Weekend reading links

1. WSJ looks at the solar energy transformation in India. This graphic says it all from the supply side.

This, from the comments section, is important,

One must view these renewable cost comparisons with some perspective. If they are quoted as costs per kW (or mega- or giga-watt), they refer to construction costs for generating capacity, not actual generation (kW-hrs). Engineers use a term called "capacity factor," i.e. the % of time that a resource can actually generate it's rated capacity. Solar and wind have an average capacity factor of ~30% (because they can only generate when the sun is shining or wind blowing) versus ~90% that is typically achieved by fossil and nuclear plants. So theoretically, you would need to construct 3x the renewable capacity to be equivalent. But that's not the whole story, because if all 3x are generating at the same time (i.e. when the sun is shining), they would overproduce then, but not fill the demand at other times. And if you factor in the costs of battery storage (or fossil generation) to supplement during these other times, it would greatly distort the cost comparisons.

2. Nice visual calculator of the costs of traffic congestion in Mumbai from the IDFC Institute. The associated report is here.

3. Very good article on the tax arbitrage strategies of pharma and technology companies by Brad Setser. This is very apt,

I wish that Apple’s global tax strategy was as widely understood as the global nature of its supply chain.

Pharmaceutical imports from countries like Ireland, Singapore and Switzerland (where manufacturing facilities are set up to limit tax) now is the single largest line of US trade deficit with the import topping almost $200 billion. This has nothing to do with low wage labour competition. Instead of reversing this, the Trump tax cuts actually ends up not only lowering their effective tax rates but also encouraging more such tax arbitrage in case of pharmaceuticals.

This testimony in the US Senate by an official about shifting of profits abroad by US MNCs is a great read.

4. Nice article on the debate on the duel between two schools of thinking on how early grade reading instruction is to be administered,

The “science of reading” stands in contrast to the “balanced literacy” theory that many teachers are exposed to in schools of education. That theory holds that students can learn to read through exposure to a wide range of books that appeal to them, without too much emphasis on technically complex texts or sounding out words. Eye-tracking studies and brain scans now show that the opposite is true, according to many scientists. Learning to read, they say, is the work of deliberately practicing how to quickly connect the letters on the page to the sounds we hear each day... Phonics has gone in and out of style for decades, and the current conflict over how to teach reading is only the latest in a tug-of-war that dates to the 19th century. A major push for phonics instruction under President George W. Bush, through a federal program called Reading First, did not produce widespread achievement gains, raising questions about whether the current efforts can succeed... States have passed laws requiring that schools use phonics-centric curriculums... The guardians of balanced literacy acknowledge that phonics has a place. But they trust their own classroom experience over brain scans or laboratory experiments, and say they have seen many children overcome reading problems without sound-it-out drills. They value children picking books that interest them and worry that pushing students into harder texts could turn them off reading entirely.

5. The march of low yields continues unabated. Sample this

The cost of insuring against the default of some of the world’s biggest corporate borrowers has dropped to its lowest levels since 2007, as investors bet that continued strong support from central banks will keep credit markets ticking over.

The price of CDS to provide protection against US corporate defaults is lower than 2007.

6. Reinforcing the point above, Europe's richest man, Bernard Arnault of LVMH, raised over $10 bn at ultra-cheap rates,

The luxury giant raised 7.5 billion euros ($8.3 billion) and 1.55 billion pounds ($2 billion), over a range of maturities from two to 11 years, to help finance its $16 billion purchase of Tiffany & Co. Two of the five euro tranches were placed at negative yields, meaning investors are paying single A-rated LVMH to borrow money. Arnault’s expectations back in November for yields from the sale of “between 0% and 1%” have been surpassed. Even the 11-year tranche has a coupon of just 0.45%. M&A has never been cheaper.

And ECB is perhaps most likely itself directly buying the LVMH bonds. This graphic is perhaps the story of our times from the financial markets,

It is not as if, as ECB meant it, this cheap debt is being used to finance new investment. Instead they are being used to swap existing higher cost debt, and boost the bottom-lines of these large companies.

