Weekend reading links

1. The Economist makes a very important point in explaining the productivity slowdown in developing countries,

Half of the slowdown in labour-productivity growth in recent years reflects not a failure to imitate but a failure to accumulate: weak investment has left labour with too little capital to work with. This shortfall in investment explains all the productivity slowdown in South Asia, the Middle East and north Africa, and two-thirds of that in Europe and Central Asia.

And this cautionary note about focusing excessively on the magnitude of the productivity slowdown,

In a World Bank publication 25 years ago Lant Pritchett, now at Oxford University, emphasised that catch-up growth was historically quite rare. Yes, imitation should be easier than innovation (and returns to investment should be high where capital is scarce). But other factors often got in the way. After all, if poor countries reliably grew faster than rich ones, there would not be so many poor countries still around. The “dominant feature” of modern economic history was not convergence between rich and poor countries, wrote Mr Pritchett, but “divergence, big time”.

2. In the context of the problems with bailing out IL&FS, TT Rammohan makes a very important point about how media trials have fuelled decision paralysis,

The moment something goes wrong with a company, especially in the financial sector, or in government, there are allegations of a “scam.” The government and public sector agencies go into a deep freeze. Nobody wants to take decisions for fear of the political fallout and reprisal from investigating agencies but the economy ends up paying a hefty price. The need to insulate the functioning of the financial sector from the “scam” mentality is surely one of the important challenges for the Indian polity.

Sample two examples of this in the case of IL&FS,

In 2015, when IL&FS faced problems of refinancing loans, it had proposed a merger with the Piramal group, which has a strong presence in the financial sector. The merger was expected to result in funds of ₹ 8,500 crore in the merged entity. Life Insurance Corporation (LIC), one of the principal shareholders of the IL&FS, did not agree with the valuation proposed. Worse, the LIC sat on the proposal for a long time. As a result, the standstill agreement with the Piramal group of three to four months got extended to nine to ten months. Under the agreement, the IL&FS could not raise debt or equity from any source until the standstill period was over and this worsened its liquidity situation.

The IL&FS has said that it has arbitration claims on National Highways Authority of India (NHAI) worth over ₹ 7,000 crore. These claims relate to payments on various infrastructure projects. Given that it is a government organisation, the NHAI often prefers to opt for litigation in relation to such claims instead of settling these through discussion. This, in turn, creates problems for infrastructure companies that have agreements with the NHAI.

3. Malappuram, Kozhikode, and Kollam figure among the top ten fastest growing cities in the world for 2015-20, with Malappuram being the fastest. Livemint has a very good analysis.

This once again raises questions about the manner in which urban areas are notified in India. Apart from notified towns and cities, the census also identifies areas as census towns with population more than 5000, density above 400 per sqkm, and with more than 75% male non-agrarian workforce. Further, there is another category of areas with population more than 5000. These throw up wide variations,

A 2019 paper (bit.ly/2019paper) in the Journal of Asian Economics shows that if we use a population threshold of 5,000, that is, if all areas having more than 5,000 people are classified as urban, India will be 47% urban. And Kerala? It goes from 16% administratively urban as per the 2011 Census to almost 100% urban by this definition.

And the difference matters because,

ULBs and RLBs provide very different kinds of goods, services and management. The 73rd and 74th constitutional amendments contain the XIth and XIIth Schedules listing the powers, authority and responsibilities of Panchayats and ULBs, respectively. Items listed for ULBs and not RLBs include: town planning, slum improvement, public amenities including street lighting, parking lots, bus stops, solid waste management, building regulations and fire services. An urban area governed by a ULB rather than an RLB could potentially benefit from a 147% increase in road length per sq. km, a 128% increase in water storage capacity in kilolitres per capita, a 25% increase in the probability of establishing a higher education institution, and an 11% increase in hospital beds per capita. 

Even when amenities and services are available in de facto urban areas, the quality may be worse than it would have been under a ULB. Roads are a good example. The NYU-UN Habitat Atlas of Urban Expansion measures the quality of roads in several Indian cities in the pre-1990 period compared to peri-urban expansion areas between 1990 and 2014. The quality drops off sharply due to the unplanned nature of the growth in the peri-urban areas. For instance, the average road width in the Kozhikode 1990-2014 expansion area was 4.03 metres, compared to 9.84 metres in its pre-1990 area (which was within the municipal boundaries)... A 2011 report on India’s municipal finances estimated that ULBs raised about 8.5 times more tax revenues than Panchayats.

