Saturday, June 29, 2019

Weekend reading links

1. The global negative yielding debt rose to an all-time high of $12.5 trillion, up from $6 trillion last year.
The resultant search for yields by insurers, pension funds, and asset managers is keeping up both the equity markets and the alternative funds industry.

2. On how costs have fallen,
Since 1950 the real cost of new vehicles has fallen by half, that of new clothing by 75% and that of household appliances by 90%, even as quality has got better.
3. The Economist on HR promotions,
In a recent article for Voxeu, an online portal, the records of almost 40,000 salespeople across 131 firms were studied by Alan Benson, Danielle Li and Kelly Shue. They found that companies have a strong tendency to promote the best sales people. Convincing others to buy goods and services is a useful skill, requiring charisma and persistence. But, as the authors point out, these are not the same capabilities as the strategic planning and administrative competence needed to lead a sales team. The research then looked at what happened after these super-salespeople were promoted. Their previous sales performance was actually a negative indicator of managerial success. The sales growth of workers assigned to the star sellers was 7.5 percentage points lower than for those whose managers were previously weaker performers.
Scott Adams, the cartoonist, described this problem in his book, “The Dilbert Principle”. In his world, the least competent people get promoted because these are the people you don’t want to do the actual work. It is foolish to promote the best salesperson or computer programmer to a management role, since the company will then be deprived of unique skills. That is how the workers in the Dilbert cartoon strip end up being managed by the clueless “pointy-haired boss”.
4. Indian Express has a series of articles that point to the magnitude of the ground water depletion problem in India.

In Haryana,
One kg of rice requires 2,000-5,000 litres of water depending upon the paddy variety, soil type and the time of sowing. With paddy production jumping from 39.89 lakh tonnes in 2014 (is this figure correct?) to 45.16 lakh tonnes in 2018, the number of tubewells in the state also shot up from a few thousand to 8 lakh, resulting in overdrawing of groundwater... In the last two decades, the farmers have pumped out much as 74% of the groundwater reservoirs. 
With the weather department forecasting a delayed onset of monsoon, the state government has now deployed the highest ever number of water tankers — 6,597 as of June 10 — to meet the drinking water needs of parched regions. This is over three times the number of tankers deployed around this time last year (1,777)... Out of 17 major reservoirs listed by the Central Water Commission (CWC), with a total live capacity of 14.073 billion cubic metres, the live storage until June 6 is just 0.778 BCM, or 5.5%... The latest survey of the Groundwater Survey and Development Agency found that of Maharashtra’s 353 talukas, 279 have experienced depletion in ground water levels.  
5. This FT article by Amy Kazmin is among the most appalling and asinine articles I have read in recent times, so much so that it seriously undermines FT's credibility. The same cherry-picked portrait could have been strung together for any country. It really is the revealed mind, laid completely bare, of a very biased observer. 

6. The developments in Ethiopia highlights the challenges of bringing liberalism and democracy into societies without the conditions to embrace it. President Abiy Ahmed, a former military man, assumed leadership of Ethiopian People's Revolutionary Democratic Front (EPRDF), the part which has ruled the country since 1991, and became President of the country last year. He has abruptly embraced values of liberal democracy, freed up the press, unbanned political parties, released political prisoners, promised elections in 2020, and made peace with Eritrea. Being the first Oromo leader of the country, the largest ethnic tribe, he has made common cause with the second largest tribe  and traditional ruling class, Amhara.

Sample the latest developments,
Brigadier General Asaminew Tsige was released last year from a life sentence for plotting to overthrow Ethiopia’s government — one of tens of thousands of political prisoners to be freed by prime minister Abiy Ahmed. Last weekend, the brigadier was named as the alleged ringleader of another coup, this one aimed at toppling the regional government in Amhara. By Monday, security forces had shot him dead. Asaminew’s story encapsulates the high-wire act of Mr Abiy, who is attempting to turn one of Africa’s most authoritarian but effective states into a liberal democracy. The 42-year-old former army intelligence officer, the most exciting leader in Africa, may yet succeed. But this weekend’s events show the perils of his enterprise.
7. Facebook's announcement of the plans for a global digital currency Libra backed 1:1 with physical currency reserve is interesting on multiple counts. For a start, the timing of the announcement and that too by Facebook, given all that has happened in recent times around Facebook, is so questionable on multiple grounds. Two, despite all the concerns around Facebook and also issues about data security, the general commentary around this announcement has largely been surprisingly appreciative. Three, amidst all these discussions, there is little deep enough exploration of the idea's likely impact on the national and global financial system. In fact, the Libra white paper itself has nothing meaningful to say about the concerns that are likely with such an idea.

Martin Wolf, surprisingly, has a good cautionary note. As he says, this idea, even without Facebook, should not be allowed without serious exploration of the implications. Barry Eichengreen too raises concerns.

8. The transhipment route to skirt around the trade sanctions on China,
The Trump administration has for more than a year sought to weed out the practice known as transshipment, in which Chinese exports typically are minimally processed or altered during a brief stop in a third port and then re-exported as a product originating from the third port. Such circumvention threatens to crimp U.S. plans as it prepares to add tariffs on to $300 billion of Chinese exports, from toys to electronics, essentially covering all its China trade. The U.S. already has placed 25% tariffs on some $200 billion of Chinese exports. In the first five months this year, exports to Vietnam from China of electronics, computers, and machinery and other equipment have sharply increased compared with a year earlier. In turn, so have exports of such goods from Vietnam to the U.S., Vietnamese trade data show.
9. Ananth points to this detailed investigation of how AMD, in pursuit of corporate profits, transferred cutting-edge x86 chip technology to China by skirting around US regulations on transfer of such technologies.

Three things come out from this. One, capitalists elevate the pursuit of profits above all else, including patriotism and national interests. As the stakes go up and capitalism becomes more global in nature, this trend will get amplified. Two, as the manner in which the joint venture between AMD and Sugon Information Industry Co was engineered, the Chinese have been very strategically pursuing the model of "introduce a foreign technology to the market, absorb it, and then innovate to make China a leader". Three, the US government at various levels played along, even connived in the subversion of the Committee on Foreign Investment in the US (Cfius) which scrutinises foreign investments for national security issues. This is only to be expected given the pervasive institutional capture in the US by corporate interests.

10. Finally, a fascinating essay on the Indian monsoon in the Economist. 

Friday, June 28, 2019

The trade-off between academic rigour and relevance

I have blogged several times wondering at why the mainstream development economics research is so busy with what are clearly (to any practitioner) marginal concerns and marginalise methodological tools which are most appropriate to explore critical concerns of policy makers. 

A friend recently pointed me to this very good paper by George Akerlof. He makes the distinction between 'hard' and 'soft' research. The former is defined by precision, quantification, causality (as against mere correlation), and empirical analysis. The latter with qualitative, ethnographic, theoretical, and generally less precise. Akerlof writes,
This article.. advances the proposition that economics, as a discipline, gives rewards that are biased in favor of the “Hard” and against the “Soft.” This bias leads to “sins of omission": in which economic research ignores important topics and problems when they are difficult to approach in a “Hard” way... An academic researcher selects from a set of possible research topics. These topics can be characterized along two dimensions: (1) Hardness (i.e., the ease or difficulty of producing precise work on the topic) and (2) Importance. The researcher values both Hardness and Importance; but the weight he places on Hardness leads him to trade off Hardness and Importance in a socially non-optimal way. In this sense, he is biased.
He attributes this bias to economists striving to present their discipline as a 'hard' science; excessive reliance on mathematics in economics; hardness or precision being easier to assess (when compared to 'importance'), such papers are easier to publish and the researchers involved therefore are more likely to be recruited and promoted. The intrinsic value placed on hardness leads to more biased rewards - negative feedback loop. And this has, in turn, led to bias against new ideas, over-specialisation, tenure and promotion evaluations based on top-five publications (which are in turn biased towards the 'hard').

