Wednesday, November 28, 2018

Mid-week reading links

Anand Giridharadas's twitter feed points to several very powerful pieces

1. From the man himself on the dubious Amazon HQ2 saga,
When combined with existing incentives, Amazon might receive three billion dollars in breaks in New York alone, the equivalent of every city resident Venmoing $348 to Bezos... It was the game-show quality of this bidding, the spectre of cash-starved governments begging to give money to a billionaire, that left some critics fuming. Richard Florida, the urban-studies theorist, told me that Amazon’s HQ2 competition “captures the zeitgeist of early 21st century American late capitalism.” He added, “The very idea that a trillion-dollar company run by the world’s richest man could run an American Idol auction on more than two hundred thirty cities across the United States (and Canada and Mexico) to extract data on sites and on incentives, and pick up a handy three billion dollars of taxpayer money in the process, is a sad statement of extreme corporate power in our time.”

...there is an opportunity cost to luring the world’s richest man by letting him free-ride on the public services that other New Yorkers must pay for—whether it’s the failing subway system, the troubled and segregated school system, or... critical renovations at public-housing complexes like Queensbridge, the largest in the United States, which will soon be down the street from Amazon’s New York headquarters... There is also the particular question of why Bezos, of all people, needs to play this way. After the announcement, David Heinemeier Hansson, the founder of the software firm Basecamp, published an open letter to Bezos, who is one of his investors... He urged Bezos to consider shaping his legacy “into something more than the man who killed retail, extracted the greatest loot from its HQ cities, and who expanded the most monopoly holdings the fastest.”
This captures the essence of it all, especially given Bezos's recent decision to become a philanthropist, 
Build a company from the ground up. Do whatever it takes to survive and grow, regardless of the consequences for your customers and workers. Consolidate a monopoly if you can, first in one arena, then in multiple. Use that power, that leverage, to exact concessions from governments, so that you pay even fewer taxes and grow even faster, even bigger. And then, with the wealth that was accumulated by underpaying workers, by avoiding taxes, by lobbying against regulations, by amassing uncompetitive levels of market power—then, with that wealth, you give back. You make a difference. You become a philanthropist, a lover of mankind. You salve by philanthropic moonlight the wounds you may have cut by operational daylight. You solve the very problems you have helped to cause.
2. Almost exemplifying this trend among America's richest is this Washington Post investigation on Carlyle Group, which has spawned some of the largest philanthropists and donors like David Rubenstein,
Under the ownership of the Carlyle Group, one of the richest private-equity firms in the world, the ManorCare nursing-home chain struggled financially until it filed for bankruptcy in March. During the five years preceding the bankruptcy, the second-largest nursing-home chain in the United States exposed its roughly 25,000 patients to increasing health risks... The number of health-code violations found at the chain each year rose 26 percent between 2013 and 2017, according to a Post review of 230 of the chain’s retirement homes. Over that period, the yearly number of health-code violations at company nursing homes rose from 1,584 to almost 2,000. The number of citations increased for, among other things, neither preventing nor treating bed sores; medication errors; not providing proper care for people who need special services such as injections, colostomies and prostheses; and not assisting patients with eating and personal hygiene.

Counting only the more serious violations, those categorized as “potential for more than minimal harm,” “immediate jeopardy” and “actual harm,”... the number of HCR ManorCare violations rose 29 percent in the years before the bankruptcy filing. The rise in health-code violations at the chain began after Carlyle and investors completed a 2011 financial deal that extracted $1.3 billion from the company for investors but also saddled the chain with what proved to be untenable financial obligations, according to interviews and financial documents. Under the terms of the deal, HCR ManorCare sold nearly all of the real estate in its nursing-home empire and then agreed to pay rent to the new owners. Taking the money out of ManorCare constrained company finances. Shortly after the maneuver, the company announced hundreds of layoffs. In a little over a year, some nursing homes were not making enough to pay rent. Over the next several years, cost-cutting programs followed... the number of violations at HCR ManorCare homes rose about three times faster than at other U.S. nursing homes.
On the business model and trends,
The firms profit by pooling money from investors, borrowing even more, and then using that money to buy, revamp and sell off companies. Their methods are geared toward generating returns for investors within a matter of years, and this has led to criticism that they merely plunder company assets while neglecting employees and customers. During and after the recession, as returns became scarce, private-equity investors began to explore industries they had once overlooked, and some invested in businesses that largely cater to the poor: payday lenders, nursing homes, bail bond providers, low-income homes for rental and prison phone services...
In December 2007, it bought HCR ManorCare for $6.1 billion plus fees and expenses. Most of the purchase price was borrowed money — about $4.8 billion — and Carlyle put up $1.3 billion... From the start, Carlyle’s acquisition of HCR ManorCare made the company’s finances more risky because the purchase burdened it with billions in long-term debt. But in April 2011, Carlyle made another critical move at HCR ManorCare, one that would enrich investors and imperil the financial footing of the chain.

Carlyle took HCR ManorCare’s vast real estate empire — the hundreds of nursing homes and assisted living facilities as well as the land underneath — and sold it to HCP, a real estate investment company. HCR ManorCare then had to pay rent to HCP for the use of the nursing homes. This kind of deal, known as a sale-leaseback, is a common tactic of private-equity firms, and it generated financial benefits for Carlyle and its investors. Carlyle got $6.1 billion from the sale, an amount that roughly matched the price that the private-equity firm had paid to buy the company just four years prior. With that money, Carlyle paid off billions in debt that it racked up buying HCR ManorCare... Crucially for Carlyle and its investors, the deal allowed them to recover the $1.3 billion in equity they put into the deal.
Carlyle made money from its investment in other ways, too. It took at least $80 million from the HCR ManorCare venture in the form of various fees, according to interviews and financial documents. Most of that was a “transaction fee,” which is money Carlyle receives when it buys a company, typically 1 percent of the purchase. The $6.1 billion ManorCare purchase yielded Carlyle $61 million, Carlyle officials confirmed. That money was distributed to Carlyle and its investors. In addition, Carlyle receives annual “advisory fees” from the companies that it purchases — essentially, Carlyle pays itself to manage the companies it owns. At ManorCare, those fees averaged about $3 million a year from 2007 to 2015, or about $27 million, according to documents and interviews. That money was also distributed to Carlyle and its investors. Finally, there was one other person who made a lot of money despite the company’s financial woes. After the bankruptcy, longtime chief executive Paul Ormond was awarded $117 million under a deferred compensation agreement...
The real estate deal... meant that HCR ManorCare had to make massive rent payments to its new landlord, and these, according to the company’s accounting, raised the company’s long-term financial obligations to $6 billion. The rent HCR ManorCare was obliged to pay — to occupy the nursing homes it had once owned — amounted to $472 million annually, according to legal filings. The rent was set to escalate at 3.5 percent a year, and according to the lease, HCR ManorCare also had to pay for property taxes, insurance and upkeep at the homes.
3. David Leonhardt lays bare the case for revival of an anti-trust movement in the US. 
This consolidation of business concentration data by Open Markets Institute is awesome!

