Weekend reading links

1. FT reports that Beijing is considering introducing property tax,

China has expanded trials for a property tax, a decision that pitches President Xi Jinping against deeply entrenched vested interests across an economy fuelled for decades by real estate development. The state council, China’s cabinet, will expand pilot schemes to tax residential and commercial property in cities, according to an announcement by the National People’s Congress — the rubber-stamp legislature — on Saturday. The locations were not disclosed but rural households will be excluded... Proposals to introduce a property tax have been discussed for almost 20 years. The tax is envisaged as an annual levy on home ownership and would be set and collected by local governments... Many tax specialists and economists believe it will also help wean local governments off their chronic dependence on selling and leasing public land to developers. This relationship has contributed to widespread property speculation and pushed land and house prices higher in a cycle that many experts believe is unsustainable.

In keeping with its "crossing the river by feeling the stones" approach, it plans to pilot it experimentally in a few places. 

See also this.

2. Tamal Bandopadhyay makes the point about low penalties imposed by RBI on banks for various regulatory violations. 

One way of tackling this could be linking the penalty to the profits of the entities, depending on the gravity of the violation. Also, to make it more effective and force the penalised entity to care for its reputation, the RBI can think of making the full contour of the violations public instead of issuing a sanitised press release. The market regulator makes full text of such orders public. Penalty must act as a deterrent. If it is too low, it could encourage the regulated entities to lap up penalty instead of complying with the norms.

3. Tesla's share price has risen five fold since July 2020 and the company is now worth more than the next nine most valuable carmakers combined.

John Thornhill has more on Tesla,

Tesla is a very different type of car manufacturer, integrating hardware and software and allowing it to charge a gross margin of about 30 per cent on each car sold, matched only by the likes of Ferrari... Tesla does not just bash metal, however elegantly. It also generates income from software services, charging, maintenance and insurance as well as sales of powertrains, batteries and carbon credits to other manufacturers. All this means Tesla enjoys far higher barriers to entry than most other carmakers.

4. From Bloomberg,

There’s a good reason we use ships to ship stuff rather than planes, though: They can carry SO much more. Take Ever Given, for example. When it’s not hanging out in the Suez Canal, it’s capable of shipping about 20,000 twenty-foot equivalent units, with a net tonnage of 99,155. The world’s biggest container ship, the Ever Ace, can ship 23,992 TEUs. In comparison, the world’s biggest-ever cargo plane can only carry a measly 250 tons. It’d need to make about 397 journeys (not including the return journeys to reload) to ship everything Ever Given could in one go, costing a bundle in fuel costs and taking way more time.

5. Useful Indian coal production facts,

In the decade between 1980-81 and 1990-91, the coal production grew by 6.5% per year on average. This fell to 3.5% per year between 1990-91 and 2000-01. Between 2000-01 and 2010-11, it stood at 4.9% per year. In the decade between 2010-11 and 2020-21, it has fallen to an all-time low of 3.3% per year... the growth in coal production for the ten-year period ending 2019-20... stands at 3.4% per year on average... The point here is that the production of Coal India typically tends to grow by 3-4% per year on average. The demand for coal on the other hand in the last ten years has grown by around 4.8% per year. 

So why is Coal India not able to expand coal production fast enough? The answer lies in the fact that the firm is not able to start new coal mines fast enough. The annual report of 2020-21 points out: “114 coal projects with a sanctioned capacity of 836.5 million tonnes and a sanctioned capital of ₹1.2 trillion are in different stages of implementation, out of which 75 projects are on schedule and 39 projects are delayed". The delay is attributed to delay in forest clearances, possession of land from which coal has to be mined and rehabilitation and resettlement of people living on that land. The firm also had to contend with encroachment and an appreciation in land prices. Simply put, Coal India runs into the major systemic challenges encountered by any entrepreneur in India...

In 1993, the government decided to allocate coal blocks to both private sector and public sector companies for captive consumption... By 2013-14, 218 coal blocks with a geological reserve of around 50 billion tonnes had been allocated. In September 2014, the Supreme Court cancelled allocation of 204 out of these 218 coal blocks... the fact is that captive blocks never really produced a significant amount of coal in the first place. In 2012-13, the total production of captive coal blocks stood at 37 million tonnes. This formed around 6.7% of the total coal production during that year. In 2020-21, net production from captive coal blocks was 66.4 million tonnes or around 9.3% of the total production.

6. Business Standard reports that Indian companies in the top 500 global companies in terms of market capitalisation are the most expensive. 

The Indian companies that are part of the top 500 are Reliance Industries, Tata Consultancy Services, Infosys, HDFC Bank, ICICI Bank, Hindustan Unilever, HDFC, Bajaj Finance, State Bank of India, Kotak Mahindra Bank, Bharti Airtel, Wipro, HCL Tech.

7. KP Krishnan has a good article on the overlapping regulatory jurisdictions in areas like audit services, competition in banking, data protection etc. 

8. Simon Kuper proposes a four-day work week in developed countries,

So to stop climate change, we need to get poorer, and the safest way to do that is to work less. This would continue a long trend of improving life by cutting working hours. In 1870, the average worker in industrialised countries put in more than 3,000 hours a year, or 60 to 70 hours a week for 50 weeks, calculate economic historians Michael Huberman and Chris Minns. By 2019, that total had dropped to 1,383 hours in Germany, and 1,777 in the US, before slumping during lockdowns... The four-day week is being piloted in various countries, discussed even in Japan, and is already common in Iceland.

9. Richard Waters wonders how much big is too big as he describes Google as devouring the global advertisement industry

Magna Global estimates that global adverting will reach $657bn this year. With around $200bn of ad revenue flowing through its systems, that suggests Google will handle around 30 per cent of all global advertising (after handing back some of this to partners in the form of traffic acquisition costs, it will keep around one-quarter of the global ads cake for itself). And it is still growing at more than twice the rate of the overall industry... Next year, Wall Street analysts are forecasting what might seem more modest growth for Alphabet of 17 per cent. When you get to this size, though, there is nothing modest about it. The extra $40bn in sales projected for Google in 2022 represents about as much as Comcast, Disney, WarnerMedia and ViacomCBS generated between them last year.

