Thursday, May 23, 2019

How can farm incomes be increased?

In the context of the government's professed objective to double farm incomes in five years, it is worth examining what could be potential pathways to realising it. 

The conventional wisdom on the pathway to increasing farm incomes is two-fold. One, squeeze more out of the farm plot, either by increasing productivity or by crop-diversification. Two, disintermediate the value chain from the farm-gate to the buyers to eliminate the brokers, thereby increasing the value captured by the farmers. 

The first one has been the objective since independence and realisation of significant gains is easier said than done. The challenges to be surmounted are too many to realise significant gains in this regard in the foreseeable future. Interestingly with the second, as the coffee example illustrates, the gains to be had by elimination of brokers may not be as high as being imagined. There are compelling reasons to believe that the narrative of brokers fleecing farmers and capturing a major share of their income as rents is dated. In fact, the average gain to the farmers from such disintermediation is likely to be no more than in single digits. In fact, in terms of value capture, if there are any significant gains, it is likely to come only from the upstream disintermediation (from the wholesale buyers to retailers or processors). But this is much harder and even unrealistic to be thinking of capturing. 

There is another less discussed pathway to increase farm incomes. Consider the current scenario. A large share of the farm produce is wasted in various forms including rotting and rejections due to not meeting the relevant standards. Further, in the absence of adequate storage as well as poorly informed harvesting and post-harvest practices, farmers cannot hold back their produce and are forced into selling it in immediately on harvest when prices are likely at their lowest. 

While I have not come across any study that quantify the aggregate loss to the farmers from this, I am inclined to believe that this is likely to be very significant. In the circumstances, measures that can minimise wastage and increase the local holding capacity of farmers so as to stagger supply release can be an area of engagement to increase farm incomes. In many respects, this may perhaps be the most promising medium-term intervention to increase farm incomes.

Tuesday, May 21, 2019

Agriculture terms of trade

The FT has a good article on the challenges facing the global coffee producers. At the heart of the problem is the shocking disparity in the terms of trade between the coffee growers and the retailer.
Although the growers’ stories are often used in the marketing of individual coffee brands, consumers are largely oblivious to the current plight of the farmers, assuming that the increased price they are paying for their morning brew is — at least partly — passed on to the producer. But in an everyday £2.50 brew, the coffee itself accounts for about 4 per cent, or around 10p — rent, labour and tax taking a much larger portion of the cost. “The cost of coffee is really marginal [for the retailer],” says Jeffrey Young, chief executive of consultants Allegra Strategies. “Even if your coffee beans go down 30 per cent, the cost of cups and workers has gone up, the rent has probably gone up and everything else has gone up.”
Given that the price share of the coffee bean includes the cost of farmer's labour, inputs, and logistics cost, the farmer's returns net of all costs is minuscule. In fact, just the profit captured by the likes of Starbucks is several multiples of the farmer's returns. 

This also raises the point about the massively skewed terms of trade between primary activities and secondary and tertiary ones, and agriculture producers and consumers in general. Granted the differences in value addition and the nature of economic systems, it is the mind-boggling order of magnitude of difference between the returns to the two kinds of activities that is a matter of great concern. Isn't it a supreme irony that the ingredient which makes coffee what it is, is also the cheapest input, by a long extent, into making a cup of coffee?

Another big takeaway from this illustration relates the idea of increasing farm incomes by disintermediating the value chain from the farm gate to the commercial buyer. While coffee may be an extreme case of upstream value capture, the broader point applies just as well to other crops, and I am inclined to believe that the broker disintermediation gains are likely to be small and not significant enough for smallholder farmers. So the pathway of enhancing farm incomes by disintermediating value chains may be a high-effort but low-return one. More on this in the next couple of days.

Monday, May 20, 2019

A history of China over the past four decades - Yasheng Huang interview

This is just such a brilliant interview of Yasheng Huang, summarising his earlier book. It is about 105 minutes long, but worth all the time. 

It has several insights about China's growth over the past four decades - there is nothing unique about Chinese state capitalism; the competitive market-led entrepreneurship, especially from rural areas (the TVEs), trumps the state-led growth that has been praised by western scholars as an example of capitalism with Chinese characteristics; the comparison between Shanghai's state-led capitalism (Pudong as an illustration of wealth theft from rural areas) and Shenzhen's entrepreneurial capitalism; comparative examples of the two models from regions in China that show how the latter model trumps; how the bureaucrats stifle entrepreneurial growth by favouring state enterprises over private entrepreneurs in channeling credit; how Alibaba struggled in Shanghai and had to go to one of the more entrepreneurial provinces to stabilise its model and make big; the model has survived the crises it has faced only because it could export its way out and because of the opportunity presented by real-estate development led economic boost; the Chinese leaders see innovation and technology as the next growth booster; why Zhao Ziyang and Hu Yaobang are the best Chinese leaders; how Hu Jintao and Weng Jiabao rescued the country from the deep agrarian crisis of the nineties; since the nineties there has been a shift towards state-capitalism and away from entrepreneurial rural capitalism, a trend which has accelerated since Xi Jinping took over; the largest private enterprises of today are those with deep networks not just to the party but also important party officials; why he's called a left-wing intellectual in the US and a right-wing one in China; how the growth of recent years has been brought about by debt-fuelled investments and why it is unsustainable; why India's post-crisis response was more effective than that of China; why it is incorrect to compare India and China and proclaim the superiority of benign autocracies; why countries like China and India need not dress up excessively to attract foreign investors, unlike smaller countries; the importance of state in human resource development and in creating other enabling conditions for capitalism to flourish; why President Trumps's actions on the trade-front demanding China opening up may be good for China in rolling back the march of state-led capitalism; and so on.

On China and India - the role of historical human resource and state capacity

Ananth pointed me to Andrew Batson's post on a Yasheng Huang interview which draws attention to the importance of historic human capital in determining the growth trajectories of India and China. Batson quotes Huang,
If you want to make an apples-to-apples China and India comparison, you need to control for other differences between the two countries. And the basic thing you need to control for is the quality and quantity of human capital. I would argue that unambiguously, China has done a thousand times better than India in terms of human capital development: public health, public education. Historically speaking, in part because of the exam system, China has always had a very strong tradition of literacy, being able to read and write. There is some evidence to suggest that China’s mass literacy in the 17th and 18th centuries was comparable to that in Britain. This is going way back. I do see that as a huge strength.

A lot of the growth differences between India and China and India are really explained by that. So there is a fundamental attribution error that many people have committed. When they look at the differences between China and India they say, one is a democracy and one is an authoritarian system, one has better GDP growth and the other has worse. Little do they know that there are other differences. It’s these other differences that explain the growth difference between China and India. I would say that human capital explains 80% of the differences. Maybe we should take that more seriously.