In terms of recommendations to address this problem, Akerlof writes,
At the journals, the norms for what should or should not be published, and the selection of the editors and the referees, and their conduct, should be the subject of examination. Likewise, at the universities, the processes of promotion and tenure should also be examined. Just as medicine in the United States was famously influenced by the Flexner Report of 1910, there is a need for a similar report today on publication and promotion in economics.

Such a report could be divided into two separate parts. The first part would analyze the norms regarding the role of journal editors and referees. As mentioned earlier, times between submission and acceptance are extremely long, as authors and their ideas are strung out with often repeated requests for revise-and-resubmits according to the tastes of the editors and referees. Returning ownership of papers to the authors would not only show greater respect to them. It would also accord with the stated purpose of two of the Top-Five journals: as the AERand REStud both have the word Review in their name. As I understand it, a “Review” is a journal that takes submissions, and decides which to accept/which to reject. That means that the editors and the referees should be viewing themselves as helpmates, rather than dictators holding authors at ransom before accepting their submissions. A second part of the Report would describe appropriate norms regarding criteria and methods of promotion. Special topics for examination would include the appropriate, and inappropriate, criteria based on publication metrics (such as the number in the Top Five), and, internationally, over-dependence on publication in US journals and even on US data.
This framework is nowhere more relevant than in explaining the rise of RCTs as the dominant means of development economics research. 

Tuesday, June 25, 2019

The reductive seduction of writing opeds

As a disclaimer, the heading is not mine and is borrowed from this article and rephrased.

A new government has taken charge in India. Predictably newspapers are full of opeds by enthusiastic commentators giving ideas to the government. The following issues/ideas would make up the majority of such opeds.  
Economic growth is flagging and India needs to initiate policies that can kickstart private investments. The stalled projects should be de-clogged and the investment cycle revived. Environmental clearances and land acquisition inordinately delay infrastructure projects, and there should be a mechanism to expedite them. The NPAs of the banks should be expeditiously resolved and credit flows restored. 
India should increase manufacturing's share of GDP. India needs to create productive jobs. Government should get out of the way and unlock private entrepreneurship. India should dramatically enhance the ease of doing business. The case disposal rates in Indian courts are abysmal and should be significantly increased.  
India should increase its tax to GDP ratio. India needs to raise its public health care spending from 1.1% of GDP to 4%. India should increase its Gross Fixed Capital Formation from 28% of GDP to 35-40%. India should have a GST with just one or two slabs. 
Unaffordable housing threatens to strangle urban growth, and we need policies that can make housing affordable. Traffic congestion is choking our cities and should be addressed on priority. The air quality in Indian cities are among the worst, and it needs to addressed on war-footing. India needs to improve state capacity.
India needs to deregulate its agriculture sector and effectively implement the APMC Act and e-NAM. Student learning outcomes are abysmal in India and the country needs to improve it. Students passing out of colleges are unemployable and we need to address this. The primary health care system is broken and it is an imperative that it is fixed. Open defecation and manual scavenging are scourges, and they need to be eliminated. 
There are two reasons to be weighing in on a public debate on an issue through opeds. One, to highlight and raise the salience of an under-appreciated problem, and/or to outline its contributory factors. Two, to communicate a particular solution or path to addressing the problem. 

If you examine each of the above, they squarely belong to the first category. This poses a problem because, none of these issues are today matters disputed by politicians or policy makers (but undoubtedly they would have been so some time back). In other words, they are not being addressed or not have been resolved not for lack of awareness or even interest. In fact, I cannot think of too many Ministries/officials who would dispute any of these and not consider them priorities for action.

The real problem is not the 'what', but the 'how'. And the 'how' is very hard and there are too few commentators with anything meaningful to say on the 'how. 

Jean Claude Juncker famously said about politicians, 
We know what to do, but we don't know how to get re-elected after having done it.
Rephrasing it slightly for bureaucrats, I would say,
We know what to do, but we don't know how to get it done.
Outsiders are frustrated at governments for not acting on these issues. One of the ways they channel their anger is by writing opeds that largely focus on reiterating the problem, the 'what'. They feel they have said something on the problem. Unfortunately, these mean for little, except fulfilling the commentators' psychological satisfaction at having expressed his/her view on a public forum. Worse, they can become boring and, in case of commentators with a reputation and therefore likely to easily find a pulpit in the mainstream newspapers, it can end up crowding out less reputed others with more relevant ideas to present. 

Even if some commentators venture beyond stating the problem, most often they end up suggesting solutions that are so conceptual or macro-level as to be impractical and not actionable or reflect dogmatic ideological preferences. Housing can be made affordable by increasing the stock of such housing. Traffic congestion can be addressed by good master plans and (something called) Transit Oriented Development (TOD). Agriculture productivity can be increased by investing in irrigation and deregulating the sector. Everything from NPA problem of banks to electricity distribution losses can be addressed by privatisation. Or state capacity can be improved by lateral entry. 

Public commentators who seek to move the needle on a major public issue need to realise that they can be influential only if they move beyond 'how' and engage seriously with the 'what'. Relevant, practical, and actionable (the trinity of fiscally supportable, politically acceptable, and bureaucratically feasible) suggestions are what would be valuable and contribute to moving the needle. The rest is all catharsis.

So, a very gentle unsolicited advice to outsiders trying to influence governments. Get beyond the 'what'. Tell governments "how" to do that "what"?

Monday, June 24, 2019

Are liberals more intolerant than conservatives?

The Economist has a briefing which describes how Brexit preferences has replaced class to emerge as the new ideological cleavage in British society and politics.

The article raises several interesting points. One snippet conveys a higher level of openness among conservatives/Leavers,
Surprisingly, it is the side that talks most about “openness” that is least open to mixing with the other lot. A YouGov/Times poll in January found that whereas only 9% of Leavers would mind if a close relative married a strong Remainer, 37% of Remainers would be bothered if their nearest and dearest hooked up with a Brexiteer. Remainers were also more likely to live in a bubble. Some 62% said all or most of their friends voted the same way, whereas only 51% of Leavers did.
And driving it may be a self-reinforcing loop,
The Remain vote in England was concentrated in cities, where it piled up huge majorities. The Leave vote was more evenly spread. Sixteen parliamentary constituencies voted by over 75% for Remain. Only one (Boston and Skegness) voted that strongly for Leave. James Kanagasooriam, a former Tory strategist, estimates that 500,000 people live in postcodes where more than 90% plumped for Remain, whereas only 57,000 live in ones which voted that strongly for Leave. Remainers are thus more likely than Leavers to live in real-world echo-chambers. The uneven distribution of the vote also means that, whereas the overall result was 52:48, the median postcode backed Leave by about 59:41, according to Mr Kanagasooriam. Middle England is substantially more Brexity than Remainers may realise.
All this squares up well with widely documented trends of liberal bias across US universities and how self-reinforcing loops are exacerbating pre-existing biases.

Is it time to ask whether liberals are more intolerant than conservatives?

Saturday, June 22, 2019

Ray Dalio is wrong on what ails capitalism

Bridgewater's Ray Dalio has been writing about the growing dysfunctionalities of capitalism and offers certain suggestions. He has even described not reforming capitalism as an "existential threat" for the US.  Two graphics that highlight the ovarian lottery in the US.