The scale of market capitalisation growth is mind-boggling,

A day after reporting earnings this week, Microsoft and Google put on nearly $200bn in stock market value between them. Google’s latest advance put its market cap within a whisker of $2tn. Big Tech’s stock market advance has come in lurches. Last year the big gainers were Apple (which added $970bn on hopes for an iPhone “supercycle”) and Amazon (which gained $700bn from the swing to ecommerce caused by Covid-19). This year it has been the turn of Google and Microsoft, which have put on around $800bn of market cap each on a belief that the pandemic-induced shift to cloud computing and digital advertising will prove lasting.

10. Vivek Kaul makes a case that inflation in India may be much higher than what's captured in the official CPI numbers. As against the official retail inflation of 4.35%, he offers some disaggregated rates,

If inflation in key commodities like palm oil…was about 100 in 2020-2021, we are now talking about 1.6 to 1.8X... A report by ICICI Securities published on 14 October points out that the price of titanium dioxide in September 2021 was up 44% from September 2020. Further, tinplate prices have risen 148% in comparison to last year, ICICI Securities points out. Tinplate is used to make the metal cans in which paint is packed. Given this, Syngle of Asian Paints said the following: “We have never seen… in the last about 3-4 decades, inflation which is so strong… Overall inflation is closer to about 18-20% levels when we see from a perspective of Q3 [October to December] of last year.”... If we look at the detailed CPI, the petrol and diesel prices in the last one year have gone up by 22.26% and 22.44%, respectively... And recreation and amusement prices have gone up 7.58% in the last one year... Taxi and autorickshaw fares are up 6.76% in the last one year... Airfares are up 32%. Domestic cooking gas prices are up 41%... 

Health inflation has been at 7.74%. Further, clothing and footwear prices have gone up by 7.16% in the last one year. Even under food prices, different things need to be considered. Cereal prices have been kind of flat in the last one year. The prices of eggs, fish and meat are up 7.91%. Edible oil and fat prices have been on fire, going up 34% in the past year. Prices of pulses are up 8.75%. But vegetable prices are down 22.47%... Within inflation of manufactured products, textiles inflation was 16.81%, chemical and chemical products inflation was 13.09%, and basic metals inflation was 26.71%. So, those who have been asking why inflation hasn’t been showing up in data have been looking at the wrong kind of inflation. Some of this inflation has seeped into retail inflation, but the extent to which you have been impacted by it depends on your consumption basket or what exactly you consume. Take a look at the price increases of fast-moving consumer goods. The price of toilet soap is up 7.86%. Toothpaste prices are up 4.84%. Shaving blades are up 6.07%. And shampoo and hair oil prices are up 5.04%.

I don't know where these numbers are from and how credible they are. But the general evidence points to a much higher inflation than is captured in the CPI.

11. The Economist points to the return of the big state in UK

According to forecasts by the Office for Budget Responsibility (obr), a watchdog, spending will grow from 39.8% of gdp before the pandemic to 41.6% by 2026-27, the highest sustained share since the 1970s. Tax will rise from 33.5% of gdp to 36.2%, a level not seen since the early 1950s.

12. Is Mongolia one of the worst exhibits of the natural resource curse? The country, despite benefiting from the commodity up-cycle, appears to have frittered away its resource revenues in populist handouts and corruption. 

Beginning last year... the country's new president, Khurelsukh Ukhnaa... paid off 695 billion tugrik ($244 million) worth of pensioners' debts by selling bonds backed by state-owned silver deposits. Then, a month before the election, the cabinet, under the control of Khurelsukh's party, transferred 216 billion tugrik to debt-free pensioners. Again the money came from bonds backed by state silver deposits. Patronage politics have become routine in Mongolia, where elections have turned into cash giveaways and the country has very little to show for the fire hose of wealth that has been largely consumed by political handouts and corruption... Andrei Mikhnev, country manager at the World Bank, cites the bank's estimate that for every dollar of mineral wealth that has been generated during the past 20 years, Mongolia has consumed 99 cents and saved a mere 1 cent. Buying elections wholesale began in 2008, when the MPP made a campaign promise to pay $700 to each citizen from mining revenues. The following day, its opponents, the Democratic Party, pledged $1,000. The amount would have totaled 60% of the country's entire GDP at the time.

(HT: Ananth)

Location is destiny - India edition

Branko Milanovic's seminal work illustrated the importance of location (country of residence) as the biggest determinant of global inequality. He argued that more than luck or effort or specific circumstances, people's economic outcomes are driven by the level and distribution of income within their country. 

The Opportunities Project work of Raj Chetty and Co highlights the importance of place of birth in determining future life outcomes of Americans. 

In the context of India, Prakash Loungani and others from the IMF have a paper that explores the role of location in determining living standards in India. 

Their headline finding,

It's not for, instance, caste or class that are really the dominant sources of your income. But as we were discussing, the fact of whether or not you were born in a poor rural community versus being born in an urban community, really is what determines 20, 25% of your income, just this one factor... we find that almost a third of living standards is likely to be determined by location alone.

Deregulation and decriminalisation

This post will argue that deregulation and decriminalisation of economic activities and their violations, 

A detailed history and timeline of the laudable Insolvency and Bankruptcy Code (IBC) would be an apt assessment of corporate governance and business practices in India. Promoters, big and small, have consistently tried to game the process, with no small help from the creditors, resolution professionals, tribunals and courts. When IBC was promulgated, I had blogged here arguing that given corporate India's track record such an outcome was almost inevitable. The IBC has since struggled with over-burdened and under-manned tribunals, crony capitalist practices, intimidation of RPs by promoters, poor quality and compromised RPs, and so on. 

The original IBC was a good and minimal legislation which assumed good intent by its stakeholders. However, questionable practices starting from the very first case resolved have forced the Ministry of Corporate Affairs to continuously tighten and become more prescriptive. The changes brought into Section 29A which defines those ineligible to be a resolution applicant is a case in point. 

