I have an oped in Mint today with V Ananthanageswaran and Mahesh Yagnaraman where we highlight the important differences between regular venture capital investing and development impact investing. It's an abridged version of the longer paper here.
Update 1 (09.08.2022)
The report of Impact Investors Council on impact investing trends in India in 2021 is here. It has an Annexure II which lists out various impact investment options.
The economic policy making in the aftermath of the Covid 19 pandemic is a teachable moment in illustrating arguably the most corrosive effect of widening inequality, that of elite capture of the political decision-making space.
The impact of Covid 19 and the recovery appears to be K-shaped across the world. While previous pandemics and wars were associated with wealth destruction among the rich and lowering of inequality, this one has been associated with the exact opposite trend.
The reason for the reversal of trend has been squarely due to the political choices made in the determination of the rules of the game.
Three in particular stand out.
1. Instead of increasing taxes at the higher income levels to raise money to support the spike in fiscal spending to combat the pandemic, tax increases have largely remained off the table.
As a counterfactual, during both the World Wars, taxes surged to finance the war effort. Morgan Hausel quotes FDR from 1942,
Are you a businessman, or do you own stock in a business corporation? Well, your profits are going to be cut down to a reasonably low level by taxation. Your income will be subject to higher taxes. Indeed in these days, when every available dollar should go to the war effort, I do not think that any American citizen should have a net income in excess of $25,000 per year after payment of taxes [roughly $375,000 adjusted for inflation].Emmanuel Saez and Gabriel Zucman advocated an excess profits tax citing precedent from World War I,
The government should impose excess profits taxes, as it has done several times in the past during periods of crisis. In 1918, all profits made by corporations above and beyond an 8 percent rate of return on their capital were deemed abnormal, and abnormal profits were taxed at progressive rates of up to 80 percent. Similar taxes on excessive profits were applied during World War II and the Korean War. These taxes all had one goal — making sure that no one could benefit outrageously from a situation in which the masses suffered.
2. Instead of wealth erosion (especially by way of equity and other asset markets falling), the massive credit market and monetary accommodation has primarily been aimed at backstopping and propping up the expansion in the asset markets. The extended monetary accommodation, with all the numerous extraordinary credit and bond market interventions since the GFC and especially since the pandemic have all been aimed primarily at keeping the equity markets booming and defies all logic. This issue is the central concern of Rise of Finance.
3. Instead of confining stimulus to those most affected and whose livelihoods were made vulnerable and allowing capitalism to enforce its disciplining powers on greedy and irresponsible executives and their companies, fiscal policy has generously and recklessly showered benefits on corporates and private equity investors. Sample this and this about the socialisation of losses involving Marriot and Disney respectively. Sample this, this and this about waste and the questionable efficacy of the massive Pay Check Protection (PPP) program.
In all three cases, the standard historical rules of game were changed to suit the preferences of the wealthy and corporates. Tax cuts were never seriously considered and backstopping the financial markets became the matter of highest priority. The wealthy elites had become too powerful to be able to manage the political establishment and their political choices. This is perhaps the most corrosive impact of widening inequality, its implications on political choices.
Economics involves the study of efficient allocation of scarce resources. And this allocation involves decisions which are fundamentally political, which goes beyond mere efficiency and looks at considerations of fairness, equity, and specific ideologies of each ruling dispensation. It's just that an establishment which is the hand maiden of elite interests and plutocrats is excessively oriented towards efficiency to the exclusion of all else, besides the inevitable cronyism and corruption.
For economists looking at canonical models to assess the impact of various trends (like inequality), which model can capture these fundamental human preferences and their consequences?
Tamal Bandopadhaya has a very informative oped on the gold loan market in India. It highlights the risk insurance value of gold for households, the ease of borrowing and lending against gold, and the challenge with micro-prudential norms for gold loans etc.
On the volume of the gold loans market,
The household gold holding in India, the second biggest consumer of gold after China, could be as much as 25,000 tonne. The pandemic had led to a 94 per cent drop in gold import during the first quarter of 2020-21 but the scene has changed. In February, gold import surged almost 124 per cent after a near 155 per cent rise in January... A January 2020 report of consultancy firm KPMG pegs informal lenders’ share in the $46-billion gold loan industry at 65 per cent. By its estimate, India’s gold loan market is set to expand by at least 34 per cent to $61 billion in two years to March 2022... The traders typically take gold loans as bridge financing to take care of temporary cash flow mismatches; individuals go for it for emergencies, particularly medical needs.
Who are the major actors in the gold loan market,
Offering loans against gold has traditionally been the business of a handful of NBFCs such as Muthoot Finance Ltd, Manappuram Finance Ltd and Muthoot Fincorp Ltd. But banks and even small NBFCs started grabbing the opportunity with both hands last year as consumers, including those at the so-called bottom of the pyramid, had shed their inhibition and were willing to monetise gold by taking loan when their cash flows dried up in a shrinking economy, hit by the Covid pandemic.
On the ease of lending and borrowing against gold,
One needs to simply dial a number to get all information about the product at SBI. The bank also reaches out to customers, basis a missed call or a text message. Most lenders have adopted a similar strategy... there are many benefits for borrowers who can get the loans in the comfort of their homes or through on-line channels. When a consumer asks for a gold loan, she gets a free valuation of the gold that she offers as collateral. Besides, as the lender keeps the gold in its vault, it’s free safe-keeping of the borrower’s assets. The financing is immediate if the purity of gold is certain, and the cost of gold loan is relatively cheaper compared with other loans.