4. Important point made here about also focusing on revenue deficit in discussions on the Fiscal Responsibility and Budget Management (FRBM) Act.

A paper, titled “Fiscal Multipliers for India” by Sukanya Bose and N R Bhanumurthy shows, the multiplier is less than 1 for revenue expenditure and over 2.5 for capital expenditure. In other words, when the government spends Rs 100 on increasing salaries in India, the economy grows by a little less than Rs 100. But, when the government uses that money to make a road or a bridge, the economy’s GDP grows by Rs 250... The popular understanding of the FRBM Act is that it is meant to “compress” or restrict government expenditure. But that is a flawed understanding. “The truth is that FRBM Act is not an expenditure compressing mechanism, rather an expenditure switching one,” says Bhanumurthy, professor at National Institute of Public Finance and Policy (NIPFP).

5. George Soros has some very strong words on Facebook,

I repeat and reaffirm my accusation against Facebook under the leadership of Mr. Zuckerberg and Ms. Sandberg. They follow only one guiding principle: maximize profits irrespective of the consequences. One way or another, they should not be left in control of Facebook.

6. Even as housing affordability looms large as a public policy problem, the NYT reports of California Legislature's decision to reject an attempt to ease the problem,

A bill challenging California’s devotion to both single-family housing and motor vehicles by stripping away limits on housing density near public transit... On Thursday, one day before the deadline for action on the hotly debated bill, it failed to muster majority support in a Senate vote. In the end, in a Legislature where consensus can be elusive despite a lopsided Democratic majority, the effort drew opposition from two key constituencies: suburbanites keen on preserving their lifestyle and less affluent city dwellers seeing a Trojan horse of gentrification... Senate Bill 50, would have overridden local zoning rules to allow high-density housing near transit lines, high-performing school districts and other amenity-laden areas. Supporters portrayed it as a big but necessary step toward reducing the state’s housing deficit — and helping to curb carbon emissions from long-distance driving — by fostering development in dense urban corridors. Opponents decried it as state overreach into local land-use rules.

This is one more example of how progressive and democratic politics is coming in the way of addressing serious public policy challenges. 

7. Among the various possible drivers of economic growth in Africa, easing restrictions on internal trade is a surprisingly less discussed one.

Africa lags behind other regions in terms of internal trade, with intracontinental commerce accounting for only 15% of total trade, compared with 58% in Asia and more than 70% in Europe. As a result, supermarket shelves in cities such as Luanda, Angola, and Abidjan, Ivory Coast, are lined with goods imported from the countries that once colonized them, Portugal and France.

One of the reasons is the bureaucratic delays at border crossings, which can even run into 2-3 days on certain borders. In this context, the African Union-led new free trade agreement, AfCFTA, encompassing a combined economy of $2.5 trillion with 1.2 billion people spread over 54 countries, and to take effect in July 2020 and be fully operational by 2030 is a very promising development. 

The challenge will be its implementation. Many smaller countries rely on taxes on cross-border trade transactions for a significant share of the national revenues, whereas the bigger countries will gain from the easing of these restrictions.

8. Finally, nice article about Uralungal Labour Contract Co-operative Society (ULCS) in Vadakara, Kerala. Sample this

The 94-year-old ULCCS stands out from other cooperatives in many ways. For one, its size. It employs over 12,000 people, making it one of the largest labour cooperatives in Asia, saw revenue of Rs 1,100 crore in 2018-19, has projects worth Rs 2,700 crore on its books and assets worth a similar amount, from land and quarries to machinery. While it is headquartered in north Kerala, it undertakes infrastructure projects across the state, from flyovers to bridges and roads, aided by a reputation for completing projects punctually and maintaining high standards of work. Its biggest project is a Rs 450 crore road in Malappuram district. This is an extraordinary achievement in job-starved Kerala. It is also a model for the reinvention a cooperative has made. Then ULCCS also has generous employee benefits. “We give our workers a bonus twice a year apart from PF, ESI, holiday wages, pension, salary advance, interest-free loans and medical insurance of Rs 15 lakh,” reels off society secretary Shaju S. The bonus and medical insurance can be availed of by all workers while the rest of the benefits are only for society members, numbering 2,969. One can apply for membership after a year of working with the society. About half of the 9,000 non-members are migrant labourers.