A big worry is that promoters are using loopholes in the IBC, aided by liberal interpretations by Tribunals and Courts, to both retain control and also force large haircuts. The IBC thereby becomes a backdoor for debt-washing for connected companies, or cleaning up their balance sheets off debt at public cost using their relationships. 

As Debashis Basu wrote recently, the balance sheet of IBC therefore is not very impressive,

According to the data from the Insolvency and Bankruptcy Board of India (IBBI), in over 363 major NCLT resolutions since 2017, banks have taken an average loss of 80 per cent. Of the 4,300 cases that have been admitted to bankruptcy courts since FY17, only 8 per cent have been resolved, nearly 40 per cent are pending, and about 30 per cent have gone into liquidation. The bankruptcy resolution system is plagued with measly recoveries and long delays. The recovery figures skewed by top nine accounts, mostly steel companies, fortunately found strong acquirers from a sector riding a strong upcycle.

In the context of the IBC, the recent introduction of One Time Settlement (OTS) mechanism, under which 90% of the Committee of Creditors (CoC) decide to give the firm back to the promoter, is a case in point. Theoretically, this is a good idea given that it will help avoid the long drawn resolution process and also preserve equity. But as shown by the example of Siva Industries and Holdings Ltd which underwent OTS with the promoter paying Rs 500 cr for a Rs 5000 cr loan, such progressive ideas cab easily get subverted in the Indian context. An oped recently summed up the challenge,

The question of whether the OTS mechanism fits within the IBC framework in India is more fraught. It can be argued that since it preserves capital, and it involves the agreement of the original lenders, it is a valuable addition to the bankruptcy process. It also takes pressure off the tribunal, which is clogged up with cases. But it must be understood that in the Indian context in particular, the OTS mechanism to settle cases can be open to subversion. If, theoretically, one group of executives at a public sector bank conspired with a corporate group to make loans that turned bad, there is no reason to suppose that those same executives will suddenly be models of integrity when they have to make decisions regarding an OTS. The theoretical possibility therefore exists that promoters could borrow money from banks, take it out of the company, and then use the OTS mechanism to have the banks take a massive haircut on the loans — all with minimal legal oversight.

The oped is misleading in confining this problem unfairly to public sector banks, since the biggest banking scandals in recent times have been those at ICICI and Yes Bank. 

All this raises an important question of deregulation and decriminalisation. 

As an analytical framework, criminalisation is a symptom of lack of trust which is the source for excess regulation. Criminalisation becomes an extra layer of deterrence to buy adherence. While having regulation is one policy feature, criminalisation of failure to adhere to them is another distinct policy feature. 

We could seek to combat/address each of these features separately, or jointly. But in the prevailing circumstances, as a strategy the latter (criminalisation) has a very compelling case. Let me explain. 

We, in India (and also elsewhere), are stuck in a very bad trust equilibrium. Governments don't trust businesses to follow rules, so pad up the rules with criminal culpability to increase the deterrence value. And the private sector by and large confirms this perception by losing no opportunity to cut corners on standards of service delivery, skimp on contractual obligations, influence peddling to buy access, insider trading, indulge price gouging etc at the slightest opportunity (sample the ways in which promoters have sought to sabotage IBC, or the pervasive corporate governance problems, or the rampant price gouging demonstrated across the country with the medicines and other supplies and hospital care in the recent pandemic). It does not help that the judiciary, in its own very unique and India-specific ways of intervening, adds to entrenching this bad equilibrium.

At a micro-level, let's take the example of town planning or municipal/utility services. One consistently encounters the thicket of regulatory requirements on information disclosure and document submission as well as layers of inspections before service delivery. Whenever these issues are taken up for reform, it generates strong internal opposition (btw, this is universal across bureaucrats as well as politicians, and includes both the dishonest and also the honest ones - thereby pointing to concerns beyond the standard vested interests ganging up). The lack of trust is deeply entrenched and near universally evident.

Perversely, this bad equilibrium does not hurt the larger companies (who have found stable coping mechanisms, even if they have their costs). But large companies are only a small part of the private sector landscape. This bad equilibrium badly hurts all the other companies, who form the overwhelming majority, by imposing prohibitive costs and uncertainties that encourage bad practices and discourages productivity improving actions. This applies just as much to citizens - the rich and well-off have exited the thicket, leaving the vast majority to face the frustration.

This equilibrium can be broken only through an honest public debate where both sides (or representatives from each) are made to own up their deficiencies and faults. Any discourse which blames the government alone will only entrench and harden positions on all sides and is unlikely to yield the desired results. For every strongly argued logical view on decriminalisation and deregulation from the private sector, there will be equally strongly argued practical (located in Indian context) view to the contrary within the bureaucratic establishment.

Having said all this, deregulation and decriminalisation is hardly an all-or-nothing package, and can be done in parallel. But while talking about decriminalisation, we should also acknowledge the importance of addressing the concerns raised above.

In this context, this Lant Pritchett interview nicely illustrates the problem.

Striking the balance between old and new economies

Jeff Currie, global head of commodities research at Goldman Sachs, makes a very important point in urging caution with the pace at which the new economy is being embraced. Globally investors are preferring technology-based businesses and shunning the old economy businesses. This is reflected in the divergent stock market fortunes of the new and old economy businesses.

The recent natural gas and coal supply shortages are a direct consequence of this trend. 

Currie points to several important insights

In the old economy, price appreciation results when the volume of demand outstrips the volume of supply. Higher-income households may control the dollars, but lower-income households control the volume of commodity demand given their greater number and propensity to consume physical goods over services. As the volume of demand for commodities waned, so did the returns for old economy sectors. Lower returns led to less long-cycle old economy capital expenditure — which traditionally requires a five to 10-year horizon of sufficient demand — in favour of short-cycle “new economy” in investment in areas such as technology... the old economy was overbuilt, debt-laden and over-polluted. While the old economy only represents about 35 per cent of global gross domestic product, it generated at least 2 times the corporate losses, had about 90 per cent of the non-financial debt and created 80 per cent of the emissions. It is no wonder why investors preferred Big Tech to oil and copper.

