Thursday, October 31, 2019

The "Phantom" FDI

The IMF's WEO talks about "phantom investments" or FDI which seeks to benefit from tax avoidance. It writes,
In practice, FDI is defined as cross-border financial investments between firms belonging to the same multinational group, and much of it is phantom in nature—investments that pass through empty corporate shells. These shells, also called special purpose entities, have no real business activities. Rather, they carry out holding activities, conduct intrafirm financing, or manage intangible assets—often to minimize multinationals’ global tax bill. Such financial and tax engineering blurs traditional FDI statistics and makes it difficult to understand genuine economic integration... Globally, phantom investments amount to an astonishing $15 trillion, or the combined annual GDP of economic powerhouses China and Germany... In less than a decade, phantom FDI has climbed from about 30 percent to almost 40 percent of global FDI...

Today, a multinational company can use financial engineering to shift large sums of money across the globe, easily relocate highly profitable intangible assets, or sell digital services from tax havens without having a physical presence. These phenomena can hugely impact traditional macroeconomic statistics—for example, inflating GDP and FDI figures in tax havens. Prominent cases include Irish GDP growth of 26 percent in 2015, following some multinationals’ relocation of intellectual property rights to Ireland, and Luxembourg’s status as one of the world’s largest FDI hosts.

Sample this,
According to official statistics, Luxembourg, a country of 600,000 people, hosts as much foreign direct investment (FDI) as the United States and much more than China. Luxembourg’s $4 trillion in FDI comes out to $6.6 million a person... Interestingly, a few well-known tax havens host the vast majority of the world’s phantom FDI. Luxembourg and the Netherlands host nearly half. And when you add Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius to the list, these 10 economies host more than 85 percent of all phantom investments.
This from the FT.
This should be a matter of concern to countries like India, which aggressively court foreign investments and tweak policies to encourage FDI. Already, only a tiny share of FDI is coming to job creating or export-generating manufacturing activities. What monitoring mechanisms do we have to assess the extent of FDI being driven by profit shifting and other financial arbitrage considerations?

Wednesday, October 30, 2019

More on the balance sheet of privatisation - Chilean edition

From the ProMarket Blog on utility services in Chile, the country which is often hailed as a pioneer in privatisation of infrastructure services,
The median wage is 400,000 CLP (Chilean pesos). That means that half of all workers are making $550 or less every month, and the replacement rate for pensions is only 31 percent. In 2019, the price of electric power increased by 19 percent, despite huge decreases in electric generation costs. Part of the explanation is that the private electric companies have a monopoly position and a law-mandated profit of 10 percent. The same thing happens with water monopoly companies. The biggest of them, Aguas Andinas, had a profit margin of 19 percent in 2013.

Finally, a public transport fare increase was the last straw. On October 6, the cost of a rush-hour subway ride grew from 800CLP to 830 (from $1.10 to $1.14). Those 4 cents were too much, considering that the average worker is spending as much as 30 percent of his income on transportation. Plus, the fares were already high compared with 47 cents for a metro ticket in Buenos Aires or 45 cents in Lima, the other capitals in Chile’s “neighborhood.”
This is illustration of inequality and market concentration is stunning,
The concentration of wealth is also similar to African countries, with the richest 1 percent of the population capturing 30.5 percent of the total income (and the 543 wealthiest households receiving 10.1 percent of that). In 2012, economist Ramon Lopez calculated that the five richest men in Chile, according to Forbes (including President Piñera), have the same income as the lowest-earning 5 million Chileans.. The beer, tobacco, and domestic air travel markets are each dominated by a single company (with 87 percent, 95 percent, and 74 percent market shares, respectively). And these are just three examples among many; according to the pro-free-market think tank Horizontal, Chileans spend 40 percent of their income in markets without any real competition.

Tuesday, October 29, 2019

SMEs and job creation in India

Ananth and me have an oped in Livemint which summarises our joint work published by Carnegie on  promotion of small, formal firms started by educated entrepreneurs to create productive jobs.

The summary stylised facts,
One, although micro businesses dominate most countries’ economies, India’s economy has an excessive proportion of less productive, informal micro businesses. Two, employment in India is concentrated in these micro businesses, whereas in developed countries, it is concentrated in formal small and medium-sized firms. Three, productive jobs are created by firms that start out as formal. Four, new and young firms create more jobs than older, established firms. Five, growing and efficient firms are founded and run by educated entrepreneurs. Six, with age, Indian firms typically stagnate or decline in employment. Seven, India has a deficit of productive, job-creating entrepreneurs, and an excess of informal entrepreneurs focused on survival.
The full paper is here. An extract here. A review here

Monday, October 28, 2019

Higher taxes could encourage racism and anti-semitism???

If there is an annual award for the "Tweet of the Year", then this by Lawrence Summers should make it to the list. In a series of tweets, Summers throws aside all pretensions and declares his allegiance. Sample this,
Forcing the wealthy to spend could boomerang. If the wealth tax had been in place a century ago, we would have had more anti-semitism from Henry Ford and a smaller Ford Foundation today.
And this,
Very few of the problems today involve personal contributions of the wealthy. They instead involve corporate contributions or large groups: e.g., the NRA, the insurance industry, sugar producers...
See the responses on the tweet thread itself. Even an apologetic Paul Krugman cannot take it.

And this,
Wealth inequality is a highly problematic basis for judging a society. Consider a country that put in place super effective social insurance against retirement, disability & health expenses. Middle class people would run their “standby assets” down & wealth inequality would go up
In fact do read the whole tweet thread. It is an exercise in mendacity.

The whole tweet storm is triggered by what appears to have been a very good event at PIIE where Summers had a panel discussion with Emmanuel Saez. 

The larger point that Saez-Zucman make about the need for higher taxes and redistribution to lower inequality is being detracted from by the quibbling over the implementation challenges of a specific set of proposals (never mind the numerous acceptable variations possible, even if the specific set was not feasible). Incidentally, the same Summers was at the forefront of the attack on Thomas Piketty when his book which highlighted the point about widening inequality and how the dynamic of today's capitalism contributes to it. Then the quibble was about how r > g would not always hold or that r was greater largely due to higher real estate prices.

The point about implementation difficulties is one of the main arguments against progressive measures like wealth tax, higher income taxes, breaking up tech companies, and taxing multinationals. This is unsurprising since implementation of most radical changes will ex-ante always appear challenging. But in this case, it is a bit rich coming as it does from ideologues who have played a major role in entrenching the narrative around far more difficult implementation endeavours like valuation of start-ups or executive compensation, both of which have engendered egregious excesses and perverse incentives. 

With nomenklatura like Larry Summers representing them, the Liberals should not be surprised by the rise of the likes of Donald Trump!

