Sunday, November 29, 2020

Weekend reading links

1. As the pandemic bites, the Andean economies with private pension systems have been indulging in what FT has noted with concern as "pension populism" by allowing subscribers greater withdrawals from pension pots. Peru has voted to allow a second withdrawal and Chile is following suit. 

2. Michael Pettis puts Xi Jinping's plans to double the economy by 2035 in perspective,

Between 1980 and 2010, Chinese GDP doubled four times, but debt levels were low and rose slowly. However, between 2010 and 2020 when GDP doubled again, China did so by tripling its total debt burden to $43tn, so that it now stands, officially, at over 280 per cent of GDP. Assume conservatively that the relationship between debt and growth doesn’t change, and China’s debt-to-GDP ratio will have to rise to over 400 per cent by 2035 if it is to double GDP again. This is a level that would be unprecedented in history. Everywhere else, growth collapsed long before debts reached levels close to this. China can in principle reduce its dependence on debt by shifting domestic demand from investment to consumption, as Beijing has long proposed. Yet this requires that the household income share of GDP rise from roughly 50 per cent today to at least 70 per cent.

And there is the demographic headwind to overcome,

From the late 1970s, China benefited from a rapidly rising working-age population, but this reversed around a decade ago. In fact, over the next 15 years, while China’s population will grow by an estimated 1.5 per cent, its working population will decline by an astonishing 6.8 per cent, and will continue to decline for the rest of the century. To put it in context, while today there are 4.7 Chinese of working age for every equivalent American, by the end of the century there will be only 2.4... Achieving GDP growth of 4.7 per cent with a declining working population requires as much productivity growth per worker as 5.2 per cent GDP growth with a stable working population. Growth in Chinese labour productivity has in fact fallen steadily since 2010. Looking ahead, a declining working population requires that the pace of this decline in productivity drops by nearly two-thirds if China is to double GDP by 2035.

3. A bearer bond issued in perpetuity in 1648 by Stichtse Rijnlanden, a Dutch water authority, and currently owned by Yale University's Beinecke Rare Book and Manuscript Library has received $153 in interest for a period of 12 years. The original interest rate of 5% has since been revised down to 2.5%. 

4. The surreal alternative reality of China and its Bigtech. Martin Lau, President of Tencent Holdings and Daniel Zhang, Chairman of Alibaba Holdings have both talked about the need for more regulation of the tech industry. 

"As technology companies become bigger and more important to the economy, I would say more regulations to reflect the new reality are needed," Lau said.

Both have welcomed the governments moves to restrict anti-competitive practices by tech companies, including selling at lower than cost. 

"Development and governance help each other forward and are mutually dependent," Zhang said. "Relevant government agencies are seeking feedback on policies and regulations to ensure the orderly development of the internet economy. We think this is very timely and necessary."

The State Administration for Market Regulation has released a 22-page document that outlaws some tactics used by internet companies to gain users. 

Practices such as selling goods below cost, price discrimination based on customer data analytics and exclusive sales agreements would be in violation of the proposed regulations. According to the document, the guidelines were drafted "to prevent and stop monopolistic practices on internet platforms, reduce the costs of compliance and law enforcement, protect fair market competition, as well as safeguard the interest of consumers."
Whatever the underlying motivations, it's impressive that the regime has used the crisis of Ant Financial's aborted IPO to mount this regulatory drive, something which other countries have shied away from. 

5. Shahid Jameel has a good article on the challenges and issues with Covid 19 vaccine administration for India.

6. As it increasingly becomes apparent that western economies are following in Japan's path of persistent low inflation and low interest rate, Adam Posen writes about the positive lessons to learn from Japan's macroeconomic management since the millennium. He delineates the period from 1990 to 2002 as one of "failure to respond adequately to financial fragility, and being too timid with macroeconomic stimulus". But he writes about how Japan has since 2003 managed to maintain decent growth, and keep inflation and bond yields low despite pursuing a long periods of expansionary monetary and fiscal policies and accumulating high public debts. 
The result is that between 1990 and 2002, Japan had the lowest average per capita gross domestic product growth rate in the G7, and from 2003 through 2019, it has had the third highest per capita GDP growth rate and the second highest productivity growth rate... Japan may in the end come out back on top in its economic peer group for the next decade, having done a better job on public health management than the EU or US, and having seen the smallest decline in its productivity growth rate since 2003.

On public debt accumulation, this is an interesting departure from orthodoxy,

Japan, however, does herald good news for us all on the fiscal front. A high-income market democracy can respond to secular stagnation with sustained fiscal stimulus, and that can continue to stimulate private demand. Substantial public debt can accumulate to levels previously thought dangerous and the warning sign of fiscal danger to watch is when private investment bids up interest rates, not before. Some public investment can indeed be supply and productivity enhancing; attention should be on assessing the quality, not the spectre of private capital misallocation.

Robin Harding and Chris Giles have a good article on Japanification. The persistent low rates is the foremost sign of Japanification.

7. Raj Chetty interview in Times. This is a good point about Covid job losses in the US,

They have to be outside their house because of the nature of their jobs, whereas high-income folks can typically self-isolate. And so what’s ended up happening is basically, because of this reduction in spending by the rich, it’s lower-income people who’ve borne the incidence of that shock in losing their jobs. And what we’re finding now is we’ve had, essentially, a V-shaped recovery for high-income folks, where their employment levels are back to where they were pre-Covid. Whereas for lower-income folks, you’re still 20% below, like 6 million jobs below where you were... So in the past, in previous recessions, what you’d tend to see is that it’s lower-income folks in less affluent cities who took the hardest hit. Turns out, in this recession, it’s actually flipped. So Silicon Valley, for example, has some of the highest unemployment rates for low-income people.

8. Shankar Acharya has a good cautionary article about the new game in the town, production linked subsidy.  

First, the fiscal cost is not trivial, especially in a context of extreme fiscal stress. The “capping” is not easy if the number of qualifying firms and incremental production is substantial in a particular sub-sector. Second, as in the case of sector-specific tariffs, PLIs also beg the basic question: Why does the government want to play favourites with particular sub-sectors? What superior knowledge do civil servants have compared to risk-taking businessmen in competitive markets? Third, how accurately can incremental production or sales be gauged? Conversely, how easy or difficult is it for firms to “game” the system, especially if the production is occurring in existing firms and their “brownfield” plants? Fourth, the implementation of the scheme requires an application/permission system allowing for significant discretionary elements. Fifth, if each PLI scheme is going to be run by different ministries and their PMAs it is easy to envisage a growing and hydra-headed bureaucracy, sprouting different qualifying criteria, incentive structures and their quality of implementation. Each PLI scheme could, over time, degenerate into its own little licence-permit raj, or, more accurately, subsidy-permit raj.

My concerns are less about picking winners etc. The big concern is with its administration where the potential for its degeneration into a subsidy for inefficient producers is very high. An export competition dimension would have addressed that problem. Now with import substitution, there is a real danger of this becoming a prop for inefficient manufacturing.

9. The Amazon Vs Reliance battle over Future Retail appears to be teachable example at multiple levels. In the contest that pits the choices of exploitation by a domestic behemoth or a global behemoth, is there no third alternative? What about adherence to norms of some global rule of law, especially at a time when India is courting foreign investors? What does it tell about corporate governance standards in Indian companies? There appears a compelling case that the false patriotic fervour is being used as a cover to undertake deeply questionable corporate practices.  

It is also disturbing that courtroom arguments in the case involving reputed lawyers have degenerated into populist rhetoric. 