Besides these, there are perhaps four basic reasons for the preference for the new over the old economy. The first is the natural human propensity to imagine progress in terms of scientific advances. Accordingly, advances in computing (hardware and software) and communications, data analytics, green infrastructure etc have come to be synonymous with progress. More important, continuing with the old economy activities are considered almost antonyms of progress. Second, there is an irresistible allure that these technologies can help leapfrog and address intractable problems that human beings and countries face. The persistence of low productivity and failures for long periods makes the possibility of breakouts, even if only in theory and sanitised pilots, very attractive. 

Then there is the aspirational dynamic associated with shedding the old and embracing the new. Phasing out fossil fuels, digitising or automating every activity, software as service etc have become universal (both geographies and sectors) buzz themes. It confers the imprimatur of having arrived. Finally, there is the blunt reality that opinion makers reside more in the new economy than the old, and therefore have a strong vested interest in its promotion. More likely their livelihoods and personal wealth are most often yoked to the emerging economy. 

This issue has strong relevance for developing countries like India. Opinion makers call for focusing attention on AI, biotech, Edtech, Medtech, Agtech, IoT and smart systems, 5G, renewables, electric cars and batteries, driverless vehicles, organic farming, metro rail and so on. Everybody are willy nilly being nudged into embracing these priorities.

These are all doubtless important areas of the future. But as Keyenes said, in the long run we're all dead, and it's therefore important to also focus (perhaps prioritise efforts) on the foreseeable future. For countries grappling with the reality of accessing basic health care and medication, acutely deficient learning outcomes and human capacity development, persistently low farm productivity, polluting industries, congested traffic, and very weak state capacity, the old economy (and its world) remains more important. For well into the foreseeable future, it's hard to imagine large parts of the new economy making significant inroads into the lives of ordinary people in developing countries. 

While all these goodies have to be pursued, the public policy priority of India's governments and profit maximising focus of its private sector as a whole should be on getting the plumbing right and ensuring supply of the basic requirements. Accordingly, Indian cities need to prioritise on basic infrastructure and governance and not IoT sensors and smart devices. Its schools and hospitals, both public and private, needs to prioritise delivery of good quality education and care, which generate acceptable outcomes. Instead of precision agriculture, its farmers should have access to good quality inputs and follow good agronomic practices. Its public systems needs to do simple data analysis to inform decision-making. 

Its private sector should focus on supporting the delivery of all these and good quality of consumer goods to meet domestic demand. For example, its telephone companies need to first deliver services without poor connectivity and recurrent call drops, before promising 5G. Or its Edtech companies need to demonstrate innovations to achieve real learning outcome improvements for the vast majority of Indians instead of providing marginal improvements to a market at the top of a massive pyramid.

Most important of all, the economy as a whole needs to generate broad-based growth that can create productive and high-paying jobs which can support the aggregate demand necessary to sustain reasonable volumes of the likes of electric and driverless vehicles. The new-old economy debates are costly distractions in this pursuit. 

Weekend reading links

1. Even after nearly a decade, Uber continues to lose money, $6.8 bn of net loss last year. It's also facing regulatory headwinds like higher payments and protections for drivers and caps on commissions charged on restaurants. Reflecting these troubles, its share price hovers at its 2019 listing price. 

2. India's market regulators are doing what has not been done by regulators elsewhere. First the SEBI delicensed Brickwork Ratings and barred two executives of CARE for ratings related malpractices. Now the RBI has barred Haribhakti & Co from undertaking any type of audit assignments in central bank regulated entities for two years. This is the fist such debarment under Section 45 MAA of the RBI Act of 1934. The auditor audited SREI Infrastructure Finance Ltd and SREI Equipment Leasing, the Boards of both which have been superseded by RBI on governance concerns, including insider trading, and defaults in meeting payment obligations. Both are being taken for insolvency proceedings. 

See this and this on the problems at SREI.

3. Interesting data on the profile of India's unicorns, of whom there have been 33 this year till date.

Underlining the plenitude of capital available in the market, there was just one unicorn with a revenue multiple of less than 10 out of the 25 startups which turned unicorn this year for which data are available.

In 19 of the unicorns of this year for which data is available, there were just 8 with founders equity more than 25%. In fact, for a group of 50 startups, including those from 2021, the medial holding of founders is just 15%. 

Finally, the roll call of foreign investors in these 2021 unicorns.

4. Fascinating account in FT of the  rise and fall of former Austrian Chancellor and People's Party leader  Sebastian Kurz. Kurz, 35 now, won one of Austria's biggest ever electoral victories in September 2019, with 37.5% of vote for People's Party. But a scandal involving use of tax payer money to bribe media organisations into providing positive coverage has forced him to quit as Chancellor. He's now facing the heat of an investigation which threatens to unveil other more damaging deeds. Prosecutors and opposition accuse him of a Kurz system, a network of patronage connecting the Chancellory to the country's economic, political, and media systems. 

5. Saudi Arabia labour market facts of the day,

In just four years, the participation of women in the labour force has almost doubled to 33 per cent... For five years after Prince Mohammed launched his Vision 2030 reform plan, unemployment hovered stubbornly above 12 per cent, with youth joblessness at more than 30 per cent... Almost 2m foreign workers have left the kingdom since 2017 as the government raised tariffs on them and their dependants... expatriates, which account for about a third of the kingdom’s 33m population...Foreigners still account for about 77 per cent of private sector jobs. In retail, for example, where nationals now dominate the customer-facing side of many outlets, Saudis still only represent 28 per cent of the total workforce of 640,000.

6. Tim Harford has a nice summary on the now abandoned Ease of Doing Business rankings,

Doing Business was a victim of its own success. There are two types of statistics in the world: the ones that politicians ignore and the ones that politicians want to manipulate. The demands for manipulation will never go away, but the answer is not to cancel the gathering of statistics. It is to defend the independence of the statisticians.