One, people in the US in the bottom income quartile have a 40% chance of having a father in the bottom quartile (in the father’s prime earning years) and people in the top quartile have only about an 8% chance of having a father in the bottom quartile, one of the worst probabilities of the countries analyzed.
Second, the odds of someone in the bottom quintile moving up to the middle quintile or higher in a 10-year period declined from about 23% in 1990 to only 14% as of 2011.
Dalio's essay points to several other indicators which illustrate why the ovarian lottery is the biggest determinant of a person's life outcomes. This has several more graphics and figures that highlight the dysfunctionalities of US capitalism. His descriptors of the problem are spot on. But the same cannot be said of his diagnosis, much less prescriptions. 

Dalio's diagnosis is that capitalism's dynamics, especially since it has been taken to its extremes (say, in seeking profits, efficiency, productivity, market share etc) is now "producing self-reinforcing spirals up for the haves and dow for the not-haves, which are leading to harmful excesses at the top and harmful deprivations at the bottom". In effect, Dalio blames the dysfunctional nature of modern capitalism to an impersonal contributor, some inexorable dynamic of capitalism, say peak capitalism.

I am not sure whether this is a complete diagnosis. By blaming the impersonal dynamic of capitalism itself, he conveniently absolves people of his own ilk, the elites, their contribution to this problem. In fact, it can be argued that there is nothing called excessive capitalism which is a natural phenomenon. Excesses, by nature, happen when the rules of the game breakdown or become compromised. As far back as Adam Smith, it has been known that markets were never supposed to work in isolation, and were to have been underpinned by social norms and market regulations. 

Unsurprisingly the rules of the game across markets (taxation, deregulation, financialisation, competition etc) and society (the social contract to support public goods, social safety nets etc) have been compromised. And this has been engineered, as has been the case numerous times in history, by elite capture of institutions and rule-making. In this capture, the economic elites have been provided the ideological platform and facilitation by  the academic elites and public opinion makers. 

It is therefore no surprise that Dalio's prescriptions to reform the system only skirts around the problem. He proposes homilies like leadership from the top, bipartisan consensus, alignment of incentives, redistribution without affecting productivity, metrics to judge success etc. These are the sort of things his peers in the elite group will cheer, as John Mauldin has done herehere, and here. They are costless and give the psychological comfort of having done something to address what is acknowledged as a problem. 

Unfortunately, none of these are likely to work because the power balance has become so skewed that those enjoying the benefits of the current regime are in complete control over the institutions and processes of rule-making. It may be a stretch to imagine these elites giving up their wealth and influence voluntarily through a consultative process. Have we ever heard in history of elites seized by enlightened self-interest to give up their wealth and power and radically reform regimes? 

Wednesday, June 19, 2019

Dynamics of informality and migration

Consider this parable. There are two countries in Planet Earthopia. Productopia is the richer country whose citizens have a higher standard of living and are more productive. Barrenopia stands at the other end on incomes, standard of living and productivity.

Consider two scenarios. One, both countries decide to ease border restrictions and liberalise migration. Two, both countries go nationalist and clamp down on cross-border migration.

In the first case, there is likely to be an increase in migration from less productive and poorer Barrenopia to Productopia. This, by composition effect, would naturally lower the average productivity of Productopia while raising the net welfare of both countries combined.

In the second case, outcomes vary based on the rigour of enforcement. Strict enforcement limits migration and thereby lowers welfare gains, and perhaps even the combined output in so far as it lowers even efficient and productive migration.

Replace the two countries with formal and informal sectors, or urban and rural, and we can expect similar results.

An excellent paper by Gabriel Ulyssea examines the impact of various barriers to entry at both the extensive (expansion of formal sector by entry of informal firms) and intensive (formal sector firms hiring workers formally) margins. It finds that,
Reducing entry costs eliminates wasteful barriers to entry, increasing the mass of firms, total output, and wages. However, the intervention has a negative effect on aggregate TFP via composition effects, as it increases the presence of low-productivity firms in the formal sector. In contrast, increasing enforcement on the extensive margin generates a positive composition effect, as it eliminates many low-productivity informal firms, which increases TFP. The net effect is a 3% increase in total output. In terms of welfare effects, reducing entry costs leads to the largest gain (5.5%), followed by the payroll tax policy (4.4%). In contrast, higher enforcement on the extensive margin leads to a loss of 6.7%, which is a consequence of enforcing costly and inefficient regulations on all firms. These results thus show that lower informality can be, but is not necessarily, associated with higher TFP or welfare... At the aggregate level, I find that increasing enforcement is highly effective in reducing informality but it reduces welfare in the economy. Reducing formal sector’s entry costs is not as effective in reducing informality but generates welfare gains and leads to greater output and wages. 
Or in case of rural to urban migration, Martin Ravallion writes about the extensive margin,
Rural poverty measures tend to fall more rapidly in countries with higher rates of population urbanization. Urbanization appears to be having a compositional effect on the urban population, in that the new urban residents tend to be poorer than the previous urban population. Naturally, this slows the pace of urban poverty reduction, even though poverty is falling in rural areas and for the population as a whole.

Monday, June 17, 2019

The challenges with exercising good judgement

I have blogged earlier about decision-making as essentially an exercise in good judgement.

Such judgements face formidable challenges. For a start, most often agents face incomplete information and have inadequate experience. After all good judgement is about inductive reasoning - draw on data points or experiences and draw generalisable inferences. Second, agents are captives of their own prejudices and preferences, which brings in bias to their judgements. Such biases can offset even experience and information.

Finally, such judgements, even when processed based on comprehensive information and free of biases, are inherently inconsistent, with wide variances, something which Daniel Kahneman et al have described as noise. They write,
Professionals in many organizations are assigned arbitrarily to cases: appraisers in credit-rating agencies, physicians in emergency rooms, underwriters of loans and insurance, and others. Organizations expect consistency from these professionals: Identical cases should be treated similarly, if not identically. The problem is that humans are unreliable decision makers; their judgments are strongly influenced by irrelevant factors, such as their current mood, the time since their last meal, and the weather. We call the chance variability of judgments noise. It is an invisible tax on the bottom line of many companies.
Some jobs are noise-free. Clerks at a bank or a post office perform complex tasks, but they must follow strict rules that limit subjective judgment and guarantee, by design, that identical cases will be treated identically. In contrast, medical professionals, loan officers, project managers, judges, and executives all make judgment calls, which are guided by informal experience and general principles rather than by rigid rules. And if they don’t reach precisely the same answer that every other person in their role would, that’s acceptable; this is what we mean when we say that a decision is “a matter of judgment.” A firm whose employees exercise judgment does not expect decisions to be entirely free of noise. But often noise is far above the level that executives would consider tolerable—and they are completely unaware of it.
Their conclusion,
Where there is judgment, there is noise—and usually more of it than you think.

Friday, June 14, 2019

The 'missing middle' in public commentators!

What is the mark of truly independent public commentators? 

In my opinion he/she should be able to see-through the clouds of ideologies and narratives and engage with issues, their positive and negative aspects, on their substance. In other words, what matters should be the distinctive merits of each issue.

F Scott Fitzgerald, the American writer and novelist, famously said,
“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”
In other words, a true intellectual is one who can engage with contrasting views on an issue unbiased by ideology and narratives and with equal objectivity (to the extent possible for any human consciousness which is a captive of his/her socialisation), and form a considered view. How many such public intellectuals do we have?

Unfortunately, and especially so in such a deeply polarised world, this is far from the reality. 

