Saturday, December 14, 2019

Weekend reading links

1. It's hard not to argue that SoftBank, with its $100 bn Vision Fund, which is ten times bigger than the next biggest venture fund, has single-handedly distorted incentives big-time in the venture capital world,
“These start-ups try to get workers attracted to them and bring them within the fold,” said Uma Rani, a researcher at the International Labor Organization who is surveying start-up contractors in emerging economies. “When the workers attach to the whole thing and are highly dependent on it, then you slash it. This is something we are systematically seeing.” SoftBank’s Vision Fund is an emblem of a broader phenomenon known as “overcapitalization” — essentially, too much cash. Venture funds inundated start-ups with more than $207 billion last year, or almost twice the amount invested globally during the dot-com peak in 2000, according to CB Insights, a firm that tracks private companies. Flush with the cash, entrepreneurs operated with scant oversight and little regard for profit. All the while, SoftBank and other investors have valued these start-ups at inflated levels, leading to an overheated system filled with unsound businesses. When the companies try to cash out by going public, some have run into hurdles. At two of SoftBank’s biggest investments, WeWork and Uber, some of these issues have become public... “Since the money started pouring out of SoftBank, they have completely distorted the priorities and focus of young ventures around the world,” said Len Sherman, a Columbia Business School professor.
The consequences,
At Ola, where SoftBank was the largest shareholder, 62 percent of what drivers earned in 2016 came from investor money rather than fares, according to the data firm RedSeer. When some of the start-ups cut costs, often prodded by SoftBank, they reduced payments to workers. Many contractors said they wanted to stop working with the start-ups, but couldn’t because of upfront investments they had to pay off. 
2. On Oyo, it is very hard to believe that its aggressive growth will have a happy ending.

3. From Eduardo Porter in the Times on how the rich cities are becoming richer still, increasing the gap with their poorer cousins,
There are about a dozen industries at the frontier of innovation. They include software and pharmaceuticals, semiconductors and data processing. Most of their workers have science or tech degrees. They invest heavily in research and development... And if you don’t live in one of a handful of urban areas along the coasts, you are unlikely to get a job in one of them. Boston, Seattle, San Diego, San Francisco and Silicon Valley captured nine out of 10 jobs created in these industries from 2005 to 2017, according to a report released on Monday. By 2017, these five metropolitan regions had accumulated almost a quarter of these jobs, up from under 18 percent a dozen years earlier. On the other end, about half of America’s 382 metro areas — including big cities like Los Angeles, Chicago and Philadelphia — lost such jobs. And the concentration of prosperity does not appear to be slowing down.
But efforts like this from a Brookings study that seeks to help others emulate the successful cities by supporting them with resources and enabling policies to attract new businesses may not be effective,
Battling the forces driving concentration will be tough. Unlike the manufacturing industries of the 20th century, which competed largely on cost, the tech businesses compete on having the next best thing. Cheap labor, which can help attract manufacturers to depressed areas, doesn’t work as an incentive. Instead, innovation industries cluster in cities where there are lots of highly educated workers, sophisticated suppliers and research institutions. Unlike businesses in, say, retail or health care, innovation businesses experience a sharp rise in the productivity of their workers if they are in places with lots of other such workers, according to research by Enrico Moretti, who is an economist at the University of California, Berkeley, and others.

Other industries and workers are also better off if they have the good fortune of being near leading-edge companies... The cycle is hard to break: Young educated workers will flock to cities with large knowledge industries because that’s where they will find the best opportunities to earn and learn and have fun. And start-ups will go there to seek them out. Even skyrocketing housing costs have not stopped the concentration of talent in a few superstar cities.
4.  Abhijit Banerjee and Esther Duflo write about the futility of searching for big ideas that drive economic growth, and instead argues in favour of focusing on smaller ideas which have evidence of impact.

5. On the phased manufacturing policy (PMP) for mobile phones, here is the latest,
India has imported mobile phone components worth more than $1 billion from Vietnam — with which India has a free trade agreement (FTA) —in the first half of this fiscal alone, compared to $800 million in the whole of 2018-19 and just over $600 million in FY18.
Following demand from handset makers, three years back India had imposed basic customs duty of up to 15% on imports of more than half-dozen mobile phone components, including a 20% duty on fully made mobile phones. The objective of the PMP was to gradually move up the value-chain by targeting volumes which, it was hoped, would help pull in sub-assembly and component industry in due course.

But apparently even as on the one hand India was imposing duties on components imports, on the other hand it was signing FTAs with Vietnam/ASEAN which ended up defeating the very purpose of the duties (which were aimed at China). A case of the two hands not co-ordinating?

Maybe I am missing something here. But if this is indeed a case of poor co-ordination and lack of active surveillance on a policy implementation, then we do have a big problem at hand.

6. This is interesting coming as it does from the Chairman of India's largest telecom operator, Mr Sunil Mittal,
We have gone through several crises before, but this probably is the most difficult time for the industry. We have seen brutal competition, an unprecedented competition, for the last two or three years. The result has broken balance sheets, eight companies have collapsed or folded up, gone bankrupt or were sold for nothing. What we have now must be protected. And for that, the government must do whatever they to support in whichever form they can, including the reduction in levies charged on us. They must have a sympathetic view towards the industry.  
He then goes ahead to suggest a new three-plus-one market structure for telecoms - three private operators and BSNL!

Left unsaid in this is an acknowledgement that the much hyped telecom story was largely about an industry being at an opportune moment in history with the market's evolution and the technological trends, and less about any inherent merits of unfettered market capitalism where governments get out of the way. The request for bailout by government would have appeared less hypocritical if this too was explicitly stated.

7. Good set of data on health expenditures from the NSS 2017-18 analysed in Livemint. Outpatient treatment expenses outstrip hospitalisation expenditures. While hospitalisation rate was 2.9% (2.9 out of 100 need hospitalisation, outside childbirth, in a year), non-hospitalisation treatment was 7.5% in the previous 15 days (to the survey). This makes average per capita expenditures on OP treatment to be double that of in-patient care. IP care in private hospitals is 6-8 times more costlier than in public hospitals. The share of OP care in total medical expenses is higher for the poor.