Sunday, October 27, 2019

Weekend reading links

1. To give a sense of the demographic challenge facing Japan, sample this from Yubari town in Hokkaido, which recently became the first Japanese municipality to file for bankruptcy,
The town’s population has declined to about 8,000 from roughly 120,000 in the 1960s, according to the local chamber of commerce. The closure of Yubari's coal mines was a blow the community never recovered from; population decline only made matters worse.
2. From Ananth, fascinating analysis of India's income tax revenue trends in Livemint. The major share of income tax comes from salaried income compared to business income,
The total income declared by individuals during AY19 stood at ₹34.1 trillion. Of this ₹20 trillion, or the bulk of the income, was declared by the salaried class. The business income came in next at ₹9.3 trillion. The declared interest income was ₹1.19 trillion, whereas the income from house property stood at ₹37,448 crore... In AY13, individuals paying an income tax of greater than ₹1.5 lakh accounted for nearly 79% of the total tax. This figure fell to 74% in AY15. It has since risen to 79.1% in AY19. A possible explanation for this lies in the higher surcharges that the government has introduced for those in the higher tax brackets over the last few years... The number of people paying an individual income tax of greater than ₹1.5 lakh has increased from 1.38 million in AY13 to 3.49 million in AY19. Nevertheless, as a percentage of the population, this remains a very small proportion. In AY19, 0.26% of the population paid close to four-fifths of the individual income tax, against 0.11% in AY13.

The government appears to be spending more effort and political capital squeezing more tax revenues out from the system, than in trying to expand the envelope itself by enabling growth. The former is easier to do, and the latter difficult. And the former comes with all its perverse incentives. In fact, it worsens the situation without commensurate performance on the latter.

This about housing rental market is very interesting,
According to the data, only around ₹37,400 crore is generated as income from house property in a year (through rents after adjusting for home loan interest, etc.) in the entire country, which shows that much of these transactions are still cash-based and completely outside the tax net... In AY19, around 8.3 million individual returns were filed for house property income. Of these, around 4.67 million declared a negative income from house property. This basically means that they are repaying their home loans. An interest of a maximum of ₹2 lakh paid on a home loan(s) is currently allowed as a deduction from taxable income during a year. Hence, around 3.63 million filers actually made a positive income from house property. If I were to put it a tad simplistically, India has just 3.63 million landlords.
It underscores the challenge about rolling back the cash economy.

3. Also from Ananth, a good set of links to research papers that highlight different signatures of financialisation in the economy. Most of them are covered in great detail in The Rise of Finance.

4. Mint's Macro Tracker shows continuing economic weakness. All the high frequency indicators are in the red.

5. Good summary of India's water problems,
As for water, a near-total reliance on moody monsoons has not made Indians careful users. Around 70% of surface water is thought to be polluted, and pumping from 20m tube wells has dangerously lowered groundwater levels. Indian farmers use more groundwater than America and China combined. They draw as much as 6,000 litres of water to produce a kilo of rice, compared with as little as 600 in China. This is because for 50 years Indian governments have subsidised farming. Water for irrigation is free, and seeds, diesel fuel, electricity and fertiliser are all sold below cost. As a result, India now has a 70m tonne grain mountain and a 15m tonne sugar mountain. It ranks as the world’s biggest exporter of virtual water, shipping out the equivalent of nearly 100bn cubic metres a year in its exports of rice, textiles and other goods. Lack of access to clean water kills an estimated 200,000 Indians a year, and sickens millions more. Once-pleasant rivers such as the Yamuna in Delhi and the Mithi in Mumbai are devoid of oxygen and black with sewage. Bengaluru’s suburban lakes now regularly burst into flames or erupt in towers of toxic foam. Between pollution, overuse and global warming—which appears to be making the monsoons more capricious and slightly less generous—India is fast approaching a water crisis.
6. Even with all its flaws and limitations, the Ease of Doing Business surveys must count as one of the rare policy reform successes of the World Bank.

7. Elizabeth Warren's "fair markets, markets with rules" based manifesto is overall very impressive. Is this the most comprehensive proposal yet on redefining a national economic paradigm? 

8. After becoming America's biggest landlord, private equity giant Blackstone has a new target - warehouses used by e-commerce companies, close to urban areas.
Blackstone owns about 800 million square feet of industrial warehouses, with nearly half of its 443 million square feet in the Americas having been acquired this year.
It raised a record $20 bn real estate fund early this year, and manages $157 bn in investor capital aimed at real estate. 

This about what favours the large funds like Blackstone,
New York firm’s history of double-digit returns and a herd effect, where pension-fund managers and other big investors tend to favor the same brand names with established track records... Even before its latest fund, Blackstone had the record for raising the four largest funds, according to Preqin. Its previous real-estate fund, at $15.8 billion, currently holds the record. Giant firms like Blackstone and Brookfield Property Group typically have an easier time raising money than smaller firms. Investment officers working for pension funds, endowments and other institutional investors prefer firms with marquee names and long track records because they have less explaining to do if things go wrong.
Then there is also the fact that large funds manage to raise debt cheaper than their smaller competitors. 

Saturday, October 26, 2019

The case of Dewan Housing is an opportunity to shine light on corporate India

If you thought that mortgaging the same asset to different lenders was what you only saw with small-time fraudsters and in movies, wait till you read about the latest twist in the case of Dewan Housing Financing Limited (DHFL). 

The company is reeling from a $12 bn pile of debt and is undergoing restructuring efforts, failing which it will have go into bankruptcy, with its ripple-effects across the financial markets.

In this context, Livemint reports about the latest developments in the already unsavoury troubles facing DHFL.
The Bombay High Court is scratching its head and wondering if Dewan securitized — that is, sold to a separate entity — assets that it had pledged to another set of investors to obtain loans. Now, the court wants the beleaguered firm to produce, under oath, a list of assets it repackaged and sold within the last year. This imbroglio has the potential to bring India’s securitization market to a standstill.
As if this was not enough,
A special review of Dewan by KPMG is still in a draft form. But the parts leaked to the media Wednesday raise damaging questions. The auditor says that $2 billion was lent to 25 borrowers with little real business or assets, and that “such entities may be working closely" with Dewan without qualifying as related parties. 
The question that will get asked in the days ahead in a vociferous manner is this. What were the regulators, on both the capital markets and banking sides, doing? 

What will not, unfortunately, get highlighted is the rot within India's corporate sector, where at the slightest opportunity subverting the rules of the game has become passe! 

The blame will get evenly distributed between the unscrupulous promoters and the government. Never mind this is only the latest in the series, the opinion makers will not think it still not appropriate enough to introspect how pervasive such practices are in corporate India.

Update 1 (21.11.2019)

More details, in a balanced apportionment of the blame, on the DHFL story here.

These cases are a matter of great concern about the country's financial market regulation, especially its enforcement, as India becomes increasingly financialised. The practice of mortgaging the same asset to multiple creditors is a case in point. It is even more disturbing since in this case, being collateralised debenture securities on housing loans, it had regulation at both sides - banking (NHB) and securities market (SEBI). The failings of Debenture Trustees, credit rating agencies, auditors etc too are egregious. 