10. Francis Fukuyama, Barak Richman and Ashish Goel make the case for reining in Big Tech, not on economic grounds, but on being threat to democracy. They point to these companies control over influencing public opinion and control over private data of citizens as being particularly disturbing for the prospects of democracy. 

As solution, they point to the use of middleware software,

If regulation, breakup, data portability, and privacy law all fall short, then what remains to be done about concentrated platform power? One of the most promising solutions has received little attention: middleware. Middleware is generally defined as software that rides on top of an existing platform and can modify the presentation of underlying data. Added to current technology platforms’ services, middleware could allow users to choose how information is curated and filtered for them. Users would select middleware services that would determine the importance and veracity of political content, and the platforms would use those determinations to curate what those users saw. In other words, a competitive layer of new companies with transparent algorithms would step in and take over the editorial gateway functions currently filled by dominant technology platforms whose algorithms are opaque.

11. The Bank of Japan has announced an unrealised profit of $56 billion on its stock market investments valued at over $400 bn (end-September 2020), which leaves it owning 6% of the Tokyo Stock Exchange. The BoJ does not directly buy stocks but invests in them through a range of ETFs. 

12. Articles by Raghuram Rajan and Viral Acharya, Shankar Acharya, Vijay Kelkar and Arvind Subramanian, Amol Agrawal, and Tamal Badopadhyay on the proposal of giving banking licenses to corporate groups. 

13. John O Sullivan makes a very important point about today's startup industry,

But unlike the railways, brewers, distillers and mines of the Fleming era, today’s new firms have no great need of capital. A young technology firm can rent computing power from the cloud, download basic software from the internet and use a range of cheap, outsourced services to help it grow. Startups are staying private for longer. When they list, it is because the founders need to cash out or (as with the latest rash of tech IPOs) when the money on offer in the public markets is simply too good to turn down. It is not to raise capital for the business.

14.  India's industrial share of GDP (manufacturing, mining, construction, electricity generation and utilities) continues its disturbing downward trend despite all efforts to revive it.

At 27.5% of GDP, industry's share is the lowest among all major developing countries, far lower than the Asian average of 31.1%. In the past three years, India's industrial output rose by just 17% cumulative in dollar terms, compared to 48%, 38%, and 29% respectively for Bangladesh, Vietnam, and China.

15. Patrick Blagrave and Weicheng Lian (HT: Mostly Economics) have an IMF working paper on India's inflation performance and the role of the flexible inflation targeting (FIT) regime which was announced in February 2015 and adopted in September 2016. They write,

We find that the passthrough of import prices to headline inflation is weaker in India than in other emerging markets. Also, headline inflation was much more backward looking in India than in other countries, mainly driven by the non-core-inflation component. Then, we show that inflation expectations have become more anchored based on two patterns. First, after 2015, core inflation became less likely to converge to headline inflation. Second, we find that medium-term inflation expectations in India were less likely to be revised and became less sensitive to inflation surprises.

We argue that domestic factors play a role in these structural changes. We show that food price inflation experienced a shift in its responsiveness to the gap between headline and core inflation, which contributes to more anchored headline inflation. We highlight that this change comes from the domestic rather than the international component of India’s food price inflation... One caveat for our analysis is that we do not rule out a possibility that subdued food price inflation caused by persistent supply shocks stood behind the patterns we document. Nevertheless, our findings support the notion that FIT is performing well in India.

As the authors data show, inflation was on the declining trend from early 2012 and reached a plateau by end of 2014, well before the FIT was even announced. Further, this also squares up with the story of the reversal of fiscal profligacy initiated by the UPA government starting from 2012-13 which was continued with admirable restraint by the NDA government. It can be argued that the experience of high inflation and fiscal deficit from the extended period of fiscal profligacy in response to the GFC and the shock of the taper tantrum had shaken the government into swinging towards fiscal rectitude. Into this mix was added the goodwill and expectations aroused by the new government and the inflation anchoring role of FIT. 

Besides, as the authors themselves acknowledge, the post-2015 period was characterised by a uniquely long period of declining food prices and that food price inflation played a significant role in the convergence between headline and core inflation, thereby taking out of play one of the most important structural drivers of inflation in India. 

Given this, how can we state that FIT has been a major factor in anchoring inflation expectations? Is it a case of appropriating credit when the real cause may have been a confluence of positive factors?

16. Reetika Khera and Meghna Yadav (again HT: Amol Agrawal) do a much-needed analysis of the ratio of executive compensation of the top executive to median employee for the NIFTY 50 companies. Their findings on the ratios only confirm the trends globally. The average ratio of 259 is comparable with those of developed countries. 

I am inclined to argue that this ratio will only increase over the years since the salaries of the Indian executives remain very small by global standards (even adjusting for various factors). It is a different matter that salaries of median and lower employees is even more disproportionately lower. As the economic integration proceeds, the rise of executive salaries will far outpace the rise of employee salaries. 

17. Finally, Andy Mukherjee's long essay on the history of the Indian economy over the last three decades and pessimism about its prospects. 

Thursday, November 26, 2020

More is not needed when less is enough - standardisation paradox in development

In recent months, I have blogged on several occasions urging caution with unqualified embrace of many closely held narratives in international development. These have been about digitisation, middlemen, leakages, efficiency, supply side etc.

This post is about the high credentials benchmarks associated with several areas of development. Earlier posts here touched on the problems of standardisation in development policy making and here discussed  the problems of harmonisation in the context of international trade and globalisation. 

The problem of occupational licensing as an entry barrier into labour markets is an acknowledged problem in developed countries too. Its manifestation in India is in the informal market - the non-accreditation or even acceptance of informal service providers, from plumbers to medical practitioners. 

Take the example of medicine. The formal medical practitioners, dominated by doctors with MBBS and specialist qualifications, have been very vocal advocates of banning and even criminalising informal medical practitioners. This is despite the latter making up 80-90% of the point of first contact in India and it being impossible to even imagine a health care system without their presence. 

The formal practitioners accuse these informal providers of practicing quackery. That's doubtless a valid accusation and a matter to be dealt with. But here too there is nothing black and white. Sample this scoring of the average provider competence levels of information practitioners compared to formal MBBS doctors across several Indian states.

The same study finds,
The medical knowledge of Informal Providers (IPs) is highly correlated with that of MBBS providers in the same state. Informal providers in high-performing states routinely outperform MBBS providers in low-performing states and in fact, in these states, the difference in quality between MBBS and non-MBBS providers is small. This trend implies that across Indian states, equal qualifications do not imply equal quality. The knowledge of an informal provider in Gujarat or Tamil Nadu is substantially higher than that of a fully-trained MBBS provider in Bihar or Jharkhand.

As I have blogged earlier here and here, India does not require full-fledged MBBS doctors to manage its primary health care centres. Trained nurses can manage most of the primary care activities, including normal deliveries. So the case for credentialing nurses accordingly. In practice, given the high share of doctor vacancies, a large number of PHCs are in any case managed by nurse practitioners.

The OECD does a ranking of countries on entry barriers to occupations, and India figures prominently as a country with very high entry barriers for professional services - accountant, architect, lawyers, and real estate agents.

Even in the cases of vocational professions like plumbing, electrician, carpentry, welding etc, there is a case that credentialing requirements may be impeding formalisation and productivity improvements. Have we not seen too many examples of accomplished service providers without any of the formal credentials but who are denied access to the formal market (either being employed by service companies or being functional employees of regular companies)? And equal or more numbers of examples of poor quality service providers but with all the requisite credentials? 

