Saturday, October 31, 2020

Weekend reading links

1. Large is not always good. Marc Levinson writes how the latest giant container ships have, instead of lowering transport costs and raising efficiency, has increased costs, reduced speeds, and created a host of other problems.

Discharging and reloading the vessel took longer as well, and not only because there were more boxes to put off and on. The new ships were much wider than their predecessors, so each of the giant shoreside cranes needed to reach a greater distance before picking up an inbound container and bringing it to the wharf, adding seconds to the average time required to move each box. Thousands more boxes multiplied by more handling time per box could add hours, or even days, to the average port call. Delays were legion... The land side of international logistics was scrambled as well. At the ports, it was feast or famine: Fewer vessels called, but each one moved more boxes off and on, leaving equipment and infrastructure either unused or overwhelmed. Mountains of boxes stuffed with imports and exports filled the patios at container terminals. The higher the stacks grew, the longer it took the stacker cranes to locate a particular box, remove it from the stack and place it aboard the transporter that would take it to be loaded aboard ship or to the rail yard or truck terminal for delivery to a customer. Freight railroads staggered under the heavy flow of boxes into and out of the ports. Where once an entire shipload of imports might be on its way to inland destinations within a day, now it could take two or three. Queues of diesel-belching trucks lined up at terminal gates, drivers unable to collect their loads because the ship lines had too few chassis on which to haul the arriving containers.

2. Gautam Bhan writes about the lop-sided nature of urban land distribution,

Despite the language of “encroachment” and widespread “land grab,” bastis (slums) are on a minute portion of city land — less than 0.6% of total land area, and 3.4% of residential land in the 2021 Delhi Master Plan. This tiny percentage supports no less than 11-15% but possibly up to 30% of the city’s population, most settled for decades. One example shows how skewed this number is. In 2017, parking Delhi’s 3.1 million cars used 13.25 sq km of land, or 5% of all residential area. Cars, then, have more space than the housing of workers, residents, and families.

3. Obituary in FT of Lee Kun-hee, Samsung's Chairman. Lee was a real business titan and a force behind South Korea's economic transformation.

Samsung, which pulled away from Hyundai to become the biggest of South Korea’s chaebol, or industrial groups, by a wide margin. The company is the largest maker of memory chips, smartphones and electronic displays, Samsung C&T built the world’s tallest building in Dubai and Samsung Heavy Industries is the world’s third-largest shipbuilder by sales. Other subsidiaries’ range from theme parks to insurance. It is for the transformation of Samsung Electronics, however, that Lee will be most remembered. Samsung was a minor player in the global technology industry when he took the helm in December 1987, succeeding Lee Byung-chull, his father and the group’s founder... Within five years, Samsung was the world’s biggest producer of memory chips underpinned by billions of dollars of annual investment, even during downturns. Despite this success, shoppers around the world continued to view Samsung’s consumer electronics as poorly designed and undesirable. Lee’s aggressive interventions to change this perception have now become legend. The most famous came in 1995, after the humiliation of finding that Samsung mobile phones he had given as gifts did not work. Two thousand Samsung employees at a phone manufacturing factory south of Seoul were instructed to don headbands marked “quality first” and gather outside. Thousands of phones and other electronic devices — with an estimated total value of $50m — were incinerated on a bonfire and the ashes were pulverised by a bulldozer.

As I blogged earlier, Samsung's spectacular success breaks the mould on several scared tenets of modern business organisation and management techniques. See this from The Economist.

3. Chandra Nuthalapati et al have a good study that informs significant gains for vegetable farmers from selling directly to supermarkets,

Even after controlling for differences in quality and other relevant factors, we found that imputed farmgate prices that farmers receive in supermarket channels are around 20% higher than the prices received in traditional channels for most of the vegetables considered. For some of the vegetables, price differences are even higher. We also found that selling to supermarkets involves lower transaction costs for farmers than selling in traditional markets, as supermarket collection centers are located closer to the villages and involve lower commission fees Higher prices seem to be needed as an incentive for farmers to deliver to supermarket collection centers, because supermarkets do not offer any other incentives to farmers. In other countries, where supermarkets often procure vegetables from farmers through contracts, farmers benefit from lower price risk or from inputs and extension provided as part of the contracts. In India, supermarkets procure vegetables without contracts, so that higher mean prices are important to ensure regular supplies. We found significant price incentives for comparable qualities. In addition, higher quality grades are rewarded in supermarket channels, which is often not the case in traditional channels. Our data showed that farmers who supply supermarkets typically sell their highest-quality vegetables in supermarket collection centers, whereas they sell lower-quality produce in traditional markets.

While this will surely have some positive effect, these are excessively big effects. Something going on here about the study.  

4. Bihar sugar mill industry fact of the day,

Around 1980, Bihar accounted for 30% of the country’s sugar production, and 28 functional sugar mills. It has now come down to less than 5% of the production, and has 10 mills... At the end of 2016-17, only about 2,900 of Bihar’s estimated 3,531 factories were operational, employing on an average 40 people each. The national average is nearly double, 77 workers. The average salary per annum per worker in Bihar then was Rs 1.2 lakh, again less than half of the national average of Rs 2.5 lakh.
5. FT has a long read on the emerging geo-political struggle in the Middle East between UAE and Turkey, motivated by ambitions in both countries to influence politics in other countries across the region. Their frontline is in Libya, where Turkey is supporting the UN-backed government and UAE is supporting the rebels led by Gen Khalifa Haftar. 
The UAE accuses Mr Erdogan of colonial delusions, supporting Islamist groups and forming a hostile axis with Qatar, its Gulf rival. The belief in Abu Dhabi is that wealthy Qatar provides the funding, and Turkey the muscle as Mr Erdogan seeks to position himself as a leader of the Sunni Muslim world. “Turkey has many things to answer for, with its long-term attempts — in concert with Qatar and the Muslim Brotherhood — to sow chaos in the Arab world, while using an aggressive and perverted interpretation of Islam as cover,” Anwar Gargash, the UAE’s minister of state for foreign affairs, wrote in the French magazine Le Point in June as tensions over Libya soared. Sheikh Mohammed, known colloquially as MBZ, is spearheading the Arab push against Turkey’s influence... The UAE, which has an indigenous population of just 1.5m but is one of the region’s wealthiest countries, has long punched above its weight. Since the 2011 Arab uprisings rocked the region, Abu Dhabi has deployed tens of billions of petrodollars to bolster allies across the Middle East and Africa through trade, aid and the use of military resources. The Gulf state’s foreign investment and bilateral aid to eight countries including Egypt, Pakistan and Ethiopia, has totalled at least $87.6bn since 2011, according to the American Enterprise Institute, which analysed publicly available data.

Turkey is today the hub for the region's dissidents, especially Islamists, who pose an existential threat to the monarchical autocracies. UAE's normalisation of relations with Israel should be seen in this backdrop - an attempt to ingratiate itself in the West, against Turkey.

A related issue is the intensification of the stand-off between Armenia and Azerbaijan over the Armenian enclave of Nogorno Karabakh in Azerbaijan. One important reason for the breakage of the Russia-brokered truce which has held since 1994 has been Erdogan and Turkey, which have aggressively armed and supported Azerbaijan, thereby emboldening it. A humanitarian disaster is now unfolding which has displaced nearly half of the enclave's population. 

6. From Ananth, this article by Norman Doidge on the problems with RCTs in medicine,

An important review of RCTs found that 71.2% were not representative of what patients are actually like in real-world clinical practice, and many of the patients studied were less sick than real-world patients. That, combined with the fact that many of the so-called finest RCTs, in the most respected and cited journals, can’t be replicated 35% of the time when their raw data is turned over to another group that is asked to reconfirm the findings, shows that in practice they are far from perfect. That finding—that something as simple as the reanalysis of the numbers and measurements in the study can’t be replicated—doesn’t even begin to deal with other potential problems in the studies: Did the author ask the right questions, collect appropriate data, have reliable tests, diagnose patients properly, use the proper medication dose, for long enough, and were their enough patients in it? And did they, as do so many RCTs, exclude the most typical and the sickest patients?