This from Louis Brandeis, the US Supreme Court Justice, is very apt,
“We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”
4. Finally, FT has an article which sums up the problems with modern financialisation-based capitalism with the illustrative example of GE, the 126 year-old company, whose share price is back to its 1994 level,
There are five key lessons. The first is that debt always catches up with you. While GE has long had strategic problems, its immediate troubles are around a credit crunch. In the boom days, GE used a top credit rating to raise debt to fund its global manufacturing operations and GE Capital arm. This year, when its credit rating was downgraded, borrowing costs went up and a negative spiral began, with investors selling off both the company’s stock and its bonds... GE would not have these problems today if it had not done so many share buybacks in the good times. This is the second lesson. Companies have carried out record amounts of share buybacks in recent years, frequently at the top of the market — moves that are often much more about getting another quarter or two of share price increases to enrich top executives than changing any real business story on the ground. Lesson three is to be careful of growth through acquisition. Over several decades, GE became so large and complex that it could not manage its own business model — witness the company becoming a “too big to fail” bank in the Welch era, a problem his successor Jeff Immelt had to deal with by spinning off the Capital division. Too many companies today, including big tech groups, are growing by acquiring, not innovating. Streamlining is not a bad idea, but the sale of GE’s lending division also exposed lesson four: financial engineering is not the same as real engineering. Once GE Capital, which could be used to hide myriad accounting high jinks, was spun off, the depth of trouble at the company became clearer. After a decade of easy money, it is a fair bet that there are corporate numbers games waiting to be discovered at many companies. The final lesson is that the nature of the economy has fundamentally changed in recent decades from industrial to digital... Companies that cannot make the transition from an economy based on tangibles to one based on intangibles are likely to face the same fate as the once-mighty GE.

Tuesday, November 27, 2018

Infrastructure financing market graphics

This blog has written on numerous occasions in support of financing infrastructure construction with bank loans and then re-financing operation and maintenance of commissioned assets using capital markets.

Construction risks are idiosyncratic, its financing draw down schedule is over the construction period, and the asset will generate cashflow to pay off debts only after construction is completed. Bank loans, which are far more easier to restructure, stagger, and back-load repayments, therefore becomes more appropriate compared to bonds.

In the context of bond market issuances in Asia, this paper points to some interesting insights.

The graphic shows that infrastructure bonds form a very tiny share of the total non-financial corporate bond market.
And syndicated loans dominate bonds themselves in financing infrastructure projects
The default rates of infrastructure bonds come out very favourably compared to non-financial corporate bonds.
And the same applies to relative recovery rates too.

On the average coupons and maturities of bond offerings across different regions.
Update 1 (25.06.2020)

Preqin update on the aggregate private capital raised in emerging markets in the year to March 31, 2020. The table is instructive, with India's share being just $4.1 bn.
And within them infrastructure deals in Asia have been declining sharply since 2016.

Saturday, November 24, 2018

Weekend reading links

1. Interest rates may be inching upwards, but the rate at which it is happening appears not to be having much impact on leveraging. Ananth points to this FT Alphaville article on the unabated rise in the share of Covenant-lite loans, or loans with weak lending protections, among loans given to riskier borrowers (leverage loans).
The robust economic growth in the US makes everyone lower their guard and borrow more and lend less prudently.  

2. Oil prices are declining again reflecting good and bad signs for the Indian economy. Good in terms of likely lowering the twin deficits and bad in terms of its portends for weaknesses in the global economy. 

One of the features of the oil market in recent times has been the rise and rise of US oil production. Sometime between May and June this year, US became the largest crude producer at 11.65 m barrels per day, the first time since 1973.

3. The cost of US sanctions on China, at least for now, appears to being borne by the Chinese exporters than US consumers. Bloomberg points to a new paper by Benedikt Zoller-Rydzek and Gabriel Felbermayr appears to point out that US companies and consumers will only pay 4.5 percent more due to the 25% tariffs on $250 bn Chinese imports and the other 20.5% will fall on Chinese exporters.  
The reason being the smart choice of goods for the first round of tariffs, those with the highest "price elasticity" or availability of substitutes which can replace the Chinese imports. This in turn prevents importers from passing through the tariffs to consumers in the US. They find that total welfare gain to US consumers to be $18.4 bn. Further, they show that this would cut US imports of affected Chinese goods by more than a third and lower the bilateral deficient by 17%.

The challenge will be when the basket of goods expands to those with lower elasticity. But for now, give Trump some credit!

4. The issues raised by Carlos Ghosn arrest in Japan on charges of fraud from an internal enquiry for having deceived Nissan by consistently under-reporting on his pay package and benefits claims and using company assets for personal purposes is symptomatic of executive culture in the corporate world. It is only a surprise that more such demeanours do not come out to the open. Perhaps the reason this came out in the open is because it happened in Japan, which, unlike in the US, has less cultural tolerance for such corporate excesses.  

The Nissan-Renault alliance, which was expanded in 2016 to include Mitsubishi, produces 10.6 million cars annually, making it the world's largest car maker. 

Rest assured that in the coming days, more stories will come out about the details of the power-struggle between the French and Japanese parts of the Nissan-Renault empire. Nissan's Japanese employees had long resented the dominance of Renault's French owners. For long, Ghosn's dominating presence had papered over differences. This FT article may only be the preview to what could come out in the open.

All this again raises questions about the alleged superiority of the "efficient" US business management style and culture over the "inefficient" Oriental one. The argument in favour of this comes from the market performance of US firms compared to their Japanese counterparts, especially the stock market performance and bottomline growth. The idea of cutting costs aggressively (Ghosn built his larger-than-life image on being the "Le cost killer") and promoting performance payments with eye only on the financial reporting bottomline imposes significant long-term costs besides corroding corporate culture. Ghosn compensation was a massive outlier in Japan - Takeshi Uchiyamada, chairman of Toyota, for example, was paid ¥181 million in 2017, compared to Mr. Ghosn’s reported ¥735 million.

But, as we all know now, these things come at considerable costs. Not just on the corporate governance and ethics, but even on business practices (sample Nissan's grow-at-all-cost discounting strategy in the US market which alienated stakeholders like its dealers) the claims of superiority appears questionable. On the net, and taking a long-term view, one cannot but not get the impression that the adoption of western management and business practices may have come at a net cost to Japanese companies.