Medicines account for the major share of the out-of-pocket expenditures.
8. A measure of the extent of credit binge by Chinese companies,
The banking system more than quadrupled in size, from $9 trillion at the end of 2008 to $40 trillion today... While most of the lending comes from banks, Chinese borrowers have increasingly turned to the bond market to get money they need to run their businesses. Now the bill is coming due. According to S&P Global, Chinese companies must pay back $90 billion in debt denominated in American dollars, meaning the lenders are global companies and investors outside China. In 2021, an additional $110 billion will come due. At home, Chinese companies will have to pay $694.6 billion to bondholders next year and $706 billion in 2021.
9. An interesting study from China about the value of collecting and disseminating information on air pollution which leads to behavioural adaptations that lower health costs,
During 2013-2014, China launched a nation-wide real-time air quality monitoring and disclosure program, a watershed moment in the history of its environmental regulations. We present the first empirical analysis of this natural experiment by exploiting its staggered introduction across cities. The program has transformed the landscape of China's environmental protection, substantially expanded public access to pollution information, and dramatically increased households' awareness about pollution issues. These transformations, in turn, triggered a cascade of behavioral changes in household activities such as online searches, day-to-day shopping, and housing demand when pollution was elevated. As a result, air pollution's mortality cost was reduced by nearly 7% post the program. A conservative estimate of the annual benefit is RMB 130 billion, which is at least one order of magnitude larger than the cost of the program and the associated avoidance behavior. Our findings highlight considerable benefits from improving access to pollution information in developing countries, many of which are experiencing the world's worst air pollution but do not systematically collect or disseminate pollution information.
10. Finally, Ed Luce shines light on the opacity surrounding financial market transactions in the US,
The US has 10 times more shell companies than the next 41 jurisdictions combined, according to the World Bank... America is the largest dirty money haven in the world. Its illicit money flows dwarf that of any other territory, unless you treat Britain and its offshore tax havens as one. The US Treasury estimates that $300bn is laundered annually in America. This is probably a fraction of the true number. Worse, the US government has no idea who controls the companies that channel the money because America lacks a corporate central registry. There is no law in America requiring disclosure of “beneficial ownership”. US banks must report suspicious activity. But law firms, real estate companies, art sellers, incorporated enterprises and non-bank financial institutions are exempt. Those hoping to clamp down on money laundering are thus heavily outgunned by lobbyists for the status quo... the US system offers a red carpet for dirty money. Furthermore, autocrats in Russia, China, Saudi Arabia and elsewhere could not thrive without the connivance of America’s suite of service providers.
This is a great primer on how the corrupt use legal structures to hide stolen wealth and what to do about it.

Thursday, December 12, 2019

Start-ups and "millennial lifestyle sponsorship"!

Derek Thompson (HT: Sandipan Deb) cuts to the chase with the start-up hype, describing it as a massive lifestyle subsidy to consumers,
Starting about a decade ago, a fleet of well-known start-ups promised to change the way we work, work out, eat, shop, cook, commute, and sleep. These lifestyle-adjustment companies were so influential that wannabe entrepreneurs saw them as a template, flooding Silicon Valley with “Uber for X” pitches. But as their promises soared, their profits didn’t. It’s easy to spend all day riding unicorns whose most magical property is their ability to combine high valuations with persistently negative earnings—something I’ve pointed out before. If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year. If you use Lime scooters to bop around the city, download Wag to walk your dog, and sign up for Blue Apron to make a meal, that’s three more brands that have never recorded a dime in earnings, or have seen their valuations fall by more than 50 percent...
To maximize customer growth they have strategically—or at least “strategically”—throttled their prices, in effect providing a massive consumer subsidy. You might call it the Millennial Lifestyle Sponsorship, in which consumer tech companies, along with their venture-capital backers, help fund the daily habits of their disproportionately young and urban user base. With each Uber ride, WeWork membership, and hand-delivered dinner, the typical consumer has been getting a sweetheart deal. For consumers—if not for many beleaguered contract workers—the MLS is a magnificent deal, a capital-to-labor transfer of wealth in pursuit of long-term profit; the sort of thing that might simultaneously please Bernie Sanders and the ghost of Milton Friedman.
When this round of start-up bubble bursts, as it will in the foreseeable future, several narratives (the world abounds with spectacular innovations waiting to be harnessed, boot-strapped start-ups are best placed to harness them, VCs are good at spotting these innovators, there is a VC funnel with this investment approach, and so on) and reputations (among the big name investors, and the world of impact investing itself) will take big hits.

This is hardly a game about building sustainable businesses, but about growing at whatever cost and thereby keeping the valuations going up - about cheshire cats than unicorns! Unfortunately, it is also giving a bad name to those investors who are genuinely good at spotting good businesses. 

Sample this, this, this and this to know more about the realities of the start-up world.

Tuesday, December 10, 2019

What drives sub-way costs - imitate, don't innovate!

Alex Tabarrok has a very good post linking to the work of Alon Levy in compiling and analysing the data on construction costs of over 205 metro rail projects in 40 countries. The data set is very rich and impressive. Sample this,
New York is planning to have spent around $35 billion between 2005 and 2030 on subway and commuter rail expansion. But it’s only getting 15 km of new tunnel! Paris is spending a similar amount over the same period: Euro 40 billion, for a total of 228 km, 187 underground. Madrid, a much smaller city, spent Euro10 billion in 1995-2015 on 234 km, around 180 underground.

This is also perhaps a great example of how academic research can add significant value to real world issues. Levy's main point is that lack of awareness and siloed thinking in structuring contracts and choice of construction techniques is the main contributor to the exorbitantly high subway costs in New York compared to other countries. It is an example of how US can learn to imitate from Europeans and Koreans.

This is interesting,
Levy is to be lauded for his pioneering work on this issue yet isn’t it weird that a Patreon supported blogger has done the best work on comparative construction costs mostly using data from newspapers and trade publications? New York plans to spend billions on railway and subway expansion. If better research could cut construction costs by 1%, it would be worth spending tens of millions on that research. So why doesn’t the MTA embed accountants with every major project in the world and get to the bottom of this cost disease? (See previous point). Perhaps the greatest value of Levy’s work is in drawing attention to the issue so that the public gets mad enough about excess costs to get politicians to put pressure on agencies like the MTA.
This is something for perhaps the World Bank to take forward. In particular, comparing across emerging technologies, and also life-cycle costs of various systems can be very useful decision-support for governments planning new metro systems. 

The main takeaways from the study

1. Geographic and geological factors are not responsible for the wide variations in project costs of sub-way systems. 

2. Station costs are a big factor in the variations. 

3. In terms of total cost, cut-and-cover method is cheaper than bored tunnel with cut-and-cover stations, by a factor of 1.5 to 2, which in turn is cheaper than bored tunnel with mined stations. 

4. The cost of mined stations is often 4-8 times that of cut-and-cover stations. So the best approach is shallow cut-and-cover construction, disrupting the street for a period of time, and refrain from mining except at under-crossings. Further, avoid mezzanines, with all circulation, including fare barriers to be on the platform level or at street level. And have an island platform, ideally accessed from a street median, to avoid duplicating elevators, stairs etc. Finally standardised station designs.

5. City centre tunnels cost more because cut-and-cover is not possible and because of number of crossing of older lines.

6. Contracts should avoid design-build approach and should be flexible and strictly separate design and construction. They should also not be lump-sum construction contracts, and the bills should be itemised to limit litigation during renegotiations and changes. 

7. Contract awards should be quality and cost-based, rather than purely cost-based ones, awarded to the lowest bidder. Madrid used technical score (50%), speed (20%) and cost (30%)

8. Finally, instead of relying on consultants, use an in-house team to oversee the design and project management. The in-house team costs 25-33% less than consultants and are also likely more effective and constructive. 