In such occupational categories, where the experience of learning by doing is arguably more important than formal academic training (a point amplified by the poor quality of prevailing academic trainings in ITIs/VTIs), there is perhaps a case for alternative approaches to credentialing. For example, is there a case for a very credible institutionalised system of market-driven (but regulated), periodic, and levels-based certification?

These problems manifest in an even bigger challenge in school education. Especially in the primary schools, India's education system suffers from a problem of very high and aspirational learning benchmarks. This graphic illustrates how over-ambitious curriculum, represented by curricular pace (CP), leads to students falling behind in Indian schools.
In all these cases, the status quo is massively welfare reducing.

It represents the problem of standardisation paradox. On the one hand, standards and accreditation are a much needed requirement to improve quality of service delivery across areas of activities. But on the other hand, standardisation often involves grafting excessive and aspirational qualifying benchmarks which ends up distorting incentives and defeating the purpose of standardisation.

Tuesday, November 24, 2020

On Peter Turchin, Yuval Noah Harari, and Jared Diamond

I have read and listened to Yuval Noah Harari and Jared Diamond and have (after being deceived by the first impressions) become convinced that their popular historical narratives are not only inaccurate and misleading, but even dangerously so. Peter Turchin, whom I have not read, appears to belong to that same category. 

In the backdrop of the tumult around the US presidential elections, Peter Turchin has been receiving a lot of attention. Turchin is an expert in cliodynamics, which uses maths to model historical change. See this and this

At least an important part of the appeal of the grand narratives (or megahistories) of Turchin, like of Yuval Harari and Jared Diamond, comes from the logic and simplicity (or accessibility) of their narratives and findings. And this while maintaining the appearance of rigour and a comprehensive global historical sweep spanning millions of years. Besides, their messages are resonant with the times. And this has been especially so with respect to Turchin. 

Like Diamond, Turchin has limited academic/scholarly background of history. Harari, influenced by Diamond, too has limited global historical scholarship beyond medieval Europe. In keeping with his original background Diamond bases his historical analysis almost completely on environmental differences. Turchin's positive and progressing evolutionary approach too draws from his own main training as an ecologist. 

Perhaps like a thermodynamics researcher applying the same tools to model financial markets and claiming a whole new body of thermo-finance? 

Ian Parker in The New Yorker has a brilliant takedown of Harari's "history of everyone, ever". 

Harari’s account, though broadly chronological, is built out of assured generalization and comparison rather than dense historical detail. “Sapiens” feels like a study-guide summary of an immense, unwritten text—or, less congenially, like a ride on a tour bus that never stops for a poke around the ruins. (“As in Rome, so also in ancient China: most generals and philosophers did not think it their duty to develop new weapons.”) Harari did not invent Big History, but he updated it with hints of self-help and futurology, as well as a high-altitude, almost nihilistic composure about human suffering. He attached the time frame of aeons to the time frame of punditry—of now, and soon. His narrative of flux, of revolution after revolution, ended urgently, and perhaps conveniently, with a cliffhanger. “Sapiens,” while acknowledging that “history teaches us that what seems to be just around the corner may never materialise,” suggests that our species is on the verge of a radical redesign. Thanks to advances in computing, cyborg engineering, and biological engineering, “we may be fast approaching a new singularity, when all the concepts that give meaning to our world—me, you, men, women, love and hate—will become irrelevant.”

Talking with the Isreali President Reuven Rivlin at a summit in Tel Aviv in September 2019, Harari made this claim,

In two hundred years, I can pretty much assure you that there will not be any more Israelis, and no Homo sapiens—there will be something else.

The confidence on this prediction, for someone who calls himself a historian, is stunning. The article has so many insights which point to the potential motivations of Harari. It also points to the very limited base of Harari's historical scholarship (research, collaborations, field work, PhD advising, seminars/workshops, etc) outside of European military history of 16th century. His historical knowledge appears almost completely to have been accumulated through reading and listening to other's works over a period of less than 10 years. To this extent, it is hard to describe him as more than a writer of popular history. But he's mighty impressive at that. 

After all, to be considered an expert in historical analysis, the least one would expect would be deep academic or practicing scholarship in the particular field and not mere accumulation of second-hand knowledge from books and other sources. It's here that the claims of historical scholarship of all the three struggles to pass muster.

Harari's digital futurology of human beings should be merely seen alongside the several other such prophecies, for there is nothing which stands out in method or techniques that distinguishes it and thereby makes it merit serious consideration.

The emergence of Turchin is in keeping with the trend of our times which worships mathematical models, to the exclusion of all else. As a thought experiment if one tries to just identify, categorise and grade historical events over even a couple of centuries (forget millennia), you'll realise how much will always be left out in any modelling exercise. Besides, the wide latitude also makes it perfect to fit in whatever hypothesis you have.

The main reason for Turchin's prominence appears to be that he's got lucky with his prediction. Underlining the point, sample this,

Turchin’s prognostications would be easier to dismiss as barstool theorizing if the disintegration were not happening now, roughly as the Seer of Storrs foretold 10 years ago. If the next 10 years are as seismic as he says they will be, his insights will have to be accounted for by historians and social scientists—assuming, of course, that there are still universities left to employ such people.

In 2008 Turchin published this exhortation on cliodynamics,

What caused the collapse of the Roman Empire? More than 200 explanations have been proposed, but there is no consensus about which explanations are plausible and which should be rejected. This situation is as risible as if, in physics, phlogiston theory and thermodynamics coexisted on equal terms. This state of affairs is holding us back. We invest in medical science to preserve the health of our bodies, and in environmental science to maintain the health of ecosystems. Yet our understanding of what makes societies healthy is in the pre-scientific stage. Sociology that focuses on the past few years or decades is important. In addition, we need a historical social science, because processes that operate over long timescales can affect the health of societies. It is time for history to become an analytical, and even a predictive, science... We must collect quantitative data, construct general explanations and test them empirically on all the data, rather than on instances carefully selected to prove our pet narratives. To truly learn from history, we must transform it into a science.

Amanda Rees has an excellent essay where she highlights the problems with the use of statistical techniques in historical analysis, 

For the majority of historians, ‘historical facts’ are not discrete items that exist independently, awaiting scholars who will hunt them down, gather them up and catalogue them safely. They need to be created and interpreted. Textual archives might seem relatively easy to reproduce, for example, but, just as with archaeological digs, the physical context in which documents are found is essential to their interpretation: what groups, or items, or experiences did past generations value and record, and which of these must be salvaged from the margins of the archives? What do the marginalia tell us about how the meanings of words have changed?... The significance of context and interpretation becomes more vital still in moving beyond the text to the material culture of the past. Scholars working on agricultural history – an essential element in the environmentally oriented narratives of Harari and Diamond – have to figure out from context and through an act of interpretative imagination how landscapes were appraised, how tools were used, who used them, and who profited from them. Or indeed, to ask, on whom the tools were used. The historical record is inevitably limited, since the experiences of some groups are much easier to access than the experiences of others...

It is for this reason, among others, that a positivist language of science – of testing hypotheses against data – sits uncomfortably with the practice of history. Cliometricians treat history as a laboratory containing many successions of datasets against which different economic theories could be tested. But ever since Leopold von Ranke – the 19th-century German scholar who founded professional history – historiographical practice has paid close attention to and critically interrogated the sources used by historians, displaying an abiding awareness of the significance of the differential distribution of social, economic, political and technological power when it comes to their creation. To paraphrase Émile Durkheim, you really shouldn’t treat historical facts as things.