On how Covid 19 episode made its value evident for households,
Till January, bank credit had shown a measly 5.7 per cent growth over the previous year. The pace of growth in retail loans, the main driver of bank credit in India for the past few years, slowed down to 9.1 per cent year-on-year in January against 16.9 per cent a year ago. But loan against gold, the new-found love of Indian bankers and borrowers, staged a phenomenal 132 per cent growth during this period. From a low base of Rs 18,596 crore, the industry’s gold loan portfolio zoomed to Rs 43,141 crore... In the past one year, most banks and NBFCs have been aggressively pushing for gold loans. The State Bank of India’s (SBI’s) gold loan portfolio jumped to Rs 17,492 crore in December, rising from Rs 11,509 crore in just three months since October 2020. The nation’s largest lender is offering gold loans at 7.5 per cent.
This build-up has been having its consequences,
In the past few weeks, quite a few advertisements have been put out in newspapers by banks and non-banking financial companies (NBFCs) on gold auctions. The lenders are selling gold to recover dues from their borrowers. Some bankers, in private, are saying they are seeing the first signs of rising defaults... Gold prices are down close to 20 per cent from the record high of Rs 55,922 in India early August 2020. Since January, the prices are down by almost Rs 6,000. In the second week of March, the price dropped to a recent low of Rs 44,177; since then, it has risen around 1.5 per cent. The drop in gold prices is at the root of the problem — both for bankers and borrowers. For instance, if a bank has given a loan of Rs 90,000 against Rs 100,000 worth of gold pledged (at 90 per cent loan-to-value or LTV — the percentage of the loan that can be disbursed against the value of gold pledged), a 20 per cent drop in value increases the risk for the bank. Why? The amount of loan given becomes higher than the value of the collateral. In such a scenario, the borrowers are required to bring in more gold to add to the collateral or prepay the loan. Some borrowers may not be able to replenish the collateral or don’t have the money to close the loan. A few smart ones even may choose not to pay back or bring in more gold (even though they have both) and decide to dump the gold already pledged, with the bank, as its value is less than the money taken from the lender. This is why probably we are seeing gold auctions... Muthoot Finance, which had a gold loan portfolio of Rs 37,724.5 crore in December 2019, has seen it rising to Rs 49,622.5 crore in December 2020. During this period, its gold holding actually came down — from 173 tonne to 166 tonne — because of the drop in gold prices. During this period, Manappuram Finance’s gold loan portfolio had risen from Rs 16,242.95 crore to Rs 20,211.48 crore but the gold holding dropped from 73.5 tonne to 68.2 tonne. The NBFCs follow a lower LTV ratio for such loans.Three observations
1. The value of gold as a risk insurance hedge for poor and middle-class households and small traders, who form the overwhelming majority of the credit market, is not going to diminish any time soon. It is not easy for formal finance to address this problem. On both cost and convenience, formal finance is way behind.
2. Both the explosive rise in gold loans and the rise in defaults in the formal market can be taken as representative of the gold loan market as a whole. Further, given the very large share of informal lenders in gold loan business and given those borrowers are even more likely to default, we get a clear picture of the distress associated with Covid 19.
3. The explosive growth in gold loans and the persistence of NRGES demand are some of the very few indicators of enduring weakness in the dominant informal sector.
1. A comparative assessment of India's macroeconomic indicators now with that at the time of taper tantrum.
The U.S. commitment to Taiwan has grown verbally stronger even as it has become militarily weaker. When a commitment is said to be “rock-solid” but in reality has the consistency of fine sand, there is a danger that both sides miscalculate... Admiral Phil Davidson, the head of U.S. forces in the Indo-Pacific, warned in his February testimony before Congress that China could invade Taiwan by 2027. Earlier this month, my Bloomberg Opinion colleague Max Hastings noted that “Taiwan evokes the sort of sentiment among [the Chinese] people that Cuba did among Americans 60 years ago.” Admiral James Stavridis, also a Bloomberg Opinion columnist, has just published “2034: A Novel of the Next World War,” in which a surprise Chinese naval encirclement of Taiwan is one of the opening ploys of World War III. (The U.S. sustains such heavy naval losses that it is driven to nuke Zhanjiang, which leads in turn to the obliteration of San Diego and Galveston.) Perhaps the most questionable part of this scenario is its date, 13 years hence. My Hoover Institution colleague Misha Auslin has imagined a U.S.-China naval war as soon as 2025.
3. The block of Suez Canal due to a huge container ship running aground is one more reminder about the strategic importance of the main trade route between Asia and Europe.
Every day, about 50 vessels sail through the 120-mile long Suez Canal. It is a key artery handling at least 10 per cent of global seaborne trade and a similar amount of oil shipments, leading to fears that a prolonged shutdown could disrupt supply chains worldwide. Taiwan-based Evergreen Marine, which operates the 220,000-tonne vessel, on Wednesday said the ship had entered the Suez Canal from the Red Sea on Tuesday and became stuck after being blown off course.
It also draws attention to the limits and risks of using the massive Suezmax or Panamax ships. The Ever Green is 400 metre long, 60 m wide, and has a gross registered tonnage of 220,000. The ship is diagonally stuck blocking the entire width of the 300 m canal.
The Canal's importance is based on the massive growth in global maritime trade,
In 2010, 8.4bn tonnes of cargo travelled by sea. By 2019, this had grown to 11.1bn tonnes. And as trade volumes have grown, so has the importance of choke-points for crucial goods such as food and fuel. In 2000, 42% of global grain exports passed through at least one maritime choke-point, according to Chatham House, a think-tank. By 2015, that had risen to 55%. In response, some choke-points have expanded their capacity. In 2015 an $8bn expansion project added 35km (22 miles) of new channels to the Suez Canal and dredged existing ones, allowing bigger ships to pass through. A year later an expansion of the Panama Canal was completed, making it big enough for 79% of cargo-carrying ships to pass through, versus just 45% before.
5. Fascinating read on perhaps the most important company in the world, Taiwan Semiconductor Manufacturing Company (TSMC), the largest contract chip maker. The company is the runaway market leader in the semiconductor manufacturing market, and more importantly the only player (along with Samsung) to have mastered the manufacturing of the most advanced chips of 5 nm and below. Smaller the transistors on a chip, the lower the energy consumption and higher the speed.