Take the case of the polariser-in-chief, American President Donald Trump. It is nobody's case that he is not whimsical, flippant, and bigoted. While he stacks up a long list of failures, he also has some very notable successes. The reset of the relationship with China, which has bipartisan support in the US and likely a permanent geo-political shift, is, at least for many people, one of President Trump's signature achievements. It is a different matter that one can quibble about the way in which he has gone about this or how the cards will be played in the weeks and months ahead. But the mainstream media have been consistently critical of all Trump's actions on China.

A close analogy, as a friend says, is with our assessment of anything connected with Adolf Hitler (taking this provocative example precisely to illustrate the deep point). As a mass mobiliser and an agenda-based unifier, Hitler has very few parallels in history. None of this is to take away from the fact that he was also a butcher whose bigotry led to more than 6 million deaths. Now these are two distinct and conceptually unrelated facts. But the latter is so cognitively overwhelming and stigmatising that we are loath to even explore what made him such a successful mass mobiliser and assess any useful learnings. Even a honest discussion on the latter cannot happen without being branded as anti-semitic, just as any support of Trump risks being branded as bigoted and ostracised.

The liberals across the world have a similar scornful view of a certain kind of democratically elected leaders across the world. They are disparaged as "populists", as though reflecting the concerns of ordinary people is something to be loathed.

The liberal consensus goes something like this. You need to espouse liberal causes - American-style democracy and social mores, global citizenry, support free trade and globalisation, entrepreneurial capitalism, minimum government - and values and aspirations of the elites. A person who holds conservative or traditional personal values, or worse still any one not adhering to any of the liberal causes, is an outcaste and denigrated accordingly.   

Social psychologist Jonathan Haidt points to the six taste buds of the moral sense - care, fairness, liberty, loyalty, authority, and sanctity or purity. Modern day liberals tightly embrace the first two, and the third only so long as it concerns themselves. The last three are mostly viewed as conservative values, at the least secondary to care and fairness, with authority and sanctity being often viewed as degenerate. Accordingly, anyone who supports traditional values and practices is often disparaged and ostracised. 

What explains the inability of even intellectuals to break-free from ideologies and narratives and interrogate issues on their merits? Where have the truly independent commentators disappeared?

Thursday, June 13, 2019

At what cost progress?

Excellent article in Quartz (HT: Ananth) about the decline of physical bank branches in remote areas of Scotland as banks embrace the digital revolution and the problems it creates for local communities. The article covers the spate of branch closures by RBS, a bank rescued with tax payer bailout during the financial crisis, and currently 60% owned by the UK government. 
It’s one more way this century has favored the young, urban, and digitally minded, concentrating power in capital cities (where nobody has heard of a bank van) and destabilizing communities that were already losing jobs and people. It draws a sharp contrast with a time, decades ago, when the bank branch manager mattered in Britain. “They had a place in society, they knew what was going on, they knew everybody who was worth knowing,” Derek French, who started working at National Westminster Bank in 1957 and spent the next 38 years there, said in an interview. But that system, where the local branch manager made key lending and banking decisions, began disintegrating before the internet came along, during the 1970s and 80s. As credit scoring and algorithms caught on, authority was sucked out of the provinces and concentrated in London. The business model proved cost efficient and unstoppable, not unlike the rise of internet banking now.
As their autonomy declined, branches were “de-skilled” and became little more than sales outposts. Their decor matched their new role. “The previously dark and imposing banking halls were redesigned into brightly coloured, open-plan retail spaces,” Pål Marthon Vik, a research fellow at the University of Salford, wrote in a PhD thesis titled The Demise of the Bank Branch Manager. The digital revolution supercharged the shift in algorithmic, automated authority that was already underway. To be sure, there are benefits beyond fattening banks’ bottom lines. The patriarchal branch manager was almost always a man and more likely to make loans to other men, with the same color of skin (that is, almost always white). Credit scoring makes lending more efficient, precise, and profitable.
But banking also became less personal, and the real-world connection of a banker who is embedded in a community was lost. While the old system could be unfair, people seem to trust the algorithms even less: The percentage of Brits who think banks are well run fell from 90% in 1983 to 19% in 2009. Another worry is that big data and better algorithms could exclude some parts of society from getting financing, according to Mick McAteer, co-director of the Financial Inclusion Centre, a not-for-profit policy group. Providers are getting better at identifying the most profitable and most risky consumers. While some, maybe even most, people will get better deals on loans and insurance than ever, those who can least afford it will pay more financial services, he said.
This about the changed role of banks is important,
The government’s role goes deeper when it comes to modern banking. Commercial banks operate in an unusual sphere, where they rely on government subsidies (access to central bank lending and money, and cheaper funding costs from the implicit expectation that big banks will get bailed out in emergency), yet exist as for-profit entities with an obligation to enrich shareholders... the underlying principle that banks are for-profit entities that derive much of their earnings from government support remains. (But) they’re designed to benefit private shareholders rather than society as a whole. 
The article is a great case study about the double-edged sword that is progress and development. Conventional wisdom would have it that digital banking and fintech constitutes technological advance and economic progress. It lowers transaction costs, access barriers, and expands opportunities, and thereby enhances economic efficiency. But amidst all these benefits, its social costs most often get glossed over.

The biggest problem with such progress is that while its benefits accrue disproportionately to the non-poor, its costs are borne disproportionately by the poor (and those living in backward areas). Like with other common signatures of progress - farm mechanisation, e-commerce, cross-border trade, immigration, globalisation, and so on - the asymmetry in their impact is the big challenge to overcome. Given that markets will not address these (at least in the short-run, and in the long-run, as Keyenes said, we are all dead), it is essential that public policy assume an important role.

While there may be specific public policy levers available for each problem, the political economy challenges associated with redistribution and other mitigating actions make them difficult to implement. In the circumstances, perhaps the only practical response may be to have a reasonable enough social safety net that cushions the vulnerable from the inevitable adverse effects of such trends that accompany development and progress. 

Tuesday, June 11, 2019

More on monetary policy transmission challenge in India

The RBI's rate cut has again raised the issue of monetary policy transmission in India. The same story will repeat - RBI will lower rate and hector banks to pass on by lower lending rates, and the latter will tend to look the other way. 

As Aparna Iyer has written in Livemint, "What good is lowering the price of money if its availability remains doubtful." In fact, far from declining, for a variety of reasons, GSec yields have been climbing unabated. While the central bank has been on the accommodation path, the transmission has remained muted.
Ananth writes about the cost of capital for banks. The prevailing Marginal Cost of Funding based Lending Rate (MCLR) regime is essentially an administered, cost-plus floor rate, and that too one which does not take into account the true cost of capital. As Ananth, says, several cost drivers do not change in the short-run. So he suggests dispensing with administered rates and allowing banks to set their own rates based on their true cost of capital, as reflected in their actual Net Interest Margins (NIMs). In simple terms, the MCLR is neither marginal nor a true cost, and is for all practical purposes a fully administered price. 

Indira Rajaraman writes about the centrality of the GSec yields and also makes the point about how administered savings schemes are a dampener on monetary transmission. She also points to the fact about state governments exiting borrowing from the higher cost National Small Savings Fund (NSSF) and shifting towards the regular financial markets, and the resultant crowding-out effect and the knock-on effect of keeping GSecs high. 

I had blogged earlier about how the nature of the liabilities of Indian banks comes in the way of monetary transmission. Even by the standards of other developing countries, Indian banks are excessively, almost completely dependent on deposits. As a share of liabilities, Indian banks' dependence on deposits is striking even when compared to other developing countries.