Friday, October 25, 2019

More on private equity

Nice article in Bloomberg about private equity. In terms of a confluence of circumstances which has contributed to PE's rise, this is important
But it’s possible that a cosmic alignment of lax corporate management, cheap debt, and desperate-for-yield pensions created a moment that won’t be repeated soon.
Debt is central to the underlying idea,
The basic idea is a little like house flipping: Take over a company that’s relatively cheap and spruce it up to make it more attractive to other buyers so you can sell it at a profit in a few years... Private equity couldn’t exist without debt. It’s the jet fuel that makes a corporate acquisition so lucrative for a turnaround investor. The more debt you can raise against a target company, the less cash you need to pay for it, and the higher your return on that cash once you sell... PE firms can use some of the companies they own as virtual ATMs—having the company borrow money to pay its owner special dividends. That allows the funds to recover their investment sooner than they typically would through a sale or an initial public offering.
Or about the impact of PE,
Research has shown that companies acquired through leveraged buyouts (LBOs) are more likely to depress worker wages and cut investments, not to mention have a higher risk of bankruptcy. Private equity owners benefit through fees and dividends, critics say, while the company is left to grapple with often debilitating debt... Private equity and hedge funds gained control of more than 80 retailers in the past decade, according to a July report by a group of progressive organizations including Americans for Financial Reform and United for Respect. And PE-owned merchants account for most of the biggest recent retail bankruptcies, including those of Gymboree, Payless, and Shopko in the past year alone. Those bankruptcies wiped out 1.3 million jobs—including positions at retailers and related jobs, such as at vendors—according to the report, which estimates that “Wall Street firms have destroyed eight times as many retail jobs as they have created in the past decade.”
And this
A July paper by Brian Ayash and Mahdi Rastad of California Polytechnic State University examined almost 500 companiestaken private from 1980 to 2006. It followed both the LBOs and a similar number of companies that stayed public for a period of 10 years. They found about 20% of the PE-owned companies filed for bankruptcy—10 times the rate of those that stayed public. Pile on debt, and employees lose, Ayash says... Research by Eileen Appelbaum, co-director of the Center for Economic and Policy Research, says the problem isn’t leverage per se but too much of it. She points to guidance issued by the Federal Deposit Insurance Corp. in 2013 saying debt levels of more than six times earnings before interest, taxes, depreciation, and amortization, or Ebitda.
And this is important,
A study co-authored by UC Merced’s Eaton, for example, found that buyouts of private colleges lead to higher tuition, student debt, and law enforcement action for fraud, as well as lower graduation rates, loan-repayment rates, and graduate earnings. But the deals did increase profits.
Jonathan Ford has another article on PE in the FT which has this summary of PE balance sheet,
First, it shows why pension funds are tempted by private equity’s blandishments. If you are struggling to meet your promises to members, you want every pound or dollar to work as hard as it can. Nonetheless, before getting carried away, it is worth also noting the source of this superior performance, which all comes from financial engineering, not running companies better. It is far from clear this justifies the three-times higher fees that the pension fund incurs with Acme B. It is also worth remembering that the extra return is not the free lunch it appears, coming at the cost of additional volatility. Private equity argues that the extra oversight involved in its governance arrangements allow it to deal with the higher financial risks. But its preference for debt can carry heavy societal costs, such as bankruptcy and lost productivity through shirked investment in the business. And lastly there is a big puzzle surrounding the credit that supports these private equity investments. Most of the gain comes from capital leverage rather than the “tax shield” of deductible debt interest. The scale of the leverage-related bump raises the question of whether banks are really earning a proper return through the cycle on the risks they are bearing on their private equity loans. If they aren’t, that’s a cost for all citizens (including pension fund scheme members) given the taxpayer support that banks enjoy. The clearest and biggest beneficiaries of lenders’ largesse are the recipients of swollen transaction and private equity fees.
Update 1 (23.04.2020)

FT has this story of perverse audit practices within the private equity industry (no different elsewhere, perhaps worse only in the extent of perversion). It talks about the KPMG audit which gave clean slate to Abraaj in the investigation ordered after the scandal broke about its founder Arif Naqvi diverting funds to his own ventures.
It transpired that KPMG had close ties to senior people in the business: the chief executive of KPMG’s Dubai arm had a son who worked at Abraaj, and one executive, Ashish Dave, had spent time at both Abraaj and KPMG. KPMG also worked for companies in which Abraaj had substantial investments.

Thursday, October 24, 2019

How quickly the tide turns!

In February 2014, I wrote an oped in Indian Express urging caution on capital account liberalisation

In response, this is what Ila Patnaik wrote mockingly,
When some Indian bureaucrats have argued in favour of a closed capital account at international forums, they have faced amusement from the audience. No country has taken this idea seriously. This so-called “lesson from the global financial crisis” is something no one is interested in learning. There has been no reduction in capital account openness — either among advanced countries or among emerging markets — after the crisis. The free movement of goods, services, ideas, capital and enterprise across national borders is an integral part of modernity.

Tuesday, October 22, 2019

The default responses when faced with a problem

When faced with any problem, we have a set of default responses. 

1. We need to do something new. A big bang. We need to innovate.

2. Somebody has to be responsible for the problem. Blame the government. Blame the politicians. Blame the corporates. Blame America or (now) China!

3. We need a reassuring solution, one which we can implement in finite time and solve the problem.

Instead, why not these?

1. What if the problem arose because we were not doing well what we were supposed to have been doing? So why not refocus efforts to doing it more effectively?

2. What if all of us are to blame? Or what if no one is to blame? What if the problem arose due to the complex dynamic of human interactions?

3. What if the problem never disappears fully? What if there are no solutions at all, never mind neat and reassuring ones? What if the solution is a never-ending journey, and not a destination?

Consider the example of increasing economic growth or development in general.

What if all governments need to do are develop human capital, invest in physical infrastructure, facilitate ease of doing business, provide a basic social safety net, maintain macroeconomic stability, and in general maintain good governance?

What if there is no one specific point of blame and the problem is the emergent consequence of the inter-play of several unforeseen forces and actions within the economy?

What if the entire set of processes is a journey, with no clear destinations, and one which requires constant vigil and recalibrations?

What rubbish! Let's go back to our good-old reflex responses!

Monday, October 21, 2019

How the humble grain was responsible for the State

Rajeev Mantri points to this review of the very original James C Scott's latest book, Against the Grain, by Scott Alexander. The essence of the book appears to be how the need to raise taxes was the underlying motivation to promote wheat over other crops. You can tax grain farmers!

Reproducing this extract from Alexander's blog, which captures the essence of the book,
Why should cereal grains play such a massive role in the earliest states? After all, other crops, in particular legumes such as lentils, chickpeas, and peas, had been domesticated in the Middle East and, in China, taro and soybean. Why were they not the basis of state formation? More broadly, why have no “lentil states,” chickpea states, taro states, sago states, breadfruit states, yam states, cassava states, potato states, peanut states, or banana states appeared in the historical record? Many of these cultivars provide more calories per unit of land than wheat and barley, some require less labor, and singly or in combination they would provide comparable basic nutrition. Many of them meet, in other words, the agro-demographic conditions of population density and food value as well as cereal grains. Only irrigated rice outclasses them in terms of sheer concentration of caloric value per unit of land.
The key to the nexus between grains and states lies, I believe, in the fact that only the cereal grains can serve as a basis for taxation: visible, divisible, assessable, storable, transportable, and “rationable.” Other crops—legumes, tubers, and starch plants—have some of these desirable state-adapted qualities, but none has all of these advantages. To appreciate the unique advantages of the cereal grains, it helps to place yourself in the sandals of an ancient tax-collection official interested, above all, in the ease and efficiency of appropriation.