“The automakers very much believe they are the giants in the world,” says Ambrose Conroy, founder and chief executive of Seraph, a supply chain consultancy. “But this is a situation where the semiconductor manufacturers are the giants, and the automotive purchasing teams are the ants.”... TSMC has long gone largely unnoticed because the semiconductors it manufactures are designed and sold in products by branded vendors such as Apple, AMD or Qualcomm. Yet the company controls more than half of the world market for made-to-order chips. And it is getting more dominant with every new process technology node: while it only accounts for 40 to 65 per cent of revenues in the 28-65nm category, the nodes used for producing most car chips, it has almost 90 per cent of the market of the most advanced nodes currently in production... Since every new node of process technology requires more challenging development and bigger investment in new production capacity, other chipmakers have over the years started focusing on design and left production to dedicated foundries such as TSMC. The steeper the cost became for new fabrication units the more other chipmakers started to outsource, and the more TSMC’s competitors in the pure-play foundry market dropped out of the race. This year, TSMC upped its forecast for capital investment to a whopping $25bn-28bn — potentially 63 per cent more than in 2020 and putting it ahead of both Intel and Samsung. Analysts believe that includes at least some investment in capacity the Taiwanese manufacturer needs to supply Intel. The US chipmaker is forced to outsource part of its processor production because it has struggled to master two successive process technology nodes — 10nm and 7nm — in time to make its own chips.
The sophistication of advanced chips is a prohibitive entry barrier,
The prohibitive cost has made it increasingly difficult for other companies to stay in the game of advanced chip manufacturing. But as the Intel example shows, money is not the only factor. Shrinking the size of transistors — the key feature necessary for cramming ever more components into one chip, which in turn allows continued cost and energy efficiency — is becoming a challenging feat of engineering. The transistor size in a 3nm node is just 1/20,000th of a human hair. The tweaks to machinery and chemicals needed to achieve this come more easily with the single-minded focus on this manufacturing technology, the large scale and broad range of applications that TSMC has developed.
6. Fascinating read on the social and environmental costs of distressed/ripped jeans!
7. On the costs of road accidents in India,
India loses nearly 40,000 youth like Thakur (aged 25-35) every year. The country has 1 per cent of the world’s vehicles but accounts for 11 per cent of all road crash deaths. In the last decade, road crashes have killed 1.3 million people and seriously injured over 5 million in India... As reported by a World Bank study, road crashes are estimated to cost the Indian economy between 3 and 5 per cent of gross domestic product (GDP) each year.
A new report by the World Bank and SaveLIFE Foundation analysing road accidents from four Indian states point to how road impact causes immiseration of the lives of the poor households,
More than 75 per cent of poor households that were affected by a road traffic crash reported a decline in their income due to the incident. The financial loss for the poor amounted to more than seven months’ household income, while it was equivalent to less than one month’s household income for rich households. Poor families were also three times more likely to seek financial help, often borrowing from informal sources... The survey also revealed that across all households, the impacts of road crashes were unequal among family members, with women being the most vulnerable — both as victims and as caregivers. In the absence of support systems and safety nets, women have to carry the double burden of physical and emotional labour, often taking up low-paying jobs outside the house.
8. On first reflection, the proposal to make math and physical optional for Engineering entrance examinations appears a case of Hamlet without the Prince of Denmark. The Approval Process Handbook released by the AICTE for the coming year does not make physics and math in pre-degree mandatory requirement for engineering entrances. As this oped points to, the decision also may have commercial considerations to keep afloat the large number of engineering colleges which are being closed down each year.
9. WSJ writes about how Covid 19 entrenched a triopoly of Google, Facebook, and Amazon in the US advertising market.
The pandemic pushed them into command of the entire advertising economy. According to a provisional analysis by ad agency GroupM, the three tech titans for the first time collected the majority of all ad spending in the U.S. last year. Beneath the shift are changes driven by the pandemic: more time spent on computer screens; more e-commerce; a jump in new-business formation, and a steady improvement in tech giants’ ability to demonstrate a return on ad investment. Success breeds success for what some call the “triopoly.” The increase in shopping and spending on Google, Facebook and Amazon’s platforms is adding to their already voluminous data on users, giving them even more appeal for advertisers that look to target their messages... The triopoly increased their share of the U.S. digital-ad market from 80% in 2019 to a range approaching 90% in 2020, GroupM estimates... Before the pandemic, a little more than 10% of retail purchases in the U.S.took place online. That jumped to 16% in last year’s second quarter when lockdowns peaked, according to Census data.
This is a fascinating case study of the appeal of digital advertising for companies,
This year, digital advertising is projected to account for more than half the roughly $1.1 billion Mondelez spends on media world-wide. It was only about 30% as recently as 2017... When Mondelez invests in digital advertising, it gets a 25% better return than with TV ads, the company says. It has found that its Google and Facebook ads do especially well, generating 40% higher returns than an average digital ad. The two now account for roughly 60% to 70% of Mondelez’s digital ad spending, up from less than 50% in 2017, the company says. The tech giants share data that allows Mondelez to understand its customers better, said the snack maker’s chief marketing officer, Martin Renaud. Google data showed Mondelez, for instance, that people tend to search the internet for healthier snacks in the morning and for more-indulgent treats as the day wears on. When the pandemic struck, Google provided updated data that helped Mondelez craft relevant ads. The company switched from showing college-age consumers an ad about eating lunch in the library to one that read: “Made it through an online class? Treat yourself.” Mondelez has been working with Google and Target Corp. to figure out how likely someone is to buy Oreos or Ritz crackers from Target stores after being served ads for them on Google’s YouTube... As it directs more ad money to the tech giants, Mondelez isn’t working with as many digital publishers in the U.S. In 2017, Mondelez worked with about 150; it now works with fewer than 10.
In simple terms, companies benefit with valuable information about consumer behaviour which helps target advertisements, and such information providers are by nature the largest few digital publishers.