China has always had something behind its back to have good, solid economic performance. Even in the 16th and 17th centuries they had pretty good performance by the standard of that time. In that sense, I’m not a free market fundamentalist. I see the state as being absolutely critical in building the human capital base. This is what the Chinese did historically, and also what the Chinese did during the Communist period, and also what the Chinese state is doing today. For that I give them an A-plus, I celebrate their achievements.
And this reference by Batson from Dwight Perkins' work on 20th China's functional bureaucracy is also instructive,
China’s capital city had a population of over one million people as early as the Song Dynasty, if not before, and supplying such a city required tens of thousands of merchants, transport workers and the like. Commerce on this scale requires records, and to use records an individual must be able to read at least numbers and some characters.
I am sympathetic to Yasheng Huang's argument. It goes to the point that was made in Can India Grow. India's human resource capacity (health and education) and state capacity are massive challenges, and in its absence there are serious limitations and ceilings to building up other capacities. For example, the quality and speed of execution of something or production of stuff is critically dependent on both these capacities. Government's role in creating the enabling conditions - whether property rights and contract enforcement or law and order - should not be underestimated. Without addressing them, unlocking private capital etc is merely tinkering at the margins. The hope to follow in the footsteps of China will remain just that.

India needs to make human resource development, specifically its quality, a political good. Then, to deliver on that good, meaningful efforts to improve state capacity will likely get initiated.

Sunday, May 19, 2019

Declining EM public investments

FT points to an alarming decline in public investments in developing countries. Sample this
The share of national output developing world governments are spending on investment in assets such as schools, hospitals and transport and power infrastructure, net of depreciation of the existing capital stock, has fallen from 3.3 per cent in 1997 to a low of just 0.9 per cent last year, according to data from the IMF.
"Rigidities on wage bills and transfers" coupled with rising public debt-to-GDP ratios have been held responsible for this declining trend in investments.
Even if strip our China, which has experienced a steep decline in net investment, thanks to depreciation from its investment splurge of recent years, the weighted average for the rest of EM work is 3.9 per cent of GDP, lower than the 4.8 per cent of 2010. This is a major cause for concern given the acute need for increasing the rate of capital accumulation in these economies.

Friday, May 17, 2019

Ovarian Lottery and Inequality - UK Edition

From FT, this
As many Oxbridge places go to students from just eight, mostly private, schools as from 2,900 other secondary schools, according to the Sutton Trust, an education charity.
And this,
A report from the Sutton Trust last year showed that almost half of all Oxbridge places go to children at private schools, although only 7 per cent of kids in the UK attend these.
And social mobility in US and UK,
When it comes to issues of social mobility and university, the UK and US are not so far apart: the OECD calculates that while Americans from families with university degrees are 6.8 times more likely to attend college than people from families without a degree, this ratio is only slightly better, at 6.3, in England. In Finland and South Korea, by contrast, it is just over one.

Wednesday, May 15, 2019

Some thoughts on job creation in India

What can be done to enhance productive job creation in the Indian economy, across sectors or within specific targeted sectors (like textiles)? 

The obvious immediate responses are infrastructure bottlenecks, enabling access to credit, and lower taxes. Policy response has been mainly in the form of establishing special economic zones and industrial parks, and offer fiscal concessions and input subsidies. In recent years, there has been a focus on enhancing the ease of doing business. 

While these are all important, and all of them are works in progress, there is little to suggest that these are the binding constraints. Alternatively, conditional on the state of the country's systems, what policy enablers are likely to have the biggest impact on job creation?

Unfortunately, far too little high-quality field research happens in this area. If only some of the numerous development economists who have made successful professional careers for themselves studying poverty in India with limited applied policy relevance had engaged with this issue. If NITI Aayog had to focus on one area of policy engagement it is perhaps this that would be the most relevant. Currently, the only meaningful engagement on this happens with the multilateral organisations, World Bank and ADB. The work of consultants in general is too superfluous to be of sufficient relevance. 

Rana Hasan et al examined the role of labour market regulations in the excessively skewed (towards small firms and too few large firms) firm distribution in India's apparel sector. They use the division of country into states with flexible and inflexible labour market regulations (in relative terms) and find that a much large share of the sector's employment is in larger sized enterprises, both in formal and informal sectors. This holds even while controlling for state of infrastructure and competitiveness of product markets. For formal and informal firms (with more than 10 workers), their firm employment distribution shows.
They also find a greater propensity among firms in state with inflexible labour regulations to hire contract workers.
In another paper Rana Hasan et al use an index of the degree of spatial concentration among plants in an industry and find that industrial agglomeration in India declined substantially in 1998-2013. If true this deprives the country off the benefits of agglomeration in "boosting firm productivity and economic growth due to various positive externalities such as knowledge spillovers, labor market pooling, and input-output linkages across firms in industrial clusters". 

They find that variations in industry policies followed by states (the differential tax incentives, capital subsidy schemes etc) and lower transportation costs (especially when frictions in land and labour markets are significant) have led to "dispersal of manufacturing, with the relatively more advanced among the backward districts experiencing large increases in numbers of firms and employment by 1998". They highlight that states which were intersected by the GQ highways saw much higher decline in industrial concentration than those not connected. They also point to a remarkably low domestic labour mobility,
Based on Bellet al.’s (2015) estimates of internal migration rates in 80 countries over a 5-year interval between 2000 and 2010, India is found to have the lowest migration rate. Similarly, Koneet al. (2017) note that although internal migrants represented 30% of India’s population in 2001, two-thirds were migrants within districts, and more than half were women migrating for marriage. They also note that in comparison to India, internal migration rates across states were nearly four times higher in Brazil and China, and more than nine times higher in the USA in the 5 years ending in 2001, despite the fact that in countries including China, urban–rural wage gaps are considerably lower than in India.
They also find that existing land market regulations and general fragmentation of land holdings deter the assembling of large land tracts necessary for industrial agglomerations to form.

Their headline explanation for the decline in agglomeration and consequent dispersion,
reductions in trade costs alongside limited labor mobility and policy-induced scarcity of land should, in theory, have led to the dispersion of industry... inefficient land management policies and improved transport infrastructure may be driving the trend toward de- agglomeration... the hypothesis implies that forces of congestion are preventing a more efficient level of agglomeration from taking place, and there may thus be a role for policy to reverse this trend by reducing inefficiencies in land markets and encouraging greater labor mobility... our hypothesis (is) that congestion costs related to land and labor market frictions are disrupting the forces of agglomeration, at the potential cost of future economic growth.
In another paper the same set of authors examined the effect of place-based industrial development policies in India by evaluating the impact of a nation-wide program initiated in 1994 that aimed to promote industrial development in underdeveloped areas. The program classified districts based on their level of industrial backwardness and provided five year tax exemption to qualified manufacturers in backward districts. They found that the program was only marginally successful - only the better-off backward districts benefited, and that too to the extent of light manufacturing industries. Compounding matters, it displaced industries from the more backward districts and those marginally better than the treated districts.

The authors raise the intriguing policy takeaway that industrialisation is perhaps best achieved by targeting the movement of industries to areas where manufacturing has a comparative advantage than trying to move them to disadvantaged regions.