The fact that cereal grains grow above ground and ripen at roughly the same time makes the job of any would-be taxman that much easier. If the army or the tax officials arrive at the right time, they can cut, thresh, and confiscate the entire harvest in one operation. For a hostile army, cereal grains make a scorched-earth policy that much simpler; they can burn the harvest-ready grain fields and reduce the cultivators to flight or starvation. Better yet, a tax collector or enemy can simply wait until the crop has been threshed and stored and confiscate the entire contents of the granary.
Compare this situation with, say, that of farmers whose staple crops are tubers such as potatoes or cassava/manioc. Such crops ripen in a year but may be safely left in the ground for an additional year or two. They can be dug up as needed and the reaminder stored where they grew, underground. If an army or tax collectors want your tubers, they will have to dig them up tuber by tuber, as the farmer does, and then they will have a cartload of potatoes which is far less valuable (either calorically or at the market) than a cartload of wheat, and is also more likely to spoil quickly. Frederick the Great of Prussia, when he ordered his subjects to plant potatoes, understood that, as planters of tubers, they could not be so easily dispersed by invading armies.
The “above ground” simultaneous ripening of cereal grains has the inestimable advantage of being legible and assessable by the state tax collectors. These characteristics are what make wheat, barley, rice, millet, and maize the premier political crops. A tax assessor typically classifies fields in terms of soil quality and, knowing the average yield of a particular grain from such soil, is able to estimate a tax. If a year-to-year adjustment is required, fields can be surveyed and crop cuttings taken from a representative patch just before harvest to arrive at an estimated yield for that particular crop year. As we shall see, state officials tried to raise crop yields and taxes in kind by mandating techniques of cultivation; in Mesopotamia this included insisting on repeated ploughing to break up the large clods of earth and repeated harrowing for better rooting and nutrient delivery. The point is that with cereal grains and soil preparation, the planting, the condition of the crop, and the ultimate yield were more visible and assessable.
And this from Alexander about what motivated acquisition of prisoners of war,
Scott discusses how this shaped the character of early Near Eastern warfare. Read a typical Near Eastern victory stele, and it looks something like “Hail the glorious king Eksamplu, who campaigned against Examplestan and took 10,000 prisoners of war back to the capital.” Territorial conquest, if it happened at all, was an afterthought; what these kings really wanted was prisoners. Why? Because they didn’t even have enough subjects to farm the land they had; they were short of labor. Prisoners of war would be resettled on some arable land, given one or another legal status that basically equated to slave laborers, and so end up little different from the native-born population. The most extreme example was the massive deportation campaigns of Assyria (eg the Ten Lost Tribes of Israel), but everybody did it because everybody knew their current subjects were a time-limited resources, available only until they gradually drained out into the wilderness.

Saturday, October 19, 2019

Weekend reading links

1. The US withdrawal from oil-rich north-east Syria, paving the way for Turkish troops to attack the Kurdish forces which had been at the forefront of the successful war against the Isis, is certain to reinforce the geo-political recalibration happening in the region away from the US. Russia and Iran would be definite beneficiaries.

The Kurdish militia which ran the region named Rojava which was taken over after the defeat of the Isis, People's Protection Units (YPG), responded by striking a deal with President Bashar Al Assad in an agreement mediated by Russia. They invited the Syrian army to fight the Turkish army alongside them. This is a good primer on the issue and the roles of different countries.

2. FT points to the changing portfolio compositions of leading financial institutions, mostly driven by the world of low interest rates and the search for yields,
In addition to its traditional roles advising on mergers and trading debt and equities, Goldman is now: a venture capitalist investing in the likes of Uber and WeWork; a retail bank offering accounts and short-term loans to ordinary consumers; a credit card issuer in partnership with Apple; and a software developer with a suite of applications... Finance is full of companies uncomfortable in their own skins and trying to adopt more fluid identities. Blackstone, notionally a private equity firm, today makes more money from property. BlackRock, famous as one of the world’s biggest owners of public equities, is now getting into private equity buyouts. Elliott Management, an activist hedge fund, has ended up owning a football club, AC Milan, and two bookstore chains, Barnes & Noble and Waterstones.
Apart from straying into areas where they may have limited expertise, the other worrying thing is the illiquid nature of many of these assets, which in turn pose challenges of runs, as faced by the collapse of leading UK fund manager Neil Woodford following suspension of withdrawals after customers started demanding their money back.
This week’s Global Financial Stability Report from the IMF pointed to renewed risks from pension funds’ headlong rush into alternative assets. The allocation to alternatives such as property and private equity has risen from just over 5 per cent in 2007 to more than 20 per cent today.
3. In recent days we've had two similar financial market failures in India and UK.

In UK, Neil Woodford, the country's best known fund manager was ousted from all his investment vehicles following the collapse of his flagship £3 bn equity fund. It followed suspension of withdrawals by fund administrators after a flood of investors demanding their money back. An article in the FT writes,
The problems... began after he loaded up his flagship £3bn “equity income” fund with investments that provided no income. About a fifth of the portfolio was composed not of the dividend-paying public stocks that one would expect, but a rash of exotic private businesses such as Industrial Heat, a company whose nuclear fusion dreams have attracted Brad Pitt — and the scepticism of physicists. These instruments cannot be sold in a hurry and, in June, when Mr Woodford’s customers wanted their money back, the fund’s administrators suspended withdrawals and then, this week, decided to liquidate the assets, resulting in the end of the firm.
And this,
Mr Woodford became a household name during 26 years at Invesco where he turned £1,000 invested into more than £25,000. But he was later known for a reckless investment style, piling into illiquid and unquoted stocks, which led to the destruction of his clients’ savings. The Equity Income Fund was suspended in June after being crippled by relentless redemption requests and investment losses, sparking the biggest crisis in the European fund management industry in a decade and an investigation by the UK’s Financial Conduct Authority. Problems at the fund stemmed from its exposure to stocks that cannot easily be bought or sold.
In India, something similar happened with a regional co-operative bank, Punjab and Maharashtra Cooperative Bank (PMC). As news of RBI putting the bank under its direct control for six months emerged, the depositors rushed to pull out their money, forcing imposition of limits on withdrawals by the regulator. It also emerged that 73% of PMC's Rs 8,800 Crore loan book was exposed to just one account, Housing Development and Infrastructure Limited (HDIL), a real estate developer whose credit worthiness was already under the cloud. This was four times the regulatory cap on exposure to single entity.