7. The reality with Uber's misleading minimum wage adherence claim.

Drivers will be guaranteed earnings — 120 per cent of the local minimum wage — though with a significant caveat: Uber won’t count the time drivers are waiting to be matched with a passenger. When you factor in that period, a Berkeley study suggests that Uber’s promised $15.60 minimum an hour instead becomes, on average, just $5.64, once adjusted for driver expenses such as fuel.

8. This shocking story of the flight of ABC's Beijing Correspondent from China tells everything about today's China, which clearly does not abide by any rules applicable for civilised nations.  

9. A rare example of expose of corruption in the defence forces, which is without doubt at least a pervasive as elsewhere (perhaps even more given the lack of external oversight). The problem though with dragging CBI, CVC etc into investigating works, especially those done in places like Ladakh during the ongoing stand-off, is that it could backfire badly and end up delaying and derailing even those critical and time-bound works. 

10. Talking of burying your head in the sand, and Eugene Fama, in this interview, is a great exhibit. The level of obduracy on financial markets, negative rates, private debt, impact of central bank policies, business concentration and so on is stunning. Virtually every paragraph is an exercise in denial of reality. Evidently Fama is living in a different world. 

11. Economist hails Aditya Puri as the world's best banker!

The attributes are very old-fashioned,
First, Mr Puri’s management style, which features a clear vision, microscopic attention to detail, blunt speaking and a knack for retaining talent... The second factor is strategic discipline. Mr Puri intuited that Indian consumers and firms would be a consistent money-maker and has stuck to that view. He took the sophisticated processes used by foreign banks and used them to target local retail and commercial clients. The result is a large branch network, half of which is outside cities. The firm’s cash-machine and credit-card networks are the largest among India’s private banks. Mr Puri stayed away from foreign ventures and investment projects, avoided lending to India’s indebted oligarchs, and financed HDFC’s balance-sheet through deposits rather than debt... The final element is HDFC's approach to technology—though not a pioneer, it is a fast follower.

12. A Livemint story of the PLI scheme for mobile phone manufacturing, which has a five year allocation of Rs 41,000 Cr. This about the success of the segment as well as the distance to be travelled, 

India had two mobile manufacturing units in 2014. By 2019, there were over 200. The number of mobile handsets produced shot up from 60 to 290 million in the same period; the value of handsets produced jumped 10 times to $30 billion... China exported phones worth over $100 billion in 2019; Vietnam over $35 billion. India exported less than $3 billion in 2018-19.

Even with the PLIs, India stays below Vietnam and China on cost-competitiveness,

Assuming that $100 is the cost of producing a phone without subsidies, China can make it at $80 after factoring in the incentives the country provides. Similarly, the cost of manufacturing a phone in Vietnam. The PLI scheme bridges some of India’s deficit. The manufacturing cost, after factoring in PLI and other subsidies, totals $92-$93.

Interesting thing about the extent of subsidy, which is very significant,

The scheme is also a massive discount on India’s current value-add, the advisor mentioned above explained. Manufacturers in India import most of the components and the assembly value ranges between 8% and 15%. “If 15% is the assembly price, an incentive of 6% is almost a 50% discount," he said.

These are very instructive numbers. If even with assembly, India is not able to compete with Vietnam and China, that's disturbing. But perhaps, this underscores the need to localise component production to become competitive. That will hopefully happen in due course and the PLI scheme will expedite. But till then, the incentive is a massive subsidy cost being incurred. If it does not catalyse component manufacturing, then this can just as well be described as a corporate freebie.

13. The IPO of Ant Financial to raise about $35 billion, the world's largest ever, has attracted a staggering $2.8 trillion of orders from more than 5 million individuals, a sum which exceeds the value of all stocks listed on exchanges in Germany or Canada. For retail investors, the simultaneous listing at Shanghai and Hong Kong was oversubscribed more than 870 times. The company has a billion users and more than $17 trillion in yearly payment volumes.

14. Gillian Tett points to the alarmingly low CDS recovery rate projects with the recent corporate bond auctions. 

Most CDS contracts stipulate that financiers need to know what a company’s cheapest available bond will be worth at the point the company defaults. That’s because CDS contracts make investors whole by paying them the bond’s original face value minus its market value. When a company goes bust, financiers hold an auction to determine the market price, and the resulting prices offer one guide to what creditors think the company’s remaining assets are worth. Over the past decade, the average CDS auction prices have moved in a band between 10 and 60 cents on the dollar, but have generally been between 30 and 40 cents. However the nine US auctions conducted in the year to August produced an average price of just 9 cents — and just 2.4 cents if you look at the worst four: Chesapeake, California Resources, Neiman Marcus Group, and McClatchy.

Worsening matters, bondholders are being continuously shortchanged, 

And because loans take priority over bonds in a bankruptcy, the practice has also weakened bondholders’ claims, sparking fights in some bankruptcies... Bondholders’ claims have been further undermined by debt exchanges and stealthy asset transfers, including one known as the “J-Crew trap door”. Named after the recently bankrupted US retailer, it refers to a manoeuvre pulled off by the company’s private equity owners in 2016 in which they transferred intellectual property rights across to new lenders, out of the reach of the original creditors. Similar tactics have emerged at other troubled groups such as Travelport.

And all this is being driven by the search for yield among investors,

Indeed, four-fifths of US loans issued last year were “covenant-lite”, that is they had little or no control over borrower behaviour, up from one-fifth at the start of the decade. That is because investors are so desperate to chase returns in a zero-rate world that they no longer dare to impose covenants. Indeed, the hunt for returns is so frenzied that junk bond yields have plunged from 12 per cent in March to below 6 per cent. Cheap money, in other words, is enabling some zombie companies to stagger on, even as creditor value shrivels — until they collapse.

15. Fascinating article about the QR Code, the low-profile but functionally valuable invention in 1994 by Masahiro Hara to track components in car factories. Its use took off with its adoption by Ant Financial to make mobile payments through Alipay, and has not looked back. It was the crucial link which enabled the use of mobile phones for digital payments. It's now being used for everything from digital payments to browsing dinner menus online. 

Mr Hara worked at Denso Wave, part of a components group allied to Toyota, which used barcodes to label components in plants. But the barcode, first used in an Ohio supermarket in 1974, could be hard to use — as anyone who has tried to scan a bag of frozen peas will know — and did not hold much information. He solved the data constraint by making the QR code a two-dimensional square instead of a horizontal strip, allowing it to store up to 4,200 characters compared to 20 on the barcode. His team also conquered the time-consuming awkwardness of barcodes — every QR code includes three squares at its corners that help scanners to focus rapidly (hence, quick response). Japanese carmakers found it very useful: it saved some workers from having to scan up to 1,000 barcodes a day. 

This is one more to the point I've been making that Alibaba is a more entrepreneurial e-commerce engine than Amazon,

The QR code enabled Ant to pioneer mobile payments in China through its Alipay super app. The renaissance of QR codes, after years of half-baked efforts by US advertisers and retailers to use them for marketing campaigns and shopping vouchers, shows that it takes time for the strengths of some inventions to emerge.

And this is interesting, an illustration of how non-patenting of such general purpose ideas can have large positive externalities,

But Denso Wave realised that the QR code had greater potential and did not enforce its patent rights. That enabled others not only to use it free but make variations for their industries. The invention knocked around for a decade without finding another compelling use until Alibaba, the Chinese ecommerce group co-founded by Jack Ma, realised it could be used for payments. Shopping in the US and Europe, both online and in stores, is mostly done with payment cards, but the QR code offered an alternative.