Finally, there is the linkages between formal and informal manufacturing firms. The work of Ejaz Ghani et al show significant horizontal and vertical linkages between formal and informal firms,

Informal firms are an important supplier of inputs to formal firms. Employment and output have increased in the formal sector in those states in India that also have a greater presence of informal firms. Conversely, unorganized employment and output are greater in states that have a greater presence of organized buyers of inputs. But there are two important asymmetries in the relationship between the organized and unorganized sectors. First, the unorganized sector is much more dependent on and responsive to organized sector presence than vice versa. Second, unorganized sector productivity is dependent on and responsive to organized sector productivity and presence but the reverse is not true.
Ejaz Ghani writes
A 10% increase in employment and output in the informal sector is associated with an increase in employment in the formal sector by 16% and increase in output by 12.6%. As formal enterprises become more productive, they demand better inputs from informal enterprises, and strengthen the forward spillovers. The backward spillovers are also strong, as informal enterprises purchasing from formal enterprises induce greater output in the formal enterprises. Although the productivity of the informal sector is more important for the formal sector, than vice versa, the two sectors act more like friends, and family members supporting each other. These linkages mean more than just buying inputs and selling outputs. They generate huge spillovers by working together.
Much of the manufacturing sector’s employment growth has come in the form of informal establishments in the tradable sector. The exceptional increase of employment in the informal tradable sector in India exceeded 10 million jobs, equivalent to the entire net growth of the manufacturing sector. This rise in the informal tradable employment coincided with a strong decline in the non-tradable sector. The concentration of informality in the tradable sector suggests that the growth in traded industries is not due to plants achieving larger economies of scale and shipping goods at a distance, as might have initially been imagined, but an important role played by the informal sector. Informal firms in the tradable sector provide an opportunity to leapfrog the development process, by connecting to global value chains, resulting in greater opportunities for domestic suppliers, increased exports, and higher productivity.
A few thoughts

1. India's firm size distribution is excessively small, even compared to other developing countries. Also, complementarily, the number of really large firms are also excessively small. We have a "small is bad" problem. What is driving the small-ness? Is labour regulations responsible for discouraging businesses from "placing too many workers under one roof"? Is there anything else driving or contributing significantly to this trend?

2. Large manufacturing firms create their own value chains which support several formal and productive SMEs. But India has too few such large firms. This in turn limits the conditions required for productive SMEs to flourish. And conversely, too many less large formal firms mean their value chains are more likely to consist of smaller, less productive, and even informal SMEs. Therefore, the case for encouraging the development of a few very large domestic manufacturing units and also attracting a few large global manufacturers. 

3. There is a trade-off between agglomeration economies and equitable growth. The former leads to spatial concentration of firms within an industry whereas the latter demands geographical dispersion. In case of India, the latter seems to have become the dominant force. This is a cautionary note against the standard policy of dispersing industrial investments across the country (and within a state itself) based on considerations of regional equity. 

Monday, May 13, 2019

More on the "Xi Jinping turn"

I had blogged earlier why Xi Jinping's tenure may be a turning point in China's stability and prosperity. The fundamental premise is that his centralisation has closed down (completely or at least partially) all the traditional safety valves that allowed a calibrated play of differing opinions and ideas, competition among different vested interests within the party, circulation of power and so on, all so important and inevitable in a massive country with a multi-level governance system.

Reading this and this, there is another danger associated with such centralisation. It shuts down any circulation of honest feedback as followers compete to follow the diktats of Xi. Sample this,
For the last three years even China’s state-run banks have been trying to extricate themselves from spending more on the initiative. Yet despite these problems, the initiative expands to new countries and continents. Why this is happening is clear enough—no other foreign policy program is associated personally with Xi like this one is. Xi’s apotheosis to permanent leadership at the 19th Party Congress this spring meant that his signature foreign-policy initiative also had to be elevated—and so it was, written directly into the constitution of the Chinese Communist Party. Now to attack the Belt and Road Initiative is to attack the legitimacy of the party itself. The Belt and Road Initiative is evidence that the party’s once responsive policymaking system is breaking down. The rest of the world must recognize that BRI persists only because it is the favored brainchild of an authoritarian leader living in an echo chamber.
... and this,
Effective statesmanship is difficult when statesmen cannot get an accurate read of how things are playing out on the ground... The trade war is another symptom of the Party's inner crisis. The most spectacular thing about the trade war is how surprised the Party was that it happened at all. Zhongnanhai was caught flat footed by a conflict whose contours were clear months before the first shots were fired. They have needlessly bumbled and stumbled since, handing gifts to their rivals in Washington that need not have been given. The trade war ads placed in the Des Moines Register back in September are the perfect example. The advertisements targeted a President known for personalizing even tepid attacks on his program, were oblivious to a media landscape that had long defined election interference as the most explosive issue in American politics, and were published just after the administration's China skeptics were signalling they had finally devised a strategy to counter rising Chinese influence. Everything about these advertisements betray terrible judgement. This was obvious before they were published. Anyone who understood just an inkling about American political culture would have known how foolish it was to go ahead with that ad campaign. It still happened.

In the Communist Party of China there is a disconnect between the people who have the power to shape events on the ground and the people who understand how things actually stand on the ground. This disconnect has many sources: the obvious one, which I focus on in the column, is the deification of Xi Jinping. General Secretary Xi's rise to godhood means that criticism of his policies (especially the policies upgraded to the label "Xi Jinping Thought") is equated with betrayal of the Party itself. Xi's great anti-corruption campaign is another likely culprit. Anti-corruption means no flamboyant expenses; no flamboyant expenses means fewer government salaried academics, think tankers, and officials traveling to places like the United States. Anti-corruption also means fear. Hundreds of thousands of officials have been jailed or sacked. In an environment where everyone's job is on the line, there is little incentive to be the bold truth teller in the room. To succeed in today's Party, you keep your head down.
And this is the real danger for outsiders, 
I do not mind if the Party leadership miscalculates on the economic front; the more reasons they give western firms to get out of China, the better shape we are in. My worries lie in the military domain. The People's Liberation Army has been ruthlessly gutted by Xi's campaigns. Were Secretary Xi to overestimate the capabilities of the armed forces under his command, which PLA leader is in a position to talk him back to reality? Things did not turn out well for the last general who tried to tell hard truths to the Party's 'core leader.' May the next general to attempt this feat secure a happier fate than he.
This assumes great significance given the very successful approach of "crossing the river by feeling the stones", one where calibrated dissonance and feedback was important, and where experimentation and deviation from the national norm was tolerated, and underpinned the country's remarkable stability and progress over the past four decades. 

Saturday, May 11, 2019

Weekend reading links

1. MR points to this article by Samo Burja about the remarkable stability and prosperity of Botswana despite several extenuating circumstances and contrary to the orthodox theories on international development. It attributes the country's success to "well-executed succession between presidents".

2. A very informative Livemint primer on the impact of demonetisation. This coupled with the return of 99% of the currency under circulation points to little having changed on the cash front. See also this. And this graphic from JP Koning is instructive. 
On the digital payments too, very little sustained impact appears visible,
3. This article points to the rise and rise of groupthink and elite consensus that censors dissenting views in international conference circuits. 
You can understand why provocative outsiders are not always welcome. Inviting them in might risk someone rudely pointing out that Mr Griffin just paid $238m for the most expensive apartment in the US, that Mr Schwartz ran Bear Stearns before its collapse or that Mr Dalio reportedly took home $2bn last year. Gadflies can be exasperating individuals, too, and unwilling to engage constructively with the people they criticise: the Milken Institute’s CEO revealed that there had been a dismaying increase in the number of people refusing to share panels with people holding different views.
4. On the context of the debate on inflation targeting, Scott Sumner reiterates the case for NGDP targeting in stabilising economies faced with demand and supply shocks.  