The country's 1500 plus co-operative banks have dual regulation - by RBI on financial supervision and State government's Registrar of Co-operative Societies for bank management. But the influence of political leaders in the running of these banks erodes the professionalism in their management.

All this highlights atleast three things. One, financial market regulation invariably runs the risk of being behind the curve. Two, the widespread perception among opinion makers about Indian financial market regulators are especially inept does not quite square up with the pervasive similar failures in the most advanced markets. Finally, it underlines the need for financial market regulation. Asset management industry is among the most competitive segments of the financial market. Such competition could not keep the most high-profile asset manager in UK honest. This again questions the underlying ideological premise about the self-regulating nature of financial markets.

4. The Economist has an article which refers to Jevons Pradox, which argues that the more efficient use of a substance inevitably leads to higher total consumption. Sample this,
Vaclav Smil, a Czech-Canadian scientist, argued that as goods become lighter and cheaper the market for them explodes and, as Jevons predicted, increases demand for resources. The weight of the average mobile phone in 2011 was one-sixth what it had been in 1990. But the number of phones ballooned from 11m to 6bn. So the total mass of phones globally went from 7,000 tonnes to about 700,000 tonnes. Less, Mr Smil writes memorably, is “an enabling agent of more”.
5. The Economist on whether share options may have had the effect of lowering business investment and productivity,
The proportion of cash paid out to shareholders by non-financial American companies was 40.7% from 2000 to 2017, when share options became popular. Between 1947 and 1999, when they were not, it was 19.6%. As a corollary, the proportion used for investment fell.
6. Good survey in The Economist on the changing rules of the game in the world economy. Sample this about low inflation and why inflation targeting as a regime may be past its relevance,
The IMF counts among its members 41 countries in which monetary-policy targets inflation. Add in the euro zone and America (where the Fed has multiple goals), and you get 43. Of those 28 will either undershoot their inflation targets in 2019 or have inflation in the bottom half of their target range, according to the fund’s most recent round of forecasts. (When those forecasts are updated on October 15th, after this special report goes to press, that number will probably rise.) By GDP 91% of the inflation-targeting world is an inflation laggard on this measure.
It talks about the breakdown of the Phillips curve relationship between inflation and unemployment, persistence of low inflation despite massive increases in credit supply, and technology making inflation statistics unreliable.

Evidence about how global value chain integration contributes to synchronisation of inflation,
The recent growth in cross-border supply chains has created conduits along which cost changes in one part of the world flow into the prices of goods that emerge from factories elsewhere. Research by Raphael Auer of the Bank for International Settlements (BIS), Andrei Levchenko of the University of Michigan and Philip Sauré of Johannes Gutenberg University in Mainz has found that half of global synchronisation in producer-price inflation is attributable to prices that can be traced through supply chains. Via this mechanism the average country imports one-fifth of any change in inflation in the rest of the world. Prices are more intertwined in integrated trading regions such as America, Canada and Mexico... In other work with his colleagues at the bis, Claudio Borio and Andrew Filardo, Mr Auer finds that the greater a country’s integration into cross-border supply chains, the more inflation tracks slack in the global economy. If imports of inputs to production double as a share of GDP, the sensitivity of inflation to global economic conditions also appears to double. Messrs Ha and Kose and Ms Ohnsorge also find that global factors explain a greater share of inflation in countries which participate more in global supply chains.
Another long-held view being questioned is the belief in depreciating currency to boost exports.
And although in theory a falling exchange rate should at least boost exports, this effect is limited by the fact that so much trade is invoiced in dominant currencies like the dollar or the euro. Research by Gita Gopinath and Emine Boz of the imf and Mikkel Plagborg-Møller of Princeton University has found that a strong dollar tends to gum up world trade, as well as making dollar debts harder to repay. As a result, even emerging markets with independent central banks and floating exchange rates can appear to be at the mercy of international financial conditions, in particular the policy of the Federal Reserve.
7. From $47 bn in late 2018 to $8 bn apparently now, the fall and fall of WeWork valuation!

8. The post-IPO balance sheet of 2019!
9. Finally a very good article about the excellent satirical Malayalam cartoon characters, Bobban and Molly, which was part of the state's folklore for a long time. Thinking about it, one of the things that made Malayalam cinema stand-out, especially till perhaps the early noughties, was its very sensitive characterisation of real-world life issues. 

Wednesday, October 16, 2019

Inequality graphics of the year and more!

From the authors of the big book of the year, Emmanuel Saez and Gabriel Zucman,
For the first time in the past hundred years, the working class — the 50 percent of Americans with the lowest incomes — today pays higher tax rates than billionaires... The richest 400 adults pay a lower tax rate than all other groups... Taking into account all taxes paid, each group contributes between 25 percent and 30 percent of its income to the community’s needs. The only exception is the billionaires, who pay a tax rate of 23 percent, less than every other group.
They disaggregate among different income categories the 28% of national paid out in federal, state and local government taxes in 2018 and get the graphic below.
The state and local taxes, which form a third of all tax revenues, are, as can be seen, extremely regressive. And how have we reached this state of affairs?
Saez and Zucman have a proposal to redress this egregiously unfair system.
There is nothing inherent in modern technology or globalization that destroys our ability to institute a highly progressive tax system. The choice is ours. We can countenance a sprawling industry that helps the affluent dodge taxation, or we can choose to regulate it. We can let multinationals pick the country where they declare their profits, or we can pick for them. We can tolerate financial opacity and the countless possibilities for tax evasion that come with it, or we can choose to measure, record and tax wealth. If we believe most commentators, tax avoidance is a law of nature... But they are mistaken. Tax avoidance, international tax competition and the race to the bottom that rage today are not laws of nature. They are policy choices, decisions we’ve collectively made — perhaps not consciously or explicitly, certainly not choices that were debated transparently and democratically — but choices nonetheless. And other, better choices are possible.
Take big corporations. Some countries may have an interest in applying low tax rates, but that’s not an obstacle to making multinationals (and their shareholders) pay a lot. How? By collecting the taxes that tax havens choose not to levy. For example, imagine that the corporate tax rate in the United States was increased to 35 percent and that Apple found a way to book billions in profits in Ireland, taxed at 1 percent. The United States could simply decide to collect the missing 34 percent. Apple, like most Fortune 500 companies, does in fact have a big tax deficit: It pays much less in taxes globally than what it would pay if its profits were taxed at 35 percent in each country where it operates. For companies headquartered in the United States, the Internal Revenue Service should collect 100 percent of this tax deficit immediately, taking up the role of tax collector of last resort. The permission of tax havens is not required. All it would take is adding a paragraph in the United States tax code. The same logic can be applied to companies headquartered abroad that sell products in America. The only difference is that the United States would collect not all but only a fraction of their tax deficit. For example, if the Swiss food giant Nestlé has a tax deficit of $1 billion and makes 20 percent of its global sales in the United States, the I.R.S. could collect 20 percent of its tax deficit, in addition to any tax owed in the United States. The information necessary to collect this remedial tax already exists: Thanks to recent advances in international cooperation, the I.R.S. knows where Nestlé books its profits, how much tax it pays in each country and where it makes its sales. 
As Saez and Zucman point out, it is for America to bite the bullet and initiate this proposal and let others follow suit. Are the liberals listening?