Rees has a neat description of Turchin's assumptions and techniques. Turchin essentially lays all his modelling around two recurring patterns. The first, secular sociodemographic cycle, revolves around centuries long cyclical increases in population size and increasing resource constraints leading to sociopolitical instability and declines in population. The second was a shorter 50-year father-son cycle which nested within the first long cycle and where experience of war by one generation leads to its rejection by the next, and re-acceptance by the third, and so on. 

With regard to Turchin's central argument about elite competition engendering social instability, there is a long history of work on these lines. All of them have been more than ecologists and mathematical modellers. And none earlier have been cavalier enough make claims about definitive enough patterns for large complex systems. Besides, Turchin's conception of elite struggle appears narrowly defined as one confined to that within a larger elite group and not elites representing the emerging social group. 

Turchin also appears to come out as being very loose with facts, including making up his data points. See this for one which jumps straight out if you start to google. 

Update 1 (01.01.2022)

Ian Hesketh has a cautionary essay on the Big History narratives. 

Monday, November 23, 2020

Reform like good news takes time to break out

In several of this writings, Morgan Housel has brilliantly described how in contrast to bad news which is felt instantaneously with all its negative force, good news takes an inordinate amount of time to create impact so much so that it imperceptibly diffuses into the background. Much the same applies to most policy reforms. Their outcomes take a long time to be felt. 

Housel writes
The age-adjusted death rate per capita from heart disease has declined more than 70% since the 1950s, according to the National Institute of Health... Had the rate had not declined over the last 65 years – if we hadn’t become better at treating heart disease and the mortality rate plateaued since the 1950s – 25 million more Americans would have died from heart disease over the last 65 years than actually did.

25 million!

Even in a single year the improvement is incredible: more than half a million fewer Americans now die of heart disease each year than would have if we hadn’t made any improvements since the 1950s. Picture the population of Atlanta saved every year. Or a full football stadium saved every month. How is this not a bigger story? Why are we not shouting in the streets about how incredible this is and building statues for cardiologists? I’ll tell you why: because the improvement happened too slowly for anyone to notice.

In contrast, bad news washes up with all its force in a few seconds or hours, or at most months.  

So how does this relate to public policy?

There are perhaps three kinds of changes - physical, individual behavioural, and collective institutional. The first belongs to the category of buildings, new technologies, and other types of things which manifest physically. The second relates to the category of changes to individual behaviours. The final category concerns changes to social norms and trends, emergence of new practices, adoption of new institutional forms (or rules), even new livelihoods and lifestyles. 

Our cognitive selves easily identify with the first and associate the attributes of the first to the other two. But both the latter two emerge over time and are too diffuse to be perceived.

When we talk of policy reforms, we are largely interested in the third category. These are all mostly about gradual accumulation of change elements, till the pile grows big enough to start making significant impacts. 

Whether it is metaphorically about compounding or completing a long race, the fact remains that the true impacts of these reforms get realised after a long time. So much time later that everyone would have stopped talking about the reform and very few would even notice the realised impact. 

Saturday, November 21, 2020

Weekend reading links

1. Chris Caldwell writes about the Trump phenomenon,

At heart, this movement is a democratic revolt against expertise. Citizens in the west have surrendered a great deal of their decision-making power to experts — central bankers, writers of search-engine algorithms, epidemiologists. Mr Trump speaks for those who want this power back. He doubts the motives of experts. He even doubts they are experts in the first place. He thinks they’re operators, not serving the country so much as exploiting it.

Whatever happens going forward, it cannot be denied that Trump has decisively reshaped American politics. Populist anger is going to be a central force; the relations with China has been irretrievably changed; revival of American manufacturing has become a priority. It's hard to believe that these shifts could have happened in such decisive manner without Trump. 

In stark contrast, when one thinks about President Obama, one takes away with the feeling that he just keep the show going for the elites. 

2. This (HT: Ananth) is stunning. Two priceless graphics in Bloomberg indicating the top 100 each of employers and occupation categories which were the biggest donors to Biden and Trump. 

Of the employers included in this analysis, those whose employees tilted the most to Trump were the New York Police Department and the U.S. Marines, with almost 70% of employees who made contributions to one of the two presidential campaigns favoring the incumbent. The employers with the greatest share of Biden donors were Facebook and the University of Washington, with over 97% of their donors giving to Biden... Trump generally fared better with manual laborers, with 84% of donors who reported being ranchers and 75% of construction workers giving to him. The vast majority of donors who work as college professors, deans or who were otherwise employed by colleges or universities gave to Biden.

The divide is cognitively striking. The knowledge-based companies and more educated occupational categories were overwhelmingly pro-Biden.  

3. Another one in the long line of Japanese monetary policy experiments,

Using the government’s relief program for small and midsize companies hit by the coronavirus pandemic, banks have extended the equivalent of more than $250 billion in loans in less than six months, according to the Small and Medium Enterprise Agency... Relative to the size of its economy, Japan’s program is bigger than the main U.S. pandemic-aid program for small business, the Paycheck Protection Program, which delivered more than five million loans totaling $525 billion. And Japan is still pumping out the money. The PPP ended in August.

4. Talking of US Paycheck Protection Program(PPP), WSJ reports of massive fraud with the program,

Evidence is growing that many others took advantage of the program’s open-door design. Banks and the government allowed companies to self-certify that they needed the funds, with little vetting. The Small Business Administration’s inspector general, an arm of the agency that administers the PPP, said last month there were “strong indicators of widespread potential abuse and fraud in the PPP.” The watchdog counted tens of thousands of companies that received PPP loans for which they appear to have been ineligible, such as corporations created after the pandemic began, businesses that exceeded workforce size limits (generally 500 employees or fewer) or those listed in a federal “Do Not Pay” database because they already owe money to taxpayers. Tens of thousands of organizations also appear to have received more money than they should have based on their headcounts and compensation rates, it said... One type of suspicious activity banks reported were multiple government payments from coronavirus-relief programs to a single account, suggesting potential abuse... Several hundred PPP-related investigations have been opened, involving nearly 500 suspects and hundreds of millions of dollars of loans, according to the Federal Bureau of Investigation.

5. The government of India is considering a policy on scrapping of vehicles after 15 years, which includes some public subsidy. Under the policy, the vehicles registration ceases after 15 years and there is a very steep fee for re-registration. I have no informed views on this. But it does suggest a bit intuitively odd that the life of a vehicle is only 15 years. 

What's the basis for the 15 year limit? Is the median shelf-life of a vehicle in the Indian context only 15 years? Is this yet another case of India adopting western aspirational standards for scrapping? If yes, does this not lead to net welfare and economic value destruction?

6. The first round of auctions to allocate coal blocks for commercial mining to private firms after the deregulation of the coal mining sector has been successfully completed. The auctions have generated competitive interest, with 19 mines and 42 bidders for 51 mt annually. The auctions were awarded on revenue share basis, with the bid amount to be counted as variable cost passed-through to consumers.

The floor price is kept at 4 per cent of revenue share. Bidders place bids in multiples of 0.5 per cent of revenue share till it reaches 10 per cent and thereafter in multiples of 0.25 per cent.

The good news is about the competitive nature of the auctions, also indicated by the fact that Adanis have won just 2 out of the 19 blocks. Just four of the twenty appear excessive. This can be termed as a good example of learning from previous experience (of the 2015 washout auctions) and conducting realistic auctions. The Ghost of Vinod Rai appears finally exorcised from Coal Ministry.