7. Sweden's Riksbank, which was the first to introduce negative interest rates in 2015 has rolled back its negative interest rate policy arguing that while it has been successful so far, but if continued for longer will have a detrimental effect. However, the decision comes even as the Swedish economy is slowing and inflation has been falling. 

It has been estimated that European banks have paid the ECB 25 billion euros for deposits since June 2014 when the ECB cut rates to negative zone. This has been one more blow to banks already struggling under the weight of ultra-low interest rates. This is an apt summary,

Bank lending in the eurozone was, however, shrinking when the ECB first cut rates below zero in 2014 and has since rebounded. Household lending is up more than 12 per cent since negative rates started, while corporate lending has grown 3 per cent. The ECB has also taken action to soften the blow for the banking sector, including a “two-tier” deposit system that exempts some of the money it holds for banks from negative rates, while also offering them loans at sub-zero levels to stimulate lending.  Among the big losers have been savers. With more than $13tn of bonds trading at negative yields, a growing number of pension funds, insurance companies, and banks are struggling to generate sufficient returns, raising doubts over some business models.

While it is difficult to construct counterfactuals and make credible assessments of the impact of ECB's policy, the longer term effects of negative rates can be unpredictable and not so benign,

Research published last year by Princeton University economists Markus Brunnermeier and Yann Koby found that many of the benefits of negative rates are front-loaded — such as gains in asset prices on bank balance sheets — while the corrosive side-effects last longer.

The long-term impact of negative rates on consumers and savers will be an interesting thing to watch for in the years ahead. 

8. Interesting take on Indonesia's deepening of state-led industrialisation since Jokowi took over in 2014. 

When Jokowi became president in 2014 he inherited an impossibly cumbersome bureaucracy with redundant and often incomprehensible regulatory architecture. It could take years to get the proper permits and licenses to a start a business, and in the absence of an eminent domain law land acquisition could drag on indefinitely. Moreover, in the new decentralized governing structure, it was unclear who had the authority to break through these bottlenecks. Jokowi’s solution was to re-concentrate administrative and legal authority with the central state government in Jakarta. Through a series of Ministerial and Presidential Decrees he equipped the central state with broad powers to issue financial guarantee for high-priority projects, circumvent regulatory requirements and acquire land in the public interest. He also found himself in an economic environment that was not very conducive to private investment, so he leaned hard into SOEs to do the heavy lifting of building roads, bridges, power plants, hospitals and airports. The size of the state-owned sector, which was already large, has accelerated dramatically throughout Jokowi’s first term... As exports have fallen as a share of GDP, fixed capital formation (including investment in major infrastructure projects) has increased to pick up the slack... Given the narrow policy goal of building infrastructure quickly and given unreliable regulatory architecture and weak rule of law, the strategy of tapping SOEs to carry out major project development has largely achieved its aim.

The flip-side of this argument is that perhaps private companies would have fared better, and the dominance of SOEs is crowding out more competitive and sustainable private investment. Unfortunately, we cannot test this empirically as time moves in only one direction. But we can look at some sectors that were opened exclusively to private developers, such as renewable energy. Since 2013, Indonesia has been experimenting with various incentives to induce private investment in the renewable energy sector – yet, as I have written here and here, growth has been anaemic. Even with lucrative rates of returns, private developers just weren’t interested. This is a complicated issue with many potential explanations, but the bottom line is that when private capital is left to fend for itself given the way Indonesia’s economy is currently structured, it often flounders. By contrast the state is uniquely positioned, for reasons of history as well as institutional design, to cut through the bottlenecks that can side-line private investment.

I am sympathetic to this line of reasoning. I am inclined to see similar limitations with India's private sector that are likely to surface in the absence of state's role. 

But the problem is that, unlike you are China, there are clear limitations to this type of growth. It should be used build the foundations for sustainable market-led capital formation and growth.

9. Livemint has a couple of graphics about India's fiscal revenues. The first shows that India has among the least progressive tax distribution

Further, the quality of government spending as a percentage of GDP is poor, with a greater proportion towards interest payments. is very high.

10. A Livemint summary of the continuation of India's disappointing economic performance.