The Madrid metro is a good example of a project which incorporated these principles into its construction, and one of the cheapest in the world.

Sunday, December 8, 2019

Weekend reading links

1. WSJ has an article which questions the widespread belief that failures help make a better entrepreneur.
Failed entrepreneurs were more likely to go bankrupt or dissolve their business than first-time entrepreneurs. In fact, even if an entrepreneur had run a business successfully before, they were just as likely to see their new business fail as a first-time entrepreneur. Other researchers have reached similar conclusions. A Harvard Business School study of venture-capital-backed firms in the U.S., published in the April 2010 Journal of Financial Economics, found that previously failed entrepreneurs were no more likely to succeed than first-time entrepreneurs. A study of German entrepreneurs by a researcher at KfW Bankengruppe found that entrepreneurs who started a company after a failure performed poorly compared with other founders. “Their probability of survival in general as well as their risk of failure in particular is worse than that of other startups,” according to the researcher, who added: On average, “there is no indication that business failure triggers a reflection process in which entrepreneurs look back on mistakes they have made and adapt their future behavior accordingly.”
2. An RCT evaluation shows that microfinance can indeed help certain types of entrepreneurs,
In Hyderabad, India, we find that “gung ho entrepreneurs” (GEs), households who were already running a business before microfinance entered, show persistent benefits that increase over time. Six years later, the treated GEs own businesses that have 35% more assets and generate double the revenues as those in control neighborhoods. We find almost no effects on non-GE households... These results show that heterogeneity in entrepreneurial ability is important and persistent. For talented but low-wealth entrepreneurs, short-term access to credit can indeed facilitate escape from a poverty trap... 
Essentially all of the benefits of credit access accrue by increasing entrepreneurship on the intensive margin: for those individuals with an existing business before the entry of microfinance (who we call gung-ho entrepreneurs or GEs), we find economically meaningful, positive effects on household businesses and consumption. Within this group, the bulk of effects come from households who escape from the fixed-cost-driven poverty trap and move into a more productive technology (with the remainder coming from already-productive businesses scaling up to exploit constant returns). The rest of the sample–those who start new businesses, or who never start a business at all–exhibit essentially zero impact of credit access. Notably, for this group the effect is a fairly precise zero throughout the distribution: while these reluctant entrepreneurs and consumption borrowers do not experience benefits from microcredit access, neither do they appear to experience harm.
The paper has several important academic insights. The big policy insight (one which the authors do not draw) is the reinforcement of the fact that SMEs in general are credit constrained, and, importantly, of them certain types of enterprises could benefit from even micro-finance. So add in the management practice support and with small amounts of credit, there can be out-sized productivity effects. The problem is how to identify them?

3. The lemon effect in used car markets can be very significant. Sample this from a Danish study,
We estimate the model using data on car ownership in Denmark, linked to register data. The lemons penalty is estimated to be 18% of the price in the first year of ownership, declining with the length of ownership. It leads to large reductions in the turnover of cars and in the probability of downgrading at job loss.
4. The work of folks at the BIS have demonstrated how globalisation has contributed to lowering and reducing domestic policy control over inflation dynamics. Kristin Forbes adds a nuance to that argument,
CPI inflation has become more synchronized around the world since the 2008 crisis, but core and wage inflation have become less synchronized. Global factors (including commodity prices, world slack, exchange rates, and global value chains) are significant drivers of CPI inflation in a cross-section of countries, and their role has increased over the last decade, particularly the role of non-fuel commodity prices. These global factors, however, do less to improve our understanding of core and wage inflation. Key results are robust to using a less-structured trend-cycle decomposition instead of a Phillips curve framework, with the set of global variables more important for understanding the cyclical component of inflation over the last decade, but not the underlying slow-moving inflation trend. Domestic slack still plays a role for all the inflation measures, although globalization has caused some “flattening” of this relationship, especially for CPI inflation. Although CPI inflation is increasingly “determined abroad”, core and wage inflation is still largely a domestic process.
5. The biggest obstacle to the emergence of Euro as a competitor to dollar,
A new study by economists Ethan Ilzetzki, Carmen Reinhart and Kenneth Rogoff... argue that “a central reason is the scarcity of high-quality marketable euro-denominated assets, and the general lack of liquidity compared to dollar debt markets”. Because of credit downgrades in the previous crisis and a still-fragmented private securities market, the euro has too few of the reliable assets that global investors use as reserves: typically ultra-safe triple A-rated bonds issued by creditworthy governments or companies.
The European Central Bank agrees, according to Benoît Cœuré, a member of its executive board. “In our analysis, [the most important move] would be a deepening of European capital markets and the introduction of a safe asset. That would be a game-changer.” In fact, no currency has ever gained predominance without liquid markets in a benchmark asset, says Mr Eichengreen. “If [Europe] succeeds in significantly enhancing the international role of the euro without that step, it would be a first.” The lack of safe euro-denominated assets was aggravated by the 2010-12 eurozone sovereign debt crisis, when investors feared the single currency might fall apart. “It’s a perfectly fine idea to promote the euro in international markets,” says Gita Gopinath, IMF chief economist. “But the necessary condition for that is to improve the euro area architecture to strengthen resilience — centralised fiscal capacity, capital markets union, banking union.”

6. Jonathan Ford in FT has a nice article on how accounting practices can cover up for corporate failings, this time in the case of Thomas Cook - the art of paying out massive dividends through accounting tricks despite the company not having the wherewithal to pay out even a cent.

7. Fascinating article about the use of back-channel diplomacy by American Presidents.

8. As the latest PISA results indicate, student learning outcomes is a problem in the US too.

9. Very good graphic explanation of the New York subway map here.

10. Finally, a new working paper comparing fiscal multipliers in developed and developing countries,
The clear theoretical implication that public investment multipliers should be higher (lower) the lower (higher) is the initial stock of public capital has not, to the best of our knowledge, been tested. This paper... finds robust evidence in favor of the above hypothesis: countries with a low initial stock of public capital (as a proportion of GDP) have significantly higher public investment multipliers than countries with a high initial stock of public capital... Our results thus suggest that public investment in developing countries would carry high returns.
Here is a good primer about fiscal multipliers from the IMF.

Monday, December 2, 2019

An slowdown caused by economic orthodoxy?

This is in continuation to earlier posts here, here, here, and here.

Harish Damodaran characterises the ongoing economic slowdown in India as a western style demand-side slowdown and blames it on commissions and omissions of policy. 

While we all agree that this is a demand-side slowdown, I think that is only a part of the picture. We may be missing the big picture necessary to address the underlying nature of the economic trends. Ashoka Mody got part of the remaining elements right, but not fully.

Here is my hypothesis. While we have an economic slow-down, from 8% to 4.5%, I feel that the 8-9% growth in the first place was itself built on shaky foundations. We therefore have a demand slow-down which has come on top of unsustainable booms. This makes the slow-down appear even more steep.