7. Economists tend to discount the equilibrium impact of disruptive technologies arguing that it creates a new category of jobs to employ those displaced. A new study on the impact of automation of telephone switching in the US from the 1920s finds,

Telephone operation, one of the most common jobs for young American women in the early 1900s, provided hundreds of thousands of female workers a pathway into the labor force. Between 1920 and 1940, AT&T adopted mechanical switching technology in more than half of the U.S. telephone network, replacing manual operation. We show that although automation eliminated most of these jobs, it did not affect future cohorts' overall employment: the decline in demand for operators was counteracted by growth in both middle-skill jobs like secretarial work and lower-skill service jobs, which absorbed future generations. Using a new genealogy-based census linking method, we show that incumbent telephone operators were most impacted by automation, and a decade later were more likely to be in lower-paying occupations or have left the labor force entirely.

The last part is important. The losers of any such disruption are real and attending to them should be an important policy consideration.  

8. The government of India's active promotion of UPI and RuPay cards (coupled with other things like the 30% limit of digital transactions for any one provider) through the NPCI are good examples of public policy to break up entrenched competition and create a more sustainable market.

9. Good explainer on serological studies by Manoj Mohanan here

10. Krishna Kant in Business Standard analyses that listed PSUs have paid out Rs 2.75 trillion in revenues in the last five years, despite falling profitability. 

In the past five years, the 55 listed PSUs cumulatively paid equity dividend worth Rs 2.75 trillion, against their cumulative net profit of Rs 3.85 trillion, which translates to a record pay-out of 71.5 per cent. This was more than twice the pay-out ratio of Nifty50 firms, which was 32 per cent. The amount the PSUs paid was separate from the sums they paid the government for share buy-backs. Between FY17 and FY20, PSUs cumulatively spent around Rs 41,000 crore on share buy-backs. This takes the total dividend pay-out ratio to around 82 per cent on average in the past five years. The bulk of the dividend was paid-out by commodity producers and industrial companies such as ONGC, Coal India, NTPC, Power Grid, Bharat Heavy Electrical, Indian Oil and Bharat Petroleum Corporation (BPCL) among others. These non-financial PSUs paid nearly Rs 42,000 crore combined as equity dividend accounting for 89 per cent of dividend pay-out by all listed government-owned companies.

11. Business Standard reports of a proposal by central government to designate manufacturing hubs and allow private operators to supply electricity to industrial consumers. Difficult to understand what's new here nor how this can help. 

If one thinks through even the first round of end-to-end effects, one will realise that there are no technical or top-down fix to this disentangling this knot. The wires will be owned by discoms, the distribution will be managed by the discom, and the regulation will be by the state government, and so on. There is only so much that can be forced down. That, perhaps, may be the saving grace!

12. Pratik Datta has a very good article on the issue of judicial action on RBI decisions. He invokes the work of Lon Luvois Fuller to argue in favour of a polycentricity test to determine judicial intervention,

Fuller’s central thesis was that adversarial adjudication is not suitable for resolving “polycentric” problems. He compared polycentricity with a spider’s web — a pull on one strand distributes the tension throughout the web in a complicated pattern. Applied to adjudication, polycentric problems normally involve many affected parties and a somewhat fluid state of affairs. The range of those affected by the dispute cannot easily be foreseen and their participation in the decision-making process by reasoned arguments and proofs cannot possibly be organised. As a result, the adjudicator is inadequately informed and cannot determine the complex repercussions of a proposed solution. Fuller argued that attempts to resolve polycentric problems through adjudication would lead to inferior outcomes. Either the solution would fail, or the adjudicator would be forced to ignore judicial proprieties to try out various solutions. Worse, the adjudicator may reformulate the problem itself to make it amenable to adjudicative disposition... Fuller did, however, recognise that all disputes submitted to adjudication have some elements of polycentricity... He, therefore, concluded that ultimately it is a question of knowing when the polycentric elements have become so significant and predominant that the proper limits of adjudication have been reached.

Disputes involving certain central bank functions are highly polycentric and are unsuitable for resolution through judicial review. For example, consider monetary policy function. This involves varying short-term interest rate to control supply and demand of money in the economy, which, in turn, influences economic activity and inflation. If judicial review supplants the central bank’s decision on this rate with the decision of the adjudicator, the repercussions would affect every single borrower and saver. Yet, the adjudicator can neither offer a meaningful hearing to all those affected parties, nor can he effectively process all the necessary information to determine an optimal solution. Evidently, disputes about monetary policy rate are highly polycentric and are better resolved outside the court... judicial review could be effectively used to resolve bipolar disputes involving the central bank if they exhibit low polycentricity... Overall, the polycentricity test offers a conceptual framework for determining if a commercial dispute brought before the court involves a question of public policy that should ideally be kept beyond the remit of substantive judicial review. Adopting this test within constitutional jurisprudence would help sustain the legitimacy of judicial review while retaining the accountability of technocratic institutions such as the central bank.

A very useful framework to restrain kritarchy, which is increasingly evident in judicial pronouncements in recent times involving central bank decisions.  

13. The Government of India appears to have seized on production-linked incentives (PLIs) as a magic-pill to overcome antecedent problems and attract investment and manufacturing to India. Mobile phones happened. Does not at all mean that anything close to similar impact with other sectors using PLIs is assured. 

Thursday, November 19, 2020

Lessons from the history of textiles

Several takeaways from this small extract of Virgina Postrel's new book on textiles in the WSJ. 

This about the productivity boost from the invention of spinning machines in late 18th century,

Before the Industrial Revolution, spinning wool into yarn was by far Britain’s largest industrial occupation, employing as many as 1.5 million people in a total workforce of about 4 million. Keeping a single weaver supplied with yarn required about 20 spinners... Spinners were paid miserably, yet their labor constituted a greater proportion of the cost of cloth than anything except the raw material. That’s because cloth consumes staggering amounts of yarn, and hand spinning takes a long time. The denim in a single pair of jeans, for instance, consumes about 6 miles of cotton yarn. The best spinners would have taken about 100 hours to produce that much. That’s nearly 13 eight-hour days.

This is something to pause and reflect as we view the productivity and other impacts of modern technologies. 

Its labour displacement effects were offset by newer products and needs,

After commissioning a report, lawmakers decided against action. Despite the upheaval... spinning mills were creating new kinds of jobs and benefiting the nation in other ways. From clothing to sails, bed linens to flour sacks, essential items were suddenly much cheaper, more varied and more easily obtained. It was the beginning of what economic historian Deirdre McCloskey calls “the Great Enrichment,” the economic takeoff that over the next two centuries lifted global living standards by 3,000 percent.

The history of textiles also informs us about the role of protectionism in the rise of the industry,

In the 17th and 18th centuries, Europeans went crazy for printed cottons from India. The colorfast dyes, beautiful patterns and soft, lightweight fabrics surpassed anything Europeans could achieve—threatening silk, linen and wool producers. In response, some countries, including Britain, banned the imports. In France, where the silk industry was running the show, the government went even further, banning all cotton imports, even plain cloth, and all printed textiles, even if they were made in France. From 1686 to 1759, France treated calico essentially the way the U.S. treats cocaine: Traffickers could be sentenced to years rowing in the navy’s galleys. Major offenders were executed. People caught wearing calico could be arrested and imprisoned without trial.

Tuesday, November 17, 2020

State capitalism in Bihar - what's the alternative?

Harish Damodaran has a very good story in Indian Express on a confluence of public investments based industrial revival in Bihar, in its old industrial capital of Begusarai district.