5. Finally a Bates Medal for macroeconomics to Emi Nakamura. This from Noah Smith and this from  Kevin Bryan. 

As Noah Smith points out while her work has supported the New Keynesian school shown that "even very small amounts of... price stickiness can generate large recessions, and make the economy very sensitive to changes in monetary policy", she has also questioned the efficacy of standard monetary policy responses. She has shown "that interest rate cuts tend to boost expectations of future growth without raising expected inflation much",  questioned the assumption that "inflation causes as much harm to the economy as unemployment", and the assumption that "a central bank always has the ability to fight recessions by lowering interest rates" including questioning the efficacy of policies like forward guidance. In contrast, her work points to fiscal policy being a more promising lever to respond in such situations. 

6. Fascinating graphic of the direct relationship between economic output and the daily calories that come from animals and their products.

And like with most things, China is the driver of the growth in global meat production.
Between 1961 and 2013 the average Chinese person went from eating 4kg of meat a year to 62kg. Half of the world’s pork is eaten in the country.
Interestingly, Indians eat just 4 kg meat a year today! However, its milk production has risen from 20 mt in 1970 to 174 mt in 2018. 

7. Andy Mukherjee highlights the biggest problem with Indian capitalism, the behaviours of its capitalists and the corporate governance culture it breeds. Finance, or more specifically investors and lenders, have been a critical pillar to disciplining and making capitalism efficient. This unfortunately, for a variety of reasons, is deficient in Indian capitalism,
Almost every large business failure in India today involves providers of outside capital — and their agents — giving insiders a free pass to maintain control using other people’s money, destroying value in the process... consider the problems brewing in India’s mutual funds industry, which lent money to media mogul Subhash Chandra against his shareholding in Zee Entertainment Enterprises Ltd... When Chandra’s leveraged bets on infrastructure ran into liquidity problems, the mutual funds agreed not to sell the Zee shares they held as collateral. The fund managers now have the chutzpah to tell investors that the net asset value for their maturing plans isn’t available in full — and won’t be until Chandra can find a buyer for Zee. Even more shockingly, the bilateral loans to Chandra, masquerading as bonds, are still rated A. Relationship lending is to be expected in a state-dominated banking system prone to rigging by crony capitalists. But relationship-based fund management? That shows the extent to which even the private sector is compromised. Business “promoters,” as they’re known in Indian law, have used a mix of personality cult and proximity to political power to terrorize the ultimate providers of outside capital.
8. Livemint again points to some proxy indicators of economic growth associated with the current and previous governments.

9. In the context of the latest impasse on the US-China trade talks, Ananth points to this brilliant tweet by Chris Balding characterising the Chinese diplomatic playbook,
1. A lot of the Chinese negotiation tactics are classic Chinese negotiation strategies. 1. Changing the terms of the agreement in major ways after they have been agreed to at the last minute. That's practically SOP
2. Urging people to continue to talking without specifying what the substance or issue that requires resolution and even not acknowledging that the issue is a problem
3. Backhandedly complementing or apologizing. We regret that you're an A$$ monkey that leads to this problem. For that we apologize. Classic Chinese.
4. Insisting that the only change that needs to happen is on the other side of the table. This benefits all man kind and the benefits are there and we urge you to change to help realize that objective.

Thursday, May 9, 2019

Assessing China and BRI

Grand carefully orchestrated plans and conspiracy theories are the staple of both hindsight analysis and real-time debates. Accordingly, the austerity imposed on Greece was part of a grand German plan, or the trade-related actions by US on China are part of a comprehensive plan, or the BRI is a grand 

In this context, Yanis Varoufakis's words of wisdom is pertinent,
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.
In recent months, there have been alarming news about the trends associated with Chinese lending to developing countries as part of the Belt and Road Initiative (BRI). Commentators have been quick to characterise it as part of a new wave of Chinese colonialismdebt-trap diplomacy, and hard development philosophy

But a new study by Mark Akpaninyie questions the argument of a grand national strategy by Beijing and instead claims that it is largely the consequence of profit-seeking actions by Chinese companies,
Little evidence actually suggests that Beijing coordinates a unified strategy to lure the developing world into unsustainable debt. Instead of a state-led strategy, Chinese firms — motivated by profit and abetted by a toxic combination of bureaucratic disorganization, incompetence, and negligence at the state level — have exploited poor nations, which are dependent on cheap, and sometimes bad, loans. These companies, knowingly or unknowingly, persuade countries to pursue projects where benefits to the firms far outpace the benefits of the host nation. Asymmetric information or deception may even misrepresent the feasibility or sustainability of pursued projects. What is worse, governments sign onto nonconcessional loans that accrue high interest rates or carry onerous terms that disadvantage already vulnerable countries. This practice does not trap recipient countries into taking on unsustainable debt. Instead, it allows Chinese companies to profit from often crooked deals building much-needed infrastructure in some of the world’s poorest countries, exploiting the undersupply of financing and these countries’ appetite for infrastructure projects.
One could replace country with business enterprises and the effects would be same. As the history of cross-border capital flows teach us, credit can flow into even the most indebted nations breaking down all semblance of discipline. In fact, this debt-fuelled investment strategy has been exactly what these same firms and their creditors have been following in China itself over the past two decades. 

Andrew Batson is spot on,
The broader point here is that looking at the Belt and Road through the lens of “grand strategy” or “geopolitics” ... is quite misleading... The Belt and Road is really the expansion of a specific part of China’s domestic political economy to the rest of the world. That is the nexus between state-owned contractors and state-owned banks, which formed in the domestic infrastructure building spree construction that began after the 2008 global financial crisis (and has not yet ended).
This assessment of BRI should not be taken to mean we can be complacent about other things that China does, some of which are most likely part of a conscious strategy. It's just that we need to assess trends on their merits and not be led purely by conspiracy theories and our availability biases or preconceived notions.

Update 1 (10.05.2019)

MR points to Tanner Greer's analysis of a study by Lee Jones and Zeng Jinhan. They write,
China’s massive ‘Belt and Road Initiative’ (BRI) – designed to build infrastructure and coordinate policymaking across Eurasia and eastern Africa – is widely seen as a clearly-defined, top-down ‘grand strategy’, reflecting Beijing’s growing ambition to reshape, or even dominate, regional and international order. This article argues that this view is mistaken. Foregrounding transformations in the Chinese party-state that shape China’s foreign policy-making, it shows that, rather than being a coherent, geopolitically-driven grand strategy, BRI is an extremely loose, indeterminate scheme, driven primarily by competing domestic interests, particularly state capitalist interests, whose struggle for power and resources are already shaping BRI’s design and implementation. This will generate outcomes that often diverge from top leaders’ intentions and may even undermine key foreign policy goals.
BRI projects are not centrally directed. Instead, lower state bodies like provincial and regional governments have been tasked with developing their own BRI projects. The officials in charge of these projects have no incentive to approve financially sound investments: by the time any given project materializes, they will have been transferred elsewhere. BRI projects are shaped first and foremost by the political incentives their planners face in China: There is no better way to signal one’s loyalty to Xi than by laboring for his favored foreign-policy initiative... BRI projects are chosen through a decentralized project-management system and then funded through concessional loans offered primarily by PRC policy banks. This is a recipe for cost escalation and corruption... In democracies this way of doing things is simply not sustainable, and in most BRI countries it is only so long before an angry opposition eager to pin their opponents with malfeasance comes to power, armed with the evidence of misplaced or exploitative projects... the failures of the BRI seem to factor back to a few central points: first, that project selection is mostly driven by the priorities of folks working in SOEs, provincial governments, and a plethora of different policy banks. The central government in Beijing has difficulty directing their efforts. Secondly, that these people do not have a good understanding of the countries in which they are investing, and face little incentive to gain this understanding. This leads to the sort of corruption and 'predatory' funding that has given BRI its poisonous reputation in countries long exposed to it.
And this confluence of economic interests is critical,
China rode out the crisis only through a US$586 billion stimulus package, mostly involving local government borrowing to finance infrastructure projects. By the early 2010s, the stimulus was spent and many local governments were virtually bankrupt. Overcapacity exceeded 30% in the iron, steel, glass, cement, aluminium and power generation industries. Many SOEs faced a major profitability crisis, with returns on domestic infrastructure turning negative. Meanwhile, Chinese banks faced their own over-accumulation crisis, with US$3 trillion in foreign exchange reserves and dwindling domestic lending prospects. For these interests, OBOR represented an opportunity to internationalise their domestic surplus capacity. Unsurprisingly, these politico-economic actors lobbied furiously to influence the translation of Xi’s slogans into concrete policy, in order to grab part of the spoils.