See also this by David Leonhardt,
The overall tax rate on the richest 1 percent would roughly double, to about 60 percent. The tax increases would bring in about $750 billion a year, or 4 percent of G.D.P., enough to pay for universal pre-K, an infrastructure program, medical research, clean energy and more. Those are the kinds of policies that do lift economic growth. One crucial part of the agenda is a minimum global corporate taxof at least 25 percent. A company would have to pay the tax on its profits in the United States even if it set up headquarters in Ireland or Bermuda. Saez and Zucman also favor a wealth tax; Elizabeth Warren’s version is based on their work.
Also, I am sure in the days ahead, the venerable economists will indulge in hair-splitting over arcane and marginal concerns, and seek to detract from the central message about sharply reduced tax progressivity and its contribution to widening inequality, which, as Paul Krugman says here, screams out loud!

Btw, in terms of economists who are engaged with important real-world issues in a meaningful manner, are there any others more important than Thomas Piketty, Emmanuel Saez and Gabriel Zucman? I am inclined to believe that in 20 years hence, these three will be hailed as being among the most influential economists of our times in terms of having deeply influenced the trajectory of economic policy making. Interestingly, none are American and all three are Frenchmen.

Tuesday, October 15, 2019

Is Japan peak-urbanisation?

Japan has been the trend-setter for many themes in the economy and the society. The latest could be in mapping the trajectory of urbanisation. In fact, Japan could represent peak-urbanisation. 

Bloomberg has an excellent article,
When it comes to Japan’s economy, there’s actually two of them. In Japan A, an urban-industrial corridor stretching about 300 miles from Tokyo through Osaka, you’ll find cutting-edge businesses and world-class wealth. In Japan B, which is just about everywhere else, small cities and towns are dying as people move to Japan A in search of opportunity. While other major developed economies are headed down a similar path, Japan has a head start on them when it comes to aging and depopulation, making it a cautionary tale for policy makers across the globe... Japan A, in which about half of the country’s 126 million people live on just 14% of the landmass... More than 80% of towns that replied to an agriculture ministry survey last year said they need to take steps to help residents who find it difficult to obtain groceries, with almost all citing aging as a reason. From 2002-2017, more than 7,000 public schools across Japan shut their doors, the majority in rural areas, as the country’s birthrate remained mired well below replacement level. As more schools close and other services disappear or become harder to access, young families will have even more reason to flock to the cities.
And this is the clincher, or peak-urbanisation, at least for Japan,
Japan will fare better in the 21st century if it reinvents itself as more of a city-state than a continental nation, said Kotaro Kuwazu, executive fellow at the Nomura Research Institute, one of Japan’s most prominent think tanks. Cities will drive the future, so to compete globally Japan should give more resources and power to Tokyo – or what will become the Tokyo megalopolis, he said.
Is this unique to Japan or is Japan a portend of things to come for the others?

Drawing the analogy of physics, a city generates positive centripetal and centrifugal forces. The former attracts migrants towards it, and the latter generates positive externalities on the conurbation and beyond. The desirable state of affairs is a balance between the two forces. If the former is disproportionately high, then development gets concentrated within the core and the periphery withers. The metropole becomes the banyan tree which crowds-out other growth.

I am inclined to believe that there are two progressive equilibriums with the trajectory of urbanisation. The first involves an evolution of numerous smaller towns co-existing with a few large cities. The growth in the larger towns and their emergence as metropolises feed their peripheral towns. This was the one which developed countries followed in their urbanisation pathway. It allows for spatial spreading out of the gains from urbanisation and promotes a very orderly structural transformation.

Then, spurred by certain factors (and this may be unique to regions and countries) and the dynamics of the modern economy, the centripetal forces come to dominate, and instead of feeding the periphery, the larger cities end up squeezing growth outside. A second equilibrium starts to emerge where a handful of very large cities become the big banyan trees and the hinterland struggles. This results in the concentration of economic activity around a few clusters/regions, with decaying hinterlands.

It is perhaps the case that developing countries are still in the first phase. This is especially likely with larger developing countries like India. However, for whatever reasons, there is also a danger of going down the second pathway prematurely. Would rapid urbanisation result in this transition? What would be the socio-economic and political consequences of such transitions? Which Indian states manifest such a transition? Andhra Pradesh?

Friday, October 11, 2019

PPP assessment in steady state!

At the turn of the millennium, public private partnerships (PPPs) emerged as the rage in infrastructure. The apparent success of PPPs in countries like the UK, Australia, and Canada, made others, including developing countries like India, follow suit.

Sample this first independent assessment of the UK PPPs by the National Audit Office (NAO),
Most construction work under the Private Finance Initiative (PFI) is being delivered on time and at the cost expected by the public sector... Under the PFI only 22 per cent of public building projects had exceeded the cost expected by the public sector at contract award. This is a dramatic improvement compared with a previous survey of public building projects in 1999 which found that 73 per cent had overshot the cost expected by the public sector... Under the PFI only 24 per cent of public building projects had been delivered late with just 8 per cent being delayed by more than two months. This is also a dramatic improvement over the previous 1999 survey which found that 70 per cent of building projects had been delivered late to the public sector.
That was February 2003, at an early stage of PPP development in UK. 

Fast-forward 2018, the same NAO, this time with a much larger sample and mature stage of PPPs, had this to say,
The higher cost of finance, combined with these other costs, means that overall cash spending on PFI and PF2 projects is higher than publicly financed alternatives. The Department for Education has estimated the expected spend on PF2 schools compared with a public sector comparator (PSC). Our analysis of these data for one group of schools shows that PF2 costs are around forty per cent higher than the costs of a project financed by government borrowing. The Treasury Committee undertook a similar analysis in 2011, which estimated the cost of a privately financed hospital to be 70% higher than the PSC.
India is somewhere in the middle, moving towards the mature stage of PPPs, where there will soon be a large number of projects which are old enough to experience renegotiations, cost overruns, asset-stripping, skimping on investments etc. 

Wednesday, October 9, 2019

A job creation policy agenda for India

I have a co-authored paper with V Ananthanageswaran on job creation in India which has been published here by Carnegie Endowment. Tim Taylor, the editor of Journal of Economic Perspectives, has reviewed the same here.

The main argument is that instead of the larger firms and micro-enterprises, the policy focus should be more on formal, young and growing firms started by educated entrepreneurs. Job creation is largely by this category of smaller firms, especially in their initial five years or so. We provide some possible measures to address them - policies that support the creation and growth of such firms. 

Among the measures is that on SMEs and job creation. Providing management capacity services as industrial public goods for small and young firms. We present a policy proposal in this regard. Dani Rodrik talked about them as extension services in an oped recently here. The policy argument is about providing management capacity training as a private consultancy type good, as opposed to large-scale mass training programs, as part of industrial policy. I foresee it becoming part of industrial policy toolkits as job creation becomes a big agenda going forward.