It was the industry's good fortune that the QR Code was not invented in the US by the likes of Apple, who would have immediately patented it. 

16. A summary of the changes incorporated in the regulations proposed to implement the new labour codes in India. 

Friday, October 30, 2020

The challenge of implementation - digital systems

The excessive optimism associated with transformational impacts of digital technologies is misplaced on at least two counts. One, there are limitations to how much digital technologies can move the needle in addressing complex issues. Two, even where relevant, technology initiatives have to overcome formidable implementation challenges and most often require time to stabilise and realise their outcomes. I have blogged earlier on the former, including here (targeting beneficiaries). This post will focus on the latter. 

This and this are examples illustrating implementation challenges with agriculture and credit. An example from health is the proposed National Digital Health Mission (NDHM),
The NDHM has been planned as a complete digital health ecosystem that will comprise unique health IDs (voluntary participation), digitised personal health records, and a registry for doctors, hospitals, diagnostic labs, and pharmacies. There will be four key building blocks — the health ID (which government officials say will resemble a UPI ID instead of an Aadhaar-style number), personal health records (PHR), Digi-Doctor, and registry for health facilities... Citizens will be in full control of their data, said officials. The scheme plans to achieve this through three building blocks — Consent Manager, Anonymizer, and Privacy Operations Centre (POC) — according to the final version of the blueprint, released by the Ministry of Health and Family Welfare. The goal of the Consent Manager is to ensure the citizen/patient is in complete control of the data collected and with whom it is shared. The Anonymizer collates matter from health data sets, removes all personally identifiable information and provides anonymised data to the seeker. The POC will monitor all access to private data, review consent artefacts, audit services for privacy compliance, and evangelise privacy principles on which the ecosystem will be built on.
The National Health Authority (NHA), which administers the PMJAY, will be responsible for its implementation. The benefits are well known,
With personal health records collated, patients can walk into a health facility without historical documents. Diagnosis becomes easier for a physician who now access historical records. Any need for a follow-up test can be customised or avoided, if not necessary. Hospitals will have higher inter-operability. The government will have access to anonymous and macro-level data like immunisation, infant mortality, childbirth, and chronic diseases like diabetes, hypertension, and nutrition that will help policymakers target their initiatives.
The challenge is, like all else, in implementation. Take for example, the Consent Manager, Anonymiser, and POC. Each of those, whether fully public sector or quasi-public, need a level of institutional integrity and maturity in managing these high-stakes activities, with consequences whose damage can be irreparable. Such integrity and maturity takes time to emerge. 

For a start, just the supply of the various service providers and professionals of good quality with the different kinds of expertise who need to be hired will be limited. There are new types of activities which will require supply of people with new sets of skills. It's not like turning on a tap and accessing the supply of such services at scale. Or, the process work-flow and co-ordination among different agents take time to get refined and attain some level of maturity. In the initial stages, there will be numerous attempts by entrenched vested interests to destabilise and game the new system. An implementation which does not double down with quick reactive follow-up will be certain to set the system for failure. 

Besides, the use of digital technologies in health come with risks of security and privacy, with implications far higher than those associated with even financial transactions. In case of the latter, at worst, you lose some money. However, in case of the former, the individual's entire health history is compromised with all its attendant life-long consequences. The systems to mitigate these risks therefore assume great significance. 

Much the same is happening now with the institutional ingredients of the Insolvency and Bankruptcy Code (IBC). Much before the pandemic brought things to standstill, the load of cases had already started to strain the fledgling bankruptcy process. Apart from the bottlenecks from numbers, there have also been growing allegations of questionable practices and questions about the competence of important stakeholders like the Insolvency Professionals (IPs). Institutional practices take time to stabilise.

The point is not to argue against such innovations and reforms. There cannot be any doubt that they are not only required but are very important steps, in case of NDHM, in enhancing the effectiveness of the country's health care system. But it is important to understand the implementation challenges and limitations of such reforms. Its importance lies foremost in the ability to take measures to address some of the associated emergent problems in course of implementation, which would ensure the success of these reform initiatives. 

Wednesday, October 28, 2020

How the sources of corporate profits weakens capitalism

Herman Mark Schwartz points to another direction of enquiry in understanding what ails capitalism, the sources of corporate surpluses, 

Changes in corporate strategy and structure from the postwar era to the current era changed the distribution of profits among and within firms and led directly to our present problems. While the distribution of profits across firms was highly unequal in both eras, changes in corporate strategy and structure have concentrated profits in firms with small labor head counts, a low marginal propensity to invest, and relatively easy tax avoidance. Reduced invest­ment and worsening income inequality in turn slow GDP growth and aggravate social and regional tensions. While these changes are generic to the rich countries, they have gone furthest in the United States.

The essay charts the changing nature of the economy in the US, especially manufacturing. The long period of stable and mutually beneficial growth which was built on capital intensive factories, vertical integration and large and unionised workforces, reached its climax by the seventies. 

Privately, firms began to disperse concentrated production and shed legal responsibility for their workers by de-merging, moving produc­tion offshore, contracting out (both on- and offshore), dispersing production geographically, and adopting variants of the franchise format. IBM, for example, shed 40 percent of its workforce between 1990 and 1994, abandoning most manufacturing in favor of R&D, soft­ware, and patent licensing. Similarly, both GM and Ford spun out their parts production as the independent firms Delphi and Visteon in 1999 and 2000. By 2008, both Delphi and Visteon had more Mexican than American employees. Where the old GM had generated 70 percent of final value in house, and Ford 50 percent, almost all automobile firms were down to 20 percent by the 2000s. Contracting out created smaller firms and smaller factories, both of which are harder to unionize.

The new strategy for firms came to be centred around the intangible capital,

Firms’ new profit strategy sought monopoly profit via control over intellectual property (IP) via intellectual property rights (IPRs), like patent, brand, copyright, and trademark, while ejecting workers and physical capital. IPRs convey an exclusive right to extract value from a given production chain. For example, Qualcomm’s patents on the technologies linking cellphones to cell towers and Wi-Fi enable it to levy a 2 to 5 percent royalty on the average selling price of almost all cellphones... many firms outside of tech have pursued an IPR-based strategy. Franchised restaurant chains are the most obvious “low-tech” example, with a high-profit brand own­er licensing the use of its brand and production methods to small­er, lower-profit owner-operators in the bottom tier. In both high-tech and low-tech industries, the general pattern is vertical disintegration and the segregation of IP ownership into a small number of legally distinct and highly profitable firms. This largely involves a rearrangement of legal boundaries, not production as such.

Sample this example from the low-tech world,

The major hotel brands neither own physical buildings nor directly employ most of the workers inside. Hilton Worldwide Holdings, for example, is a firm whose major asset is its intellectual property: 5,900 registered trademarks and 15 carefully gradated and curated hotel brands as of December 2018. Hilton directly owned or leased only 71 of the 5,685 properties labeled with those brands. The hotel buildings themselves—the mid­dle layer in the new industrial structure—are a large physical asset, variously owned by private equity firms, family trusts, and real estate investment trusts (REITs). For example, a different “Apple”—Apple Hospitality Real Estate Investment Trust—owns 242 hotels in the United States, operating under the nominally competing Hilton and Marriott brands. Apple REIT’s buildings are managed by hotel man­agement firms operating under contract. These management firms either directly employ or contract in labor from third-tier firms like Hospitality Services Group. These jobs can be “gig”-like but are more often standard employment relations. Thus even a low-tech sector like hotels has a tripartite division combining legally separate but functionally integrated firms specializing in IP production, firms holding physical capital, and firms supplying low-skill labor power.