5. Staying on the theme of corporate governance, there are growing signs that the 1MDB-Goldman Sachs scandal involved the topmost leadership of Goldman. It now emerges that Jha Low, a financier with close ties to the then Malaysian PM, Najib Razaq, and the alleged mastermind in the plot to siphon over $6 bn of Malaysian public funds, met one-on-one with Goldman Chairman and CEO, Lloyd Blankfein in December 2012. This seriously weakens Goldman's efforts to spin the scandal as the work of a few rogue employees.

Sample this,
In the three years before the 2012 meeting, the bank’s compliance staff had repeatedly rejected Mr. Low’s attempts to become a Goldman client because it was unclear how he had amassed his wealth... The compliance team also identified Mr. Low as someone Goldman should avoid working with on any 1MDB transactions...  But when Mr. Blankfein’s aides sought information about Mr. Low in preparation for the meeting, a senior investment banker in Asia praised Mr. Low and did not mention the compliance concerns, according to a person who has reviewed internal Goldman emails about the meeting. Nor did the compliance red flags stop the bank from doing extensive business with 1MDB, which Malaysia’s prime minister at the time had set up in 2009 ostensibly to invest in infrastructure and other projects to improve Malaysians’ daily lives. Goldman ultimately helped 1MDB sell more than $6 billion in bonds to investors, earning about $600 million in fees.
It is hard to believe that a deal like this, an that too one which was bagged without any competitive bidding and on nomination, and especially one which earned the firm $600 million in fees, did not involve not just the knowledge but the active support of the top leadership. Btw, if this were government, it would be impossible to not have loud public demands for resignations and the like.

6. Finally Paul Romer makes good suggestions about the role of governments in the promotion of innovation,
First, government needs to take a more active role in creating scientific infrastructure... Congress can help without any additional spending by letting recipients of research grants use those funds to support open-source projects, which make their blueprints publicly available... Take Python, the open-source programming language that has become the language of choice for software developers in the fields of artificial intelligence and data science. Programmers have used Python to power innovation in everything from the detection of gravity waves (resulting in last year’s Nobel Prize in Physics) to reducing the cost of developing new drugs... Second, Congress should look for opportunities to extend scientific transparency to the private sector. It could draw on the principles that guided the design of our patent system; the law protects a private right to charge for the use of a discovery, but mandates public disclosure of its details so others can learn from it. To see how this could work, consider hydraulic fracturing, or fracking, for oil and gas. Regulators in North Dakota forced firms to disclose how much water and sand they used to frack each well and how much oil it produced. This let a different firm drilling a well nearby select a better mixture for its well. Over time, the entire industry optimized the mix used in various geological conditions and substantially reduced costs.

Friday, November 23, 2018

The return to 'tribalism'?

David Brooks points to an utterly fascinating study about how identities have come to shape core personal beliefs and value systems in the US. The report by More in Common breaks down Americans into seven groups, from left to right, with the most active groups being on the extremes - Progressive Activists (8%) and Devoted Conservatives (6%) - and the richest, whitest, most educated, and most secure. 

The cleavage in their respective views, driving what Brooks calls a "rich, white civil war" and a clash of "privilege", is just stunning. Sample this,
Ninety percent of Devoted Conservatives think immigration is bad, while 99 percent of Progressive Activists think it is good. Seventy-six percent of Devoted Conservatives think Islam is more violent than other religions; only 3 percent of Progressive Activists agree. Eighty-six percent of Devoted Conservatives think it’s more important for children to be well behaved than creative. Only 13 percent of Progressive Activists agree... Ninety-one percent of Progressive Activists say sexual harassment is common, while only 12 percent of Devoted Conservatives agree. Ninety-two percent of Progressive Activists say people don’t take racism seriously enough, compared with 6 percent of Devoted Conservatives. Eighty-six percent of Progressive Activists say life’s outcomes are outside people’s control; only 2 percent of Devoted Conservatives agree. Progressive Activists are nearly three times as likely to say they are ashamed to be American as the average voter... The researchers asked a wide variety of questions, on everything from child-rearing to national anthem protests. In many cases, 97 to 99 percent of Progressive Activists said one thing and 93 to 95 percent of Dedicated Conservatives said the opposite. There’s little evidence of individual thought, just cult conformity. The current situation really does begin to look like the religious wars that ripped through Europe after the invention of the printing press, except that our religions now wear pagan political garb.

Sample this
Our research concludes that we have become a set of tribes, with different codes, values, and even facts. In our public debates, it seems that we no longer just disagree. We reject each other’s premises and doubt each other’s motives. We question each other’s character. We block our ears to diverse perspectives. At home, polarization is souring personal relationships, ruining Thanksgiving dinners, and driving families apart. We are experiencing these divisions in our workplaces, neighborhood groups, even our places of worship. In the media, pundits score points, mock opponents, and talk over each other. On the Internet, social media has become a hotbed of outrage, takedowns, and cruelty—often targeting total strangers... Everyone appears to have a varying version of world events, and it feels harder than ever to sort fact from fiction. Our news feeds seem to just echo our own views, and when people post alternative opinions they are often attacked by angry mobs. We don't seem to disagree anymore without perceiving another person's views as stupid, wrong or even evil...
Often more than 90 percent of people in one of these groups holds the same view about a controversial issue, and typically, it will be the reverse of whatever the opposing wing believes. In contrast, the remaining two-thirds of Americans at the center show more diversity in their political views, express less certainty about them, and are more open to compromise and change—even on issues that we all tend to consider highly polarizing.
Immigration; racial justice and police brutality; sex, gender, and morality; and terrorism and Islam are at the forefront of what drives the cleavages. 

Views on feminism...
... and Donald Trump

A few thoughts

1. As Brooks writes, the power of narratives is immense and all-encompassing. Powerful narratives exercise their hegemony over the two extremist factions. And their conversations set the social and political agenda for everyone. The hegemony of such narratives is impervious to logical thinking and analytical reasoning. One only needs to look at the hegemony exercised by other dominant prevailing narratives.

Just as such narratives, and its hegemony, serves to create cohesion, its absence detracts from coherent thinking and action. Where will such a narrative emerge for those in between the two extremist factions?

2. The clash of these two narratives resembles the the classic Hegelian dialectic. In such dialectical inter-play of thesis and anti-thesis, the synthesis can emerge either from outside the two warring groups or from within them. The Marxian, Keynesian, and Communist counter-revolutions emerged from within the elites, in particular from the liberal sides in each case. 

Unfortunately, and this has been the biggest disappointment, the liberal elites uniformly appear so captivated by their current narrative and so hateful of the other narrative that there may have left very limited room for alternative thinking. 

For example, how many liberal intellectuals and opinion makers oppose excessive financialisation, trade liberalisation, globalisation, and migration and support (at least the core principles of) Trump's policies on China and forcing US MNCs to relocate back? How many of them are, what Daniel Bell described himself as "socialist in economics, a liberal in politics, and a conservative in culture"? 