The capital foundations (human resource, physical infrastructure, financial capital, institutional strength, and market demand) required to sustain the high growth rates were never in place. This was outlined in Can India Grow. In the circumstances, the two spurts of growth – 2003-04 to 2007-08, and 2009-10 to 2010-11 – were built on two bubbles. The former was the capex and construction boom, especially driven by infrastructure companies, and the latter by the lagged effects of the transfers boom, especially driven by rises in MSP and NREGS spending and monetary accommodation. The former spawned a financial cycle, whose ruinous effects are seen in the banking and non-banking sector crises. The financial cycle was also associated with massive resource misallocation towards real-estate and construction (property prices went over the roof, and the pile up of massive real estate inventory has its origins in that cycle).

I am inclined to believe that in the absence of these two bubbles (excessive capex and construction investments, and excessive transfers), the economic growth would perhaps have been, in the range of 5-7%. 

While the signatures of decline in high-frequency indicators can be traced back to September-October 2018, it can be argued that the underlying drivers of growth had run out of steam much earlier. The euphoria surrounding the new government in 2014-15 provided tailwinds to sustain growth despite all the credit market and corporate balance sheet problems. This momentum was perhaps completely snuffed out by the triple shocks – demonetisation, GST, and regulatory over-kill and tight money policy by RBI – and the decline had started by early 2017. In other words, the triple-shocks were merely expediting and exposing the shaky foundations. 

Despite this ongoing economic weakness, the financial cycle appears to have remained buoyant and may be ebbing only now. This is borne out by the high FDI inflows, the vast majority of which went into finance, real-estate, renewables, and consumer technology services sectors. Less than 5% of FDI went into manufacturing. The solar investment bubble, where the chickens are now coming home to roost, was significantly inflated by private equity. Same with commercial real estate. In fact, PE has been consistently 40-60% of the total FDI, largely in the form of buyouts. QE and the global search for yields too were tailwinds sustaining this financial cycle, amidst the continuously weakening economy.

R Nagaraj has pointed to a financialisation dimension of FDI flows, highlighting the close correlation between inward and outward flows, and the possibility of tax arbitraging and treaty shopping. The IMF's latest Fiscal Monitor identifies almost 40% of global FDI as "phantom FDI" driven by tax avoidance.

The misleading economic data till recently gave the false impression to the government that everything was alright. It created a sense of complacency and came in the way of recognising the problems early on and taking measures to address them head-on. It also led to the Inflation Targeting regime and fiscal conservatism being pursued well beyond their limits.

Economists scorn at demonetisation. But ironically the remaining contributors to the mess were straight out of the orthodoxy - Inflation Targeting, Basel III adherence, fiscal conservatism, GST, RBI's slew of regulatory actions, IBC etc. For an economy struggling with the twin-balance sheet problem (corporates and banks), the combined squeeze due to all these, coming at more or less the same time, was understandably back-breaking. Complementing these was the enthusiastic embrace of cross-border capital flows and the crack-down on black money and shell companies. All these were best-in-class policies implemented at the behest of  technocrats with limited skin in the game. Why is no one discussing these? Where are the economists queuing up to study the effects of the sledgehammer shock from RBI?

Realising this structural dimension is important now as we pursue measures to revive the economy. The QE was pursued far beyond its relevance on the false assumption that economic growth (in the US etc) could be restored back to that of the Great Moderation era. Policy makers in the US were unwilling to accept the more realistic 2-3% growth rates. India’s policy makers too need to acknowledge the reality that a return to sustainable 8% growth rates is not possible without addressing fundamental capital accumulation deficiencies.

Demand-side measures are urgently required to ensure that the economy does not get entrapped in a vicious downward spiral and ends-up like the Latin American economies and gripped by the problems of the middle-income trap. But it will have to be accompanied by deep structural reforms on all the four fronts of capital accumulation – human (fixing education), physical (infrastructure investments), financial (intermediation, savings), and institutional (state capacity, management of cities). This will have to be accompanied by policies that address problems in agriculture and manufacturing.

We cannot afford a sequential path, get immediate demand-side measures and then tackle the other structural issues. In fact, all these should have been solved yesterday!

Sunday, December 1, 2019

Weekend reading links

1. Amazon's Mechanical Turk is the latest in the cost-minimising innovations with massive negative externalities on society.
Employers, known as requesters, post batches of what are called Human Intelligence Tasks, or HITs, on Mechanical Turk’s website. A task could be transcribing an invoice, or taking part in a study, or labeling photographs to train an artificial intelligence program... Most tasks pay a dime or less, and there is a daily churn of tasks that pay only a penny... People turk to save for a motorcycle. They turk to buy insulin. They turk to pay off debt or pass the time profitably while on the clock at a boring job. Some do it because there are few decent-paying jobs that can be done at will. People who are confined to their homes by disability or social anxiety or who live where there are few jobs do it because, despite lousy wages, it seems like the best option. Plenty turk full time. In a 2016 Pew Research Center survey of nearly 3,000 American turkers, a quarter said they made most or all of their earned income on the platform. More than half the turkers surveyed said they earned under $5 an hour. 
As little as turking appears to pay on paper, in practice it often pays less because MTurk, as it is known, is a sloppy, shoddy free-for-all. Turkers spend their time fighting requesters over an unfair 10-cent rejection or a missing 60-cent payment. They waste minutes filling out bubbles on defective questionnaires that cannot be submitted. They abandon “10-minute” surveys after half an hour. They swap horror stories and warnings on turker message boards (“rejection on a $0.50 hit,” read one recent bulletin, “reason is ‘funds were not allocated’”). They leave scathing reviews on the turker-run site Turkopticon (“unfair and wild use of the rejection button”). Just how much turkers make is the subject of considerable scholarly debate, but one paper published last year analyzed millions of tasks done by thousands of turkers. Though they probably overrepresented novice turkers like me who do the lowest-paying tasks, the paper’s authors concluded that if you count time spent looking for tasks and working on tasks that came to nothing, the median turker’s hourly wage was $1.77... 
Presiding over this production is the world’s biggest tech company, feet firmly planted on the sidelines. Amazon usually declines to get involved when turkers say requesters rip them off, even as it lets requesters hide behind aliases that can make them impossible to track down... Amazon even finds ways to recoup some of the pennies turkers earn, a reminder of the days when miners were paid in scrip redeemable only at the company store. While American turkers can get their wages direct-deposited, thousands of turkers overseas have only one way to get paid without incurring third-party fees: on an Amazon gift card... Minimum-wage laws generally do not apply to piecework jobs like turking. Mechanical Turk is now one of a handful of big players in the field known as crowdwork or microwork. (One crowdwork company, Prolific, used by academic researchers, enforces a minimum wage: $6.50 an hour.)
Crowdwork’s proponents see a gleaming future — a borderless, no-overhead labor market where task-creator and task-doer meet at the intersection of supply and demand. Its critics see a throwback to something more Dickensian, where the lack of regulation and accountability keeps workers in the dark and on the defensive. Mechanical Turk, in particular, combines the inconsistency and precariousness of gig work with Big Tech’s tendency to dodge liability for the icky things that happen on its platforms. 
2. The Economist has a nice article on the $3.5 trillion US healthcare industry, perhaps the most famous example of why unfettered markets do not work. Sample this,
The merger wave has increased concentration and pricing power. Brent Fulton of the University of California, Berkeley, found that 90% of America’s hospital markets, representing a population of over 200m, were highly concentrated. Zack Cooper of Yale University, whose team looked at insurance claims covering over a quarter of Americans with employer-provided health insurance, discovered that prices at hospitals with a local monopoly were 12% higher than in markets with four or more rivals. A study by an insurance-industry body concluded that consolidation cut costs by 15-30% at acquired hospitals, but average prices for hospital services still rose by between 6% and 18%.
According to the American Hospital Association, a lobby group, operating margins in the industry rose from 4.4% in 2007 to 6.4% in 2017. But many hospitals in rural areas, which suffer from undercapacity, and in poor urban areas, which have lots of uninsured patients, barely break even or lose money. Big for-profit chains like hca Healthcare, with around 180 hospitals, can enjoy high (if volatile) margins. Non-profit institutions often plough those gains into expansion or salaries.
And the incentives facing the different participants,
Patients are often not price-sensitive. They are either in need of urgent care, with no time to shop around, or have insurance, and so pay a fraction of the full cost (often nothing beyond an annual out-of-pocket limit). Insurers, for their part, care less about prices because they now make more money by managing health plans for self-insured employers than by managing risk. They may even like to see inflation rise, since they can take a bigger cut from a bigger base. A well-intentioned Obamacare rule forces insurers to pay out at least 80% of their revenue from premiums. But by capping margins, it encourages raising revenue, not efficiency—and higher costs can be used to justify higher premiums.
3. Excellent essay by Paul Graham on what goes behind the creation of a genius (HT: Rajeev Mantri),
An obsessive interest in a topic is both a proxy for ability and a substitute for determination. Unless you have sufficient mathematical aptitude, you won't find series interesting. And when you're obsessively interested in something, you don't need as much determination: you don't need to push yourself as hard when curiosity is pulling you. An obsessive interest will even bring you luck, to the extent anything can. Chance, as Pasteur said, favors the prepared mind, and if there's one thing an obsessed mind is, it's prepared. The disinterestedness of this kind of obsession is its most important feature. Not just because it's a filter for earnestness, but because it helps you discover new ideas... The popular story is that they simply have better vision: because they're so talented, they see paths that others miss. But if you look at the way great discoveries are made, that's not what happens. Darwin didn't pay closer attention to individual species than other people because he saw that this would lead to great discoveries, and they didn't. He was just really, really interested in such things. Darwin couldn't turn it off. Neither could Ramanujan. They didn't discover the hidden paths that they did because they seemed promising, but because they couldn't help it. That's what allowed them to follow paths that someone who was merely ambitious would have ignored.
The important thing is to cultivate disinterested obsessive interest in something which matters!