The result of all this,

First, it skews the distribution of income upward, reducing demand and weakening the state’s fiscal base. Second, and most important, the three-tier structure creates firms with lots of profit but a low marginal propensity to invest, and firms with a high marginal propensity to invest but profits too weak to enable robust productive investment. 

In many respect, this new capitalist organisational structure may be the apogee of the search for efficiency (from the perspective of capital owners) and profit maximisation. From their perspective, the three-tier structure not only maximises efficiency but also creates a perfect hierarchy of income distribution among the various stakeholders. This arrangement in turn gets its ideological support from the prevailing norms around the likes of superiority of intellectual capital, meritocracy, and financial engineering.

In other words, capital itself split into two parts, the physical and intangible capital. Among capital, the unbundled manufacturing model and new organisational structures enabled the appropriation of greater share of profits towards the intangible capital. The owners of the intangible and physical capital too were different, with financial market interests and IPR-rich firms dominating the former. 

And physical capital, in turn, squeezed an ever expanding share of labour in the third tier to at least partially make up for its diminished returns. This was complemented with the inter-firm redistribution arising from the dynamic of surplus concentration in a handful of superstar firms. Automation, globalisation, and de-unionisation merely amplified these dynamics. While production remained essentially the same, the shifts in legal boundaries within the production system were hugely consequential. 

It is not easy to reverse the trend. Any regulation driven approach is unlikely to work. It will have to be a more organic endogenous effort. But regulation has its role to play. 

It needs to be borne in mind that the unbundling has been facilitated by enabling regulations, which allowed private appropriation of incremental gains and externalisation of costs. After all the whole idea of mandatory employment benefits for workers arose from the need to make businesses internalise the life-cycle costs of employment, which went beyond just wages. If that requirement has now been removed and labour protections have fallen back on governments, it is only appropriate that the same be recovered from the businesses which have benefited from these shifts. 

To give a sense of the importance of such regulatory arbitrage, a group of ride-hailing and delivery companies led by Uber, Lyft, and DoorDash have spent a staggering $200 million to garner support for a California ballot measure, Proposition 22, that would exempt them from a new state labour law that would exempt them from treating their riders as employees (thereby saving the need to provide them benefits). In fact, the stakes are so high that the movers of Prop 22 have inserted a provision mandating a staggering seven-eighth of legislators should agree before any changes can be made to the law once the Prop is passed. 

While the enabling regulations legalised the creation of the large pool of low-paid and unprotected workforce, academicians and opinion makers at business schools and think tanks have provided the ideological credibility. 

It was not just labour regulations. Accounting regulations allowed capitalisation of different forms of intangible capital, broadening of the application of intellectual property regulations allowed rent-seeking, and so on. 

In fact, far from capturing a share of the profits from capital to support the new social security liabilities, governments have lowered both corporate and income taxes. Further, intangible capital has received more preferential treatment by way of changes in the taxation systems. The greater globalisation and financial market integration have allowed them to indulge in practices like tax avoidance to drive down their profits to the lowest minimum. 

Governments have faced the double whammy of increased labour force obligations and reduced revenues. 

It is to be noted that the problem is not per se with the unbundling itself. By itself, it did enhance efficiency and globalisation has lifted hundreds of millions out of poverty. Further, there is merit in differentiated labour market depending on the different types of skills. Instead, the problem is with the excesses that have spawned from these shifts. In particular, the disproportionately high levels of profit appropriation by capital and executives. 

One could of course argue that once cost-less unbundling was permitted, these dynamics were inevitable.

The knock-on effects were predictable,

Because consumption spending accounts for about 70 percent of GDP, rising income con­centration slows GDP growth. Buying one South Carolina–built BMW SUV generates fewer jobs and less subsequent consumption than buying three Ohio-built Honda Accords.

A disproportionate share of profits were cornered by intangible capital, whose owners (typically finance and IPR-rich firms) were less likely to invest, especially in productive and job creating activities. The squeeze on labour meant diminished disposable incomes to spend on consumption to support economic growth.

An accompanying consequence of the unbundling and outsourcing has been the hollowing out of the productive parts of the US economy like manufacturing and the cessation of the space to foreigners, especially China. Its consequences being played out now are an entirely different set of problems. 

As a concluding snippet, sample this,

But investment banks increasingly rely on Class 705 business process patents to protect new derivatives and processes. In 2014, for example, Bank of America filed roughly the same number of successful U.S. patents as Novartis, Rolls Royce, or MIT, and J.P. Morgan filed as many as Genentech or Siemens. Bespoke derivatives and other forms of rent seeking enable key finan­cial firms to extract rents from nonfinancial firms... IPR-rich firms accumulated immense passive cash hoards. Micro­soft, for example, would have been the eleventh largest holder of U.S. Treasury bonds if it were a country in 2019, excluding tax havens; Apple has been described by the Economist magazine as an investment bank that also makes phones... the winners from this were big U.S. retail and financial firms, and manufacturers with recognizable brands, and the losers were the rest of the domestic manufacturing base and its labor force. The winners increasingly parked their profits offshore in tax havens, while the losers drew on an increasingly weak state and feder­al government fiscal base.

In sum, the shifts in capitalist organisational structures has engendered a giant profits misallocation problem, whose negative effects cascade across the economy. 

Tuesday, October 27, 2020

What do Google's founders tell us about data monetisation, advertising, and public funding of research?

Rana Faroohar points to this original paper by Sergey Brin and Lawrence Page which conceptualised the idea of search engines and Google.

They could not have been more prescient about what they themselves would end up doing,

The goals of the advertising business model do not always correspond to providing quality search to users. For example, in our prototype search engine one of the top results for cellular phone is "The Effect of Cellular Phone Use Upon Driver Attention", a study which explains in great detail the distractions and risk associated with conversing on a cell phone while driving. This search result came up first because of its high importance as judged by the PageRank algorithm, an approximation of citation importance on the web. It is clear that a search engine which was taking money for showing cellular phone ads would have difficulty justifying the page that our system returned to its paying advertisers. For this type of reason and historical experience with other media, we expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers... Furthermore, advertising income often provides an incentive to provide poor quality search results.

Given these problems, this is what the duo thought about operationalisation of search engines,

The issue of advertising causes enough mixed incentives that it is crucial to have a competitive search engine that is transparent and in the academic realm.

And this about personal data monetisation,

... we expect that advertising-funded search engines will be inherently biased towards the advertisers and away from the needs of consumers. Since it is very difficult even for experts to evaluate search engines, search-engine bias is particularly insidious.

The acknowledgements section of the paper highlights the central role played by public funding (effectively as angel or seed investors) in the emergence of Google,

The research described here was conducted as part of the Stanford Integrated Digital Library Project, supported by the National Science Foundation under Cooperative Agreement IRI-9411306. Funding for this cooperative agreement is also provided by DARPA and NASA, and by Interval Research, and the industrial partners of the Stanford Digital Libraries Project.

Interesting that none of the private venture capital were part of the conceptualisation of Google! 

Monday, October 26, 2020

Limits of digitisation and data analytics - banking sector supervision edition

Tamal Bandopadhyay has a good article explaining the RBI's supervisory framework, which assumes significance in light of the series of recent high-profile financial sector frauds. He discusses the consequences of the change in 2013 away from compliance-based to a more risk-based, data-driven, and off-site approach. 

Earlier, onsite supervision was the mainstay of RBI supervision; it has been reduced and replaced by reliance on offsite inspection, which essentially consists of tracking data — daily, weekly, fortnightly, monthly. Onsite supervision must be done across India and not restricted to bank headquarters alone. The assumption that everything is centralised in all banks (because they have a centralised processing system) may not be correct. The regional offices and select branches must also be put under the scanner. Earlier, onsite supervision was theme-based, across banks — with a focus on treasury, priority sector lending, and so on. That must be restored along with city-specific and geography-specific scrutiny of bank practices. The RBI used to carry out transaction testing, but stopped after it set up a new supervisory framework — Supervisory Programme for Assessment of Risk and Capital — based on the recommendations of a high-level steering committee for the supervision of commercial banks. Following this, the RBI shifted to the so-called risk-based supervision (RBS) — a rather complex model...