This reliance makes them vulnerable on both sides. On the one hand they need to keep deposit rates high to compete with administered savings rates schemes. And on the other hand, given that bulk of deposits are time deposits, this cost of capital is inherently inflexible to accommodate repo rate cuts. Exacerbating the problem, deposit growth rates have remained lower than credit growth rate. In simple terms, as long as Indian banks remain excessively reliant on deposits, their ability to transmit repo rate cuts down to borrowers will be constrained. 

Relaxing the constraints on monetary transmission is a major structural reform, one that involves pulling multiple levers. Dispensing off with administered prices and shifting to market determined rate is easier said than done. It requires dismantling the dual-price market for savings, diversifying the financing sources of banks and lowering the excessive dependence on deposits, and allowing banks to set rates at their true marginal cost of capital. But the short-term ripple effects of any action to address these can be significant and uncertain and can disrupt the market in unanticipated ways. Then there are the political economy constraints. 

A prudent compromise may be required in this regard. For example, on the dismantling of the dual-price market of administered small savings schemes, it will have to be done in a phased manner. A good place to start may be to target these savings schemes to only certain lower categories of employees and with lower upper savings limits. Another choice may be to ring-fence the incremental "subsidy" support from the budget itself, and have that amount transferred directly. 

As an aside, this is an example of how academic research on India, both by Indians and by outsiders, is so skewed towards marginal microeconomic issues. I am not aware of a rigorously researched empirical study that examines the different factors hindering monetary transmission in India. For example, what explains the excessive dependence on deposits for Indian banks, even compared to its developing country peers? An empirical study that examined the contributors and dynamics of monetary policy transmission (or its depression) would have been a good example of truly evidence-based policy making.

Monday, June 10, 2019

Promise of e-commerce in enabling access to markets for rural entrepreneurs

While the mainstream discussion on e-commerce had centred around the consumption side, its real development impact may lie on the production side. In particular, I am intrigued by the possibility of e-commerce platforms being a critical market access linkage provider for entrepreneurs and producers in the rural areas. 

In terms of the scale of rural penetration of e-commerce, there is no comparison to what is happening in China,
The number of Taobao Villages, defined by AliResearch as administrative village with e-tailers clustering and total annual e-commerce transaction volume of more than RMB 10 million (about US$1.5 million), as well as at least 10 percent of village households actively engaging in e-commerce or at least 100 active online shops operated by villagers, primarily with the use of and marketplace – increased from 212 in 2014 to 2,118 in 2017 and to 3,202 in 2018. Most Taobao Villages are in coastal areas and show significant trends of clustering... Development of Taobao Villages shows a trend of clustering, and new Taobao Villages tend to emerge next to existing Taobao Villages... According to Ali Research, the clustering trend results from a developed industrial base in old Taobao Villages, attractiveness from e-commerce success in existing nearby Taobao Villages, and the rapid development of an e-commerce service ecosystem. The number of active online shops in Taobao Villages increased from 70,000 in 2014 to 660,000 in 2018. Clothing, furniture, and shoes were the top three purchased products from Taobao Villages. Luggage and leather goods, auto accessories, toys, and bedding products are also very popular.
Its impact on the development side,
A fast-growing body of case studies on e-commerce in rural China focuses on Taobao Villages. Numerous cases show the prosperity of Taobao Villages and that people gain wealth and have better lives through participating in e-commerce. Case studies, such as Shaji in Jiangsu province and Caoxian in Shandong province, show many young and talented people, including women, have returned to their hometown in rural areas, earning income similar to or higher than they were as migrant workers in the cities and at the same time enjoying family life with their elderly and children. Many have become leaders of e-commerce in their home villages and are role models for their fellow villagers. Case studies in Mengjin in Henan province show people are enriched by access to new markets through online platforms for traditional cultural products such as peony painting and Tang tri-color ceramics. Case studies in Xifeng in Guizhou province show households received higher farmgate price for kiwis and therefore have an incentive to increase the production through online sales to domestic as well as European markets. Many cases, including poverty-stricken counties in remote and mountainous areas, show that access to an online market allows people in rural areas to enjoy the convenience, variety, and similarly low prices that are enjoyed by people in big cities... 
The Chinese Taobao Village development report (Nanjing University and AliResearch 2018) examines the patterns of formation of the Taobao Villages and their evolution, drawing from extensive fieldwork. The report shows that, while most Taobao Villages on the coast developed spontaneously, often led by a couple of first-mover return migrants and followed by fellow villages, government support, often through subsidized service provision by experienced e-commerce service firms, has become a major force for the incubation of inland Taobao Villages.
There is a stark contrast in the entrepreneurship and successes of the Chinese e-commerce providers with that of their Indian counterparts. Even government initiated large flagship initiatives like the agriculture national market place (e-NAM) have had limited success. In fact, I am not aware of even one Indian manufacturer of any kind who has become reasonably big by growing from their rural base, whereas such Township and Village Enterprises (TVEs) were the stars of China's growth.  

This is surprising since efforts to enable wider market access to local farm and non-farm produce has been a major part of rural development programs of the central and state governments for decades. It was then thought that there was a large urban market for, say, indigenous crafts and organic produce, and the major constraint was a means to connect rural sellers and urban buyers, or matching frictions. Now that the e-commerce marketplaces have solved that matching problem, one would have thought that the market ought to have taken off. So clearly there are other binding constraints on the flourishing of rural e-commerce. I am not aware of any research exploring these in the Indian context. 

One can understand the challenges associated with agriculture produce given the concerns of quality and standards, reliability of delivery, transportation times, settlement of payments etc. While the same applies just as well to non-farm production, they are perhaps less daunting. For example, unlike agriculture produce, perishability is not a problem, and even quality and standards can be defined reasonably well in case of many products.

There are also issues of broadband connectivity, use of smartphones, transportation logistics etc which are critical. We may also need to question whether there is availability of large enough concentrated demand pockets so as to leverage economies of scale with production, marketing, and logistics. Maybe there is a need for some form of receivables credit provision. Or maybe Indian consumers, socialised by distrust, prefer to buy such products through physical retail. 

I am not sure what public policy can do to promote this market. One may be to work with the industry and define clear and simple standards for the main manufacturing products in rural areas, facilitate access to standards accreditation, enable receivables credit financing, and encourage e-commerce players to venture into rural areas with targeted incentives in this regard. There may be a role for the National e-Government market, GEM, place to play some role in catalysing this - perhaps even promoting strategic public procurements from rural areas etc.

A more promising and perhaps effective and quicker approach would be the emergence of some  deep-pocketed and visionary market participant like Alibaba. It would need to make the large upfront fixed investments, including hiring local marketing personnel and enlisting rural partners, required to dramatically expand the market and capture it. None of the incumbents in India like Flipkart or Amazon are likely to take a leaf out of Alibaba's book play this game. Jio?

If a private provider like Jio is interested in pursuing this approach, I don't think it is a bad idea to support that player, even at at the cost of contributing to massive private benefits at tax payer expense. It is just that the total long-term social value creation and externalities would far-exceed the private benefits. 