4. Livemint points to the tanking of one of the last remaining drivers of economic growth, the state governments capital investments. 

The value of new state government projects fell 75% over last year, and is the lowest in 15 years. This, at a time when across states, government funded capex has overtaken private capex as the major source of investment. 

The article also points to how UDAY, without the complementary power sectors reforms to lower losses and raise tariffs, has both weakened state government and discom finances and lowered investments in the power sector. 

5. A stunning snippet capturing the demographic shifts taking place,
Harvard has more students at its Division for Continuing Education (for mature and retired students) than it does at the university itself.
6. Much gloss has been applied on the recent Business Roundtable Declaration by over 180 leading US corporate executives pledging their allegiance to beyond shareholders to cover employees and customers.  Sample some of the reality behind it,
Most of the CEOs who pledge to fight climate change do not run firms that are responsible for it. Take the biggest 200 Western firms that disclose emission figures. Of these, the top 20 are responsible for 70% of all emissions: the other 180 don’t matter much... the accusations of hypocrisy: it is not hard to find. Nike, which has pushed virtuous branding, has been embroiled in a doping scandal. BlackRock, a fund manager that pushes other firms to invest more, spent over 100% of its own cashflow on buybacks in the past 12 months. Visa signed the Roundtable letter championing customers, but is part of a payments oligopoly. 
This national effort—call it Industrial Policy 2.0—should focus on ensuring that hardware innovations are manufactured in this country. The idea is not to recover lost industries but to rebuild lost capabilities. The U.S. needs to leverage its dominance in science and technology to create future industries, to provide us with first-mover advantages and reclaim American leadership in manufacturing. The first step would be to create a new federal agency responsible for the health of U.S. manufacturing. A number of agencies currently have manufacturing-related programs, but there is little or no coordination or strategy. Defense alone cannot solve this challenge because defense procurement needs are dwarfed by commercial markets, and defense-specific technologies may have few commercial applications. A new agency is needed to signal new priorities. This National Manufacturing Foundation, as it could be called, would be a cabinet-level agency focused on rebuilding America’s industrial commons and translating our scientific knowledge into new products and processes.

Thursday, November 28, 2019

How much efficiency is too much efficiency?

One of the salient markers of progress and development is efficiency and cost-effectiveness - is the work being done more efficiently and cost-effectively than earlier? So formal markets are more efficient than informal ones, technology enhances efficiency, machines make people more efficient, and so on.

So theoretically, a large share of the work in today's world could be parcelled out to be done either completely by machines or farmed out to a waiting army of low-paid and unprotected virtual workers. Amazon's Mechanical Turk is an illustration of this. This is efficiency enhancing. But what about its costs?

This view of the world overlooks two factors.

1. Efficiency from whose perspective? What is efficient from the perspective of the business need not be efficient (much less desirable) from the perspective of the economy or society as a whole.

For a business, the most efficient path is to reduce its costs and maximise its revenues and profits, return money to the shareholders, and make good quality products available to its customers at the lowest price possible. In the process, it can outsource activities to other countries, squeeze more out of workers, even parcel out work to the likes of Mechanical Turks. It can squeeze on wages, minimise its tax outgo (tax avoidance planning), and avoid paying workers benefits. It can seek to externalise all costs and appropriate all gains.

This can look efficient in the aggregate (profits go up, consumers are happy, share prices rises, and animal spirits become active). But do we care that these gains come with a social cost (welfare of the workers) and tax payer subsidy (social security, tax revenues foregone etc)?

2. The social contract. This search for efficiency creates its set of externalities. All economic activities come with costs and benefits. Businesses have always sought to internalise the benefits and externalise the costs of any activity. Governments and regulations exist to mitigate this risk and make businesses internalise at least some part of the costs.

With any innovation once it becomes commercial, it takes time for the externalities to get recognised and internalised. After that regulations kick-in to address the market failures. Indeed this initial run-way which allows the first-movers to internalise and appropriate gains and externalise costs is the incentive for innovation itself, the first-mover's advantage.