Historically, the RBI has been an onsite, inspection-heavy and offsite, supervision-light regulator. The RBS has reversed the trend. Along with this, the focus has shifted from onsite inspection to offsite supervision and the transaction testing samples have shrunk. The inspections have been made mostly headquarter-oriented and all designated foreign exchange and treasury branches, administrative offices and sensitive branches, which were under the scanner of onsite inspection, have been excluded. The upgrade of the offsite surveillance system is welcome, but it should not have coincided with the dilution of the rigour of onsite examination. The challenge is how to create capacity, with continuity and convergence between offsite supervision and onsite inspection. Only data analytics and transaction testing can red-flag impending dangers. Closer coordination with the capital market regulator to track the flow of funds across the financial system will also help.

This is a teachable exhibit on multiple grounds. It highlights the limitations of modern management techniques and the importance of old-style physical inspections. 

The application of management techniques to public bureaucracies harp on the importance of non-invasive and impersonal monitoring approaches that focus on the use of technology and data analytics to exercise oversight. Accordingly, it has become fashionable (among management gurus, consultants, academic researchers, and general commentators) to advocate the shift away from old-style invasive approaches toward technology and data-based approaches on regulation and supervision. 

They point to the promise of harnessing modern digital and telemetry technologies to capture data, process work-flows, analyse the digital exhaust, and present reports as decision-support. This is a logically irresistible combination. 

It is now common practice, an article of faith, to advocate doing away with all forms of traditional supervision and oversight mechanisms. They range from dispensing with traditional physical inspections and meetings of various kinds to default/deemed digital approvals and reconciliations of accounts to junking all physical records and maintaining only raw digital trails which can be queried as required. This, supporters contend, can transform governance everywhere, from labour to financial market monitoring and regulation. These are all great ideas and they all have a role in any future design of supervision and regulation. 

The only problem is that of reality and its practical challenges. In systems where trust is low, the intent and commission of deviations high, civil society oversight weak, state capability constrained, resources chronically deficient, with massive volume of transactions, and too many types of transactions, the weak links with such technology and data-based off-site approaches are too many. No matter however robust the technology, work-flow, and data analytics, there will always remain too many areas of weakness which will get exploited by those interested in doing so. It is therefore important to be realistic about the expectations from them. 

So, even today, or at least for now, field inspections, physical documentation, and face-to-face meetings remain very relevant and have an important role in complex public systems. They remain important, at least, as back-ups. Therefore, prudence dictates that, given our contexts, it is important to have a balanced mix of modern and old-style techniques in any supervisory and regulatory system. The specific details and shares of the two approaches would depend on the nature of the activities sought to be monitored and regulated. Further, this balance will vary with changes in the context, and maturity and stability of the processes. 

Like all else, the design of supervisory systems must be done keeping in mind the prevailing contexts. There may be sophisticated and promising technologies. And they should necessarily be harnessed. But only in a manner that accounts for the implementation prospects and failure possibilities in the particular context. Prudence and not digital ideology should dictate such operational designs.

This also draws attention to the problem of excessive pursuit of efficiency. It, as I have blogged earlier here and here, comes at the cost of resilience. Even in the most hospitable environments, it may not be a good idea to digitise and automate everything and have no physical back-ups. As the constantly emerging examples from the tech world demonstrates, this comes at the cost of resilience and effectiveness. In systems whose mandate is public service delivery, resilience assumes even greater importance. 

Update 1 (28.10.2020)

The Labour Secretary of Government of India says,

We are working towards single randomised inspection so that for both Employees’ Provident Fund Organisation (EPFO) and Employees' State Insurance (ESIC) related inspections, the officer can go at once, rather than making a separate visit on office premises. Our first target would be to achieve faceless inspection by examining of records. Physical visits (for inspection) should be avoided as much as possible. If it is to happen then there should be a common inspection. We also want to emulate the provisions in the income tax law to ensure that only authorised inspections take place, a model that works well. Even though we have moved towards randomised inspection system, there are no checks on inspectors making visits to a factory without really being assigned to do so. The inspector will go only if he is authorised to go through a portal and the establishment to which the inspector makes a visit gets intimation, maybe on the day of visit or at the time inspector reaches the premises.

To wait and watch how this plays itself out. I'll wager that a fully digitised approach which junks all human discretion (at the level of both the inspector and, equally important, at the level of their managers) will get gamed repeatedly and fail. 

Saturday, October 24, 2020

Weekend reading links

1. Sandip G has an excellent essay on Thangarasu Natarajan, the Yorker-king of the Sunrisers Hyderabad (SRH) Indina Premier League (IPL) team. It weaves together so many dimensions - how IPL is starting to impact even remote and rural India, the value of aspirational models, the dire lack of opportunities and facilities for the vast majority of youth, the social dynamics and cultural norms in villages, the influence of Rajanikanth, and so on. Nothing more exceptional than the willingness to give back, gratitude, and large heartedness - be it his friends, his village, his coach. People talk of philanthropy in the content of billionaires. That may be nothing before this type of giving back. 

2. There are two things that certain policy makers in the financial markets don't realise - financial markets are only a means to a larger objective, and there is a context in which financial market regulation has to operate. When you come from a world steeped in models, these blindspots become even more acute. It's understandable that academic economists, especially those helicoptered in from outside, struggle with these two aspects of policy making. 

This interview of Viral Acharya is littered with snippets that amply demonstrates the point. For a start, the answer to realising financial stability and fiscal stability is not to "severely limit most of government of India's spending". The lack of perspective in the interview is mind-boggling and a great exhibit about what Paul Tucker highlights when he warns about the arrogance and ignorance of the experts in places like central banks. 

3. Talking of fiscal dominance, the irony of Carmen Reinhart cannot be missed,

Carmen Reinhart, the eminent economic historian who is now chief economist at the World Bank, recommended countries should borrow heavily during the pandemic. “While the disease is raging, what else are you going to do?” she asks. “First you worry about fighting the war, then you figure out how to pay for it.” Ms Reinhart was a leading advocate of austerity a decade ago after publishing a research paper which concluded that at a similar stage in the 2008-09 financial crisis — to where we are now — high levels of public debt undermined economic performance. It concluded that, “traditional debt management issues should be at the forefront of public policy concerns”.

Or sample this,

In recent weeks, Jay Powell, the Federal Reserve chairman, said “the recovery will go faster if we have both tools [fiscal and monetary] working together”, while Andrew Bailey, Bank of England governor, called for “a very close and sensible co-ordination” of the two economic policies. Long gone is the notion, supported by former UK chancellor George Osborne, that it was imperative to have a credible plan to reduce deficits in the public finances because that would give households the confidence to spend rather than save.
While it's tempting to attribute this U-turn to differences in economic conditions (this time is different!), a more accurate response would be that Reinhart is now in the position of having to deal with a problem herself rather than be the academic sitting in the ivory tower. 

IMF is formally telling all countries with access to financial markets to raise debt and spend without the prospect of austerity later. In fact, Kristalina Georgieva of IMF has exhorted governments "to be able to dare"! But, in case of developing countries, also because they lack "access to financial markets", the same IMF prescriptions verge more towards austerity.

4. Disturbing new form of journalism - websites that publish only paid news items. NYT has this story about 1300 such websites in the US which effectively serve as propaganda outlets for various interests. 

5. An economically flourishing Bangladesh is in India's strategic interest on multiple grounds - adding a new dimension to the sub-continental politics by increasing its importance and thereby also diminishing Pakistan's salience; opening up opportunities for greater mutual economic co-operation that would benefit India more than now; being a bridge for economic integration with S E Asia and thereby development of India's own north east etc. C Rajamohan has an important column in this regard. 