The Hindustan Fertilizer Corporation Ltd’s (HFCL) ammonia-urea complex at Barauni town of Begusarai district, shut down in January 1999, is now being revived – through the setting up of a brand new plant on the same 480 acres land that housed the earlier project. At Rs 7,043.26 crore capital cost, it would be Bihar’s biggest industrial investment. It is expected to create over 5000 jobs when commissioned by December 2021.

The project is being undertaken by Hindustan Urvarak & Rasayan Ltd (HURL) - a joint venture of Coal India Ltd, NTPC, Indian Oil Corporation (IOC), HFCL and Fertilizer Corporation of India. It is also putting up two other similar-sized ammonia-urea complexes at Gorakhpur (Uttar Pradesh) and Sindri (Jharkhand). These, like Barauni, are greenfield natural gas-based plants in locations that previously had units running on naphtha and fuel oil, respectively, and lying closed for two decades or more.

The production of urea from Barauni is supposed to meet the requirements of Bihar farmers, whose supply now comes from outside the state. The gas for these projects will come from GAIL's Jagdishpur-Phulpur-Haldia pipeline. 

The revival story is not confined to fertilisers. Take this about petroleum, 

IOC’s oil refinery at Barauni was India’s second after Assam’s Digboi. It came on stream in July 1964 with a one million tonnes (mt) annual crude processing capacity, augmented to 3 mt in 1969 and 6 mt by 2002. On January 30, after nearly 18 years, the IOC board approved a further expansion to 9 mt at an estimated cost of Rs 13,779 crore. This project – entailing the setting up of a new 9 mt atmospheric and vacuum distillation unit, the contract for which was awarded to L&T Hydrocarbon Engineering in April – is to be commissioned by April 2023.

This in power sector, 

Equally significant is the Barauni Thermal Power Station (BTPS). This coal-fired project, too, came up in the early-sixties, with five units of 145 megawatt (MW) aggregate generation capacity being made operational between January 1963 and December 1971. All of them were retired by 1995-96. Units 6 and 7, of 110 MW each established in 1984-85, were taken up for renovation and modernisation. On December 15, 2018, NTPC acquired BTPS from the Bihar State Power Generation Company. Today, not only are units 6 & 7 running, a new 250 MW plant was declared operational from March 1, this year. Another 250 MW unit is expected to be added by 2021, taking the total to 720 MW.

And in dairying, 

The Barauni Dairy, with a turnover of Rs 755.36 crore, it is not just Bihar’s, but also eastern India’s, largest cooperative dairy union. In 2019-20, the Deshratna Dr Rajendra Prasad Dugdh Utpadak Sahkari Sangh, as it is called, made Rs 499.03 crore of payments to 1.32 lakh farmers and procured 4.55 lakh kg per day of milk on an average. Barauni Dairy is planning to invest Rs 95.5 crore in what will be the country’s biggest plant for making indigenous milk products. The proposed plant will consume 2 lakh litres per day of milk to exclusively produce rasagulla, gulab jamun, peda, cham cham, kalakand, misti dahi, raskadam, milk cake, khoa, paneer, lassi and plain dahi. The dairy union is already using 70,000-80,000 litres daily now for producing indigenous milk sweets under the ‘Sudha’ brand.

Note the common thread. All these are public sector led initiatives. There is no private sector involvement. Besides, many also involve revival of old and sick facilities.  

How do we interpret this?

The conventional wisdom would be to dismiss them as money down the drain. After all, many of them are only repeating failed paths. Instead of government making these investments, they should create enabling conditions to attract private investments. Further, the opportunity cost of scarce public resources merits investments in infrastructure etc. 

Here is another view. No private investor is likely to either revive these units or make large investments in these and other areas in the foreseeable future. Creation of the enabling conditions is a work in progress, and by itself will not catalyse private investments. It also needs some successes, in turn, required to create the minimum industrial base. Besides, industrial development histories across the world have all been driven by state capitalism. Finally, these are not exactly fungible resources - these investments are not from budget resources but corporations making investment from the internal resources. 

Several questions follow.

The point about "enabling environment" assumes that there is something called a right level of "enabling environment", which in turn can be targeted and realised by the state as it exists today in Bihar through specific actions and in finite time, and on which private investments will follow despite a landscape where there are no other investment precedents and where the narrative on such investments in dismal. How correct and/or realistic are these assumptions?

Governments face a challenging reality. No large private investor would invest in Bihar. And government's ability to undertake the reforms to improve environment and encourage investors is questionable. So to break this gridlock, does industrial policy demand that investments by PSUs is an essential requirement, but if only as part of efforts (along side other reforms) to trigger growth impulses? 

And what about lessons from history about the importance of state capitalism? How about the use of public sector entities to produce felt needs (fertiliser, petrol, power, milk products etc) which are currently not locally produced? 

What are the accompanying "enablers" that state government could supply so as to maximise the potential for an economic take-off for the region? Is the state government cognisant of this rare growth opportunity for the region?

This is also interesting in so far as the multiple sectors being simultaneously brought to play here - though petroleum, power and fertilisers are closely intertwined. It will be extremely useful to see its impact ten years hence. This is the closest to a big-push development example from recent times in India. 

Monday, November 16, 2020

The "smartness" problem in development

Critique of technocracy has been a constant theme of several posts in this blog. I blogged here earlier about Anand Giridhardas's work and his excoriation of smart outsiders prescribing smart solutions to the natives. I also blogged here making the distinction between smart and wise and the importance of the latter in exercising judgment. 

In this context, it is useful to point to two studies. One by a sociologist Rachel Schurman (also here) uses a case study of the Agriculture Development program of Bill and Melinda Gates Foundation (BMGF) to shine light on its organisational culture and how it might conflict with its development work,

My analysis reveals an organizational culture that, particularly during the early years, reflects important continuities with the corporate culture for which its parent company, Microsoft, was so well known. From the start, the Foundation sought professional staff who possessed strong analytical skills, were very smart in a ‘‘logical-mathematical” way, had business experience, and were highly motivated. By hiring people who represented the ‘‘best and the brightest” by these criteria and charging them with solving the perceived problems of African agriculture, the Agricultural Development program became populated by individuals who applied their business thinking and analytical skills to ‘‘fixing” rural Africa and rural Africans. The foundation’s orientation toward strategic planning, which is a key aspect of this mindset, produced a decontextualized program that abstracted away from farmers’ real agricultural and sociocultural worlds and proffered a set of universal (and universalizing) solutions.

My analysis also highlights two other noteworthy features of the BMGF’s organizational culture. One is that by immersing bright, high-achieving professionals in an intense workplace run by a powerful and revered leader, the Gates Foundation taught staff to ‘‘manage up” (toward Bill Gates) rather than manage down (toward African farmers). This, together with the ‘‘culture of smartness” that pervades the Foundation, leads BMGF staff to privilege expert knowledge and professional credentials over other kinds of knowledge, including smallholder farmer knowledge, community familiarity, and experiential knowledge. Both of these phenomena serve to insulate and distance Gates staff from the field, making it difficult for them to listen and learn from those whose lives they seek to improve, even though many express a genuine desire to do so. As a result, the intended beneficiaries of the Foundation’s largesse are treated as passive objects of development rather than complex, knowledgeable social actors.