3. It may be incorrect to view this trend as being an exception. Historically tribalism and factionalism have been the norm. Modernism and the dawn of the liberal era was supposed to have ended such divisive trends. In fact, we may actually be witnessing the return to the norm after a brief lull. Proclamations of "end of ideology" and "end of history" have turned out to be remarkably naive. Like with analysing other trends, we may have forgotten to take the "long view of history". 

4. The near complete unanimity among members of the two extreme factions on important social issues and trends offers a stark contrast with the considerable heterogeneity in views among the other factions. Clearly, the more educated, more globally exposed, richer, and more comfortably ensconced populace suffer from groupthink and herd mentality. What makes this so - over-confidence, complacency, hubris, intolerance of alternative views?

It is ironical that liberals, who are supposed to be the most eclectic and hold the widest array of views, have become so parochial!

5. Finally, as Brooks writes, politics and politicking is the turf of privilege. Others struggle to live their lives and make ends meet.

As if to underline the deep roots of tribalism, even dietary preferences are not spared from the influence of politics and tribalism (or vice-versa).
All this is a package and who knows in which direction causality runs!

Tuesday, November 20, 2018

Transforming systems - the perception Vs reality

I blogged earlier outlining some pathways to bring about systemic transformations to address wicked problems. This post will make the distinction between such transformations brought about through strong personalities and leaders and those through genuine system-wide changes.

In India's development lore, we come across examples of District Collectors, Municipal Commissioners, Police Superintendents, and State Government Secretaries supposedly having achieved transformational change with their initiatives. But unfortunately, as outlined below, the whole literature on best practices and case studies that highlight the work of outstanding individuals may actually present very little by way of replicable learnings. 

When faced with wicked problems, apart from doing nothing, there are perhaps three possible reform responses that leaders can try out.

The commonest is to try out some or other technical fixes - privatise, outsource, digitise, restructure and so on. Examples of high-profile PPPs, use of Blockchains and Machine Learning, process reengineering etc abound, which have done much more damage than any benefit. This, while intuitively appealing (we are doing something new to an old problem which has elided satisfactory solutions) is like band-aid on gangrene. While there may be some 'form' of change, it is unlikely to be accompanied by any 'substance' of change.

The glibbest among such leaders propagate themselves through social media and manage to win awards. This approach has perhaps the most damaging influence in so far as it conveys an impression of success and incentivises peer emulation. A very distorted trend can get entrenched.

Sometimes outstanding individuals emerge to lead organisations. They use intense personal energies and commitment to instil fear, inspire teams, monitor intensely, micro-manage extensively etc that can paper over systemic decay and get stuff done to a satisfactory enough level. But the effect is rarely sustainable and success is transient. In fact, they make systems work effectively when they are at the helm, even deliver outcomes, by sheer force of their personality and intensity of their drive. But these are not system transformations. It is most likely kicking the can down the road for the successors to engage with.

The flip side of this approach is that such intensity of engagement by the leader typically, but not always, ends up undermining initiative and lowering the motivation of subordinates and concentrating authority and action at the top of the bureaucracy. I have written about the example of the Indian Administrative Service (IAS) here.

Finally there are the very rare genuine systemic transformation efforts. It involves some or all of these - cultivate champions at all levels; empower extensively, even at the risk of short-term failures; nurture positive deviances and encourage their diffusion; trigger conversations at all levels about the need for change; create the conditions for internal ruptures etc. This is very difficult to sustain. The toolkits are very different from what modern management teaches.

The most difficult (to comprehend) part of this approach is that it cannot be planned in any detail. You have to initiate the process with a few carefully thought out interventions or reforms which resonate with the felt-needs of all stakeholders, is important enough in the system's overall perspective, and which the system has the capacity to engage with meaningfully. Once initiated, the challenge is to watch and engage opportunistically based on emergent dynamics of the system and steer the course without letting things get off control. It is a long-drawn effort with uncertain pathway of change. This needs patience, tact, and an ability to continuously step back and in as required.

While the first two approaches present themselves as amenable to replication, only the first is, in theory at least, both replicable and scaleable. The second option runs straight into the constraint of committed leaders - there are only so many of them. It is difficult to reduce the third approach to even a plan much less a replication toolkit. 

For those looking at examples of system transformation, it is important to understand the underlying approach to figure out which category a particular system transformation attempt belongs to.

Sunday, November 18, 2018

Times feature on how China became a superpower

The NYT has a China feature with several articles. 