6. Alongside Milton Friedman's monetarism and shareholder value maximisation, and Eugene Fama's efficient markets, another Nobel contribution which deserves revise is the Modigliani-Miller hypothesis which articulated that it was irrelevant whether companies funded themselves with debt or equity. It has been an important ideological contributor to the age of leverage that has brought the world economy to a precipice with high levels of corporate debt and phenomena like zombie companies. Robin Wigglesworth has a good column in this regard. 

If the mix of funding is in practice irrelevant to the overall cost, why not leverage up and increase returns to shareholders that own the business, and, indirectly but no less importantly, corporate executives? Indeed, given that debt enjoys tax breaks in most countries, isn’t it almost irresponsible not to take advantage? When interest rates began to fall globally in the 1980s, many companies did just that. That executive compensation is largely tied to earnings per share was an additional incentive for companies to leverage up. Later on, other economists would give the corporate borrowing binge more academic legitimacy by arguing that debt was a potent tool to ensure corporate discipline and therefore increase economic dynamism. This gave rise to the idea of “efficient” balance sheets layered with debt, and immortalised by a memorable phrase written by two corporate finance specialists in 1988: “Equity is soft, debt hard. Equity is forgiving, debt insistent. Equity is a pillow, debt a sword.” The result can be seen in the evolving distribution of corporate credit ratings. Four decades ago, Standard & Poor’s had given 65 companies around the world a spotless triple A rating, equal to almost 6 per cent of its total ratings. Another 679 companies enjoyed ratings in the A range. Today there are only five — five! — companies with triple A ratings, out of nearly 5,000 companies. And under 14 per cent of all rated companies are in the A range.

7. In the context of the Supreme Court of India's observations suggesting waiver of interest and delaying recognition of non performing assets in light of Covid 19, Manish Sabharwal has a very good oped making the case against doing so. The Court's suggestion to the government that common man's Diwali was in government's hand was the equivalent of judicial dog whistles. 

8. Following the now well-established precedent of too big to be convicted, the US Justice Department and Goldman Sachs have found a way to reach a settlement that would bring a closure to the 1MDB scandal. A Goldman subsidiary in Asia will plead guilty of wrongdoing and pay $2.8 bn, thereby allowing the parent company to escape felony charges that would have hurt its business prospects. With this Goldman has settled the matter in Malaysia and US for $5 bn. 

The settlement allows Goldman to escape without any formal record of felony nor having to take action against any of its serving executives, including the current CEO, who have all had documented parts to play in allowing the scandal to unfold. Two Asia-based executives who have already left Goldman are the only ones to have been penalised. As the WSJ article writes,

Critics have said that the fees Goldman earned from 1MDB, which were far higher than is typical for the kind of work it did, should have been a warning sign that something wasn’t right.

The settlement also has a feature, deferred prosecution arrangement, that may have some relevance in addressing such corrupt practices,

A Goldman subsidiary tied to the misconduct in Asia is expected to plead guilty but the parent company won’t face prosecution, the people said, avoiding a felony mark that could have crippled its ability to do business. The arrangement, known as a deferred prosecution agreement, would allow officials to pursue charges later if Goldman errs again. The bank will also escape without a government-appointed monitor to oversee its compliance department, which... had earlier been a priority for prosecutors.

9.  From Ananth, this NAR article about the pandemic induced debt rescheduling initiative for low income countries. The G-20 countries agreed to a 6 month debt repayment freeze for 73 poor countries due to the pandemic. Interestingly, China has refused to include its bilateral loans in this arrangement.  

Some of these countries, like Zambia and Mozambique, face debt equivalent to over 100% of their gross domestic product. The World Bank considers 33 of the 73 countries to either be in external debt distress, or at a high risk for it. The 73 countries together owe $744 billion to the World Bank and other foreign actors. Official government loans from a G-20 member accounts for $178 billion, 63% of which comes from China. Certain countries like the Republic of the Congo and Djibouti owe 50% to 60% of its total external debt to China... Chinese financing also carries an interest rate of over 3%, compared with the roughly 1% for World Bank and IMF loans... According to a team, which includes World Bank chief economist Carmen Reinhart, China has lent $385 billion to developing countries, including $200 billion in hidden debt.

10. More wolf warrior diplomacy, this time from the Chinese Ambassador in Canada, Cons Peiwu, who has threatened the safety of Canadian citizens and businesses in China and Hong Kong if Canada persists with giving asylum to Hong Kong refugees.  

11. As Andy Mukherjee writes, ITC can emerge as a third strong e-commerce competitor to Reliance and Tata if the group restructures and hives off its tobacco operations. 

12. Nice oped by Janmajeya Sinha on the achievement of TCS, which is currently the world's most value company in the market segment of IT services, ahead of Accenture and IBM. 

In 2000, TCS was not a listed company. It was not even the segment leader in India. By 2010, its market cap had grown to a creditable $25 billion and it had become the segment leader in India. In the next 10 years, it has managed to enter the $100 billion club, and today, it has become a global segment leader. India, therefore, is the only Asian country that can currently boast of a global segment leader.

13. The headlines tell us that Tesla delivered its fifth successive quarter of profits, thereby adding more fuel to the raging fire that its stock price is. The stock price gained 2.5% in the after-hours trading. But even a cursory look tells another story. Its net profit was $331 million, of which $397 million came from sale of regulatory credits (where Tesla sells zero-emission credits from various governments to other carmakers). 

In other words, operationally Tesla lost $66 million! Furthermore, while profits may have risen 131%, its revenues from regulatory credit, the driver of profitability, fell from $428 million to $397 million. It may also be useful to look at the share of profits from other non-core activities. It is inevitable that these drivers become marginal as car production expands. 

14. This does not look like the popularity graphs of a country aspiring to be a global influencer. 

15. Fascinating graphic of India's population density

The gangetic plains stand out. 

16. One more signature of how badly the Indian economy has done during the pandemic - highest increase in public debt.

17. The steep rise in NPAs at SBI Cards highlights the possibility of more problems in the Indian financial sector. TN Ninan asks whether it is a canary in the coal mine for the personal credit segment, one which had been among the only growing part of the loan portfolio of public sector banks. 

18. Finally, Economist has a briefing on the problems faced by social media in content moderation. The near black-out by the main social media platforms of the New York Post articles on the Hunter Biden tapes 

Facebook disables some 17m fake accounts every single day, more than twice the number three years ago. YouTube, a video platform owned by Google with about 2bn monthly users, removed 11.4m videos in the past quarter, along with 2.1bn user comments, up from just 166m comments in the second quarter of 2018. Twitter, with a smaller base of about 350m users, removed 2.9m tweets in the second half of last year, more than double the amount a year earlier. TikTok, a Chinese short-video upstart, removed 105m clips in the first half of this year, twice as many as in the previous six months (a jump partly explained by the firm’s growth).

While all but a tiny share of the content is being screened out using AI software, the explosion of content has only meant that the magnitude of inclusion and exclusion errors on such content has become very high. What should have been shown are getting clipped by the algorithms and certain things which ought to have been blocked get past the algorithms. The media platforms say they employ human content moderators, but even at large numbers, they remain very small compared to the requirement. And such moderation comes with its own problems. 

Facebook now employs about 35,000 people to moderate content. In May the company agreed to pay $52m to 11,250 moderators who developed post-traumatic stress disorder from looking at the worst of the internet... The pressure from the media is to “remove more, remove more, remove more”, says one senior tech executive. But in some quarters unease is growing that the firms are removing too much... Elsewhere, liberals worry that whistle-blowing content is being wrongly taken down... Last year Google received 30,000 requests from governments to remove pieces of content, up from a couple of thousand requests ten years ago (see chart 3). And Facebook took down 33,600 pieces of content in response to legal requests... Some governments are leaning on social networks to remove content that may be legal... “Authoritarian governments are taking cues from the loose regulatory talk among democracies,” writes David Kaye, a former un special rapporteur on free expression.