The other significant feature of the Gates Foundation’s organizational culture – and one that has important consequences for the way the BMGF ‘does development’ and influences other organizations – is the foundation’s obsession with having impact on a large scale. This manifests in two ways. First, it leads the foundation to privilege big, international organizations that can develop and manage megaprojects. Second, it manifests itself in the BMGF’s concern with making sure that its grants can be ‘‘scaled up,” that is, expanded into new social, biophysical and geographic domains. This often encourages grantees to expand their projects beyond their organizational capacities and into locales where they possess little knowledge and few local connections. At the same time, small, local organizations and individuals that are cognizant of community needs and could offer strong links at the local level, tend not to be supported.

This is a searing takedown of the world's standard setting non-profit organisation. Schurman raises very important issues, for which there are no easy answers. While agreeing with the concern she raises, it is also important to not to go the other extreme (which she does not, but could be interpreted by others with such inclinations) and abandon strategic planning, dismiss all expertise, embrace smallness, and focus only on communitarian engagements.  

Another paper raises concern at the rise of non government organisations (NGOs) with their "upward" accountable (to donors) and technocratic approaches to solving development problems and the associated shrinkage of space for various membership based organisations (MBOs) like social movements, political or religious institutions, trade unions, co-operatives, self-help groups etc which are "downward" accountable and exercise a civil society function. 

Ongoing representation of civil society as constituting a relatively narrow band of NGOs representing moderate points of view and lacking the membership base and politicized methods necessary for achieving change is irreconcilable with the need to reconfigure deeply rooted inequalities. Tackling issues of power, inequality, social, and political change requires a fundamental redress in how we conceptualize, distinguish between and support NGOs in relation to MBOs. It is only through mobilizing a strong membership base with internal accountability structures that participation in program design or political change can remain political, a process through which MBOs seek to take an independent or oppositional stance to the state or private interests and to leverage better terms of recognition, resource distribution, and political influence... How can NGOs continue to expand their successes in service delivery while returning to a stronger engagement with the root causes of poverty that are so deeply embedded in the systems and structures of power and politics that underlie poverty and inequality? How can they join forces with local MBOs as equal partners, jointly pursuing their mutual goals of transformation and social justice?... The gradual erosion of their civil society roots and their inability to secure ‘development alternatives’ at any scale means that NGOs remain unable to engage with transformative agendas that seek large-scale redistribution and the re-ordering of wealth and privilege... Development as a project-based and professional activity has yet to find a way to confront the dominance of established elites and corporate interests.

The authors point to some direction of work for NGOs in this regard, 

Government–NGO partnerships and the subsequent ‘transformation by stealth’ is one means through which NGOs strive for more transformative forms of service delivery, but other forms of institutional advocacy remain blocked by the limited civil society space afforded to them by states and donors. A shift toward a stronger, more inter-connected civil society in which NGOs play a key bridging role between MBOs, local and national governments and transnational may be the way forward.

But this path has to be a carefully tread. In particular, it's important to strongly confine such engagement to only local NGOs and ensure that foreign finance does not play any role in these efforts.

Wednesday, November 11, 2020

The missing supply side problem in development

The Business Standard reports about the problem of supply-side in national highways contracting in India,

As the Union government sets out to fix targets for the highways sector, there are few large players that can deliver as required... An official in the know said: “There are few players that can undertake build-operate-transfer (BOT) projects and 25-28 mid-sized firms to build hybrid-annuity projects. Together they may not able to achieve the targets set by the Central government. Therefore, we need global players for not just operation and maintenance but also execution.” The industry says maintaining a steady cash flow to do the job is tough... Over the past three years, 70 contractors and developers have bagged projects from the National Highways Authority of India and the Ministry of Road Transport and Highways, which includes all sizes of contractors. The sector, however, has been falling short of achieving the daily road construction target for the past few years, which may be attributed to unrealistic targets.

It's more than the working capital flows. Even execution will run into problems if expansion is very fast. There are hard limits to how quickly the supply side of BT paver machines, ready mix concrete, or skilled manpower can be mobilised. This example has resonance across other sectors. 

Development is about the combined action of state and markets. 

The former involves state capacity to design appropriate policies and implement them effectively. It is about making political choices regarding policies, but reasonable autonomy and capacity in ensuring their effective design and implementation. 

The latter involves three requirements - availability of market enabling regulations, and the emergence of demand and supply sides. 

There is copious literature on all these, except the last one, the availability of supply-side. I have blogged extensively on India's weak state capacity, deficient demand, and problems with carrying out business activities. 

However, the point about supply-side is often taken for granted. Even those who acknowledge the need for active policies to create demand (say, strategic purchasing by the government) and enabling requirements (say, ease of doing business reforms), stop short of overlook supply-side issues. There is a "build it and they'll come" assumption about the supply side. The strongly held beliefs about India's massive latent entrepreneurial talents and the vast globalised nature of markets reinforce this conviction.

For sure, supply-side will finally arrive. But there are two problems. One, the time taken may be inordinately long, often decades. Two, the system may have to go through multiple wasteful equilibriums before an adequate enough supply side emerges. 

Take a few examples. Private provisioning of water and sewerage or solid waste management or mass transit, or privatised electricity distribution, or public housing projects on PPP, or affordable private schools and hospitals, or various kinds of services ranging from cleaning to managing IT systems. 

As private participation in public services has deepened, an influential line of thinking has sought to shift the debate away from public production and provisioning of services toward private production and public provisioning of services, even private production and provisioning and public payment. Accordingly opinion makers and consultants have advocated that governments buy services instead of owning assets. 

So, for example, why own school or hospital buildings, or sewerage and water treatment facilities, or faecal sludge collection and treatment facilities, but buy the respective services through long-term concessions. 

There is no doubt that these are all thoughts in the right direction. So, for example, it has now become common for governments to outsource cleanliness of its facilities to sanitation contractors or hire vehicles instead of recruiting sweepers and drivers (and own vehicles) as full-time employees. Similarly, many facilities construction contracts are most often bundled with maintenance. These have all been undoubtedly beneficial fiscally and also improve service quality. But they have taken decades of experimentation and iteration to get de-risked and emerge as mature markets with deep enough supply-side. 

The same logic is now being applied to the newly emerging area of software as a service (SaaS) is attracting a lot of interest. So why not ask service providers to provide attendance monitoring as a service (and avoid owning biometric devices), location tracking on public vehicles as a service (and avoid owning GPS devices), or meter reading as a service (and avoid having to own household meters and their billing), or SCADA as a service (and avoid having to own the infrastructure). 

These too will emerge in due course. But now if you call a tender for any of these even in small volumes, you will be lucky to get competitive bids and luckier still to get service anywhere near the expected levels. And higher the volumes of supply solicited, greater the certainty of disappointment.  

There are multiple reasons for the slow pace of emergence of these markets. 

1. These innovations are less about technology and more about implementation. And there are several constraints to implementation - establishing field presence require hiring skilled personnel at affordable prices, being able to overcome entrenched vested interests. This requires getting execution right, a not so easy challenge given its environment. For example, a biometric or GPS implementation can be gamed or go wrong in so many different ways that it requires very tight and high intensity monitoring, for a long enough time for implementation to stabilise. 

As I have blogged here, this requires hunkered down execution by entrepreneurs, something not made easy by the prevailing incentive structures. 

2. Delivering these services at the required service levels often demand a much higher price than what the government offers. These services are often new or being done internally at far lower cost. For example, it would cost more to outsource maintenance of a water or sewerage treatment facility than to maintain them internally since the service level expectations with the former are much higher, which in turn demands higher costs.  

