivism" and its growing list of new "unmet needs". I think his focus on the aggregates is deceptive in so far as it glosses over the reality of local governments as offering the most basic services that citizens are concerned with and the fact that local government allocations have shrunk significantly in recent years.