One could also add that the statistical method should undergo constant improvement to account for emergent deficiencies. 

7. Jens Wiedmann, the hawkish long-standing President of Bundesbank announced his resignation early this week. During his decade long career and the Bundesbank and in the ECB's Governing Council, Wiedmann had been the voice of dissent against ECB's extended monetary accommodation. He played the role of the orthodox central banker, cautioning against inflation and monetary profligacy, and also against central banks venturing into areas like preventing climate change. This FT editorial has a good summary

Weidmann’s hawkish views, in keeping with many in his country and the reputation of the Bundesbank, meant he was often in the minority and would be passed over to become the next ECB president in favour of Christine Lagarde, with no prior experience of central banking. Still, to his considerable credit, he was a team player, often defending the ECB against unreasoned criticism in his home country. Critically, he rejected the potentially explosive assertion of the constitutional court that the ECB’s quantitative easing programme represented monetary financing...

Either way, Weidmann’s career showed that there was ultimately nothing for the eurozone’s institutions to fear from forceful dissent. Even while it annoyed Draghi, disagreement between members of the ECB’s governing board, which includes the head of the national central banks, did not prevent the ECB from acting decisively in moments of crisis. If anything, a loud voice reflecting the views of more hawkish member states, often in the north, helps build consensus and ensure that the institution — protected from political influence by international treaty — truly reflects the views of all it serves.

Wiedmann's role in the ECB is a great example of why strong and mature institutions need credible dissenting voices. 

It can be said that Weidmann's dissent contributed to keeping the ECB honest in its internal deliberations on continuing its monetary accommodation, and may even have enhanced the credibility of ECB's decisions than would otherwise have been. 

8. Justin Fox has a good article which examines the impact of Covid 19 in Sweden in light of the country's relatively relaxed pandemic policies. On both Covid 19 casualties and economic performance, the country appears to have done no better or worse than others, making it difficult to draw any definitive conclusions.

It's also a good pointer to the difficulty of drawing generalisable enough headline lessons about specific approaches on any such issue. As the article shows with several different statistics, it's always possible to selectively quote statistics to claim success or failure. 

9. Equity funding available for startups globally has soared this year.

Reflecting this, the number of unicorns too have risen.

This says it all,

There are now almost 850 unicorns — startups valued at more than $1 billion — more than 50% higher than this time a year ago.

10. Interesting McKinsey graphic which highlights the disconnect between employees and employers on labour market attrition - why employees leave and what employers think is the real reason.

11. The Economist has an article on Samsung as it grapples with its priorities in the rapidly changing market. Samsung's low valuation, apart from it being listed only in Korea, has to do with it not being a western firm. In terms of real value creation and long-term prospects, it's had to see how Apple can even compare with Samsung. 

12. Livemint reports on how Covid 19 has been a devastating blow for the Rs 1 trillion low-cost private schools in India. 

Of these 400,000-plus private schools, a bulk—over 320,000—are actually affordable private schools (those that charge a fee of less than ₹2,000 per month). School entrepreneurs claim that tens of thousands of these budget schools have now either permanently shut or are on the verge of shutting down... Contrary to the popular perception of a private school as an institution that’s all about high fees, swanky buildings and a ready physical-digital infrastructure that could take care of any eventuality, the low-cost budget school is often run with bare minimum facilities... According to Central Square Foundation, at least 90 million children—or 75% of all private school students—are enrolled in private unaided schools. And around 70% of the students in private schools pay less than ₹1,000 per month in fees and 45% pay less than ₹500 per month in India, according to the Union ministry of statistics... The National Independent Schools Alliance estimates that in the aftermath of the coronavirus outbreak, private budget schools will be facing an annual loss of ₹77,000 crore... low-cost private school teachers are now earning as little as ₹5,000-10,000 a month. Post pandemic, teacher salaries have dropped steeply—between 30-65%—and there is no surety that the salary will be credited by the end of the month.

The actionability test of development research

I have blogged on multiple occasions illustrating how what appear to be logically perfect solutions turn out far less effective in reality. This highlights an important lesson in development policy making - there is  most often a world of difference between the assumed outcomes of a technically ideal policy and the realised outcomes of its real-world implementation.  

This is the implementation deficit. The difference is a combination of state capacity weakness, behavioural change problems, political economy difficulties, and a variety of entrenched systemic constraints as well as failings of the agents implementing them. 

The history of development policy making is littered with implementation deficits. Good and technically robust ideas implemented with good intentions but failing to yield the desired objectives. 

The problem is even more pervasive in development economics research. In fact, it's rare to find a paper that points to a significantly efficacious idea or insight which is also implementable (or actionable) in the median development setting. 

In this context, I am drawn to this description of an example of cash transfer programs and food rations by Yogendra Yadav from an interview of Jean Dreze by Ashok Kotwal, 

In response to Kotwal’s advocacy of cash transfer over subsidised food to the poor, Dreze drew a distinction between an economist who advises the government and an economist who advises the poor. The policy advisor must think of the possible benefits while assuming that his or her suggestions will be implemented fully and in the right spirit. The advisor to the poor must focus on the likely consequences of a policy, how would a policy be implemented, on the ground. Dreze said that on paper, direct cash transfer can be the most economical and efficient way to help the poor, but food-grain delivery through ration shops is their best real-life option.

This is what Dreze says in that interview,

On the question of the PDS vs. cash transfers, I think there are at least two possible sources of differences in our perspective. One is that I have been very influenced by numerous conversations with poor people in states such as Jharkhand, Bihar, and Chhattisgarh. I have been influenced by their fear of kind being replaced with cash and I think they have some very valid arguments. For example, they don’t trust the government to index the cash transfers – not just before the elections but also afterwards. They are worried about what will happen to local food prices if the system of procurement and distribution is dismantled. They are worried that cash can be more easily misused than food, because food can only be consumed in small quantities over time while cash is easily spent in one go.