Bureaucrats who were once obstacles to growth became engines of growth. Officials devoted to class warfare and price controls began chasing investment and promoting private enterprise. Every day now, the leader of a Chinese district, city or province makes a pitch like the one Yan Chaojun made at a business forum in September. “Sanya,” Mr. Yan said, referring to the southern resort town he leads, “must be a good butler, nanny, driver and cleaning person for businesses, and welcome investment from foreign companies.” It was a remarkable act of reinvention, one that eluded the Soviets. In both China and the Soviet Union, vast Stalinist bureaucracies had smothered economic growth, with officials who wielded unchecked power resisting change that threatened their privileges... Afraid to open up politically but unwilling to stand still, the party found another way. It moved gradually and followed the pattern of the compromise... which left the planned economy intact while allowing a market economy to flourish and outgrow it.
Examples of the now famous "crossing the river by feeling the stones" approach
Factories should meet state quotas but sell anything extra they made at any price they chose. It was a clever, quietly radical proposal to undercut the planned economy... allowing farmers to grow and sell their own crops, for example, while retaining state ownership of the land; lifting investment restrictions in “special economic zones,” while leaving them in place in the rest of the country; or introducing privatization by selling only minority stakes in state firms at first.
This approach has been followed on the political side too,
But in reality, the party made changes after Mao’s death that fell short of free elections or independent courts yet were nevertheless significant. The party introduced term limits and mandatory retirement ages, for example, making it easier to flush out incompetent officials. And it revamped the internal report cards it used to evaluate local leaders for promotions and bonuses, focusing them almost exclusively on concrete economic targets. These seemingly minor adjustments had an outsize impact, injecting a dose of accountability — and competition — into the political system, said Yuen Yuen Ang, a political scientist at the University of Michigan. “China created a unique hybrid,” she said, “an autocracy with democratic characteristics.”
Sample this on the growth of China's school tutoring market,
In cities like Shanghai, Chinese schoolchildren outperform peers around the world. For many parents, though, even that is not enough. Because of new wealth, a traditional emphasis on education as a path to social mobility and the state’s hypercompetitive college entrance exam, most students also enroll in after-school tutoring programs — a market worth $125 billion, according to one study, or as much as half the government’s annual military budget.
On the role of private sector,
The private sector now produces more than 60 percent of the nation’s economic output, employs over 80 percent of workers in cities and towns, and generates 90 percent of new jobs, a senior official said in a speech last year.
On China's role as the builder-in-chief with nearly 600 projects across, mainly, developing countries,
41 pipelines and other oil and gas infrastructure help China secure valuable resources. 203 bridges, roads and railways create new ways for China to move its goods around the world. 199 power plants — for nuclear, natural gas, coal and renewables — give China new markets for its construction and equipment companies... at least 63 power plants financed by China around the world, which collectively pollute more than Spain.
On its efforts to reshape the global narrative on China in popular media,
Of the top 100 highest-grossing films worldwide each year from 1997 to 2013, China helped finance only 12 Hollywood movies. But in the five years that followed, China co-financed 41 top-grossing Hollywood films... Perhaps most central to China’s soft power push is CGTN, the international arm of the state broadcaster CCTV. With employees from more than 70 countries and regions working on television channels broadcasting in English, Spanish, French, Arabic and Russian, CGTN’s mission is to report news for global audiences “from a Chinese perspective.”
On China's progress up the manufacturing value chain from 2000 to 2016,
On the evolution of the country's internet landscape,
It is years ahead of the United States in replacing paper money with smartphone payments, turning tech giants into vital gatekeepers of the consumer economy. And it is host to a supernova of creative expression — in short videos, podcasts, blogs and streaming TV — that ought to dispel any notions of Chinese culture as drearily conformist. All this, on a patch of cyberspace that is walled off from Facebook and Google, policed by tens of thousands of censors and subject to strict controls on how data is collected, stored and shared... In China, there is pretty much only one rule, and it is simple: Don’t undermine the state. So.. unwanted beliefs and ideologies are kept out. Beyond that, everything is fair game. Start-ups can achieve mammoth scale with astonishing speed; they can also crash brutally. Thanks to weak intellectual property protections, they can rip one another off with abandon — not great for rewarding innovation, but O.K. for consumers, who get lots of choices...
Little remains of daily life that has not been transformed. Shopping. Getting a loan. Renting a bike. Even going to the doctor. This level of clout hasn’t gone unnoticed by China’s leaders. Never in the Communist era have private entities wielded such influence over people’s lives. To keep tech in its place, the government is demanding stakes in companies and influence over management. Regulators have reprimanded online platforms for hosting content they deem distasteful — too raunchy, too flirty, too creepy or just too weird. That’s why the best way for tech companies to thrive in China is to make themselves useful to the state. Nearly everyone in China uses WeChat, making the social network a great way for the authorities to police what people say and do. SenseTime, whose facial recognition technology powers those fun filters in video apps, also sells software to law enforcement.
The results of all this have been truly impressive,
Eight hundred million people have risen out of poverty. That’s two and a half times the population of the United States... Chinese men born in 2013 are expected to live more than seven years longer than those born in 1990; women are expected to live nearly 10 years longer... China used to make up much of the world’s poor. Now it makes up much of the world’s middle class.

Monday, November 12, 2018

System transformations in development

Systems change is the buzzword in development today. The presumption is that wicked problems in development cannot be solved with piecemeal projects, however innovative, and demand simultaneous system-wide interventions to change both processes and behaviours and attitudes.

While I am in agreement with the need to reform systems to realise truly sustainable change and the desired development outcomes, I am less sanguine about its prospects. For a start, there are truly very few examples of such changes from any country. Two, I think very few stakeholders actually appreciate what it takes to realise system-wide change. 

The danger with such efforts is that it can get sucked into a rabbit hole with the strong likelihood of little to show for even after a reasonable period of experimentation. We know what a good system looks like and maybe its ingredient elements but know very little about the relative importance associated with each element much less how to get there.

Take the example of systems change in bureaucracies. It would involve having in place attributes like goal clarity, motivated officials, systemic appetite for change, performance accountability, guidance and monitoring systems, stable leadership, and political and bureaucratic commitment. Addressing each one of these is a challenge in itself and we know very little about how to achieve that. Further, creating an objective function of all these to assess their relative importance would be almost God-like. Compounding problems, this transformation has to be achieved in an environment of acutely weak state capacity. 

The only practical response to this problem is to start somewhere promising, a minimum viable product (MVP), and opportunistically engage very actively to steer the course. The starting point is therefore very critical and has to be a powerful enough lever with potential to trigger off system-wide ripples as well as be ripe enough in time to for the change momentum to be strong enough.  

Once the starting point is identified, the next step is to figure out the pathways to change. In the context of developing countries like India, I can think of at least four pathways to change.

1. Positive deviances effect - Spot champions of change at a reasonably small but systemically important enough level and support them to emerge as positive deviances. This is a two-dimensional exercise - identify appropriate level, and spot champions - which require the deepest contextual and systemic understanding. Once we have a small sample of such champions out there, one can only hope that some of them are replaced by equally good successors and the reforms have enough time to stick. 

The whole e-governance eco-system in India can trace its origins to several positive deviances, both on use-cases as well as work-flow innovations, that emerged over the early noughties across districts of India. Over time the best features of different positive deviances got consolidated to form robust e-governance solutions across the entire spectrum of development activities. 

Globally, the use of PPPs in infrastructure contracting has evolved gradually through the emulation of positive deviances in different types of contracting structures and across different sectors, especially in UK, Canada, Australia, and Latin America. Resources like the World Bank's PPIAF have helped enormously in consolidating the learnings and providing resources which interested parties could take off the shelf and use with minimal customisation. 

2. Anchor interventions - Given the amorphous nature of what is required to realise system transformation, it is useful to have a clear and actionable starting point. Technology platforms (and not solutions) - by consolidating data and making available actionable information as decision-support and monitoring system, and which can be used to gradually build out modules covering other use-cases - are good examples of likely anchor interventions. 

For example, India's Swachh Bharat Mission or Smart Cities programs are good examples of anchors for systemic changes on sanitation and urbanisation. Similarly, the Ease of Doing Business (EoDB) in improving business environment and National Assessment Survey (NAS) and School Education Quality Index (SEQI) in improving learning outcomes are other good examples. But as all these show, the anchors by themselves are no good without good execution and opportunistic engagement to attract and integrate other elements of system transformation as we go along. 

3. Mutations - Another way to realise systemic change is through sudden regime shifts which replace legacies - new rules of the game, new personnel, new entities, new political regimes etc. They are essentially mutations which cannot be planned for, though one could work actively to create the conditions for them. The more wicked and universal the problem, the greater the difficulty of having this pathway to change.  