Wednesday, May 8, 2019

Thoughts on system transformation

Some thoughts in the context of the WDR 2004 and systems transformation

In physics, the second law of thermodynamics states that the entropy of a system always increases. Any system perturbation sets in motion a dynamic whose transmission trajectory and consequence is unpredictable. This is so even for physical systems where particles are not self-acting.

Now consider the example of a human system where agents are clearly self-acting. A social system is a tenuously balanced one with countless and overlapping relationships involving human beings with a wide variety of preferences. This balance has emerged organically through repeat interactions. Further, this is no balance in the static sense, but a dynamic one. It is impossible to predict the outcome of any perturbation (a reform) to this system, beyond its immediate aftermath. Even when well-intentioned and planned, the emergent unintended consequences can be several and often very damaging.

The only response in such a situation is to get the minimum viable product (MVP) out and engage actively with the system, especially in the initial period, to respond quickly to emergent trends and iteratively improve the intervention's design accordingly.

This assumes relevance because it goes against the conventional wisdom on planning a program end-to-end. If we accept the aforesaid reality, then it becomes impossible to plan the details of execution beyond the MVP.

In fact, the only thing that can be planned is to be ready with enabling requirements at different levels to respond quickly and effectively to emergent situations. And given the importance of iterative adaptation, mechanisms to collect data and make available granular-enough actionable information (or feedback) relevant to each level of the bureaucratic system becomes central.

Here is an illustrative plan for a reform idea in terms of the four principal-agent relationships. One, engage continuously to keep ripening the conditions so that the change being sought can be a political good. Two, design an incentive compatible compact between the government and organisational providers (its own departments and non-government providers). Three, design an MVP implementation plan that is sufficiently flexible to allow for local adaptation and has a feedback monitoring system that enables iterative refinement of the plan. Four, create enabling conditions that make frontline service providers accountable to the end-users.

Apart from the second relationship, all others are likely to be dynamic, especially in the initial periods of a program implementation. The first and last would require ongoing political engagement and community mobilisation respectively, with the need for opportunistic engagement being critical in the former. The third would be the realm of iterative adaptation of the implementation plan.

Prudence dictates that the level of flexibility and iteration be calibrated to be consistent with the state's capacity to be able to respond effectively and engage as required.

Programs like the GST or IBC or Ayshman Bharat or Rythu Bandhu scheme or RERA in India are all good examples of reforms which could benefit from such an approach to implementation. 

Monday, May 6, 2019

Inflation dynamics in India

Interesting ongoing debate on inflation dynamics in India. Mainstream discussion points to two structural factors. One the MPC and Inflation Targeting framework; and second the reforms on the agriculture side.

The argument on MPC/IT framework is perhaps not a very compelling one, given the fairly strong body of global research which questions the efficacy of IT framework, especially for developing countries. See this, this, this, and this, all by IMF. In fact, on the inflation count, I would be more inclined to argue that the credit should go to the Government in having exercised restraint on the fiscal front (especially when compared to the previous regime).

This brings us to the argument that supply-side factors on agriculture have been responsible for the disinflation of recent years. Sample this,
“We believe the key driver of the collapse in vegetable prices has likely been the deregulation of markets. Vegetables inflation declined sharply in 2014 and 2015 and has stayed low since then. The timing of the sharp drop in vegetables inflation coincides with the delisting of vegetables from the Agriculture and Product Marketing Committee (APMC) Act in 14 states.” (Prachi Mishra)
I doubt the impact of this transmission channel for several practical reasons. The APMC Act implementation has been very tardy. This is understandable given that its implementation is not just a legislative enactment but creation of a whole set of enabling market facilitation infrastructure and systems, as well as the political economy challenges with breaking the stranglehold of brokers and mandis. These will take time, even long time, to make any meaningful impact. It is also factually borne out that intra-mandi trades, even in the states where APMC implementation has progressed reasonably well, have been negligible. Even the volumes on e-NAM have been very small, and a significant proportion are effectively off-line business-as-usual transactions whose data have been digitised.

The most charitable thing that can be said about monetary policy lowering inflation is perhaps of its classic indirect effect,
“People seem to overlook that this structural decline in inflation may have something to do with the inflation-targeting credibility that central banks and the RBI have earned the hard way. A change in central bank objective, i.e., it will not hike until and unless inflation has become entrenched, could well erode this credibility, un-anchor inflation, and start an inflation spiral. Would India like to risk this?” (Jahangir Aziz)
But this is too general and applicable to any country or context. It is difficult to believe that a 2-3 year old IT regime could have firmed up expectations so strongly. In fact, this is more likely due to the fairly long history of RBI being a relatively independent and credible institution, rather than any recent institutional shifts or personalities. And herein lies the need for governments to exercise restraint on how much it interferes with the central bank's actions.
For now, the only thing we can be sure is that food price inflation has been declining. And core-inflation though running over 4% has been stable.

So it may be reasonable to argue that we are experiencing low inflation because of a confluence of happenstance factors (oil prices, global economic cycle etc) and low aggregate demand in general, coupled with the government’s restraint on fiscal slippage (especially, the restraint on MSP etc).

In the context of the low food prices, this collateral damage from the war on inflation is interesting,
“We don’t see inflation because we are focused on urban households. The continued food disinflation… has resulted in the terms-of-trade that farmers face to sink to their lowest in over 35 years.” (Jahangir Aziz)
This is borne out by the recent work of Ashok Gulati etc, which show that Producer Price Index faced by Indian farmers has been the most adverse among large economies in recent years. Some commentators have pointed to structural factors like the transition to an “age of surplus” from one of production deficits. In any case, farmgate prices have been falling. The issue of general distress facing the farm sector in India therefore appears unsurprising. 

This takes us to the classic conundrum. Low food prices hurt farmers. And high food prices hurt the urban consumers. The latter being more vocal, their concerns are more likely to influence the considerations of the technical experts in the RBI. Amplifying this would be the theoretical models which would have it that higher food prices feed into inflation and impact macroeconomic stability.