10. Scott Galloway points to an important likely trend post-Covid, at least in the developed economies,
Commercial real estate is a $16T asset class. If gross demand for office space declines by a third, we could see the GDP of Japan ($5.1T) reallocated from office to residential real estate. Sonos, Sub-Zero, Restoration Hardware, and Slack — along with everything else that enables or enhances work from home — should benefit. In addition, we will see a great repurposing of office real estate. Many offices will remain, but no company will need the square footage they previously did, and companies will look for increased flexibility. In New York City, the amount of vacant office space available for sublet has doubled since 2019 and, as of December, the commercial vacancy rate in the city was the highest it’s been since the Great Recession. In 2020, San Francisco went from the lowest office vacancy rate in the city’s history to the highest.
11. Finally, NYT articles here and here about over heating and the likelihood of inflation in the US.
‘The real problem of humanity is the following: we have paleolithic emotions; medieval institutions; and god-like technology. And it is terrifically dangerous, and it is now approaching a point of crisis overall.’
First, since civilizations and cultures are distinct, there can be no universal culture. No body of thought emanating from one culture can be imposed upon another, either peacefully or through force. And civilizational decline is an immutable rule that applies to all civilizations, including the West. The second noteworthy element of Spengler’s thought is his view, based on his study of eight great civilizations, that the process of decline carries with it a surge of imperial fervor and a flight toward Caesarism. Hegemonic impulses come to the fore along with forms of dictatorship. As Charles and Mary Beard wrote in The American Spirit, “Spengler’s judgment of history certainly conveyed to American readers the notion that ‘Western civilization’ was doomed and that another Caesar, the conquering man of blood and iron, would bring it to an end.”
Its cultural essence, once of the soil and spread throughout the “mother-region” in town, village and city, now becomes the domain of a few rich and powerful “world-cities,” which twist and distort the concepts of old and replace them with cynicism, cosmopolitanism, irony and a money culture. Thus, Spengler draws a sharp distinction between culture and civilization. The former is the phase of creative energy, the “soul” of the countryside; the latter is a time of material preoccupation, the “intellect” of the city. As Hughes elaborates, “So long as the culture phase lasts, the leading figures in a society manifest a sure sense of artistic ‘style’ and personal ‘form.’ Indeed, the breakdown of style and form most clearly marks the transition from culture to civilization.”... But what most clearly marks the civilizational phase is what he considered the inevitable gravitation toward Caesarism and empire. Spengler’s historical analogies taught him that the transition from culture to civilization unleashes a kind of Will to Power, manifest internally in a drive to consolidate power within the civilization, and externally in a drive to assert dominance over other peoples. “Imperialism,” writes Spengler, “is Civilization unadulterated.”...
Spengler predicted with uncanny foresight a number of Western developments of the past century, including the rise of world-cities and the money culture, the emergence of a powerful feminism focused on the yearnings of the Ibsen woman, the force of money in politics, declining birthrates and the popular embrace of avant-garde cultural sensibilities, awash in cynicism and cosmopolitanism and bent on destroying the cultural verities of old.
As an analytical framework to think about designing solutions to complex and intractable development problems, I have found the following very useful.
There could be three headline principles on thinking about development solutions. Then there could be six points to be cautious about while designing them. Let me caution that these are general principles and does not preclude the occasional exceptions, again most certainly depending on the nature of the problem.
The three headline principles applicable while designing solutions are as follows:
1. There are no universally applicable models or rules. This is a cautionary note on cookie-cutter approaches to development problems. Free-markets or public private participation or private banks or low tariffs or deregulation in general have no universal application. This is a nod to the post-modern idea of rejecting grand narratives on development problems. So policy design depends...
2. Success generally happens through long-drawn engagement. There are very few turn-on-tap type solutions. Even legislative changes like deregulation need to be implemented. In this sense, solutions to most development problems are like a long race, where you get to the starting line and then run the race. So policy implementation depends...
3. Politics matters. Too often solutions are dressed up in technical terms. But addressing complex development challenges requires a combination of policy and politics. Politics is critical not only to to convince or keep at bay vested interests who lose out, but also change entrenched individual behaviours and collective norms.
The following are the six generally applicable cautions to be kept in mind:
1. History matters. Development is strongly path dependent. The historical evolution and cultural norms matter in the design of policies.
The choices for Kerala and Uttar Pradesh between public health and treatment, or public health investments and health insurance are very different. The industrial policy requirements of the two states are similarly very different, as are in most other areas, including the models of access to drinking water.
2. Context, or the starting point, matters equally. What is likely to work for a particular context most often fails for another. In particular, it's important to see whether the bureaucracy can implement the solution, and/or market is ripe enough to be catalysed, and/or the society can absorb the consequences that follow.
So for example, nationalised banks and financial repression were good till the eighties, but not so in the millennium. Across the board tariff liberalisation was the need of nineties, but today demands a more nuanced approach. Targeting and leakage reduction in welfare programs were the only problem for long, but today addressing exclusion errors may be at least as important a problem.
3. Solutions are multi-pronged. Solutions generally involve the simultaneous application of multiple interventions, and not doing so leads to failure. There are at least a few critical interventions associated with any effort to solve a development problem.
The outcomes from the recently announced labour or agriculture reforms demand bringing together several interventions at various levels of government and implementing them over a long period. Some like those involving changing individual behaviours and collective norms will require political engagement.
4. The sequence of the interventions matter. While the solution may consist of a basket of interventions, some elements may have to be undertaken in a sequential manner.
Financial liberalisation without reaching certain minimum levels of economic development and institutional maturity is most likely to lead to distortions and engender generally bad outcomes. So deregulation without the state capacity to monitor and manage is a recipe for exploitation and distortions. Similarly, efforts to catalyse markets without the supporting demand.