The Indian Insolvency and Bankruptcy Code (IBC) is a recent example of how a mutation can trigger the emergence of conditions that aligns incentives of lenders and borrowers to create a strong bankruptcy and resolution environment. The most prominent examples of such mutations over the past three decades are China's and India's liberalisation, the collapse of the Communist regimes etc. 

4. Cumulative effect - Finally, things just happen. In such cases it is difficult to attribute the change to any proximate causes but more likely the cumulative effect of several diffuse factors over a long period of time. The problem with such changes is that not only can it be planned but also once the change happens it is unlikely to have champions ready to lead the change. 

For example, the shift in the debate from inputs to learning outcomes in India over the past 3-4 years does not have any immediate cause. It has been the cumulative result of several factors, the most prominent being the receding importance of inputs and the growing salience of poor learning outcomes and its adverse impact on productivity and economic growth. But the cumulative nature of the change has also meant that the agenda on what and how to move to addressing deficient learning outcomes has remained still-born and without any champions to lead it. 

It is also the case that many changes are path dependent - the change requires traversing the path of exhausting alternative options and demonstrating their inadequacy or failure, thereby creating the conditions for acceptability of the desired change element. This is the political reality of any system. In fact, in many cases the desired change elements themselves emerge only as we progress with implementation. 

Take the example of focus on access and inputs in case of health and education. In the absence of buildings, teachers, and student attendance, focusing on quality could not have been a bureaucratic of political imperative. Or without the difficult experience and struggles of (and memory thereof) having done engineering works through government agencies, it would be impossible for systems to embrace PPPs contracts and concessions. Or of austerity, despite the knowledge of near certain suffering and damage, invariably preceding expansionary policies since the moral hazard concerns in its absence are considered to be prohibitive. Or the political will to embrace delegation of power requires a history of failure with centralised administration. 

One would have noticed that I have not mentioned evidence as a pathway to significant change in case of complex development challenges. Its role lies more in being one of the many contributors to creating the conditions required for systemic change. By itself, I cannot think of any evidence (or even a set of consciously created evidences) having been significant proximate contributors to triggering decisions that led to transformative systemic changes. 

Actually presence of right people at the right place at the right moment in time - or Overton windows - is perhaps the most important requirement to realise systemic transformations. Funny that in this age of evidence-based policy making, very little of development thinking and engagement goes in this direction. 

Each of these pathways to change are not mutually exclusive and they often co-exist and get strengthened by association of some or all of others. 

As a note of caution, while I can now think of only these four factors, it is entirely likely that there are other pathways to change. Further, while the post is likely to be relevant in most country contexts, I have written it from the perspective of system change in India. 

In another post, I shall focus on the distinction between leader's personality-induced perception of systems transformation and real systems transformation.  

Sunday, November 11, 2018

Weekend reading links

1. On the traffic related negative externalities associated with ride hailing services,
Far from reducing congestion by encouraging people to give up their cars, as many had hoped, ride-hailing seems to increase it. Bruce Schaller, a transport consultant, estimates that over half of all Uber and Lyft trips in big American cities would otherwise have been made on foot or by bike, bus, subway or train. He reckons that ride-hailing services add 2.8 vehicle miles of driving in those cities for every mile they subtract. A new working paper by John Barrios of the University of Chicago and Yael Hochberg and Hanyi Yi of Rice University spells out one deadly consequence of this increase in traffic. Using data from the federal transport department, they find that the introduction of ride-sharing to a city is associated with an increase in vehicle-miles travelled, petrol consumption and car registrations—and a 3.5% jump in fatal car accidents. At a national level, this translates into 987 extra deaths a year.
As I have blogged earlier, this really should not have been a matter of debate. Ride-hailing services clearly induce more passenger vehicles into the roads. And that is precisely what public policy should strive to discourage.

2. This timeline of events on the insolvency resolution process in India is very informative.
One of the true "big bang" reforms and a genuine success of the government. The challenge is now its implementation - both in terms of supply (capacity and integrity of NCLT, IRP, CoC etc) and demand (market absorption, debtors gaming etc). 

And it also raises the question about whether such reforms could not have been pushed without the gravity of the crisis being so. 

3. Good illustration of the challenges associated with infrastructure project bond financing,
A 2016 bond issued for the construction of a public‐private partnership (PPP) hospital in Turkey is frequently mentioned as a model for how MDBs can credit‐enhance project bonds, but is in many ways more illustrative of its difficulties. The project involved a risk guarantee provided by the Multilateral Investment Guarantee Agency (MIGA) for €208 million (out of a total €288 million bond) in the event of expropriation, transfer restriction or breach of contract. This was supplemented with a liquidity facility by the EBRD for €89 million to mitigate project construction risk and potential payment delays from MIGA’s guarantee caused by required arbitration procedures. Even with this credit enhancement package, investor interest was insufficient to float the bond publicly. It was in the end a private deal, and a substantial portion was purchased by other development finance institutions (DFIs): IFC for €80 million, France’s Agence Française de Développement‐ Proparco for €40 million and Holland’s Nederlandse Financierings‐Maatschappij voor Ontwikkelingslanden (FMO) for €20 million.
The EBRD support was effectively a guarantee on a guarantee!

4. Juan Ketterer and Andrew Powell from IADB are the latest to highlight the unbundling of construction and maintenance phases of an infrastructure asset and finance them accordingly. They also suggest refinancing of assets post-construction with bond issuances and establishment of national infrastructure development funds that aggregate projects and fund them. 

5. The Indian Economic Survey 2017-18 said that 12% of urban housing stock is vacant. It triggered a flurry of responses to address this "problem".

So how does this 12% compare with that in other countries. The Bloomberg has an article which shows that over 50 million units or 22% of China's urban housing stock is unoccupied and 12-15% is pretty much the norm across countries.

Clearly there is a natural dynamic associated with all systems. In this case, it is clear that even in  a reasonably efficient steady state 12% of houses are likely to remain vacant for various reasons - temporary migration, second property purchases, speculation, and just the flow from purchase to moving in. Further, the numbers are likely to be even lower in average percentage terms across Indian cities if we take out the largest 4-5 cities whose absolute house numbers skew the percentage.

6. Too many of canonical experiments that purport to illustrate evidence on something are being debunked. The Easterlin Paradox (and this) and Marshmallow Test (and this) are but just two examples. The latest is new research which traces a biochemical cause for the Placebo effect - fake treatments with no plausible reason to create an effect. 
Depression, back pain, chemotherapy-related malaise, migraine, post-traumatic stress disorder: The list of conditions that respond to placebos — as well as they do to drugs, with some patients — is long and growing. But as ubiquitous as the phenomenon is, and as plentiful the studies that demonstrate it, the placebo effect has yet to become part of the doctor’s standard armamentarium — and not only because it has a reputation as “fake medicine” doled out by the unscrupulous to the credulous. It also has, so far, resisted a full understanding, its mechanisms shrouded in mystery. Without a clear knowledge of how it works, doctors can’t know when to deploy it, or how... theories, which posit that the mind acts upon the body to bring about physical responses, tend to strike doctors and researchers steeped in the scientific tradition as insufficiently scientific to lend credibility to the placebo effect...