Another possible difference relates to where we place ourselves and who we are advising. Economists, to the extent that they get involved in policy debates, think of themselves largely as government advisors. So, for example, this point about inflation and whether the government is going to index the transfers, if you are positioning yourself as a government advisor it is not much of an issue because indexation can be part of your advice to start using cash transfers. But if you are advising poor people rather than the government, things might look quite different. If poor people ask me, after hearing that the government may introduce cash transfers, whether they can trust the government to index the transfers, I would have to say no, there is no guarantee of it at all.

For me the bottom line is that the poor are getting something very important from the PDS. It has improved a great deal in recent years and it is now a very substantial form of support for people who are on the margin of subsistence. They have no reason to go along with something else unless there is a real guarantee that it is something demonstrably better, and as of now I do not see that... So I would not say that I oppose cash transfers, but I do resist them in the context of the PDS, at least for now... It is easy to do a blackboard calculation showing that the government could save thousands of crores by replacing kind with cash. But there is a key difference in practice – the PDS is in place and the cash payment system is not. When you consider giving up something that is in place and means a lot to poor people, you really have to think hard about the practicalities of the transition.

In other words, policy economists should see themselves as advisors to people instead of governments. Their objective should be the analysis of the world as it is, instead of an imaginary idealised world, with prescriptions relevant for the former. 

Some takeaways from Article IV consultations

The report of the IMF's Article IV consultations with Government of India is out. It's generally a data rich report.

Pointing to significant scope for improving its communications strategy, the report shows that RBI's monetary policy decisions have surprised the market far more often than with peers.

The low level of foreign debt and adequate foreign exchange reserves are important cushions against external vulnerabilities.

Highlighting low and stable long-term government bond yields, the REER has appreciated slightly.

Since the GFC, central government revenues have remained more or less stable at 10-11% of GDP, with direct taxes being the stablest. 

However, since 2012-13, central government subsidies have been coming down, almost halving by 2019-20 before Covid hit. 

This subsidy reduction is very impressive. However, it's not been accompanied by any proportionate increase in capital expenditure. Pre-dating Covid and since the GFC, the government capital spending has remained lower, The main culprit, on a long term basis, appears to be the central government. Its expenditure has remained stuck at 1.7-1.8% of GDP for entire last decade.

Corporate deleveraging has been a positive feature of the economy in recent years.

But stress tests points to likely Covid 19 induced problems for both corporates and banks going forward.

As regards public debt, the Covid 19 backstop measures have pushed it into a new higher trajectory. Long-term fiscal consolidation depends on economic growth rate. The IMF projections show that under a constant primary deficit of -2% of GDP and an interest rate-growth differential of about -3.5%, debt would decline to 70% of GDP in about 20 years. 

The staff projections point to a medium-term potential output growth of 6%, a decline by 25 basis points. A lower growth rate is a big concern on the fiscal consolidation path. 

The positive feature is that the public debt is both overwhelmingly domestic and medium to long-term, thereby limiting any external or internal vulnerabilities.

China property market facts of the day

From FT

Property sector represents 29 per cent of Chinese gross domestic product and is more than $5tn in debt. Some 41 per cent of the Chinese banking system’s assets are associated with the property sector, and 78 per cent of the invested wealth of urban Chinese is in housing.

This on the share of land sale revenues in local government revenues

Land transfer revenues stood at just 50.7 billion yuan in 1998 according to data from the Ministry of Finance (MOF), yet had risen to over 8.4 trillion yuan by 2020, for an approximately 165-fold increase. In 2020 land transfer revenues were 8.4142 trillion yuan, for a YoY increase of 15.9%. MOF forecasts that 2021 revenues will remain on par with those last year. 

Since 2015 land transfer revenues have steadily expanded as a share of Chinese GDP, reaching 8.3% of the total by 2020. Research from Yuekai Securities indicates that... in 2019 the land fiscal dependence ratio of provinces including Zhejiang, Anhui, Jiangsu, Shandong, Jiangxi, Guizhou and Hubei stood at between 90 – 120%.

And this,

Sales of government land brought 16% more in revenue last year at 8.41 trillion yuan ($1.30 trillion), a sum equivalent to the value-added tax and corporate income tax, two mainstays of China's tax regime, combined... the intake from land sales at 55% of overall tax receipts collected by the central and local governments, up from 26% in 2015. Chinese municipalities often sell land to condominium developers. Local authorities also collect five other taxes relating to real estate, including one for using urban land. Revenue from the five taxes quadrupled over the decade through 2019 and expanded to 25% of local government receipts.

Is there any other instance in history of property being so disproportionately large and important in a major economy?

The Chinese policy makers face a difficult choice. In line with President Xi Jinping's "Common Prosperity", they may want and orderly deflation of the property bubble and also avoid the moral hazard of bailing out the large real estate firms. But property is a critical driver of China's economic growth, underpinning both household wealth and local government revenues as well as bank credit. Any wobble in the property market will invariably ripple across the economy and cause considerable damage. And not even the formidable Chinese government can be confident of either preventing the wobble becoming a self-reinforcing spiral or controlling the contagion once a threshold is crossed. 

Update 1 (28.10.2021)

FT reports that Beijing is considering introducing property tax,

According to research group Capital Economics, an effective tax rate of 0.7 per cent of the total property value would have generated Rmb1.8tn ($282bn) last year in China. That compares to Rmb1.6 tn local governments generated in net revenue from land sales, after paying billions of dollars in land transfer expenses including compensation payments.

And from Robin Harding, 

According to Kenneth Rogoff of Harvard and Yuanchen Yang of Tsinghua University, the property sector accounts for as much as 29 per cent of China’s output. That may be an overestimate in absolute terms, but on a comparable basis it is even higher than in Spain at the peak of its 2006 property boom.

A perspective on the EoDB ranking controversy

The World Bank's Ease of Doing Business (EoDB) survey, perhaps the most famous of any WB product or service (though of deeply questionable technical merit), is at the centre of a high profile governance scandal. An independent investigation has found that the rankings of China and Saudi Arabia were manipulated at the behest of the Bank's senior management. There have been calls for the removal of Kristalina Georgieva, the current head of IMF, who as the CEO of the World Bank is alleged to have been personally involved in manipulating China's rankings. 