Monday, October 7, 2019

Some thoughts on the Indian Economy

There is a growing chorus of voices calling for policies to stimulate aggregate demand, revive animal spirits, and restore the corporate investment cycle. The time-frame for action has to be immediate with impacts felt immediately on implementation of the policy or intervention. 

This demand has little theoretical or even practical basis and creates the danger of pursuing the path of attractive but harmful short-term measures.

The standard economic toolkits for stimulating aggregate demand involves the policy instrument and its target audience. 

In terms of policy instruments, the orthodox choices are fiscal and monetary policies. In the present circumstances, the former is constrained by the limited fiscal headroom available for the government. The latter is constrained by its poor transmission arising from the bad health of the banking system and the weak investment climate. In the circumstances, the cupboard of orthodox toolkits available is bare.

There is a third choice, involving specific sectoral or targeted policies. The problem with this approach is that they run the risk of targeting the wrong sectors with the wrong kind of initiatives and in the process creating distortions. The previous government’s post-crisis response in terms of revenue expenditures is a good example of the dangers. Besides, even in the best of cases, these measures take effect with a lag and are therefore less likely to have much immediate impact. 

In terms of audience, there are clearly four distinct audiences. They are households, urban and rural, corporate sector, and government agencies. 

1. Government agencies – Front-loading of the investment cycle of the public sector units, where they already have the resources available and their respective Boards and managements have approved investment proposals. In such cases, expediting these investments can be a very big booster.

2. Corporate sector – Facilitating and expediting the planned investments of private corporates, especially in sectors like infrastructure. This will require facilitating with government approvals and regulatory clearances. It may also be useful to think of some fiscal incentives on some of these expedited investments.

3. Farmers - One measure would be to lift the just-imposed export restrictions that have been imposed on the likes of onions and allow farmers to benefit from higher global prices. While such restrictions may perhaps benefit the consumers, it ends up penalising farmers who are anyways forced to bear the brunt of the downside of such market cycles without being allowed to benefit from the upside.

4. Households - The equivalent of corporate tax cuts on the income tax side has its strong political appeal. But it runs the risk of seriously destabilising the fiscal balance. So, it should be avoided.

5. Specific actions aimed at sectors 

  • The two sectors are large enough to stimulate broad-based consumption are agriculture and construction. Construction in particular has a high multiplier.
  • Agriculture – The demand stimulus of 2008-11 came primarily from measures like raising minimum support prices etc. Its adverse consequences in terms of inflation and fiscal deficits are well known. Any step in that direction may be misguided.
  • Real estate – Given the large stock of stalled housing projects, some appropriate measures to expedite completion of the large pool of delayed construction projects; simplification of the processes to facilitate increased utilisation of the CLSS scheme for affordable housing etc.
  • Urban sector – If the government does resort to some form of fiscal measures to stimulate using public spending, then transferring funds to cities is perhaps more appropriate. Among all government agencies, urban local bodies are perhaps more capable in terms of spending the money received in reasonable time. 
  • General corporate sector – Now that corporate bottom-lines have been boosted by the corporate tax cuts, it may be perhaps useful to explore which sectors or categories of companies are likely to benefit the most. It may be useful to engage with those corporates to facilitate their investment decisions by easing various kinds of government-related restrictions in the hope of quickly ploughing back some share of the money channelled into corporate balance sheets by the tax cuts. 
As can be seen, the list of immediate aggregate-demand boosting measures is very limited. Further, the underlying premise that such boost to the aggregate demand can trigger animal spirits, which in turn can revive the investment cycle is very doubtful. For a start, the weakness of the Indian economy today is not a sudden turn of events, but part of a trend over several recent years. 

The current despondency with the Indian economy gets amplified when one compares it with the high growth rates of 2003-04 to 20010-11. But that lens may be misleading for multiple reasons. 

For a start, there are compelling reasons to believe that that episode of high growth was not built on the foundations of any significant and sustainable productivity growth. Instead, that growth episode was sustained by very high credit growth and an unsustainable boom in investments, especially in real estate and infrastructure sectors. It also coincided with a period of frothy asset prices, with attendant income effects. Adding to this was the largely rural-focused burst of welfare spending of the government by way of the likes of employment guarantee scheme, increases in MSP etc. The cumulative impact on aggregate demand was accordingly exaggerated.

Then there were the external tailwinds associated with rapidly expanding global trade, the China-effect, and high global economic growth rates. This growth was not sustainable. We lost a great opportunity to undertake critical plumbing reforms – improving the ease of doing business; fixing education and health care systems; enhancing state capacity; urban sector reforms like promoting vertical development, transit oriented development, and affordable housing; investments in rural infrastructure (including agriculture); improving governance of public sector banks; second-generation reforms to infrastructure contracting; policies on resource allocations; agriculture sector related policies and so on. 

Also missed was the opportunity to pursue proactive industrial policy to support a few sunrise and higher value sectors (renewables, electronic components including telecom equipment, software products) like that with the belated phased manufacturing policy (PMP) adopted for mobile phones since 2017. In fact, policies like GST and increased regulatory oversight on the banks (SMA accounts, PCA framework etc) should have been done during those boom times. 

Today, the aggregate demand boost provided by all these exogenous factors has died down. Further, the Indian economy has also been hobbled by the balance sheet problems of the banks and the corporate sector. Exacerbating the problems, the fiscal space available with the government is negligible. The global tailwinds have reversed to become headwinds. The world economy has definitely moved into a lower growth trajectory since 2010, and there may have been a further blip since 2017. World trade growth has plateaued, and even contracting.

There is enough to suggest that the current weakness is part of a trend decline in the potential output, starting sometime since 2011. There are several signatures of this. None more important that the gross domestic savings and gross fixed capital formation, both of which have declined significantly since 2011-12. The growth in exports, imports, credit, electricity consumption, IIP and so on have all moved to a lower trajectory.

In the absence of rigorous analysis, it is difficult to pin the source for these troubles. This period coincided with the surfacing of the banking sector non-performing assets, rise in stalled projects, renegotiation requests with the large numbers of contracts allocated in the 2003-09 period, the spate of scandals, the court cancellations of resource allocations, and of course the tapering off of the post-crisis stimulus measures. Not to speak of external factors. What role did these all play?

In the circumstances, even as the various immediate growth revival measures are being tried out, we should not lose sight of the long-term structural reforms that are essential to restore sustainable growth. We should both repair (like with bank and corporate balance sheets) and reform. In fact, the mere perception that those repairs and reforms are being initiated and also being implemented with right earnestness can perhaps go some way in signalling to the markets, shaping expectations, and thereby reviving the animal spirits.