The most disturbing part of the issue, one on which all parties agree, is that of leaving such content moderation to the whims and fancies of privately owned media platforms.  

It may be instructive to study the evolution of print media in its early stages, in particular the evolution of regulation of libellous and incendiary content. Digital social media may well be going in that direction. 

Friday, October 23, 2020

GVC graphic of the day

From the World Bank's 2020 WDR, the graphic below highlights the lop-sided nature of global value chain integration.
The first panel measures the share of foreign value added in gross exports of Japanese textile companies, and the second measures the share of domestic value added in India embodied in importing countries' exports to others. Markup is output price divided by marginal cost for Japanese and Indian textile companies.

For the textile firms in developed countries like Japan, the rise in the share of imported components in exports has been accompanied by a rise in their markups. This indicates some form of pricing power over their retail customers. In stark contrast, for textile firms in supplier countries like India, an increased share of their sales to an importer becoming embodied as share of their exports to third countries is associated with decreasing price markups. In other words, supplier countries exercise limited pricing power over their branded buyers whose pricing power in turn has been increasing. The Mathew Effect of GVCs!

In so far as Indian textile exports are as contract manufacturers to foreign brands (unlike the Japanese firms which are brands themselves), this only reinforces the lop-sided nature of value capture in the manufacturing value-chain. 

This trend is consistent across developing countries, except China.

Thursday, October 22, 2020

Finally, the anti-trust action on big tech begins

The action on anti-trust on the big tech companies in the US is gathering pace. First there was the high profile US Congressional Subcommittee on anti-trust which questioned the heads of the major American tech companies. Then came the detailed report of a US House of Representatives Panel on investigation of competition in digital markets. The Democrat led Panel's report advocated breakup of big tech, forcing separation of their dominant platforms from their other businesses. The report covered Amazon, Apple, Facebook, and Google. 

The culmination has been the executive action in the form of US Department of Justice (DoJ) along with 11 States filing an anti-trust law suit under Section 2 of Sherman Act in a federal court against Google, the first such big action since that on Microsoft in the 1990s. This is expected to be a precursor to several similar suits against big tech companies. The suit states,
Google is so dominant that “Google” is not only a noun to identify the company and the Google search engine but also a verb that means to search the internet... Google effectively owns or controls search distribution channels accounting for roughly 80 percent of the general search queries in the United States. Largely as a result of Google’s exclusionary agreements and anticompetitive conduct, Google in recent years has accounted for nearly 90 percent of all general-search-engine queries in the United States, and almost 95 percent of queries on mobile devices.

Sample this for the dominance across devices.

The suit describes Google as "a monopoly gatekeeper for the internet", and accuses it of  suppressing competition in internet search and using a "web of exclusionary" deals to thwart competition and stifle the next wave of innovators. The suit does not specific the remedy, but calls for "structural relief", pointing to the break-up of the company. Here is an FT summary of the charge,

In a complaint that echoes the European Union’s 2016 case against Google over Android, its mobile operating system, the US government claimed the search company used its contracts with device makers to block other search engines, while also paying to put its search service in front of users on many of the most widely used smartphones and browsers. Some 60 per cent of all search queries in the US are drawn to Google thanks to this web of arrangements, according to the lawsuit. When combined with Google’s own distribution channels, such as its Chrome browser, this number rises to 80 per cent, the lawsuit alleged. The contract terms at the centre of the case include alleged provisions that prevent device makers which use Android from supporting rival versions of the open source operating system on any other devices they make. The DoJ also objected to Google requiring its search service be given a prominent position on all handsets that include its Play app store and other services. The case takes aim at payments worth billions of dollars a year — usually in the form of sharing revenue from mobile search advertising — that Google pays to handset makers, mobile phone companies and browser makers to give its search service prominence... The lawsuit argues Google’s conduct harmed consumers through quality reductions relating to “privacy, data protection, and use of consumer data” as well as “lessening choice” and “impeding innovation”.

A WSJ report tries to put some numbers on the benefits from such bilateral deals with hardware makers, especially with Apple,

It has long been known that Google relies on search traffic from Apple’s popular line of phones. Google’s flagship search engine is the preset default on Apple’s Safari phone browser, meaning that when consumers enter a term on their phone, they are automatically fed Google search results—and related advertising... Though Google and Apple have been tight-lipped on how much their deal is worth, the lawsuit projects that it accounts for between 15% and 20% of Apple’s annual profits. That means Google pays as much as $11 billion, or roughly one-third of Alphabet’s annual profits, to Apple for pole position on the iPhone. In return, Apple-originated search traffic adds up to half of Google search volume, the government says... Securing the prime piece of real estate in the Apple ecosystem has had the effect of denying competitors the ability to compete, the government alleged... In June, Toni Sacconaghi, an analyst for Bernstein, estimated Google pays Apple as much as $8 billion annually to be the default search engine for its mobile operating system and Siri, a voice assistant. Other analysts have pegged it as higher, closer to the figures cited in the government lawsuit. Mr. Sacconaghi suggested in a note to investors that Google was motivated to spend the money in part to block rival Microsoft Corp.’s Bing search engine from gaining a foothold.

While there are crucial differences in interpretations, the anti-trust action has bipartisan consensus in the US.

In the context of the Subcommittee hearings, Rana Foroohar felt that we may be entering a new era of vigorous antitrust action, especially if the Democrats win the presidential election. She also points to a new report by Institute for Local Self-Reliance (ILSR) on how consolidation of corporate power across sectors is an important contributor to major social problems in the US. 

The classical argument for anti-trust, revolving around consumer welfare, is not relevant to the current circumstances. Instead, Prosenjit Datta points to the two major areas of concern,
First, whether the big five are using their dominance to shut out rivals. Amazon has driven smaller sellers to bankruptcy by copying their stuff and introducing them at cheaper prices under home labels. Facebook bought up Instagram and WhatsApp when they were still small. Apple, Microsoft and Google all use dominance to squeeze users of their ecosystems dry. Also, while their services to consumers are often free or low priced, they collect loads of data that are then monetised leading to worries about privacy and data misuse.
In this context, here is a list of related stories which have accumulated in recent couple of months:

1. For anti-trust agencies, Dina Srinivasan points to Google's naked manipulation of the advertising market.
Approximately 86% of online display advertising space in the U.S. is bought and sold in real-time on electronic trading venues, which the industry calls "advertising exchanges." With intermediaries that route buy and sell orders, the structure of the ad market is similar to the structure of electronically traded financial markets. In advertising, a single company, Alphabet (“Google”), simultaneously operates the leading trading venue, as well as the leading intermediaries that buyers and sellers go through to trade. At the same time, Google itself is one of the largest sellers of ad space globally. This Paper explains how Google dominates advertising markets by engaging in conduct that lawmakers prohibit in other electronic trading markets: Google’s exchange shares superior trading information and speed with the Google-owned intermediaries, Google steers buy and sell orders to its exchange and websites (Search & YouTube), and Google abuses its access to inside information. In the market for electronically traded equities, we require exchanges to provide traders with fair access to data and speed, we identify and manage intermediary conflicts of interest, and we require trading disclosures to help police the market.
So Google sells advertisement space in a market where it is also the leading trading venue and the leading intermediaries!