We know that in any democracy, the considerations of both constituencies have to be taken into account. The latter (producers) especially so given that they form the majority of the country’s population and that of the poor. But monetary policy experts generally do not take this into consideration in their rate-setting decisions. The IT framework only exacerbates this skewed decision-making calculus.

Not to speak of the questionable value of interest rate policy when faced with cost-push inflation arising from the numerous (and recurrently surfacing) supply side constraints in the food market. 

Would the defenders of RBI's sole pursuit of inflation ignoring the government's repeated calls to take economic growth into account, acknowledge this failing of their model? Does this also raises questions about the orthodoxy on monetary policy in India? 

Monday, April 29, 2019

China infrastructure and debt facts of the day

From The Economist, on the scale of Chinese infrastructure building,
China aims to build 3,200km of high-speed rail lines this year. That is nearly as much as Spain, the country with the second-largest high-speed rail network, has in total; for China, though, it is down from an average of 3,600km annually over the past five years.
And despite all the talk of reining in debt financing,
Total social financing, a measure that consists mainly of bank loans and bond issuance, hit 8.2trn yuan ($1.2trn) in the first quarter, up by 40% from the same period last year, well above most forecasts. A quarter of the financing has been short-term corporate loans. In China that is usually a sign that pliant state-owned banks are heeding the government’s call to pump out credit, ahead of demand from borrowers.

Sunday, April 28, 2019

Analysing Trump - missing the woods for the trees?

In his recent interviews (this, this, and this), the outgoing French Ambassador from Washington Gerard Araud has pulled no punches in describing Trump and Trumpland. 

This is perhaps the most apt description of the punditry and discussions around Trump,
“I’m using the Chinese saying, ‘When the finger is showing the moon, the fool is looking at the finger and the wise man at the moon.’ In a sense, Trump is the finger. I do think Washington, D.C., is much too obsessed by the finger and should look at the crisis” revealed by the 2016 election... “The press, to be frank, is so anti-Trump that I do understand that the natural reaction of Trump is to go over the head of the press,” he said.
And this,
That Trump, for all his flaws, is asking legitimate questions, Araud said. That the Republican president saw the world “shifting, in a sense, to a new era” and that his “genius” was understanding the “malaise” in the United States. It’s a malaise, Araud is quick to add, that is leading people to embrace populism and nationalism in France and other countries, too. “We have to address the concerns of these people,” he said. “It’s a serious crisis of our democracy.”... He also argued that although some of the questions Trump asks might seem odd at first glance, they are nonetheless fair game. For instance, Trump has wondered why the United States should go to war to protect the tiny nation of Montenegro if it were attacked. To foreign policy types, the answer is obvious: Montenegro is a NATO member and the military alliance is built on the idea of collective defense. Araud, though, pointed out that many ordinary Americans would pose the same question if the scenario ever arose. By raising the point, Trump is exposing the fact that not everyone is automatically on board with the views of foreign policy elites in places like Washington.
This excerpts some very candid views. 

Wednesday, April 24, 2019

When competition causes market failures

The grounding and possible bankruptcy of one of India's biggest airline, Jet Airways, in the world's fastest growing airline market for the last seven years and 54 months of double-digit growth is a great irony. And this comes on top of the bankruptcy at the start of the boom, in 2012, of another major airline, Kingfisher. So what is it about India's airline sector that healthy aggregate growth and mega failures (and weak bottom-lines in general) go together?

This also raises an interesting question about Indian capitalism itself, since this feature is not unique to airline industry. What is it about the Indian market's failure to balance competition with quality and sustainability?

Along with telecommunications, airlines sector is often held out as the two shining examples of the superiority of private sector over the public sector. Deregulation and the entry of private participants have dramatically improved the quality of service delivery. Simultaneously, even as demand has soared, both sectors have witnessed the entry of several service providers and intense competition among them. In both sectors, India has among the largest number of service providers, with fierce competition among them. 

Econ 101 tells us that a market characterised by soaring demand and a good number of suppliers should generate efficient competition. Suppliers would compete intensely to improve their service quality so as to differentiate themselves and thereby capture the rising demand. And the competition would also reduce prices to an efficient equilibrium, one without any rents. 

Instead what has happened in both sectors has been a competitive race to the bottom on pricing. This in turn squeezed their bottom-lines, and made them skimp heavily on investments to improve quality. The result has been deteriorating or stagnant quality. This is an example of how competition can perversely enough lead to market failures. 

It is true that there are policy issues like lowering the tax on Aviation Turbine Fuel (ATF) which the airlines have been demanding. But these apply just as well to all airlines operating in India. And given their behaviours, it would be most likely the case that lower ATF too would be competed away in a race to bottom on price. Further, the airline industry ought to have benefited from the relatively long period of lower and stable fuel prices, which makes up a significant share of the operating costs.

The race to the bottom with pricing has been a constant feature of the Indian telecoms and airline market for a long time. Sample this analysis by Andy Mukherjee from mid-2018,
It’s unclear as to why pricing should behave as if India’s aviation industry is saddled with huge overcapacity. Unable to pay interest and wages, Kingfisher Airlines Ltd. went belly up in late 2012. In almost every month since then, revenue passenger kilometers (a measure of demand) have grown faster than available seat kilometers (a unit of supply), according to the International Air Transport Association. Even in June 2018, when the industry was crashing, domestic air travel grew by 17.6 percent. Not only was it the fastest growth of any major market including China, it was nearly 2 percentage points quicker than India’s own demand expansion in the same month last year. Yet desperate carriers are pampering fliers with promotions they can ill-afford. Jet, for instance, is currently offering a 30 percent discount on base fares to international destinations. This is when its cost of flying one passenger-kilometer, excluding fuel, was 3.17 rupees last fiscal year, according to SBICAP Securities Ltd., compared with 2.53 rupees for SpiceJet and 2.04 rupees for IndiGo. Revenue per available seat kilometer has exceeded all-in costs in just three of the past 14 quarters.
And this,
With the entry of budget carriers such as IndiGo and SpiceJet Ltd. since the mid-2000’s, full-service carriers like Jet Airways that have higher overhead costs -- for in-flight meals and entertainment -- have been forced to offer discounts to passengers looking for a great bargain. For instance, in 2015, SpiceJet offered base fares of as low as 2 cents. Average ticket prices for New Delhi to Mumbai, the world’s third-busiest route, fell 15 percent to 3,334 rupees in July-August from the previous year, according to online travel agent Fares are down 40 percent from 2014, according to Sanjiv Kapoor, the chief commercial officer of Vistara, Singapore Air’s local venture. That compares with a premium rail service for the same route at 4,075 rupees.
Cyclical factors and rapid expansion have been able to paper over some of the debilitating effects of rock-bottom prices. Even the run-away industry leader Indigo may be one shock away from hitting air turbulence.

The market dynamics itself apart, the promoter of Jet Airways has been just as much culpable of reckless business expansion decisions as that of Kingfisher. In fact Jet had been losing money in nine out of the past eleven years. It speaks something about the very narrow and deeply price sensitive Indian market itself that two of the three large full-service airlines have now gone under, and the third, Air India, is surviving only through public subsidy. It is a testament to the inability of these full-service carriers to have figured out a business model required to differentiate themselves from their low-cost counterparts. Should Jet (and Kingfisher) have charted a path very different from the various low-cost airlines, focusing on specific routes and quality of service, and associated calibrated expansion and maintenance of higher prices? 