Thursday, October 3, 2019

The enduring fallacies of development

Some of the enduring narratives of development, a frequent recent topic of my blogs, goes something like this,
A lot of development programs just fail because they’re trying to solve a problem that doesn’t exist. They’re just solving the wrong problem. The first really important thing you’ve got to do is really understand what the issue is in any given area. If we’re worried about girls not going to school because of menstruation, well, let’s start by finding out whether they actually don’t go to school more when they’re menstruating. That’s a really basic, obvious thing. But we actually need more work on that kind of understanding the context, understanding the problem, is really important first step.

Some one should engage on an unpacking exercise of this program to address girl children dropping out. Why is this program's design flawed? How does it not realise the objective? What are the alternatives? How implementable - fiscally supportable, administratively doable, and politically acceptable - are those alternatives? 

Sample this.
I did a project looking at how to improve immunization rates in India, which was fantastically effective. It started with a first assessment of what are the health problems in this area? Only 3% of kids in this part of India were getting fully immunized... There were a number of theories about why that could be... people... don’t trust the formal health system. There was also a question of, so the clinics are often closed, so is that the problem? Is it that when you go and take your kid to the clinic, it’s often closed? Is it nurse absenteeism that’s the problem? Or is it just a behavioral economics thing that you’re happy to get your kid immunized, but you’ll do it tomorrow? We read all this behavioral economics and we said, “Well, maybe we should look at that.” But we also wanted to test these other ideas. One arm made sure that without fail, there was someone to immunize your child and another arm did that, but also provide a small incentive. So, yes, we were testing a program but we were also asking a more fundamental question, which is, why don’t people get their kids immunized?
What we saw in the data is a lot of people got their kid immunized with one immunization, but they failed to persist to the end of the schedule. Which already, that’s just descriptive data and it starts to tell you, it’s not that they distrust the system or that they think that immunizations are evil, because they’re getting their kid one immunization. It’s more question of persistence. Now, fixing the supply problem increased the number of people getting the first shot, and the second shot, but again, it failed to fix this persistence problem. Where the incentive effect worked, was it helped people persist to the end. That tells you that one of the big problems was this persistence problem. It tells you a lot about why immunization isn’t happening. 
Blimey! What can a policy maker learn from this academically famous experiment on lentils? In any population group, people are likely to not end up immunising their children for a variety of reasons and these reasons would likely vary considerably across contexts. And in every context, the more perceptive among the nurses, and there are several of them, would invariably know exactly the primary reasons for the state of affairs with a fair degree of accuracy. It is a different matter that their concerns are rarely enquired and even more rarely acted upon. 

What was the need to conduct an expensive RCT with limited external validity to ascertain this? Why should we elevate the form of academic rigour associated with an experiment conducted by outsiders with little idea of the context over the substance of information discovery (by whatever means) from those living in those contexts and working on the same issue for years, even decades? Talk about arrogance of experts. 

If this story is narrated to an audience of practitioners engaged with the problem, it would only be out of courtesy that the narrator would escape being heckled.

This is some claim,
And actually, if you look at most of the people doing RCTs, they don’t think that their audience is aid donors. Their audience is the government of India and the government of Brazil and the government of Indonesia, and to some extent big companies or other individuals there.
Government of India and RCTs?? Didn't the last Chief Economic Advisor to the Government of India say this?
When asked how many of these expensive RCTs had moved the policy needle in India, Arvind Subramanian, Chief Economic Advisor, GOI, was hard pressed to find a single one that had been helpful to him in addressing the dozens of pressing policy questions that came across his table.
This claim about the policy relevance to the Government of India of RCTs in illuminating the big questions in education and resolving the most problems is just that, a researcher's self-serving claim. 
A lot of the work on education has suggested that the most effective thing we can do in education is to focus on the learning within the classroom. It’s not about more money, it’s not about more textbooks, it’s not about… And that’s what governments spend their money on. They spend it on teachers and textbooks, mainly teachers. But more teachers doesn’t actually improve learning. More textbooks doesn’t improve learning. But that’s what the Indian government is spending their money on. So if I want to help the Indian government on education, I want to test those different things about how the Indian government could improve their education, and then help them reform the education system. And what this set of RCTs has suggested is, not just that it’s about the pedagogy, but it’s specifically about the problem that the Indian curriculum is up here, and most kids are here. If you look at the data, just descriptive data, again, the power of descriptive data… within an average Indian classroom in 9th grade, none of the kids are even close to the 9th grade curriculum. They’re testing at somewhere between 2nd grade and 6th grade. No wonder they’re not learning very much, ’cause the teacher, the only thing that a teacher has to do by law in India is complete the curriculum, even if the kids have no idea what they’re talking about. So yes, you have RCTs testing very specific interventions; all of the ones that worked were ones that got the teaching down from the 9th grade curriculum to a level that the kids could actually understand. Now the lesson from that, the big lesson for the Indian government if they were ever to agree to this, is change your curriculum. That’s the biggest thing that you could do. Reform the curriculum and make it more appropriate to what children are doing. 
This is a staggering level of naivety about how development happens in the real world. I wish I could write in greater detail.

This assessment of China's economic policies has to take the cake,
Well, if there are cases of countries that are as screwed up as China, helping them move to a more effective economic management, that’s gotta be the most effective thing that we could for poverty. You can’t do that as an outside donor, unless someone’s willing to do it.
Yes, this is about a country whose policies over the past three decades have realised the most spectacular economic and social development transformation in all of human history.

Tuesday, October 1, 2019

Saving capitalism from capitalists - gig economy edition

Sometime back I had blogged about how regulatory arbitrage has been a major contributor to the emergence of many of the tech start-ups. While their "innovation" is lauded, very little discussion around this arbitrage happens.

In this context, the discussion around the new California law, Assembly Bill 5, to take effect from January 1, 2020, which makes it tougher for gig economy companies like Uber and Lyft to classify their drivers as independent contractors and not as employees. This has allowed these companies to avoid paying benefits and protections for these workers.

But the FT writes, the companies are already bracing for a stiff defence to overturn the legislation,
It is certainly not a foregone conclusion that the drivers summoned by ride-hailing apps, along with other gig economy workers, will end up on the corporate payroll. Uber argues that, even with California’s stricter test, it will still be able to treat its drivers as independent contractors. What this comes down to, at heart, is whether Uber is a tech company, or whether it is really just another operator of a taxi-like service. According to California’s new law, companies can only treat workers as contractors if the work these people do falls outside the organisation’s usual business In short: if Uber is a service for supplying rides, then the work of driving would seem to be closely tied to its core mission. But if it is instead a tech company, operating at one remove from the actual service — one that operates an online platform, selling technology services to both drivers and riders in a two-sided market — then driving may not be as central. This is likely to be a hard case for Uber to make. After all, it is so closely associated with its core service that its name has even become a verb for taking a ride. But this is not a foregone conclusion.
How can you with a straight face claim to be a socially responsible corporate citizen and represent sustainable capitalism when you make disingenuous arguments like these? How could the ideologues of compassionate capitalism and liberals opinion makers who wail about inequality and deprivation allow these corporates to discard even pretensions of propriety and scruples and nonchalantly make such arguments?