Aided by functional magnetic resonance imaging (f.M.R.I.) and other precise surveillance techniques, Kaptchuk and his colleagues have begun to elucidate an ensemble of biochemical processes that may finally account for how placebos work and why they are more effective for some people, and some disorders, than others. The molecules, in other words, appear to be emerging. And their emergence may reveal fundamental flaws in the way we understand the body’s healing mechanisms, and the way we evaluate whether more standard medical interventions in those processes work, or don’t. Long a useful foil for medical science, the placebo effect might soon represent a more fundamental challenge to it... the placebo effect is a biological response to an act of caring; that somehow the encounter itself calls forth healing and that the more intense and focused it is, the more healing it evokes... “Rituals trigger specific neurobiological pathways that specifically modulate bodily sensations, symptoms and emotions,” he wrote. “It seems that if the mind can be persuaded, the body can sometimes act accordingly.” 
Does this also mean that Eastern systems of medicine which focus as much on the mind as on the body itself is correct on purely technical basis as well?

7. FT covers how the infamous Malaysian 1MDB scandal is engulfing Goldman Sachs with the DoJ indictment of three of its senior executives, including the co-head of Asia-Pacific investment banking division. The investment bank had raised $6.5 bn for the Malaysian state investment fund in 2012-13 pocketing nearly $600 m in fees in the process.

Goldman is presenting the case legally as one of 'rogue employees' and not known by its leadership. But it is a very hard act to pull off since these 'rogue' employees were themselves part of the leadership.

8. Finally, Times has a long overdue post on the corrosive political implications of business concentration. Tim Wu writes,
Over the last two decades, more than 75 percent of United States industries have experienced an increase in concentration, while United States public markets have lost almost 50 percent of their publicly traded firms. There is a direct link between concentration and the distortion of democratic process. As any undergraduate political science major could tell you, the more concentrated an industry — the fewer members it has — the easier it is to cooperate to achieve its political goals. A group like the middle class is hopelessly disorganized and has limited influence in Congress. But concentrated industries, like the pharmaceutical industry, find it easy to organize to take from the public for their own benefit. Consider the law preventing Medicare from negotiating for lower drug prices: That particular lobbying project cost the industry more than $100 million — but it returns some $15 billion a year in higher payments for its products.

Wednesday, November 7, 2018

Adults in the Room - observations

Read Yanis Varoufakis' chronicle of his tenure as Finance Minister of Greece. 

Several interesting bits. Great account of how European institutions actually work and the power balance within. Clearly Germany matters and those at the helm don't try to hide it.

Two points stand out. 

1. He clearly is someone who believes he cannot do wrong and his views and plans are the fail-proof. Not one admission of goof-ups that I can remember from the entire book. 

2. Resolution of any problem or situation for him is more about its technical dimension. Sample the numerous instances of the pride with which he talks about his proposals and his speeches, compared with the grudging acceptance of compromises and concessions to the Troika and other interlocutors.

Without in anyway condoning the pig-headedness of the institutions on austerity and the failings of European politics, it is no surprise that Yanis failed. Just those behavioural attributes meant that he had to. A perfect illustration of a brilliant technocrat struggling with navigating his ideas by overcoming real-world challenges. 

Two standout extracts

On insiders and outsiders,
“There are two kinds of politicians: insiders and outsiders. The outsiders prioritise their freedom to speak their version of the truth. The price of their freedom is that they are ignored by the insiders, who make the important decisions. The insiders, for their part, follow a sacrosanct rule: never turn against other insiders and never talk to outsiders about what insiders say or do. Their reward? Access to inside information and a chance, though no guarantee, of influencing powerful people and outcomes. So Yanis, which of the two are you?”
On conspiracy theories (applies as much to claims of grand strategies),
“There are what I called “super black boxes”, whose size and import is so great that even those who created and control them cannot fully understand their inner workings : for example, financial derivatives whose effects are not truly understood even by the financial engineers who designed them, global banks and multinational corporations whose activities are seldom grasped by their CEOs, and of course governments and supranational institutions like the IMF, led by politicians and influential bureaucrats who may be in office but are rarely in power. They too convert inputs – money, debt, taxes, votes – into outputs – profit, more complicated forms of debt, reductions in welfare payments, health and education policies...
When a large-scale crisis hits, it is tempting to attribute it to a conspiracy between the powerful. Images spring to mind of smoke-filled rooms with cunning men (and the occasional woman) plotting how to profit at the expense of the common good and the weak. These images are, however, delusions. If our sharply diminished circumstances can be blamed on a conspiracy, then it is one whose members do not even know that they are part of it. That which feels to many like a conspiracy of the powerful is simply the emergent property of any network of super black boxes. The keys to such power networks are exclusion and opacity. Recall the ‘Greed if great’ ethos of Wall Street and the City of London in the years before the 2008 implosion. Many decent bank employees were worried sick by what they were observing and doing. But when they got their hands on evidence or information foreshadowing terrible developments, they faced Summers’s dilemma: leak it to outsiders and become irrelevant; keep it to themselves and become complicit; or embrace their power by exchanging it for other information held by someone else in the know, resulting in an impromptu two-person alliance that turbocharges both individuals’ power within the broader network of insiders. As further sensitive information is exchanged, this two-person alliance forges links with other such alliances. The result is a network of power within other pre-existing networks, involving participants who conspire de facto without being conscious conspirators. Whenever a politician in the know gives a journalist an exclusive in exchange for a particular spin that is in the politician’s interest, then journalist is appended, however unconsciously, to a network of insiders. Whenever a journalist refuses to slant their story in the politician’s favour, they risk losing a valuable source and being excluded from that network. This is how networks of power control the flow of information: through co-opting outsiders and excluding those who refuse to play ball. They evolve organically and are guided by a supra-intentional drive that no individual can control, not even the President of the US, the CEO of Barclays or those manning the pivotal nodes in the IMF or national governments.”

Sunday, November 4, 2018

Weekend research papers reading links

1. Erik Brynjolfsson, Chad Syverson, and Daniel Rock find a productivity J-curve as General Purpose Technologies (GPTs) evolve,
General purpose technologies (GPTs) such as AI enable and require significant complementary investments, including business process redesign, co-invention of new products and business models, and investments in human capital. These complementary investments are often intangible and poorly measured in the national accounts, even if they create valuable assets for the firm. We develop a model that shows how this leads to an underestimation of output and productivity in the early years of a new GPT, and how later, when the benefits of intangible investments are harvested, productivity will be overestimated... The error in measured total factor productivity therefore follows a J-curve shape, initially dipping while the investment rate in unmeasured capital is larger than the investment rate in other types of capital, then rising as growing intangible stocks begin to affect measured production...