Saturday, June 8, 2019

Weekend reading links

1. Very good survey in The Economist on the future of the aviation industry. This in particular is a great summary of the science and the commerce behind the manufacturing process of a passenger aircraft.
Each of the finished planes sits at the apex of a system of supply chains which fans out across the world, bringing 3.5m components together into a single product. An A 350’s airframe is composed of seven sections. Three are assembled into the fuselage, two being made at another site in France and the third in Germany. The two wings are made in Britain, then transferred to Germany to be finished. The tail fin and the horizontal-stabiliser assembly are made in Spain. All of these pieces are flown to Toulouse in special transport aircraft called Belugas—after the whale, which they resemble, rather than the sturgeon, which they do not. They are made, mostly, of carbon-fibre-reinforced plastics (CFRPs). These are composite materials that cannot be riveted in the way metal is because of the damage this causes to the fibres. They are therefore held together by lock-bolts inserted through 10,000 specially drilled holes in the flanges where the sections overlap.

Connecting the sections involves fitting them together, drilling the holes (a process less damaging than riveting), unfitting them, cleaning the holes and surrounding areas of debris, applying a sealant to the flanges, fitting the pieces back together again and then inserting the lock-bolts. At this point the myriad cables which keep a modern aircraft flying, and which have been pre-fitted into the airframe sections, are linked up. Before their final bonding, however, the fuselage sections have had what are known as “monuments” installed. These are bits of equipment—galleys, crews’ quarters and so on—that would be too big to carry through the cabin doors later. Afterwards, the rest of the fitting-out is done, the plane is painted in the customer’s livery and the crucial finishing touches, a pair of engines, one under each wing, are added. The whole process takes about a month.
2. This summarises the giant leap made by the mobile phone market in India,
In 2014, the cost of one GB of mobile data was ₹270. Now, it is ₹10 per GB. As a result, mobile data consumption has soared. In late-2014, an average user on Airtel’s network (India’s largest telecom operator back then) used 622 megabytes (MB) of data in a month. By late-2018, the number of users had tripled, but, despite a broader base, average data usage stood at 10GB a month.
The Economist has a good briefing article on how entertainment is driving the penetration and use of internet, and India leads this trend - "internet is the leisure economy of the world's poor"or "timepass". 
“Timepass” is the essence of the internet. The vast majority of the top 25 apps by revenue in both Google’s and Apple’s app stores are games (and both companies announced new paid gaming services this year). Tencent became one of China’s internet giants because of games. Facebook grew into the world’s sixth-most valuable company by giving people a place to “do timepass”. YouTube is the gateway to several lifetimes’ worth of timepass. The fastest-growing new apps of recent years have all been aimed at timepass: Fortnite, WhatsApp, Instagram, Snapchat. TikTok, which consists of 15-second videos, is timepass in its essence, made by bored kids in mofussil towns who have found vast audiences by doing silly things.
In fact, India has the cheapest mobile internet in the world, nearly 48 times cheaper than the US to download a GB of mobile data!
3. IndiaSpend has a good series on informalisation of labour market in India. This and this covers the trend of contractualisation whereby firms prefer to contract than recruit workers, allowing them to skimp on benefits and statutory payments and keep wage costs down. This covers the fate of the 1.5 million people employed by ride-hailing providers,
Our interviews with workers... revealed that many of them were migrants to the city and spent long hours on the job to earn incentives to be able to send savings back home or make their existence in their adoptive city a bit more comfortable. They had little or no employment benefits such as insurance, and complained that their incomes were declining... All drivers for app-based cab companies complained about falling earnings due to increased competition--more and more cabs are plying every day.
4. The fastest growing retail activities in UK are the classic non-tradeables,
The article itself is a very good account of the disappearance of retail shops,
Technology will continue to transform shopping, and there are some good arguments for embracing this. Why shouldn’t people have easier lives, if the fridge tells you when it is on the last yoghurt and the supermarket delivers an hour after you’ve ordered on its website? The reason isn’t obvious: it will reveal itself only slowly, as the gift of sociability that shops give for free is withdrawn... The disappearance of shops, where the commercial exchange can be encased in a social one, will be something of a disaster if nothing of equal social use takes their place.
5. Jarrod Kimber revives the dying art of great cricket writing with this beautiful article.

6. Hubert Horan nails the Uber story, taking on the sustainability of its business model, cost structure, and commercials. This is a good summary,
An examination of Uber’s economics suggests that it has no hope of ever earning sustainable urban car service profits in competitive markets. Its costs are simply much higher than the market is willing to pay, as its nine years of massive losses indicate. Uber not only lacks powerful competitive advantages, but it is actually less efficient than the competitors it has been driving out of business... Uber pursued a “growth at all costs” strategy financed by a staggering $20 billion in investor funding. This funding subsidized fares and service levels that could not be matched by incumbents who had to cover costs out of actual passenger fares. Uber’s massive subsidies were explicitly anticompetitive—and are ultimately unsustainable—but they made the company enormously popular with passengers who enjoyed not having to pay the full cost of their service. The resulting rapid growth was also intended to make Uber highly attractive to those segments of the investment world that believed explosive top-line growth was the only important determinant of how start-up companies should be valued. Investors focused narrow­ly on Uber’s revenue growth and only rarely considered whether the company could ever produce the profits that might someday repay the multibillion dollar subsidies... Uber’s longer-term goal was to eliminate all meaningful competition and then profit from this quasi-monopoly power... Uber’s most important innovation has been to produce staggering levels of private wealth without creating any sustainable benefits for consumers, workers, the cities they serve, or anyone else...
This is not a case of a company with a reasonably sound operating business that has managed to inflate stock market expectations a bit. This is a case of a massive valuation that has no relationship to any economic fundamentals. Uber has no competitive efficiency advantages, operates in an industry with few barriers to entry, and has lost more than $14 billion in the previous four years. But its narratives convinced most people in the media, invest­ment, and tech worlds that it is the most valuable transportation company on the planet and the second most valuable start-up IPO in U.S. history (after Facebook). Uber is the breakthrough case where the public perception of a large new company was entirely created using the types of manufactured narratives typically employed in partisan political campaigns. Narrative construction is perhaps Uber’s greatest competitive strength. The company used these techniques to completely divert attention away from the massive subsidies that were the actual drivers of its popularity and growth. It successfully framed the entire public discussion around an emotive, “us-versus-them” battle between heroic innovators and corrupt regulators who were falsely blamed for all of the industry’s historic service problems. Uber’s desired framing—that it was fighting a moral battle on behalf of technological progress and economic freedom—was uncritically ac­cepted by the mainstream business and tech industry press, who then never bothered to analyze the firm’s actual economics or its anticompetitive behavior.
And even the less worse (albeit heavily red) bottomline comes from squeezing driver pay,
If Uber drivers still received their 2015 share of each passenger dollar, Uber’s negative margins would still be in the triple digits... Starting in 2015, Uber eliminated most of the incentives it had used to attract drivers and unilaterally raised its share of passenger fares from 20 percent to 25–30 percent. Almost all of Uber’s margin improvement since 2015 is explained by this reduction of driver compensation down to minimum wage levels, not by improved efficiency. These unilateral compensation cuts resulted in a direct wealth transfer from labor to capital of over $3 billion.
7. Pramit in Livemint has a graphical summary of the ongoing controversy over Indian GDP statistics.  

8. Fascinating article on kidnapping and ransom insurance, with its 20 odd firms operating out of Lloyds of London. This captures the essence of how it is able to get kidnappers and insurance providers to work together,
"It's a one-off transaction between the family and the kidnapper, but it's a repeated interaction for the insurance market."
9. Ananth points to a very good article by Andy Mukherjee with actionable proposals (a refreshing change from the general 36000 ft ideas that oped writers typically offer) to address the liquidity squeeze that is being faced in India's shadow banking sector. While the suggestions are all logical, the problem is with getting the government too deep into solving these problems. For example, the incentive distortions likely with a government sponsored refinance facility are numerous. 