Without holding a brief for anyone whatsoever, this post seeks to offer some thoughts that can perhaps help place the incident (purely on its own, and independent of other things that may have been going on) in a better perspective. 

Complicating any effort to separate the wheat from the chaff and make an objective assessment of the situation is the politics surrounding the issue. As Justin Sandefur has written, everything from the 'independence' of the investigation, the relative under-examination of similar actions involving Saudi Arabia, the Washington polarisation surrounding China and ex-President Donald Trump's appointees, raises at least as many questions as those about Georgieva's actions.

Any dispassionate view of the controversy is difficult, especially for those once involved with the Bank or IMF or currently engaged with the Washington development aid ecosystem. And much of the commentary has been by these people. In these extremely polarised times, it's most likely that views of those involved with the issue on these lines become skewed towards one side or the other.

This is not to deny that there are some deeply questionable findings. For example, it has to be said that Georgieva's visit to the House of a junior EoDB staffer on a weekend to collect the China report raises deep suspicions. But is it also possible, from whatever information is available on the public domain and without being judgemental, that Kristalina Georgieva was merely doing what any pragmatic leader would do to protect the larger interests of her organisation?

In this context, as a complete outsider, let me offer two alternative perspectives from the private and public sectors. In both these cases, in their own respective contexts, the relative stakes are much higher for all sides involved than with either China or its alleged supporters like Georgieva. 

Let's first do the private sector. In recent years, there have been several similar controversies involving the most reputed consultants, financial institutions, audit firms and so on. They have been accused of either directly or indirectly supporting or indulging in corrupt or manipulative practices, most of which could not have happened without the complicity of the leadership. The stake in each case is much, often by orders of magnitude, higher than the one involving the EoDB survey rankings, for all sides. 

If we take the view of those calling for Georgieva's head, Lloyd Blankfein and David Solomon of Goldman Sachs and Dominic Barton and Kevin Sneader of McKinsey should have resigned many times over. They have been associated with allegations of much more serious nature, involving fraud and bribery (perhaps even murders and genocide), especially with governments. The same applies to the several Wall Street chief executives whose firms actions in short-changing, even defrauding, their investors and clients could not have been done without at least the tacit approval from the top. All the Big Four major accountancy and audit firms have been accused (and some even found guilty) of having helped manipulate accounts or cover-up large bribery and corruption cases, or massage corporate accounts through arguably illegal practices that have helped evade billions in taxes. 

And, in common with the EoDB issue, it's possible to trace at least one instance involving most of these companies and their leaders where their actions in support of China or Chinese interests could be questioned on grounds of violating corporate governance standards, with some even bordering on corrupt practices. Is it at all possible that all those Chinese princelings were hired on preferential basis by venerated Wall Street institutions and consulting organisations without the approval of the top leadership?

The second perspective is from the public sector. Consider the following examples from an Indian context. One, a Municipal Commissioner deals with several Councillors, most of them with entrenched links with local preferred contractors and lobbying to further their interests. Two, a District Collector often comes across decisions requiring the selection of housing colonies or roads or other works or locations for an economic establishment from among competing ones, and with strong political interests behind many of them. Three, a Head of Department (HoD) or the Managing Director (MD) of a public Corporation deals with requests for postings, transfers and deputations of officials at various levels, often involving intense pressure from political representatives and employee unions.

Consider also in each case that the Commissioner or Collector or HoD/MD has to deal with the China equivalents - a very powerful Mayor or local Parliament representative or legislator or Department Minister. They also have to deal with slightly less powerful other interests - certain Councillors, other legislators, and other Ministers. 

There are two simplistic perspectives on viewing such situations, one involving compromise and another refusal to accommodate. One, compromise and get on the bed with the political interests. Once on this slippery slope, also compromise with all the other less powerful interests. Two, reject all such requests and not accommodate even one bit. The fate of the former is easy to predict. He or she is likely to be both corrupt and weak administrator. But the latter is a much misunderstood creature. While being completely honest, given the complex contexts and the challenging nature of public responsibilities, the rigidity is most likely to constrain effectiveness. 

Accommodation can provide the space and flexibility necessary to not only administer effectively but also rein in vested interests and push through bitter and contested reforms. It can be the critical difference between being successful with your initiatives and hitting the wall and failing on your endeavours. It has to be said that this is no universal recipe and such accommodation is not possible with certain Mayors or legislators or Ministers. But in many, if not most, cases, there are spaces for accommodation. 

Accommodation would involve even simple things like prioritising on addressing the problems or issues raised by the powerful interest purely on merits, or greater application of mind or spending more time on references made by them, or even a slight preference in razor-thin margin decisions involving exercises of judgements. In all these cases, the mindset of a complete non-accommodater can generate significantly different outcomes from that of even the only slight accommodator. 

So a third perspective is a mesonic accommodation, but one inclined more towards the second perspective. The very powerful interest has to be accommodated, but only to just the least possible extent. There has to be clear red lines of accommodation, known to both sides. And, especially in case of individuals holding high public office, they will have to hold him or herself accountable for not only adhering but also seen to be adhering to those red lines. Yes, I admit there are several judgement calls, and all of them have very slippery slopes. But, we must all admit that even the most saintly life or unblemished career itself are too complex to be algorithmized or to be sanitised from judgement calls.  

There is something about seeing the big picture without also not losing sight of the small pictures. Accommodating without compromising. Accommodating only to the least possible extent required. Drawing lines and walking the talk with those lines. This path is difficult to straddle for the individuals themselves and the idea is even more difficult for outsiders to comprehend. 

A simple test around this conundrum is the personal integrity test. As long as the individual did not benefit financially from the incident and the actions were motivated purely by organisation's best overall interests, there's a case for condoning the actions. But here too the simplicity can be deceptive. A slightly more accommodative official can benefit from future employment and other opportunities, which ultimately confer financial benefits on the individual. 