In telecoms too there has been similar race to the bottom, with Indian operators having among the lowest Average Revenue Per Users (ARPUs) and struggling to mobilise resources for capex. Compounding problems this comes on top of the top-collar winner's curse payouts to acquire spectrum. The result is minimal investments in capacity expansion and technology up-gradation, and being very poorly positioned to transition to the 5G technology.

And this is not confined to just airlines and telecoms. In fact, the same market failure could be generalised to most infrastructure sectors. The power generators and road contractors have never been averse to bidding recklessly and being stuck with contracts which they soon realise they are unable to service sustainably. Besides, they also create piles of non-performing assets for their lenders and attendant need for loan restructurings and tax-payer financed bank recapitalisations. The lenders too do not learn from past experience and repeat their mistakes - the latest bubble in lending to solar renewables generators should show up as NPAs in the coming years.

Clearly the orthodox playbook of Econ 101 does not stand the test of reality. One way of looking at such recurrent crises is to acknowledge it as true "capitalism with exit" and welcome it. Such bankruptcies are to be seen as a cost of a more efficient capitalism. The other way is to view this is as market failure which imposes significant long-term costs on the economy and explore ways to mitigate it.

One response to such market failure is to encourage consolidation and hope for a market with 3-4 (or even 2-3) large players. But this can emerge only through market dynamics and very difficult to be realised through policy actions. The other response is to resort to specific public policy levers to address the contributors to the market failure. But mitigation by way of such policy action runs the risk of incentive distortions, politicisation, and corruption. 

Even with these risks, I am personally inclined to policy response approach. Accordingly, in case of the airlines, there may be a case for the regulators to closely watch the ticket price trends and intervene to pre-empt price wars. Given that a regulator has the responsibility for ensuring the welfare of all market participants, there is perhaps a compelling case for regulators intervening not just in case of price gouging (or price ceilings) but also in case of competitive race to the bottom (or price floors). Even at the risk of incentive distortions and not getting things right, an objective and clearly defined set of principles and guidelines on price floors appears to be a superior alternative to the laissez faire competition approach.   

Similarly the Case II bids for power generation plants should not have given the option of fixed fuel price and should have had mandatory fuel price pass-through - remember the aggressive fixed price bids for the UMPPs which unravelled when the imported coal prices soared. Or there should be some restriction on the number of projects one developer can bid for in any set of tenders - remember the Reliance bids for UMPPs and the recent Adani bids for airports. Or roads sector bids (or even power generation levellized tariffs) which are very significantly off the mark from the internal cost benchmarks should be scrutinised more closely or even rejected. Or should spectrum auctions be structured to explicitly limit revenues mobilisation objectives and keep in mind life-cycle service costs.

Tuesday, April 23, 2019

The Rise of Finance is now available

The Rise of Finance is now available for purchase on Amazon. Also see the blurbs, including by past three Governors of the Reserve Bank of India.

Monday, April 22, 2019

Judicial activism and the IBC

The argument in favour of having Tribunals is that they offer a specialised and dedicated forum for settling specific categories of disputes which are otherwise likely to get stuck in the regular judicial channels. But this assumption holds only if the regular judiciary exercises restraint and does not insert itself into the proceedings pending before Tribunals. 

Unfortunately, this assumption is deeply questionable given the pervasive tendency of Indian Courts to interfere indiscriminately with the work of Tribunals. In the circumstances, the Tribunals (with their appellate level) becomes two additional layers of litigation.

The example of the latest Supreme Court order staying the the sale of Essar Steel, one of the first of the twelve cases taken up under the new Insolvency and Bankruptcy Code (IBC), is a case in point.

In October, 2018, after following the due process of inviting bids, the Committee of Creditors (CoC) had accepted the resolution plan submitted by ArcelorMittal SA, the highest bidder at Rs 420 billion. The approved plan had proposed providing financial creditors Rs 419.87 bn out of their total dues of Rs 493.95 bn and Rs 2.14 bn out of Rs 49.76 bn to operational creditors. The apportionment of the payouts between the operational and financial creditors under the resolution plan was disputed by the largest of the operational creditors, Standard Chartered Bank. It said that it was receiving just 1.7% of its dues, whereas the financial creditors were receiving over 85% of their dues. 

The takeover of Essar Steel by ArcelorMittal SA was then approved by the NCLT on March 8, 2019. However, the NCLT order also asked ArcelorMittal and the COC to consider giving a higher 15% of the upfront cash settlement (of Rs 420 bn) to the operational creditors. The decision itself came after the resolution of a protracted series of allegations of ineligible criterion under Section 29(c) of IBC on related party defaults involving Essar, Numetal, and Arcelor.

On being approached by Standard Chartered Bank on appeal, the NCLAT too, on March 19, 2019, while approving the takeover plan had also ruled that the apportionment among different creditors will be decided separately. It had also directed the CoC to meet and decide on the apportionment. Further, the Insolvency and Bankruptcy Board of India (IBBI) submitted before the NCLAT that in the 88 successfully resolved IBC cases till date, the financial creditors and operational creditors have received 48.24% and 48.41% respectively. Subsequently, on April 9, 2019, the NCLAT also asked all creditors to filed their claims and had posted the case for April 23, 2019. 

Also, it was reported that internal discussions were afoot among the financial creditors to offer more to the operational creditors, so as to expedite the bankruptcy sale. However, while the proposed payouts may appear unfavourable to the operational creditors, the financial creditors point out that the former have already benefited over the last two years in receiving payouts whereas they had not received any repayments. And in any case, the Courts cannot have no jurisdiction over the commercial aspects of such apportionment taken by the CoC, and can adjudicate only on the procedural and legal aspects. 

In fact, based on the NCLT orders, ArcelorMittal initiated the process to recruit a team to manage Essar Steel. While the matter stood, Standard Chartered approached the Supreme Court. On April 13, 2019, the Supreme Court stopped ArcelorMittal from making any payment to lenders to buy Essar Steel, and also ordered status quo on the resolution plan. It directed the bankruptcy appellate tribunal to expeditiously decide on the appeals. 

The Supreme Court's intervention and status quo order may have set an unhealthy precedent to the bankruptcy process, besides undermining the market confidence in the institutional strength and credibility of the IBC and the Tribunals.

For a start, the main issue, one of apportioning the payments among creditors, was already under the consideration of the NCLAT and the matter was posted for next hearing on April 23rd. The Supreme Court could have allowed the Tribunal proceedings to be exhausted before inserting itself. Second, even if it had to intervene, it could have legally separated the matter of Essar Steel's takeover by ArcelorMittal from that of apportionment of the payments. The former could have gone ahead without the latter, which could have been decided in due course.

Finally, the Supreme Court's directive to the NCLAT to decide on the apportionment of the dues among the different types of creditors may actually be a lever (mis)used in future by Tribunals or Courts themselves in expanding their jurisdiction to cover what are essentially commercial decisions taken by creditors based on certain defined principles and guidelines.

This was a good opportunity to exercise judicial restraint and increase the credibility of the nascent bankruptcy regime. Unfortunately, instead business as usual has taken precedence. 