Friday, June 7, 2019

Building infrastructure in NYC

From an article on the exorbitant cost of building infrastructure in New York City,
New York intends to spend $39 million per station for the next round of accessibility retrofits, which will add elevators and ramps to make stations accessible on a step-free basis. According to figures gathered by transit researcher Alon Levy, $39 million is double what it costs to make a station accessible in London, five times what it costs in Madrid, and 15 times what it costs in Berlin.
In terms of station costs, sample this, 
Madrid: $14 million per station. The three-mile, two-station Line 9 extension was completed in 2015 for a total cost of $140 million. Los Angeles: $120 million per station. L.A. spends as much as New York to dig tunnels, but “cut and cover” station construction has kept the cost of its four-mile, three-station Purple Line extension down to $2.8 billion. Paris: $168 million per station. Adding nine miles and seven stations to Line 14 will cost the city $4.4 billion in total — a lot for a city that usually spends between $90 million and $135 million per station. New York: $425 million per station. The world’s most expensive subway line per mile, the first phase of the Second Avenue Subway cost $4.5 billion after two miles and four stations.
Among the contributors to the cost problem, this is instructive,
The MTA tries to shift the risk of cost overruns onto outside companies it contracts with, even if those overruns are caused by factors outside their control; the companies are not stupid, and they respond to this by inflating their bids for work on MTA projects in what’s known as the “MTA premium.” New York has unusual laws about contractor liability that make insurance very expensive... City Council Speaker Corey Johnson (says)... “When the projects are being negotiated, many, many times, the MTA just signs off on what the contractors put in front of them. There’s no forensic auditing or effort to see if costs have been inflated in an unscrupulous way.”
And there is also the standard problem of lack of co-ordination and attendant delays and cost over-runs, arising from the Metropolitan Transit Authority's (MTA's) lack of institutional power. This would resonate with construction in India's metropolitan cities,
When the MTA wants to build a big new shiny thing, it’s at the mercy of a lot of people and entities it doesn’t control. The MTA often needs utilities moved in order to do construction below city streets, but it lacks the city’s power to boss the utilities around, so it pays more for the same sort of utility relocations that the city might demand. It can’t force the city to make zoning changes that would aid its capital projects or its finances... things go to hell when agencies have to work together... executives overseeing the MTA’s capital construction may lack the authority to boss around its operating agencies such as Long Island Railroad (LIRR) and NYC Transit. And even when the MTA’s internal units work constructively together, they are dependent on outside agencies like Amtrak to cooperate and make rights of way available for construction in a timely manner; when they don’t, which is frequent, expensive labor time is wasted. In the case of East Side Access project, the new LIRR tracks to Grand Central must connect with existing tracks at the Harold Interlocking in Queens, which is already the busiest rail junction in America. Coordinated labor is often required, with Amtrak and LIRR employees and workers for various private contracting firms needing to be present simultaneously. But sometimes Amtrak’s crews don’t show up and everyone else sort of stands around, getting paid but not building East Side Access... In an April 2018 letter, MTA chief development officer Janno Lieber alleged that Amtrak’s failures to cooperate on the East Side Access project — for example, by canceling planned service outages and not providing its workers as scheduled — had added $340 million to ESA’s costs over four years...

Megaprojects built in New York today are subject to extensive delays and costs imposed by community input, as with the requirement that all the excavation spoils from East Side Access be carted out via tunnel to Queens, avoiding disruption in midtown Manhattan but adding significant costs and delays to the project. Those costs and delays don’t just mean a longer wait for LIRR trains to roll into Grand Central; they impose opportunity costs that mean other projects don’t get built or proposed at all. A more empowered MTA would mean fewer costs like that, but it would also have to mean a reduction in the fetishization of community input. As a public that has chosen Jane Jacobs over Robert Moses, we would have to get more comfortable with the idea that sometimes things won’t be built exactly as we want them.
Clearly New York is illustrative of the problems that contribute to cost over-runs in many cities of India. And the counter-point to NYC and MTA is perhaps London and its Transport for London (TfL). 

Wednesday, June 5, 2019

The ahistoricism and dataisation of economics!

I was not following this story. Raj Chetty has apparently introduced this theory-free and data-driven Economics introductory course, Ec 1152 at Harvard. This Vox article is largely admiring,
There’s little discussion of supply and demand curves, of producer or consumer surplus, or other elementary concepts introduced in classes like Ec 10. There is no textbook, only a set of empirical papers. The material is relatively cutting-edge. Of the 12 papers students are required to read, 11 were released in 2010 or after. Half of the assigned papers were released in 2017 or 2018. Chetty co-authored a third of them... Economics 1152 is fundamentally about tools — learning to use them, learning when to use which, and learning what they can and cannot do for you. And it trains students to use those tools to study inequality, specifically: in their own neighborhoods, in housing, in education, and more. Rather than having weekly problem sets (the standard pedagogy in most introductory econ classes), Ec 1152 asks students to complete four major projects in which students directly analyze data... Chetty is aiming to make the course a model for other schools.
I am no economist to take on a Bates Clark medal winner. But as a lay person, much less a policy maker, I find this descent and degeneration appalling. 

The Chetty thing is the latest, perhaps the most extreme and disturbing, in the recent trend in development economics that debunks theoretical models and sings the virtues of empiricism through evidence-based policy making. As it is, the original theoretical focus itself was not desirable in its marginalisation of priors. This latest development is like positivism has come the full-circle in social sciences, and this time for the worse. 

This view goes something like this - there are no priors (in fact, you discredit experience as being biased - after all you guys have been doing development for decades and we still have poverty and misery in abundance) >> and therefore conventions, latent wisdom, and experience counts for little >> therefore there are no theories >> so we need evidence on everything >> how better to create evidence than look for data >> so let's do experiments (RCTs) or mine administrative data and understand reality and design evidence-based policies.

Notice how neatly this approach fits with the perspective of someone who is both an outsider and knows little about "that" real world they seek to understand and who are equipped with some toolkits which they believe can help explain phenomena in "that" real world.

Fundamentally, this is where the likes of Chetty goes wrong,
If Chetty is an advocate for anything, it’s for the notion that economics is an empirical discipline, a science just as much as, say, medicine is.
I am comforted by the fact that Lars Peter Hansen, no less, has taken on evidence-based policy making.
I was reminded of the commonly used slogan “evidence-based policy.” Except for pure marketing purposes, I find this terminology to be a misnomer, a misleading portrayal of academic discourse and the advancement of understanding. While we want to embrace evidence, the evidence seldom speaks for itself; typically, it requires a modeling or conceptual framework for interpretation. Put another way, economists—and everyone else—need two things to draw a conclusion: data, and some way of making sense of the data.
On the limitations of data and evidence, he writes,
A modeling challenge that I and others have confronted is how to incorporate, meaningfully acknowledge, and capture the limits to our understanding—and what implications these limits have for markets and economic outcomes. While experimental evidence of various guises is available, unlike many of our colleagues in the physical and biological sciences, macroeconomists are limited in terms of the types of experiments we can run. Other sources of evidence can be helpful, including those captured in aggregate time series and in microeconomic cross sections. But for important policy-relevant questions, to use this evidence in meaningful ways requires conceptual frameworks or models...
Understanding that the evidence itself does not contain all the answers is crucial to an informed society. We’re living in a world that along some dimensions feels very data rich. We’re able to collect a lot of data, we have powerful hardware to store and process them, and we have machine-learning techniques to find patterns in them. But many of the important questions we face are about fundamentally dynamic problems. They’re in areas in which, along some dimensions, our knowledge is sparse. How do we best handle financial-market oversight in order to limit the possibilities of a big financial crisis? What economic policies should be in place to confront climate change?... Many of the people who influence, or want to influence, public policy are reluctant to acknowledge that we’re often working with incomplete information. Ambiguity, they believe, is hard to sell to the public or to politicians claiming to represent the public: politicians and policy makers often seek confidence in policy outcomes, even when this confidence is not justified. As a result, there will always be people willing to step to the forefront to give confident answers... Designing activist policy prescriptions on the basis of a false pretense of knowledge can indeed be harmful.
Of course, modeling runs into its set of limitations and failings, like that of confusing a model for the model, much less imagining that there can ever be the model. 