3. Unlike products, these services are generally delivered locally. Even SaaS requires local support teams. Building up such local teams and that too quickly and at reasonable scale is not easy. Managing these local  teams is a non-trivial management challenge. 

In fact, greater the degree of human engagement involved (and therefore quality consideration), the more difficult is it for private providers to deliver such service at scale. It's for this reason that third party quality audits for engineering works (outside the large projects) remains a very fragmented and localised market in India despite being in place for over two decades. 

4. Despite their logical appeal, some of these services are best done internally, at least until the country reaches a certain stage of economic progress and human development. Some, for their inherent nature, may never be done well by private providers or require much higher cost for private delivery.

5. Finally, human imagination and ideation runs far faster than reality can support. There is no cost to ideation and talk is cheap. Execution is costly.   

I have not dwelt on the bigger challenge of regulating these providers once markets mature. This, as developed countries are finding out today is leading to reversion to public production and provisioning in many areas.

So what can governments do to expedite supply side? Two, in particular, come to mind. 

In this context, industrial policy on development issues can be helpful in catalysing the supply side. The central and state governments could signal their policy intent so as to shape market expectations and investment. Announcement of long-term plans and adherence to them would be the best market signal. Even advisories encouraging specific trends, as far as possible, but without any mandatory requirements can be non-distortionary. 

We all know the impact of government purchases of smart meters and LED lights have had on the respective markets. But these are products. We need similar intent and action on the services side. 

Another area is for public policy is to standardise procurement processes and documents and disseminate them for use by interested officials at different levels of government across the country. And actively encourage these officials to apply them. 

Tuesday, November 10, 2020

RCTs in Development

I have an interview in this new OUP compilation that makes a critical assessment of the use of randomised control trials (RCTs) in the field of development. Available for pre-order here

I am also a discussant on a book launch event hosted by UNU-WIDER on November 10.  

Monday, November 9, 2020

The "dual circulation" and "China plus one"

There are two very interesting global dynamics at play about China. On the one hand, China has started pursuing a policy of economic growth anchored on the domestic market, with the global market as support cast. On the other hand, the multinational corporations are pursuing a policy of making in China for China, and making elsewhere for the rest of the world.

It will interesting to see how each of these two trends play themselves out in the years ahead. The architecture of the global value chains as well as global trade and economic growth will depend on them. 

Internally, following President Xi Jinping's announcement in May, the Chinese have formally adopted a dual circulation growth strategy, "a new development pattern in which domestic and foreign markets boost each other, with the domestic market as the mainstay". The world to revolve around the big Chinese economy! 

Externally, hastened by the events in the aftermath of the Covid 19 pandemic, major economies have realised the over-dependence of the global manufacturing supply chains on China. Accordingly, global businesses have resolved to diversify away from China by pursuing a China plus one strategy - use China as the manufacturing hub for its domestic market, but cultivate manufacturing bases in other countries to serve the global market. China for China, and some others for rest of the world!

Yukon Huang and Joshua Levy have a good analysis of the problems facing dual circulation strategy. Whatever the strategy, China's future will depend on it being able to address egregious distortions - between regions, between rural and urban, between producing and consuming, public and private sectors, and the massive debt overhang. Sample this,

Last year investment accounted for 43% of China's gross domestic product. That is not, in itself, a reason for worry, but capital's diminishing efficiency is a cause for concern. Economists evaluate returns on investment with an indicator called the incremental capital-output ratio, which measures how many units of investment are needed to generate a single unit of GDP. Since 2005, that number has nearly doubled from 3.3. to over 6 in 2017, reflecting a halving in returns on investment in China... The International Monetary Fund estimates that fixed-asset investment accounted for about half -- roughly 5 percentage points -- of China's GDP growth over the past several decades... Today, private companies' rate of return on assets is around 9% whereas SOEs only offer around 4%.

There is little to suggest that any of the cleavages are narrowing in a meaningful and sustainable manner.

Besides, there are three aspects of President Xi Jinping's economic paradigm, of which "dual circulation" is an important part, which have the potential to engender distortions. One, a feature of the new paradigm has been the return of state-owned enterprises (SOEs) as important economic actors. The SOEs are being cultivated to become dominant players in their respective market segments. Second, the China 2025 plan seeks to achieve not only self-sufficiency but also global market dominance in several identified industries. Three, the Communist Party's control over Chinese businesses, even private ones, has become more direct and institutionalised in recent years. This effectively forces multinationals dealing in China to engage directly with the Party. 

If these three aspects end up having an inordinate influence on "dual circulation" then it is also likely to end up hurting the interests of multinational corporations and create one more reason to reduce their exposure to China for non-economic reasons. 

The recent decision to pull the plug on the ultra-high profile IPO of Ant Financial at the very last minute came at a very high cost to China's credibility. It points to Xi's willingness to incur any cost to drive home the message about the supremacy of the Party and the system. No one matters. It clearly signalled the boundaries of engagement for the Chinese private sector. It's only the latest illustration of the authoritarian nature of the regime. The same attitudes underpin foreign policy too, with the numerous recent instances of take-no-prisoners Wolf Warrior approach to diplomacy. See this and this

The China plus one strategy has its roots going back to at least a decade, arising from the trend of high labour costs causing businesses to shift some of their more labour-intensive activities to countries with lower labour costs. So, it was more a case of giving a name to a practice which was already afoot rather than any conscious effort to move out of China. However the trade war with the US initiated by President Trump may have introduced the risk mitigation by diversification of supply chains and production locations. The pandemic has surely introduced an element of urgency and importance to this trend. Countries like Japan have even offered financing support to help their companies to shift production out of China. 

Be that as may, there is also a need to be cautious about reading too much into the shifts happening to a neighbouring country like Vietnam. For a start, there is only so much that Vietnam can absorb. Then, it's one thing to shift to Vietnam across the border, and an altogether different thing to shift into South Asia or Sub Saharan Africa.

As I have blogged here, any attempt to shift out of China is easier said than done. Apart from the inertia associated with breaking apart comfortably ensconced supply chains, China offers important factors which few, if any, others can match - large pipeline of skilled workers; localised manufacturing ecosystems that encompasses design, prototyping, and production; strong supplier networks; world-class infrastructure; and a massive domestic market. Only when the extenuating factors - labour cost and concentration risk - start to offset these considerable advantages in a significant manner would commercially attuned firms feel compelled to shift in a meaningful enough manner. 

But the non-economic extenuating factors appear to be growing in importance. For example, the changing geo-politics appears to have already influenced the plans of the largest manufacturers like Foxconn. They appear to be shifting towards a strategy of producing in China for China and gradually shifting production, at least in terms of new investments, toward other countries for their export markets. 

Another extenuating factor can be the rise of protectionist tariffs and other non-tariff barriers which slows down and reverses trade. And China's aggressive foreign policy actions may actually be triggering and hastening this trend. A full-fledged Cold War between China and several western countries is well within the realm of possibilities. It is safe to argue that, even with the exit of President Trump, any form of technology related trade between China and the west is now off the table. 

In the final analysis, the repressive, completely centralised, and individual-cult based nature of the regime shift during President Xi Jinping's tenure will be the Achilles heel of "dual circulation" or any other reform. See thisthis, and this. History does not have precedents that point to any other direction. 

Francis Fukuyama says that historically China's biggest issue has been the bad emperor problem. Democracy puts a floor on the bad emperor - if he gets too bad, then he can be removed. It has had a long history of recurrent bad emperors. Its recent four decades of prosperity has been due to its ability to keep out bad emperors. Xi Jinping may well have ended that period of good fortune!