The regulatory arbitrage associated with e-commerce and aggregators is an example of this process at play. The Ubers, Lyfts, AirBnBs, Facebooks and Amazons are currently reaping the fruits of this run-way. It is only a matter of time before the costs are recognised and regulations put in place to internalise some of those costs. That has always been the case and will be this time too (Do valuations take this into account?)?

Any society, democratic or authoritarian, is built on a social contract among different socio-economic groups. The rich need the poor, owners need workers, lenders need borrowers, rural needs urban, shareholders need executives, landlords need tenants, sellers need buyers, and so on. The exact vice-versa holds in equal measure. The relationships are symbiotic.

Accordingly, its richer people agree to pay more taxes; poor people agree to live in less attractive areas; savers lend their money at cheap rates to borrowers who in turn make very high returns; shareholders allow their executives to payout exorbitant salaries, far disconnected from their inherent worth; workers agree to workplace conditions and benefits that are far less comfortable than their managers and executives; farmers agree to policies that lead to terms of trade that favours consumers; residents of rural areas (and slums) allow a higher absolute and per-capita investment and better infrastructure in urban areas (and posh colonies) and so on.

There is no iron law which states this should always be the case. We've had societies in not too distant past where these were not true. After all the majority could turn around and say why should these be the case?

It has generally been the case that the power relationships between these groups have been skewed in favour of one side. And ironically, the relationship has always been in favour of the few and against the many. But this dynamic of relationship has held for centuries. But this dynamic was generally tempered by the social contract.

In a world of brute force majority, the powerless many would always question and upend the powerful few. Indeed revolutions have been built on the back of this inequity in relationships, especially when the inequity exceeds reasonable proportions. 

Tuesday, November 26, 2019

The struggles of the outsourcing industry

There are perhaps three different approaches to private participation in public services. Apart from full privatisation and PPPs, there is also outsourcing of public services. This blog has written extensively about the impact of privatisation and PPPs. 

Interestingly the world of outsourcing of public services has been undergoing serious turmoil in the UK. The collapse of the contractor Carillion early this year was a landmark event. 

Now Interserve, a construction and support services contractor for public works and services, which employs more than 45000 people across UK (and 69,000 staff worldwide), has announced deep restructuring to stay afloat. The company employs twice as many people as Carillion, and earns almost 70% of its income from offering services like probation, hospital cleaning and home nursing to governments in UK. It is now surviving on the back of its profitable equipment services subsidiary, RMDK. Interserve's problems come on the back of those of Amey and Kier, two other outsourcing contractors struggling for survival. 

Other major outsourcing contractors like Sodexo, Sopra Steria, G4S and Serco too have courted several controversies and fines in recent years. Some have been accused of outright fraud by way of fraudulent claims on electronic monitoring contracts for offenders and even admitted to the charges and paid fines. G4S was earlier stripped off its outsourcing contract to run Birmingham prison.

A just released study by think-tank Reform has found that 52 outsourcing contracts to private companies wasted at least £14.3 bn of taxpayers' money in the 2016-19 period. It attributed this to poorly designed contracts and their management,
It found that the Ministry of Defence was the biggest culprit, accounting for just under a third, or £3.9bn, of the extra cost. One of the most costly programmes was a 15-year delay in the full decommissioning of some of the Royal Navy’s nuclear submarines, which cost an extra £1.4bn. An army recruitment programme run by Capita cost £286m more than expected, after soldiers had to be brought in to tackle backlogs created by an untested IT system. Other examples include the high-profile liquidation of Carillion in 2018, which cost the taxpayer at least £148m and a £105m payment by the Department for Education to Learndirect to continue delivering training for an extra year even after the £120m programme was rated “inadequate” by Ofsted, the regulator... About a third of the government’s budget — or £292bn annually — is spent buying services from the voluntary and private sectors... Last year, the government awarded a 12-year contract to Capita to run the Ministry of Defence’s fire and rescue services, including the transfer of 2,000 staff at 53 MoD fire stations in the UK and overseas. 
It called for the creation of an outsourcing regulator to review all contracts from signing to completion. 

Even as these problems play out, the UK government has continued with outsourcing,
Civil enforcement officers employed by the HM Courts and Tribunals Service will be transferred to private sector companies Jacobs, Marston and JBW Group, according to a contract notice released by the Ministry of Justice last week. The bailiff-style work involves the serving of warrants for magistrates’ courts, including the powers to arrest people who have failed to pay court fines — which range from speeding tickets and TV licences to more serious offences such as assault. According to the notice, the work “includes all warrants of control and warrants of arrest in relation to the enforcement of unpaid criminal financial impositions”. Although private contractors, with arrest powers, have been used in the past within the MoJ’s civil enforcement service, it is the first time that all of the work has been outsourced.

Monday, November 25, 2019

Do tax cuts spur investments?

It is an entrenched narrative that tax cuts will lead to greater investments. This was one of the primary arguments behind the Trump tax cuts in the US. The top executives of US companies lobbied aggressively making public statements that if the cuts were made, it would boost investments.
The law cut the corporate rate to 21 percent from 35 percent, and allowed companies to deduct the full cost of new equipment investments in the year that they make them... Companies have already saved upward of $100 billion more on their taxes than analysts predicted when the law was passed. Companies that make up the S&P 500 index had an average effective tax rate of 18.1 percent in 2018, down from 25.9 percent in 2016, according to an analysis of securities filings. More than 200 of those companies saw their effective tax rates fall by 10 points or more. Nearly three dozen, including FedEx, saw their tax rates fall to zero or reported that tax authorities owed them money.
Now that the $1.5 trillion cuts have happened, what has been the outcome?
A New York Times analysis of data compiled by Capital IQ shows no statistically meaningful relationship between the size of the tax cut that companies and industries received and the investments they made. If anything, the companies that received the biggest tax cuts increased their capital investment by less, on average, than companies that got smaller cuts... 
From the first quarter of 2018, when the law fully took effect, companies have spent nearly three times as much on additional dividends and stock buybacks, which boost a company’s stock price and market value, than on increased investment... Those cuts stimulated the American economy in 2018, helping to push economic growth to 2.5 percent for the year and fueling a boost in hiring. Business investment rose at an 8.8 percent rate in the first quarter of 2018, and was nearly as strong in the second quarter. But the impact dwindled quickly. In the summer, the economy grew at just 1.9 percent and business investment fell 3 percent, including a 15.3 percent plunge in spending on factories and offices. Over the spring, companies spent less on new investments, after adjusting for inflation, than they had in the winter.
The Times article writes about FedEx, one of the more vocal lobbyists for tax cuts,
FedEx’s financial filings show that the law has so far saved it at least $1.6 billion. Its financial filings show it owed no taxes in the 2018 fiscal year overall. Company officials said FedEx paid $2 billion in total federal income taxes over the past 10 years. As for capital investments, the company spent less in the 2018 fiscal year than it had projected in December 2017, before the tax law passed. It spent even less in 2019. Much of its savings have gone to reward shareholders: FedEx spent more than $2 billion on stock buybacks and dividend increases in the 2019 fiscal year, up from $1.6 billion in 2018, and more than double the amount the company spent on buybacks and dividends in fiscal year 2017... FedEx spent $10 million on lobbying in 2017, in line with previous spending, with much of it focused on tax issues, according tofederal records. Its team pushed hard to shape the bill behind the scenes, meeting regularly with House and Senate committee staff who were writing the provisions.