Update 1 (21.05.2020)

James Heckman takes issue with Raj Chetty and Co's statistical economics. The latter's work has spawned a "Zip code is destiny" narrative, with the researchers themselves having launched an Opportunity Atlas that ranks neighbourhoods according to their chances of propelling poor children upwards. But Heckman takes issue,
A working paper by Magne Mogstad, another economist at the University of Chicago, and his colleagues argues that the “noise”, or random fluctuation, in Mr Chetty’s data means “it is not possible to draw firm conclusions about which counties in the United States have high or low values” of upward mobility from the poorest 25% of households. Mr Heckman acknowledges that there are clear differences in mobility according to neighbourhood. But the ultimate drivers could lie in family structure, parenting habits, exposure to crime or the quality of schooling. All these are difficult to derive from American tax-return data. Pundits take the research on “neighbourhood effects” as evidence that “zipcode is destiny”. Mr Heckman bristles at that. It overlooks the fact that Asians and black women do fairly well in mobility relative to whites. “It diverts attention away from other plausible explanations for why African-Americans are not doing well. Put discrimination on the table…but family structure is the one thing that is just off the table in American society,” he says.

Tuesday, June 4, 2019

Is tax avoidance actually a cloak for tax evasion?

FT Alphaville investigates tax avoidance and shows how a significant share of what is packaged as tax avoidance is actually tax evasion. The author, Nicholas Shaxson, writes,
Germany collected €64.5bn in extra tax revenue from large multinationals over five years, as a result of audits to get taxpayers to pay the right amount, and a total of €83bn from all corporations... about half of this, or €39.8bn, was down to corporate income taxes... And who knows how much more should have been, but didn't, get caught by the auditors? What's happening here is that taxpayers, in this case corporations, tried to claim these billions for themselves but official audits found them to have transgressed the law in doing so. To label this stuff 'legal' is plainly wrong... A full 50 per cent of tax audits, according to the OECD, led to tax adjustments in 2015. That was higher for large companies -- and with the in-depth comprehensive audits, around 80 per cent resulted in adjustments. In other words, in half of the corporate tax audits, companies were found to have filed incorrect tax returns. In every country, the audits resulted in additional taxes being due, suggesting that companies were systematically trying to underpay: to get away with more than what was legally allowed. Unlawfully trying to obtain money that wasn't theirs...
For large taxpayers (Table 2 in the PDF) 57 and 58 per cent of audits led to tax adjustments in 2014 and 2015 respectively. And for transfer pricing audits, the figure was 58 per cent in 2015. The audit adjustments added up to an average of 10.7 per cent of total corporate income tax revenues (Table 5) though in some countries it was much larger. In Brazil, for example, an average of 45 per cent of corporate income (CIT) tax revenues stemmed from audit adjustments in 2014 and 2015, while in Italy the figures were 63 per cent and 49 per cent respectively. Finally, when it comes to comprehensive audits - more in-depth and penetrating than routine audits - Table 4 shows that the rate for audits which provoked tax adjustments in 2014 and 2015 was, respectively, 79 and 83 per cent... Overall, the patten is clear: multinationals routinely try to get away with (potentially unlawfully) dodging billions in tax they should, by law, be paying to contribute to schools, hospitals, tax courts and other public services.
A pointer for policy makers in India. Interestingly, the data is not available for India. What are the results of tax audits in India? Do tax authorities here do tax audits on multinationals and large Indian corporates, if so how? Is there any mechanism to target such audits (and thereby avoid the mistakes of the tax terrorism episodes), if they are being done?

Monday, June 3, 2019

Some thoughts on Indian agriculture

Harish Damodaran presents cluster and area-based proposals focusing on specific crops for improving farm incomes in UP. This all sound great. But here is the challenge.

It has been known for a long time that the Indian agriculture landscape is dotted with exceptional and truly world-class examples of productivity and prosperity in a variety of crops. They represent the best in irrigation systems, agronomic practices and extension services, integrated co-operatives like linkages, and upstream integration with global markets. But scaling these, beyond small areas, has remained elusive. It has been so even in areas which have concentrated on specific crops and therefore potentially have all the ingredients to reap the benefits of economies of scale and scope. In fact, even significant productivity improvements have remained elusive, and the large production increases have largely been the result of inputs and less due to productivity. What gives?

As a framework of analysis, we can perhaps classify agriculture interventions into five broad categories - inputs, extension services, research, market linkage, and policy support measures. The first requires huge investments and is also a function of the country's stage of development (access to high quality inputs in villages, for example, depends on connectivity and access to the village itself). The second is critically dependent on state capacity to deliver services, and that too human engagement intensive ones (or thick activities). The potential for technical productivity improvements is a function of research. The fourth is critical for staggering supply releases and ensuring that farmers get good value for their produce. And the fifth involves the application of public policy to create enabling conditions for market-based transactions and rectify market failures.

The interventions that require capex investments will take time. So farm credit, irrigation, access to high quality inputs, and storage facilities will not come easily. They are also dependent on physical capital accumulation in the economy and will therefore depend on the stage of development. But large-scale capital formation in this area should be a priority, especially in the development of dry and cold storage infrastructure, essential to create the holding capacity throughout the chain that is critical to staggering the release of supply so as to increase farm incomes

Extension services is perhaps where some form of leap-frog is possible, especially when it is combined with research. Currently extension services exist only in name. Consider this reality. It is well-known that prices are a function of the quality of the produce, and this in turn is a function of adherence to the standards required for specific markets. This, in turn, all things being equal, depends almost entirely, on the agronomic practices being followed. But dissemination of agronomic practices requires strong extension services system.

And there are reasons to question the connect between the ongoing agriculture research and its applied relevance. How much of agriculture research is first-order applied in nature? What can be done in research to improve the effectiveness of extension services?

Market linkages are important, but perhaps not as important as is often made out. The gains from disintermediation in the chain between farm-gate and wholesale buyers is unlikely to be very high. 

Policy is more complicated. Sample all the recent policy interventions in agriculture. Micro and drip irrigation, crop insurance schemes, amendment to APMC Act, electronic market places or e-NAM, farmer producer organisations etc have, beyond marginal gains, not been able to generate anywhere close to the expected results. All of them require the mobilisation of several enabling conditions and behavioural change management, apart from the related market infrastructure. Unfortunately, very few of these requirements are in place, and are unlikely to be so in the foreseeable future. 

Consider an electronic trading marketplace. Its effectiveness is critically dependent on the credibility of the quality assurance mechanisms available. This, in turn, depends on deep internalisation of grading and sorting practices at the farm gate itself. In the absence of this, any form of electronic trading is just meaningless ab-initio - almost like replacing hand-written bills with computerised billing with all other activities (like physical inspections and face-to-face meetings intact).

So there are no easy answers to the question about the struggles with replicating great examples of successes. It is just super-hard. Being aware of the true magnitude of the challenge ahead is perhaps the best preparation to meet the challenge.