This period can be of considerable length. For example, the technologies driving the British industrial revolution led to “Engels’ Pause,” a half-century-long period of capital accumulation, industrial innovation, and wage stagnation. In the later GPT case of electrification, it took a generation as the nature of factory layouts was re-invented.
2. Stephan Heblich, Daniel M Sturm, and Stephen J Redding seek to quantify the impact of transport technologies on the urban economy. Their model uses data for London from 1801-1921 and the introduction of steam railways and finds for the period,
... that removing the entire railway network reduces the population and the value of land and buildings in Greater London by 20 percent or more, and brings down commuting into the City of London from more than 370,000 to less than 60,000 workers.
3. Stephen Cecchetti and Enisse Kharroubi find evidence of the adverse impact of credit growth on productivity,
We examine the negative relationship between the rate of growth in credit and the rate of growth in output per worker. Using a panel of 20 countries over 25 years, we establish that there is a robust correlation: the higher the growth rate of credit, the lower the growth rate of output per worker. We then proceed to build a model in which this relationship arises from the fact that investment projects that are more risky have a higher return. As their borrowing grows more quickly over time, entrepreneurs turn to safer, hence lower return projects, thereby reducing aggregate productivity growth. We take this theoretical prediction to industry-level data and find that credit growth disproportionately harms output per worker growth in industries that have either less tangible assets or are more R&D intensive.
And their conclusions on financial sector growth are very important,
First, the growth of a country's financial system is a drag on productivity growth. That is, higher growth in the financial sector reduces real growth. Financial booms are not, in general, growth-enhancing. Second, using sectoral data, we examine the distributional nature of this effect and find that credit booms harm what we normally think of as the engines for growth – those industries that have either lower asset tangibility or high R&D-intensity. This evidence, together with recent experience during the financial crisis, leads us to conclude that there is a pressing need to reassess the relationship of finance and real growth in modern economic systems.
This graphic on the R&D intensity of various manufacturing industries is interesting

4. Falk Brauning and Victoria Ivashina find significant spillovers from US monetary policy on emerging market economies through the foreign banks' lending channel.
Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated predominantly in U.S. dollars... Outstanding shares of foreign banks’ dollar credit for African, American, and Asian emerging economies are over 90 percent. Even for emerging Europe, this number is 60 percent... This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers experience a 32-percentage-point greater increase in the volume of loans issued by foreign banks than do borrowers from developed markets, followed by a fast credit contraction of a similar magnitude upon reversal of the U.S. monetary policy stance. This result is robust across different geographies and industries, and holds for U.S. and non-U.S. lenders, including those with little direct exposure to the U.S. economy. EME local lenders do not offset the foreign bank capital flows, and U.S. monetary policy affects credit conditions for EME firms, both at the extensive and intensive margin. Consistent with a risk-driven credit-supply adjustment, we show that the spillover is stronger for riskier EMEs, and, within countries, for higher-risk firms.
In case of EM's loans are the dominant form of external liability compared with bonds for developed markets, and foreign banks share of all external liability is for EMs is double that of developed countries.
 5. Raj Chetty et al map children's adult life outcomes based on their childhood circumstances. 
We construct a publicly available atlas of children's outcomes in adulthood by Census tract using anonymized longitudinal data covering nearly the entire U.S. population. For each tract, we estimate children's earnings distributions, incarceration rates, and other outcomes in adulthood by parental income, race, and gender. These estimates allow us to trace the roots of outcomes such as poverty and incarceration back to the neighborhoods in which children grew up. We find that children's outcomes vary sharply across nearby areas: for children of parents at the 25th percentile of the income distribution, the standard deviation of mean household income at age 35 is $5,000 across tracts within counties. We illustrate how these tract-level data can provide insight into how neighborhoods shape the development of human capital and support local economic policy using two applications. First, the estimates permit precise targeting of policies to improve economic opportunity by uncovering specific neighborhoods where certain subgroups of children grow up to have poor outcomes. Neighborhoods matter at a very granular level: conditional on characteristics such as poverty rates in a child's own Census tract, characteristics of tracts that are one mile away have little predictive power for a child's outcomes. Our historical estimates are informative predictors of outcomes even for children growing up today because neighborhood conditions are relatively stable over time. Second, we show that the observational estimates are highly predictive of neighborhoods' causal effects, based on a comparison to data from the Moving to Opportunity experiment and a quasi-experimental research design analyzing movers' outcomes. We then identify high-opportunity neighborhoods that are affordable to low- income families, providing an input into the design of affordable housing policies. Our measures of children's long-term outcomes are only weakly correlated with traditional proxies for local economic success such as rates of job growth, showing that the conditions that create greater upward mobility are not necessarily the same as those that lead to productive labor markets.

6. Finally, Tyler Watts, Greg Duncan, and Haonan Quan, have a 900 student sample study which questions the findings of the famous Marshmallow test which appeared to show that children who were able to exercise self-control and resist marshmallows placed before them did better in life. They find limited support for delayed gratification leading to better outcomes and claims that circumstances matter more,
Instead, it suggests that the capacity to hold out for a second marshmallow is shaped in large part by a child’s social and economic background—and, in turn, that that background, not the ability to delay gratification, is what’s behind kids’ long-term success... This new paper found that among kids whose mothers had a college degree, those who waited for a second marshmallow did no better in the long run—in terms of standardized test scores and mothers’ reports of their children’s behavior—than those who dug right in. Similarly, among kids whose mothers did not have college degrees, those who waited did no better than those who gave in to temptation, once other factors like household income and the child’s home environment at age 3 (evaluated according to a standard research measure that notes, for instance, the number of books that researchers observed in the home and how responsive mothers were to their children in the researchers’ presence) were taken into account. For those kids, self-control alone couldn’t overcome economic and social disadvantages.

The failed replication of the marshmallow test does more than just debunk the earlier notion; it suggests other possible explanations for why poorer kids would be less motivated to wait for that second marshmallow. For them, daily life holds fewer guarantees: There might be food in the pantry today, but there might not be tomorrow, so there is a risk that comes with waiting. And even if their parents promise to buy more of a certain food, sometimes that promise gets broken out of financial necessity. Meanwhile, for kids who come from households headed by parents who are better educated and earn more money, it’s typically easier to delay gratification: Experience tends to tell them that adults have the resources and financial stability to keep the pantry well stocked. And even if these children don’t delay gratification, they can trust that things will all work out in the end—that even if they don’t get the second marshmallow, they can probably count on their parents to take them out for ice cream instead.