Friday, November 22, 2019

Shining light on the balance sheet of corporate India

When some trouble surfaces in the economy, there is a common narrative. The government and politics is shackling India's enterprise and entrepreneurship. If only the government could get out of the way, the energies of India's private sector would be unlocked. If only it were so simple.

Ananth has a nice post which provokes thinking in this direction. 

Consider this balance sheet of corporate India in recent years.

1. The IT sector has achieved remarkable success in establishing themselves as the world leader in outsourced services. But it has remained a services industry, and have not been able to move up the value chain into making products and into leading-edge areas like cloud computing, data analytics, and artificial intelligence. Where is the Indian major IT product or solution? Where is the Salesforce or Slack or Skype or Cognos? Or even world-leading products on niche markets, apart from core-banking solutions for Indian banks like Finacle or BaNCS?

2. While the Indian start-up sector is bubbling with enthusiasm and there are now 30 unicorns, none of them are in areas of deep technology like robotics or artificial intelligence or data analytics. Most of them are in the consumer facing me-too areas, copying ideas from developed markets. Where is the Indian internet company (even TikTok?)? Given fintech is the simplest, where is the Indian Lufax?

3. There is a hype that entrepreneurship and innovation will help address many of India's development problems. As I have blogged here, where are the expected telemedicine, e-learning, killer app in agriculture, low-cost diagnostics, and so on? There is not one start-up innovation from the country which has addressed any of the persistent development problems. Even in copying, where is the Indian equivalent of Alibaba's rural Taobao?

4. The Indian pharma companies have had a head start in generic drugs and Active Pharmaceutical Ingredients (APIs). In both, it is struggling to keep pace on the back of self-inflicted quality-related fraud and stave off the Chinese assault. The sector's global share and importance has steadily declined in the years and has become stigmatised globally for fraud and poor quality. 

5. The telecom sector, the contrast between BSNL and the private operators, has for long been held out as the totemic example of what private sector in India could have achieved if unleashed from the restrictive role of governments. But the sector's current problems, at the least qualifies that claim significantly. In perhaps one of the most competitive markets, the race to the bottom in terms of tariffs has devastated the balance sheets of telecom companies, 

6. Much the same applies to the Indian airlines sector which is entrapped in a bad equilibrium, which can no longer support a full-service domestic carrier. Again, competitive markets have led to aggressive ticket pricing and fleet expansions have resulted in cycles of boom and bust. Admittedly, boom and bust are a feature of the airline industry globally.

7. What about private banking in India. In the early days of the ongoing banking crisis, the contrast between the public and private sector banks made it appear that bad practices were the exclusive preserve of public sector banks. In due course, the skeletons have come tumbling out from the cupboards of the private banks. Major corporate governance failings and concealed NPAs have surfaced from most of the big private banks - ICICI, Axis Bank, Yes Bank, and RBL. 

8. Take the example of infrastructure sector. As we know now, the 2003-08 boom was built on the back of aggressive bidding and gold-plated project reports to raise debt. There were no stressed promoters but only stressed projects. The promoters had already made their returns and had no skin left when the projects started to stall. The banks are still reeling from these bad loans. 

9. What about sectors where a home-grown champion could have emerged - mobile phones, solar panels, consumer electronics? Isn't it just shocking that there are no major Indian brands among refrigerators, air conditioners, washing machines, televisions etc (except a stray Voltas, Videocon, and Godrej)? None among automobiles!

10. What about the sunrise sectors - renewables, medical devices, batteries, internet of things etc? There is not one Indian company of any growth promise anywhere on the horizon in any of these areas. What happened to Suzlon?

11. The worst set of failings have been with the financial markets. The Credit Suisse folks have written about the excessive concentration of debt among the big corporate groups. The culture of relationship banking, as we have seen above, was not the exclusive preserve of public sector banks. The IL&FS and DHFL scandals may be exceptional only in its excess and its elements in varying degrees representative of the larger malaise.

12. Finally, on corporate ethics and leadership in general, less said the better. See this, this, and this. There are exceptions of course, but we are talking about the norm.  

Yes, on each of the above, the supporters of the private sector will have an explanation. The government or RBI or regulators did not do this. Or they did this. And so on. But the canvas of failures is too broad, almost universal, over such a long time for a massive private sector in a continental sized economy to hide behind such excuses.

I am not holding any brief for government or civil society or anyone else. Just making the point that there are "many fountainheads of India's economic malaise". And the corporate sector is just as, or more, culpable. The other less discussed, but just as much contributing, culprit is the judiciary - the IBC, here and here, is only the latest high-profile exhibit.

These need to be acknowledged as we proceed with policies to address the malaise if we are to make sustainable progress.

Update 1 (28.11.2019)

Bloomberg has a nice article about the competitive race in India's mobile payments market. The big name Indian capitalists - Anand Mahindra, Kumar Mangalam Birla, and Dilip Sanghvi - have all chickened out after acquiring Payment Bank licenses. Only Reliance is left to fight the battle with global giants like Google Pay, Phone Pe (Walmart), and PayTm (Alibaba and Softbank). 

But on the positive side, there is T-Series, which owns rights to as much as 70% of Bollywood music released in the past three decades, and with 117 million subscribers is the world's largest You Tube Channel. It appears reasonably well-positioned to take on the likes of Netflix. This is interesting
T-Series’ presence on YouTube and other streaming platforms is maintained by just 10 full-time employees, each responsible for uploading videos and songs in one language or genre.

Thursday, November 21, 2019

The regulatory shock to the Indian economy

The demonetisation and Goods and Services Tax (GST) are commonly considered the two biggest negative shocks faced by the Indian economy in the 2016-8 period. They have been variously blamed for the economic slowdown, credit squeeze, and other ills afflicting the Indian economy today.

There is a third, perhaps a more important negative shock. This involves the administrative actions by way of enhancing oversight and enforcement of laws and regulations by the RBI in particular.

Three sets of actions in this regard assume relevance.

1. The RBI initiated the asset quality review (AQR) of all schedule commercial banks. It then initiated a process for early detection of stressed loans and their surveillance, by classifying them as Special Mention Accounts (SMA). It also then withdrew all the restructuring schemes and through its February 12, 2018 circular directed that all defaulting loan accounts had to be classified as stressed even for a day of default, and also mandated that bankers had to refer all accounts with over Rs 2000 Cr loans to the National Company Law Tribunal (NCLT) within 180 days of default. In order to initiate immediate corrective action on banks struggling with capital adequacy ratios, asset quality, and profitability, the RBI initiated the Prompt Corrective Action (PCA) framework.