5. The pace of the change matters. The pace of change is dependent on the system's capacity to absorb the change. Push too hard and the whole thing would likely unravel. Leapfrogging in case of fundamental development problems is rarely possible in practice.
Antecedent student learning outcome gaps, poor sanitation, low farm productivity, weak state capacity and so on take time to be addressed. Even the most thoughtful process reforms, latest technologies, and deepest bureaucratic and political commitment have their limitations. Even supply side to a market takes time to emerge, thereby necessitating a gradual introduction of private participation in public activities.
6. Policies should be dynamic. What was appropriate till a few years back may have become counter-productive. Then there are the inevitable unintended consequences. So, the need to monitor progress and make changes as required.
Stakeholders respond to any policy and there are often emergent problems which need to addressed so as to keep the change process flowing unimpeded. This often manifests in the form of changing priorities. So, the focus on public health and primary education in health and education slowly gives way to tertiary and higher education. This applies just as much to the industry policy levers required to incentivise movement up the manufacturing value chain.
This framework can be applied to any development problem and design and implementation of solutions motivated by them.
Big risks happen when a bunch of small risks combine and compound. But small risks are easy to ignore, so people always underestimate the odds of big risks...
Big risks are easy to overlook because they’re just a chain reaction of small events, each of which is easy to shrug off. So people always underestimate the odds of big risks... No one in 1929 thought there would be a Great Depression. You’d be laughed away if you warned in 1929 that the stock market was about to fall 90% and unemployment rise to 25%. People weren’t complacent. The late 1920s saw an overvalued stock market, real estate speculation, and poor farm maintenance. That was obvious. It was well documented. It was discussed. But so what? None of those things are a big deal in isolation. It wasn’t until they happened at the same time, and fed off each other, that they turned into the Great Depression...(With Covid 19) what happened – and I can only say this with hindsight – was a bunch of small risks colliding and multiplying at once. A virus transferred from animal to human (has happened forever) and those humans interacted with other people (of course). It was a mystery for a while (understandable) and then bad news was then likely suppressed (bad, but common). Other countries thought it would be contained (standard denial) and didn’t act fast enough (bureaucracy, lack of leadership). We weren’t prepared (over-optimism) and could only respond with blunt-force lockdowns (do what you gotta do). None of those on their own are surprising. But combined they turned into probably the biggest event of our lifetime.
Optimism is the fuel of progress, and without it people will grind to a halt. So you will often find it even when the odds are stacked against you and the facts don’t align.
... most of us suffer from being "blissfully unaware". But we don’t actually suffer from it, because it feels great. And the fact that it feels good is the fuel we need to wake up and keep working even when the world around us can be objectively awful... We tell ourselves stories about our potential for progress because if we’re realistic about how common failure and pain is, we’d never get off the couch... The idea that most people are overly optimistic about their own future – even if they’re pessimistic about others’ – shows up all over history... People believe things that aren’t true, are only loosely true, true but improbable, or true but lacking important context. To do otherwise hurts too much. They tell themselves stories, find statistics, and surround themselves with incentives to make their beliefs seem as real as possible.
People will avoid even the slightest discomfort, even when the pain is manageable and trying to avoid the pain creates bigger risks...
Pain is miserable. Life without pain is a disaster... there’s something to the idea that pain is the most useful map of what works and what doesn’t. Remove it, and you’re left wandering somewhere between oblivious and reckless. So it’s interesting how much effort we put into avoiding the slightest pain, even when it backfires...
The history of the stock market is that it goes up a lot in the long run but falls often in the short run. The falls are painful, but the gains are amazing. Put up with one and you get the other. Yet a large portion of the investing industry is devoted to avoiding the falls. They forecast when the next 10% or 20% decline will come and sell in anticipation. They’re wrong virtually every time. But they appeal to investors because asking people to just accept the temporary pain of losing 10% or 20% – maybe more once a decade – is unbearable. The majority of investors I know will tell you that you will perform better over time if you simply endure the pain of declines rather than try to avoid them. Still, they try to avoid them.The upside when you simply accept and endure the pain from market declines is that future declines don’t hurt as bad. You realize it’s just part of the game... Accepting a little pain has huge benefits. But it’ll always be rare, because it hurts.
Disagreement is constant because it’s rooted in individual experiences. Experiencing a major stressor can permanently change your behavior, leaving certain countries and generations with extreme feelings toward specific topics...
People tend to have short memories. Most of the time they can forget about bad experiences and fail to heed lessons previously learned. But hardcore stress leaves a scar. Experiencing something that makes you stare ruin in the face and question whether you’ll survive can permanently reset your expectations and change behaviors that were previously ingrained... It’s why the generation who lived through the Great Depression never viewed money the same. They saved more money, used less debt, and were weary of risk – for the rest of their lives... It’s why countries that have endured devastating wars have a higher preference for social safety nets... It’s why baby boomers who lived through the 1970s and 1980s think about inflation in ways millennials can’t fathom. And why you can separate today’s tech entrepreneurs into two clearly different buckets – those who experienced the dot-com crash, and those who didn’t because they were too young to...
The oldest story of history is that of two sides who don’t agree with each other. It’s probably the most important storyline, the root of nearly every major social event. The question, “Why don’t you agree with me?” can have infinite answers. Sometimes one side is selfish, or stupid, or blind, or uninformed. But usually a better question is, “What have you experienced that I haven’t that makes you believe what you do? And would I think about the world like you do if I experienced what you have?” It’s the question that contains the most answers of why people don’t agree with each other. But it’s such a hard question to ask.
It’s uncomfortable to think that what you haven’t experienced might change what you believe because it’s admitting your own ignorance. It’s much easier to assume those who disagree with you aren’t thinking as hard as you are. So people will disagree, even as access to information explodes... Disagreement is less to do with what people know and more to do with what they’ve experienced.
Morgan Housel has another post with five lessons from history here.