2. On to Apple next. The European Union has launched two anti-trust cases against it. John Thornhill writes,
The first concerns the operations of Apple’s App Store following complaints from Spotify, the music-streaming service, and Kobo, the ebook business. Each has attacked the company for demanding an initial 30 per cent cut of the subscription fee from all customers who sign up via the App Store, while promoting its own rival music and books services. Margrethe Vestager, EU vice-president in charge of competition policy, said Apple appeared to be acting as a discriminatory “gatekeeper” controlling the distribution of apps while keeping most of the data derived from them. “We need to ensure that Apple’s rules do not distort competition in markets where Apple is competing with other app developers,” she said. The second investigation focuses on whether Apple unfairly denies Apple Pay’s “tap and go” functionality on iPhones to rival payments companies.
The Economist adds about the reasons for the discontent of the likes of Spotify and Kobo,
They are unhappy about rules that force app-makers that sell digital services on Apple devices to use Apple’s own system for handling purchases made in their apps. Apple takes a cut of up to 30% from each such transaction. At the same time the rules limit firms’ ability to guide users to other payment options (via their websites, for instance). Since the App Store is the only way to sell software to iPhone users, the firms allege that Apple’s rules amount to an abuse of its control over the platform.
As Thornhill writes, Apple's logic on competition goes like this and looks compelling, even benign,
The company argues that it invented and built the App Store that now reaches 1.5bn device users. If developers do not like its rules then they do not have to play. Millions of developers, who have made a lot of money from the App Store, are happy with the way it operates and comforted by the security it offers. Besides, Apple charges no fees on the 85 per cent of apps that are free to users.
This is a case of throwing a few crumbs which will keep most stakeholders satisfied, while ensuring that no real competitor emerges. For the vast numbers of small developers, Apple provides an unmatchable platform to peddle their wares. For Apple, these millions of developers and their customers enrich the network and increase its liquidity. Apple knows that it can always squeeze out the odd developer who becomes very successful on its platform. In the absence of competing counterfactuals, customers will not feel that they are losing out on something by being yoked to Apple. All this takes care of US regulators who prioritise consumer welfare over all else.

The App market, while small today, is the future for Apple which may now be facing the other side of peak-iPhone.
See also this article on Tim Sweeney and his company Epic Games (of "Fortnite" fame). He has been waging a battle against Apple and Google for the 30% cut they take for digital transactions that happen using its Apps, and in case of Apple, the mandatory nature of all App purchases on iPhone and iPad to be done through Apple Store. Also this editorial which describes the commissions as a "digital rent" and this article which has a good overview of the issue. This blog post is about Apple's battle with Epic

3. The US anti-trust action comes amidst some encouraging news from Germany. In a significant judgement with implications on how anti-trust cases will come to be be examined, the German Federal Court of Justice upheld the German competition agency's decision on Facebook that excessive data collection can be a form of anti-competitive conduct.

Describing the agency's ruling, Anne Witt writes,
On February 6, 2019, in the first case of its kind, the Bundeskartellamt had found Facebook guilty of abusing its dominant position in the German market for private social networks, pursuant to sec. 19(1) of the German Competition Act (GWB). In essence, the agency ruled that Facebook, which has held a steady market share of over 90 percent in this market since 2011, used its market power to force unfair data collection terms upon consumers. While the Bundeskartellamt did not question Facebook’s right to collect user data from the social network itself, it objected to Facebook’s practice of combining user data collected from a multitude of different sources—i.e.,, any Facebook-owned service (such as Instagram), and any of the millions of third-party website worldwide that use “Facebook business tools” for the purpose of profiling their users...

Unlike Section 2 of the Sherman Antitrust Act, the competition laws of the EU and its Member States prohibit both exclusionary and exploitative abuses. While the term “exclusionary abuse” refers to a practice through which a dominant undertaking (or company) uses its market power to exclude competitors from the market, thereby further reducing competition to the detriment of consumers, an exploitative abuse consists of the dominant undertaking harming consumers directly by using its market power to extract “unfair” contractual conditions that it could not have achieved in a competitive market. Historically, the great majority of exploitative abuse cases have concerned instances of excessive pricing by dominant firms... All three of the European Commission’s abuse cases against Google, for example—Google Search (Shopping), Google Android, and Google Search (AdSense)—pursued exclusionary conduct...
The Bundeskartellamt deemed Facebook’s data collection unfair because it invaded its users’ constitutional right to privacy, which it inferred from the fact that the practice violated the European Union’s General Data Protection Regulation (GDPR). In the court’s view, users had not freely consented to the transfer of data when they ticked the box acknowledging Facebook’s data collection policy, because they had had no real choice in the matter: if they wanted to use a social network of reasonable scope, they had to accept Facebook’s terms, as there was simply no alternative to Facebook. According to the Bundeskartellamt, this was a prime example of the “privacy paradox”—the inconsistency between people’s concerns regarding privacy and their actual behavior—in action... Without explicitly rejecting the Bundeskartellamt’s privacy-based theory of harm, the Federal Court of Justice considered that the main problem was that Facebook was denying consumers the choice between the use of (1) a highly personalized social network service, which might indeed require extensive data collection from all three sources, or (2) a less personalized service that relied only on the data users chose to disclose on It was thus also preventing the emergence of a service for which there was demand, and which a competitive market would likely have provided.
4. In this context, a New York Times investigation of the Global Anti-Trust Institute at George Mason University, which is almost completely financed by tech companies facing anti-trust accusations, is instructive,
The long era of restraint in antitrust enforcement in the United States can be traced back, in part, to an ideology that tied economic analysis to legal cases. The view was that it’s not enough for a company to dominate a market and crush competitors, there must be evidence of so-called consumer harm — usually in the form of higher prices. That notion permeated through the American judicial system with the aid of economics seminars for federal judges funded by corporate donors. The Manne Economics Institute for Federal Judges, which ran from 1976 to 1999, was organized by the Law and Economics Center — now housed at George Mason University’s law school. By 1990, about 40 percent of all sitting federal judges had attended one of these seminars, according to the program’s director. Researchers found that judges who attended the seminars were more likely to approve mergers, rule against environmental protections and organized labor, and use economic language in rulings compared to judges who did not attend, according to an academic study looking at the effects of the program.

The Global Antitrust Institute, which was established in 2014 as part of George Mason University’s Law and Economics Center, has taken a page from the success of the federal judges program and adapted it for an international audience. It is also starting to offer an economics program for U.S. federal judges, with one scheduled for October in Napa, Calif... it had already trained more than 850 foreign judges and regulators... The institute does not disclose the source of its funding, but The New York Times obtained copies of the group’s annual budgets and donation checks in document requests. It is funded almost entirely by companies and foundations affiliated with companies.
In other words, a systematic attempt to establish the hegemony of a particular narrative on anti-trust actions! It is encouraging that a counter-narrative is now taking hold. What happens in the US has ramifications far beyond its borders and will set the trend for actions elsewhere and also hasten the EU's own set of actions. 

5. From India, the spectacular emergence of Reliance Jio, while advancing the cause of Digital India, also comes with several concerns,
Jio’s entry saw tariff wars that greatly reduced prices and benefited the consumers at great detriment to its competitors. The expansion of Jio platforms might portend similar benefits for consumers in the short-haul. However, the longer-term ramifications are uncertain. The concentration of such clout in India’s digital economy in a single entity might eventually influence or even restrict the choices of consumers. In the run-up to the Jio deal, Facebook floated a new wholly-owned subsidiary called “Jaadhu Holdings, Llc" in March 2020. The entire investment was routed through Jaadhu, and Facebook was able to able to declare that Jaadhu “is not engaged in any business in India or anywhere in the world", therefore denying any plausible collusion. As tech giants become more creative to skirt anti-competition arrangement, CCI will have to become savvier.
This is a good summary of the market capture ambitions of the company across several sectors. 

Update 1 (26.10.2020)

Rana Faroohar points to how big tech collude to retain their monopoly over markets. NYT has this story of the Google-Apple deal and how co-opetition is not uncommon in Silicon Valley.