The AQR and SMA made no distinction between the different asset categories of banks. Temporary defaults on large infrastructure projects with their innately cyclical nature, even for a day beyond the 90 day period, were to be treated on a par with those on personal loans and classified as NPAs with process initiated to recover the loans under the IBC. 

In addition to all these, the RBI adopted the Basel III capital adequacy norms, and that too with a higher capital buffer than required. This, at a time when banks were struggling under the weight of the rising NPAs, squeezed them even more. The credit taps just got turned off completely. 

2. The Insolvency and Bankruptcy Code (IBC) was promulgated to help resolve bankrupt businesses and recover debtors and investors capital. It introduced a paradigm shift into the process of dealing with defaulting corporates. It was a welcome reform. This was state-of-the-art regulation and a progressive and big-bang reform. It was believed then that the days of capitalism without exits was over!

It should have been eased into the system. Again, here too the RBI stepped in by mandating a zero-tolerance approach for defaulting borrowers through its SMA classification. Ambitious time lines were fixed for completion of the entire process of resolution, including the judicial stages.

In fact, at that time, I thought it was a good move by the RBI, since a paradigm shift often needed actions which shook up the system off deeply entrenched practices. But it clearly seems to have backfired, by squeezing too soon.

3. The spate of financial market scandals led to tax authorities initiating investigations and raids across the country and across business sectors. This was accompanied by the crack-downs on shell companies, tax evaders, and black money peddlers. Both the demonetisation and the GST accentuated this trend. All this empowered tax officials and created a culture of aggressive enforcement.

All the three cases mentioned above were associated with radical regime shifts. In all of them, the system moved quickly from one of permissiveness and abundance of slack to one where tight adherence to very restrictive requirements became the norm. Theoretically, all of them were progressive moves, attempts to emulate best practices which are the norm in developed economies.

But these were sledgehammers. And these sledgehammers from RBI, IBC, and tax authorities (black money, shell companies, evasion etc) all fell at the same time, and that too when the economy was weakening. This was perhaps the last straw which broke the camel's back.

As I wrote in an earlier post, using the sledgehammer is just as inappropriate as is ignoring the problem altogether. Both are easy responses for regulators and policy makers at the helm of affairs. Making change happen in a more thoughtful and calibrated manner is very challenging.

I am inclined to believe that when the history of the Indian economy for this period, perhaps even an important long-term inflection point, is written, then these three channels of regulatory shocks will occupy the central role. It may also be a good example of the limitations of technocracy, especially in central banking. 

Wednesday, November 20, 2019

The "liberal meritocratic capitalism"?

The Economist reviews the latest book of Branko Milanovic which takes about different phases of capitalist evolution. It refers to the current phase as one of "liberal meritocratic capitalism". That, in particular, the "meritocratic" nature may be a figment of imagination. 

There are at least two reasons.

1. Getting to the starting line in accessing life's opportunities is increasingly one of ovarian lottery and less about innate talent or merit. The rich invest heavily in their children's education, which in turn gives them an unassailable head-start in the race to access career opportunities. The signatures of these are everywhere, from declining intergenerational mobility to increasing concentration of those from privileged backgrounds in top universities.

2. The aforementioned trend is being reinforced by a capture of the institutions, or the processes of rule-making, by a tiny elite. This, in turn, is being driven by the dynamic of widening inequality, and, there too, the excessive concentration of wealth in the hands of a tiny few at the very top. A striking manifestation of this is the fact that in the US in 2016, the "top 1% of the top 1% accounted for 40% of campaign donations".

In fact, in the US, the share of campaign donations by the top 0.01% has surged four-fold since the early nineties.

There is no better illustration of political capture than the Big Tech, especially Apple. Sample this,
Apple currently holds about $252 billion in profits offshore, where it can avoid paying U.S. taxes. That’s over 90% of the company’s total cash on hand. This profit is subject to the corporate income tax as soon as it’s “repatriated” back to the U.S. Before the recent tax code overhaul, the company would’ve paid $78.6 billion in taxes if it brought the money home, according to the Institute on Taxation and Economic Policy. Apple didn’t want to pay this tax, so it let the cash sit offshore for years.
In the meantime, Apple and its peers have been working furiously to tilt the tax code in their favor. Apple spent $2.3 million in the third quarter of 2017 alone lobbying. The other four big tech companies—Microsoft, Facebook, Alphabet (which owns Google), and Amazon—chipped in another $14 million. For their efforts, these titans of Silicon Valley are being rewarded handsomely. Now their offshore profits will be taxed at a one-time, 15.5% repatriation rate, also called a tax holiday. And all other corporate profits will be taxed at 21%, down from a previous nominal rate of 35%. So that $38 billion Apple’s going to pay in taxes now? It means the company effectively dodged more than $40 billion it would’ve otherwise paid.
A more appropriate description of today's capitalism would be "benign plutocratic capitalism"!

Tuesday, November 19, 2019

Summarising the entrepreneurship, urbanisation, and job creation research

Ejaz Ghani and his team have done some very good work on entrepreneurship, urbanisation, and job creation in India by studying granular data on economic activity in nearly 650 districts across services and manufacturing, and formal and informal sectors, and come up with certain observations. 

A summary of their clear takeaways (most of them were already well known, nevertheless a summary is useful):

1. New and young firms form the overwhelming share of net job creation

2. Urban areas are responsible for all of net job creation in manufacturing

3. Among the factor market distortions, the biggest and most critical is that involving land markets. Land is critical to both set up the enterprises as well as to raise capital. Distortions in this market drive spatial dynamics of economic activity.

4. The primary driver of entrepreneurship and job creation are investments in physical infrastructure and human resources, with the former being critical for manufacturing, and the latter for services. Ease of doing business, differential rates of returns etc are all distant secondary.

5. Firms face centripetal (access to markets, labour supply, good infrastructure, economies of scale etc) and centrifugal (cheaper cost of land, housing affordability, traffic congestion etc) forces in urban areas. In case of the large firms, the latter dominate, making them shift away from the large cities towards rural areas beside major transport corridors - de-urbanisation of manufacturing. In case of SMEs, the former dominate, making them shift to the large cities.

6. But the medium-sized (secondary) cities in India are not well equipped to support the shifting larger firms, nor be attractive enough for the SMEs. Prioritise the development of infrastructure and human resource investments in these cities.

7. The result is an uneven spatial development compared to other countries, with most productivity and growth concentrated within large cities.

8. Nevertheless low-density intermediate towns and cities (secondary) have been growing faster than the high-density large cities, pointing to the power of the inherent dynamic of economic growth.

9. Investments in the Golden Quadrilateral (GQ) is associated with heightened firm entry growth in non-nodal districts within 10 km of the network in industries that are land and building intensive, but even reduction in those further away pointing to displacement effects (as well as the importance of such transportation infrastructure). The GQ nodal districts experienced shifts towards industries less intensive in land and buildings. In the net, GQ improved the spatial allocation of economic activity in India. It activated economic activity in medium-density cities.

The conclusion is very clear - focus on human resource development (education and health), and development of physical infrastructure. Without this foundational requirement, rest all is tinkering at the margins.