One, calm plants the seeds of crazy... Nothing too good or too bad stays that way forever, because great times plant the seeds of their own destruction through complacency and leverage, and bad times plant the seeds of their own turnaround through opportunity and panic-driven problem-solving... Crazy plants the seeds of calm, because wild times incentivize people to solve problems and stay alert, like a healthy dose of paranoia...
Two, progress requires optimism and pessimism to coexist... the long run is usually pretty good and the short run is usually pretty bad. It takes effort to reconcile those two, and learn how to manage them with what seem like conflicting skills. Those who can’t usually end up either bitter pessimists or bankrupt optimists...
Three, people believe what they want to believe, see what they want to see, and hear what they want to hear... everyone sees the world through a different lens, and incentives can cause smart people to embrace and defend ideas that range from goofy to disastrous. It shows up all over the place...
Four, important things rarely have one cause... big events are more complicated than we make them out to be – and the bigger the event, the more complexity. It makes forecasting hard, politics nasty, and learning specific lessons from big events harder than we’d like to think...
Five, risk is what you don’t see... the risks we talk about in the news are rarely the most important risks in hindsight. We saw that over the last decade of economists and investors spending their lives discussing the biggest risk to the economy – was it Ben Bernanke’s monetary policy? Barack Obama’s fiscal policy? Donald Trump’s trade wars? No, none of those. It was a virus. Out of the blue, causing havoc we couldn’t comprehend.
1. Good article on ride-hailing firm Ola's factory outside Bangalore which builds electric scooters.
2. Jahangir Aziz on why India's recovery may have a long way to go.
3. Bari Weiss has a very good account of the wokeness gone too far in the United States in the context of the pervasive climate of political correctness on racism across schools and colleges.
4. FT argues that the $1.9 trillion stimulus in the US, American Rescue Plan, is a sign of definitive swing away from Reganism to embrace big government. A better description may be that it's a correction to the excessive marketism. However, like with all such course corrections, this one too is likely to end up resulting in excessive government. And like earlier, it too will, in due course, invite its course correction.
The NYT has this description,
While providing an array of benefits to the middle class, it is also a poverty-fighting initiative of potentially historic proportions, delivering more immediate cash assistance to families at the bottom of the income scale than any federal legislation since at least the New Deal... In the eyes of its backers, the law is not just one of the most far-reaching packages of economic and social policy in a generation. It is also, they say, the beginning of an opportunity for Democrats to unite a new majority in a deeply polarized country, built around a renewed belief in government. “Next to civil rights, voting rights and open housing in the ’60s, and maybe next to the Affordable Care Act — maybe — this is the biggest thing Congress has done since the New Deal,” said Senator Sherrod Brown, Democrat of Ohio and a longtime champion of the antipoverty efforts included in Mr. Biden’s plan.
It remains to be seen as to how many of these schemes, especially those like child tax credit, will become permanent.
The $1.9 trillion stimulus follows the $2.2 bn CARES Act in March and a $900 bn stimulus in December.
5. On a related note, the FT has this article about the apparently diverging fortunes of Europe and US arising from the latter's more generous fiscal policy stance.
I am not in agreement with the unambiguous tone of the article advocating European countries to follow the US with fiscal accommodation. There is a very strong case that the US approach borders on fiscal recklessness and its consequences will be felt in the years ahead. In contrast, as the graphic shows, the Europeans were more generous with their immediate post-pandemic stimulus and have been restrained with their subsequent responses.
6. Dani Rodrik has a very good oped which points to the limitations of forward causal inference (starting with cause to identify effect) based economics research.
The most highly prized empirical research is that which demonstrates that an exogenous variation in some underlying cause X has a predictable and statistically significant effect on an outcome of interest Y... It merely provides evidence on one of the causes, which may not even be one of the more important factors. Worse, because economists are trained only in the forward-induction approach, they often present their research as if the partial answer is in fact the more comprehensive one, further raising the ire of scholars from other disciplines... In their quest for statistical “identification” of a causal effect, economists often have to resort to techniques that answer either a narrower or a somewhat different version of the question that motivated the research... economists’ research can rarely substitute for more complete works of synthesis, which consider a multitude of causes, weigh likely effects, and address spatial and temporal variation of causal mechanisms. Work of this kind is more likely to be undertaken by historians and non-quantitatively oriented social scientists. Judgment necessarily plays a larger role in this kind of research, which in turn leaves greater room for dispute about the validity of the conclusions. And no synthesis can produce a complete list of the causes, even if one could gauge their relative significance. Nevertheless, such work is essential. Economists would not even know where to start without the work of historians, ethnographers, and other social scientists who provide rich narratives of phenomena and hypothesize about possible causes, but do not claim causal certainty.
6. The South Korean e-commerce leader Coupang listed at NYSE in a triumphant offering, rising 41% on the first day to close at $49.25. The IPO raised $4.6 bn and valued the company at $85bn, the second largest valuation for an Asian company after Alibaba Group. Coupang's value proposition is its cheap prices and fast delivery, coupled with large products offering.
India's much hyped startup entrepreneurs in a country with more than twenty times the population with tens of e-commerce copycats, cannot hold even a candle to what Coupang has achieved in a country with just 52 million people.
As one more illustration, why doesn't India have even one world-beating start-up like Stripe, the online payment system started by Patrick and John Collinson, sitting in tiny Ireland.
7. Some links on Special Purpose Acquisition Vehicles (SPACs) which are the rage in financial markets. SPAC sponsors float shell companies to raise money and then scout for private companies to invest, usually within two years. In other words, they are "blank check" companies. SPACs raised $26 bn in just January. Businesses find it more convenient to sell themselves to SPACs than comply with onerous IPO process.