Saturday, April 20, 2019

Weekend reading links

1. Height (or panoramic view) premium associated with residential units overlooking Central Park in New York City,
A 95th floor condominium at 432 Park Avenue sold in December for $30.7 million, or about $7,592 a square foot. That same month, a unit about halfway down the building sold for $4,216 a square foot.
When such premiums exist, developers find a way, as with 432 Park Avenue,
The building and nearby towers are able to push high into the sky because of a loophole in the city’s labyrinthine zoning laws. Floors reserved for structural and mechanical equipment, no matter how much, do not count against a building’s maximum size under the laws, so developers explicitly use them to make buildings far higher than would otherwise be permitted. 
2. Some achievements of technology enabled transformations in service delivery in India,
Getting or renewing a passport used to be a total nightmare a decade back. Enter private sector plus technology and the average time it takes for the passport application process is 30 minutes to under 4 hours. The passport reaches home by courier in a couple of days. At every stage, you get an SMS informing you what will happen next. In a country this large, there will be anecdotes of mis-service, but the average experience is now ahead of global standards. Take another area full of rent-seeking, long waits, harassment and bribes—getting a driving licence. At least in Delhi, the process is mostly painless—online form filling, and 30 minutes to three hours of time in the local office. The licence reaches home in just a few days. Property registration used to be a nightmare. That again is a breeze. Again a mix of technology and processes has reduced transaction time and pain hugely.
And this in banking,
Mr Puri says HDFC can now process a personal loan and put money in an account in 11 seconds.
3. The much-awaited IPO season has kicked-off with a whimper, as Lyft has tanked nearly a quarter from its listing price. An even bigger story, one much more disturbing but perfectly in line with what to expect from Wall Street, is Lyft's accusation that the lead underwriter of its IPO, Morgan Stanley, supported short-selling of Lyft shares. Lyft has formally written to Morgan Stanley questioning it about sale of certain short-selling products to Lyft's pre-IPO investors which would allow them to hedge against price falls by short-selling Lyft shares in violation of lock-up agreements. 

If true, this may well turn out to be Morgan Stanley's Abacus moment!

4. A very detailed explanation of Modern Monetary Theory.

5. Pitfalls of relying excessively on experts in legal matters. Upshot writes,
Another prominent factor in wrongful convictions across the country was misleading forensic evidence. A close look at these cases reveals how experts in fields like hair analysis, bite marks and DNA analysis have used exaggerated statistical claims to bolster unscientific assertions... “A lot of the problem with forensic testimony is that the diagnosticity is overstated,” said Barbara O’Brien, a professor at the Michigan State University College of Law and author of the report. A hair sample at the crime scene that resembles a suspect’s hair “gets dressed up with this scientific certainty that isn’t justified,” she said.
6. Times points to a new study which highlights the striking concentration of land ownership in England,
Less than 1 percent of the population — including aristocrats, royals and wealthy investors — owns about half of the land, according to “Who Owns England,” a book that is to be published in May. And many of them inherited the property as members of families that have held it for generations — even centuries. In the book, the author, Guy Shrubsole, an environmental activist and writer, identifies many of the owners and compiles data gathered by peppering public bodies with freedom of information requests and combing through the 25 million title records in the government’s Land Registry. He reached a striking conclusion — that in England, home to about 56 million people, half the country belongs to just 25,000 landowners, some of them corporations... Real estate prices in England are among the highest in Europe and have soared over the last generation. Mr. Shrubsole’s book documents ownership, maps unregistered land and argues that the concentration of ownership helps keep available land scarce and expensive. Houses, stores, office buildings, schools and farms are often held under long-term leases, paying a steady stream of rents — directly or through intermediate leaseholders — to major landowners.
7. The scary world of facial recognition developers, who may well be unbeknownst to you scraping your images and building up databases to fine-tune facial recognition technology,
The biggest technical obstacle to achieving accurate facial recognition thus far has been the inability of machines to identify human faces when they are only partially visible, shrouded in shadow or covered by clothing, as opposed to the high-resolution, front-facing portrait photos the computers were trained on. To teach a machine how to better read and recognise a human face in these conditions, it has to be trained using hundreds of thousands of faces of all shapes, sizes, colours, ages and genders. The more natural, varied and unposed the faces are, the better they simulate real-life scenarios in which surveillance might take place, and the more accurate the resulting models for facial recognition. In order to feed this hungry system, a plethora of face repositories — such as IJB-C — have sprung up, containing images manually culled and bound together from sources as varied as university campuses, town squares, markets, caf├ęs, mugshots and social-media sites such as Flickr, Instagram and YouTube... The images... are used to train and benchmark algorithms that serve a variety of biometric-related purposes — recognising faces at passport control, crowd surveillance, automated driving, robotics, even emotion analysis for advertising.
8. Finally, Ananth points to this interview of the outgoing French Ambassador in Washington, Gerard Araud. It has several refreshingly candid and insightful thoughts. Sample this on the Arab-Israel policy, 
The problem is that the disproportion of power is such between the two sides that the strongest may conclude that they have no interest to make concessions. And also the fact that the status quo is extremely comfortable for Israel. Because they [can] have the cake and eat it. They have the West Bank, but at the same time they don’t have to make the painful decision about the Palestinians, really making them really, totally stateless or making them citizens of Israel. They won’t make them citizens of Israel. So they will have to make it official, which is we know the situation, which is an apartheid. There will be officially an apartheid state. They are in fact already.
This on the China relationship and trade,
Let’s look at the dogma of the previous period. For instance, free trade. It’s over. Trump is doing it in his own way. Brutal, a bit primitive, but in a sense he’s right. What he’s doing with China should have been done, maybe in a different way, but should have been done before. Trump has felt Americans’ fatigue, but [Barack] Obama also did. The role of the United States as a policeman of the world, it’s over. Obama started, Trump really pursued it. You saw it in Ukraine. You are seeing it every day in Syria. People here faint when you discuss NATO, but when he said, “Why should we defend Montenegro?,” it’s a genuine question. I know that people at Brookings or the Atlantic Council will faint again, but really yes, why, why should you? These are the questions which are being put on the table in a brutal and a bit primitive way by Trump, but they are real questions.
This on the election of Trump and the attendant reactions is so spot on,
It was so shocking to have Trump elected that basically [Democrats’] conclusion was either the Russians are responsible or she was a very bad candidate. The case of Trump for me, it’s not so much Donald Trump, it’s not so much a person, but it’s a political phenomenon.
And the parallels with France,
The “yellow vest” demonstrations against Macron are basically the demonstrators who, more or less, voted for Trump here. It’s people coming from small cities, from rural areas, lower-middle-class, saying, “We have been left behind.” And, on the right, our conservative party is moving in the same direction as the Republicans are here. Suddenly this party which was traditionally conservative is becoming really protectionist, obsessed by immigration, and obsessed by questions of identity. You know: “France is a Judeo-Christian country,” which means basically anti-Muslim. There is a uniformity in the crisis, and you see it also in Brexit. It’s not by chance that your president has been elected by Pennsylvania, Wisconsin, and Michigan, while our Rust Belt, in the north of France, has elected five or six members of Parliament on the far-right.
This should count as the leader to be the interview of the year!!!