The Times writes,
Typically, a SPAC’s sponsor — the person putting up the initial capital — invests a nominal amount in return for a 20 percent stake, so long as the SPAC finds a target company and completes a merger. In other words, if a Wall Street executive or celebrity raises $400 million from public investors, that person also gets a stake worth $100 million, regardless of how well the company performs after the merger. This is not pay for performance. It is pay before performance... Companies are racing to go public via SPAC because the sponsor, unlike an I.P.O., can guarantee them a precise amount of money. Just as important, some of those companies could never bear the scrutiny that comes with an I.P.O. When a company goes public through the traditional I.P.O. process, it must show potential investors its prior financial records. It is not allowed to make projections about its earnings, because regulators have long worried that companies could mislead investors with unrealistic forecasts. In a SPAC transaction, which is a merger instead of a listing, companies can publish their financial projections, many of which will prove to be inflated. Since many companies merging with SPACs have no earnings, this has become a useful feature.See also this primer in Business Standard. And this by Ananth, and this in FT.
If this idea catches on, it could lead to greater financial and social stability worldwide. Decades of loose central bank policy have done less to generate growth in the real economy than in the financial markets — and those gains benefit mainly the rich... Research looking back 140 years in 17 major nations has shown that before the second world war, only one in four recessions followed a bubble in housing or stocks. But as banking, particularly mortgage lending, grew to assume a pivotal role in modern economies, the dynamics changed. Since the war, more than two out of every three recessions followed a housing or stock bubble. Housing bubbles are the worst. The $220tn global housing market is more than twice the size of the global stock market and complicated by debt. When prices fall, it can take years to clean up failed mortgages, drawing out a recession. In general, recessions that follow debt-fuelled housing booms are the longest and deepest.
10. Business Standard questions the contracting model for the railway station development projects.
11. A new working paper examines whether India's economic growth is services-led or services-biased,
At the core of our identification strategy are consumers’ preferences, in particular, the income elasticity of aggregate service demand. The higher this elasticity, the more service-biased economic growth is. Conversely, if the income elasticity of consumer demand is limited, rising employment in the consumer service sector is a sign that growth was service led. Given the importance of this parameter, we infer it directly using Indian household data. Importantly, we show that the income elasticity of consumers’ observable demand system over final expenditure coincides with the one defined over value added that is relevant in our theory.Our analysis delivers two main results. First and foremost, Indian growth was to a large extent service led. Quantitatively, productivity growth in sectors such as retail, hospitality, or transportation account for one third of welfare growth between 1987 and 2011. Second, the welfare impact of service-led growth was strikingly unequal and benefitted mostly wealth individuals in urbanized locations. The reasons are that service productivity grew particularly fast in urban areas and that richer consumers care more about the consumption of services owing to nonhomothetic preferences. We also document that productivity growth in consumer services was the main driver of the structural transformation and accounts for almost half of the decline in agricultural employment. By contrast, technical progress in agriculture, did not promote structural change.
12. Scott Galloway excoriates the corporate bailouts in the US
The rescue package should protect people, not businesses. From 2017 to 2019, the CEOs of Delta, American, United, and Carnival Cruises earned over $150 million in compensation. But, now … “We’re in this together” (i.e., “bail our asses out”)... Since 2000, U.S. airlines have declared bankruptcy 66 times. Despite the obvious vulnerability of the sector, boards/CEOs of the six largest airlines have spent 96 percent of their free cash flow on share buybacks, bolstering the share price and compensation of management … who now want a bailout. They should be allowed to fail. Bondholders will own the firms. Ships and planes will continue to float and fly... Just as death is a key part of life, so is the demise and reinvention of firms that can’t endure tropes. Covid-19 is no more historic than an 11 year-long bull market. With dangerous disregard for future generations, we’ve decided that hundreds of thousands of people dying is meaningful, but the NASDAQ going down would be worse. The rescue package is $2.2 trillion. The annual CDC budget — $6.6 billion.
13. Morgan Housel has a stunning graphic which highlights the importance of long-term in investing.
Ten years is perhaps the least investment period likely to reward investors.
This is just utterly brilliant,
Nassim Taleb says he’s a libertarian at the federal level, a republican at the state level, a democrat at the local level, and a socialist at the family level. People handle risk and responsibility in totally different ways when a group scales from four people to 100 to 100,000 to 100 million. In the same way, a management style that works brilliantly at a 10-person company can destroy a 1,000-person company, which is a hard lesson to learn when some companies grow that fast in a few short years. Travis Kalanick at Uber may be the best example. No one but him was capable of growing the company early on, and anyone but him was needed as the company matured. I don’t think that’s a flaw; just a reflection that some things don’t scale.
It is an article of faith among a large and vocal set of opinion makers that deregulation and private sector companies deliver infrastructure services of better quality and at a lower price than public operators.
This is despite the realms of evidence to the contrary from across the world on sectors ranging from utilities to transportation. There is no empirical evidence to suggest that the private sector is innately superior to the public sector in delivering infrastructure services. This has reference to several examples and global research in this regard.
The latest evidence comes from the recent electricity blackouts in Texas, even as the state was reeling from a cold wave. A WSJ investigation has this to say,
Texas’s deregulated electricity market, which was supposed to provide reliable power at a lower price, left millions in the dark last week. For two decades, its customers have paid more for electricity than state residents who are served by traditional utilities... Nearly 20 years ago, Texas shifted from using full-service regulated utilities to generate power and deliver it to consumers. The state deregulated power generation, creating the system that failed last week. And it required nearly 60% of consumers to buy their electricity from one of many retail power companies, rather than a local utility.
Those deregulated Texas residential consumers paid $28 billion more for their power since 2004 than they would have paid at the rates charged to the customers of the state’s traditional utilities, according to the Journal’s analysis of data from the federal Energy Information Administration... Power prices surged to the market price cap of $9,000 a megawatt hour for several days during the crisis, a feature of the state’s system designed to incentivize power plants to supply more juice. Some consumers who chose variable rate power plans from retail power companies are seeing the big bills.
None of this was supposed to happen under deregulation. Backers of competition in the electricity-supply business promised it would lower prices for consumers who could shop around for the best deals, just as they do for cellphone service. The system would be an improvement over monopoly utilities, which have little incentive to innovate and provide better service to customers, supporters of deregulation said... From 2004 through 2019, the annual rate for electricity from Texas’s traditional utilities was 8% lower, on average, than the nationwide average rate, while the rates of retail providers averaged 13% higher than the nationwide rate.
Even as markets are deregulated, there is a strong case for retaining some public sector presence, if only to keep the markets honest.
In other states that allow retail competition for electricity, customers have the option of getting their power from a regulated utility. The absence of an incumbent utility in parts of Texas that allow retail competition makes it difficult for consumers to know if they are paying too much for power.
Private provisioning generates incentive distortions which are not easily addressed.
For power generators, the laissez-faire market design rewarded companies that could sell electricity inexpensively and still recover their capital costs. But it provided little incentive for companies to spend cash on infrastructure that could protect power plants during sporadic severe cold snaps.
This is only the latest exhibit in the reality of private participation in infrastructure sector.
I have a new working paper with V Ananthangeswaran and Mahesh Yagnaraman here.
Ajay Shah has an oped where he narrates the story of the deregulated pricing of demat securities settlement by private Depository Participants to make the case for deregulated sale of Covid 19 vaccines by private providers to expedite coverage.
It's a great illustration of the limitations with application of logically neat and incentive compatible market solutions to complex public policy challenges.
He writes,
In the late 1990s, there was a clamour for price controls. Many proposed that the government or NSDL should control the price that DPs charge the customer. It was argued that if prices were not controlled, DPs would engage in price gouging or that DPs would not serve the poor. C B Bhave and others at NSDL argued that there was no market failure in the DP business. In a place like Mumbai, the cost of producing DP services was low, given the prices of skilled manpower, telecom connectivity, and reliable electricity. And, in Mumbai, there was a large volume of customers for DP services. As a consequence, the prices paid by customers in South Mumbai would be inevitably low. In remote places, it was costly to produce DP services, and there were fewer customers. The only way to achieve last-mile outreach was to have high prices. If there was a price control, DPs would choose to not serve remote places and DP services would be restricted to cities. In a remote place, if a DP charged a high price and earned a supernormal rate of return, this would attract others to start a competing business, as there was no entry barrier. The private sector would innovate and reduce costs. In the event, non-interference prevailed: The price charged by DPs was left to market prices. Competition developed, and the prices charged to customers crashed. Competition ate away the profit rate in the easy urban sites and DPs got the incentive to go forth into the great Indian hinterland, looking for more business. This generated outreach.
This is deceptive and an extremely misleading story. In fact it is shocking that this comparison could even be made. As I shall explain in brief, this extrapolation from the world of demat shares settlement to that of administration of vaccines is all logic with little understanding of the differences between the respective markets.
Consider these points:
1. In a country where the vast majority of population defer even the most urgent visits for medical care due to poverty/affordability, is it difficult to imagine the same vast majority ignoring/declining administration of vaccine on a disease which is by now tapering off? I am not even talking about behavioural biases that come in the way of vaccinations, an area with a large body of public health and economics research.
2. In the context of the debate on health insurance in the US Supreme Court where its purchase was often compared with that of borccoli, this oped wrote that broccoli is a choice whereas health insurance is not. On the same lines, share market participation is a choice (in the Indian case, one would even say a choice available to less than 5% of the population) and Covid 19 vaccine is an essential health requirement.
3. On a related note, unlike share market participation, vaccines generate large positive externalities. In the case of Covid 19, with its extremely infectious nature, vaccines are an essential requirement (at least among certain population categories). Vaccination is required to protect the society (and country) as a whole from the disease.
4. Then there is the issue of inequality. Markets allocate resources to those who can afford them. In case of scarce goods, even with some form of price ceilings, market allocation ends up overwhelmingly favouring those with the resources. For a massive country like India and also given the limited vaccine quantities becoming available, a primarily market driven allocation will invariably result in the vaccine administration being a trickle down exercise along the income ladder. And the trickle can be very slow beyond a certain income level.
5. Unlike broccoli or demat shares settlement, vaccines involve adherence to certain protocols. They include post-vaccine follow-up in case of adverse reactions, second dose administration etc. In a country where private health clinics have to be (mostly unsuccessfully) forced into keeping and sharing patient data in case of periodic localised outbreaks of epidemics, adherence to such requirements in case of Covid 19 vaccine may be a stretch.
6. Effective markets are underpinned by strong state capacity. Weak state capacity engenders subverted markets. And India is a country littered with such subversions across markets. It is not at all difficult to imagine widespread protocols flouting, price gouging, and counterfeiting once the flood gates are opened to markets.
The article waxes eloquent about innovation of the private sector. As I blogged here, less said about it the better. More here, here, here, and here on India's private sector. We have drunk too much of the jugaad innovation Kool aid. Some idiosyncratic and localised anecdotes of jugaad do not make a story of constant industrial-scale innovation that improves the productivity of large economies. There is little of that to show for in the vast industrial and even software landscape of India.
Some of other arguments are mind-boggling
Some private health care firms might find that it is better to import the Johnson & Johnson vaccine for use in remote places.
As a counter-factual, consider this. India is the vaccine factory of the world. It has some of the cheapest vaccine prices in the world. The outreach of private medical care sector (formal and informal) is greater than that of the public facilities. Then why is it that private vaccines market is so tiny and largely confined to the upper quartile decile of the population? India did not eradicate communicable diseases on the back of any private sector innovation in delivery. In fact, private sector involvement in vaccine delivery was almost nil.
None of this is to say private market should not be part of the vaccine drive. A low enough price should be fixed and vaccines administered privately too. But coverage of the vast majority of Indians in remote and rural areas will have to be through the public system, as has always been the case with all other vaccines.
Some stories and narratives just endure, irrespective of the vast evidence to the contrary!