Another test in such cases is take the long view. Instead of judging the individual actions as an isolated incident, it's better to judge the actions in the backdrop of the individual's career track record on personal integrity. This is exactly what Sandefur, for example, does, when he takes Shanta Devarajan at his word in his (Devarajan's) judgement of Georgieva's instructions involving China. 

I hold no brief for either Georgieva or World Bank, much less the EoDB ranking. I have little idea of Georgieva's track record of professional and personal integrity. But, given the information in the public domain, there are enough grounds for us to at least pause and reflect before indicting based on commentary which may in theory be at least as flawed as Georgieva's motivations. Having said all this, I'm open to the possibility that Georgieva did indeed cross a line and should be sacked. It's also very much possible that, given the politics of the current circumstances (read China's aggressive bullying and wolf-warrior posturing and appeasing it), her actions have crossed a line too far and it may therefore be appropriate to remove her. 

But it's important for us to have a more accurate perspective on the current accusations so as to not only be balanced about our views on the EoDB scandal, but also focus our collective consciousness on the important and critical governance problems in both the public and private sectors. 

I'm also inclined to believe that even in a ranking of all the countless questionable and corrupt practices (including those trying to placate or protect the interests of their main funders) indulged by the leadership of the World Bank and IMF over the years, the actions currently under discussion would struggle to register anywhere in even the top half. 

Weekend reading links

1. A status check on the share of e-commerce in India's retail market,

India has, as of now, nearly 13 million retail grocery stores (or kirana stores), contributing 10 per cent to India’s gross domestic product and accounting for 8 per cent of India’s employment. So-called “modern retail” is just 8,000 outlets, which make up a mere 0.05 per cent of the total and online e-commerce less than 2 per cent of retail sales.

2.  This is purely self-serving,

Praveer Sinha, chief executive officer and MD, Tata Power, had said in an interview in September that in the case of some imported coal-based plants, it was “absolutely unviable” to have a fixed-price agreement.

In case of the UMPP bids, the bidders had the option of quoting fixed tariffs or allowing fuel price pass-through, and Tata and other chose fixed tariffs. And when the Indonesian government changed its regulations by hiking domestic duties, the bidders found their fixed price tariff structure unviable and have been demanding fuel price pass-through.

3. More on India's missing middle class

The percentage of households owning a car, computer, AC, TV, and Fridge increased from just 2% to 3% over the 2014-19 period. 

4. Citing Covid 19, the Adani Group have sought time till December 2021 to take over the three airports of Trivandrum, Guwahati, and Jaipur. For the record, AAI had declared Adani Group the winner of six airports in February 2019. It assumed management control of Lucknow, Ahmedabad and Mangalore airports in November 2020. 

In stark contrast to the delays in assuming control of these airports, the Group has swiftly moved in to assume control of the Mumbai International Airport. 

The Group had bid very aggressively to win the six airports - in contrast to the Rs 85 and 69 per passenger revenue share quoted by GMR, the Group offered Rs 177 and 174 respectively. 

5. On the Chinese power crisis,

Some of those consequences have stemmed from production cuts in provinces struggling to meet strict year-end energy efficiency targets. Plants in other regions have been affected by coal shortages, soaring coal costs and electricity price caps, which mean they can only generate power at a loss. On Monday Chinese coal futures reached record highs after a big coal-producing region was affected by flooding.

6. Disruptions of supply chain and acute lorry driver shortage is leading to pile up of ships in English ports,

Congestion at ports has been widespread across the world since the end of last year when the pandemic wreaked havoc on supply chains by triggering volatile demand for goods, factory closures and restricted operations at ports. As a result, shipping a container between China and Europe costs more than six times as much as a year ago. However, the situation at ports in the UK has been particularly severe because of its acute lorry driver shortage. Felixstowe port said a shortage of drivers meant that it was taking about 10 days before cargo could be taken inland to be unloaded, up from the usual four-and-a-half days... “The pre-Christmas peak, combined with haulage shortages, congested inland terminals, poor vessel schedule reliability and the pandemic, has resulted in a build-up of containers at the port,” the port said.

And this on ships stuck outside ports, 

Globally, there are now 584 container ships stuck outside ports, nearly double the number at the start of the year... The snarl-ups in supply chains are reflected in a surge in shipping costs: the average global price of shipping a 40 foot container is now close to $10,000, three times higher than at the start of 2021 and almost 10 times pre-pandemic levels... Similar logistical problems have hit ports on the west coast of the US. Although the number of ships waiting at sea has fallen from a record 76 in September to 57 now, shortages of port workers and truckers means it takes up to 12 days for ships to drop anchor and unload containers, delaying the delivery of everything from sneakers to tropical fruits and Lego. That is why it takes three times longer compared with pre-pandemic times to clear vessels at Los Angeles and Long Beach.

7. Spain has imposed a windfall tax to plough back some of the large increases in profits of utilities due to the soaring natural gas prices. 

Spain’s big electricity companies — notably Iberdrola, the multinational utility, and Endesa, the subsidiary of Italy’s Enel — are making their first payments under the country’s temporary windfall levy, which rises in tandem with the price of gas. Spain’s leftwing government initially estimated that based on prices last month, the measure would raise €2.6bn during its six months in force, taking funds from utilities that benefit from the impact of gas on the electricity price but which do not have corresponding gas costs of their own. But the continued increase in gas prices means the levy may now cost the companies involved more than €5.5bn, which the groups argue shows that it was disproportionate and ill-conceived.

8.  NYT has an article on the central issue in US-China relations, the issue of Taiwan. A few days back, Xi Jinping said that Taiwan independence "was a grave lurking threat to national rejuvenation" and affirmed his commitment to unite Taiwan with China. 

The biggest destabilising force is the possible breakdown of the belief that US forces could at the least tied down the Chinese military. 

In war games since at least 2018, American “blue” teams have repeatedly lost against a “red” team representing a hypothetical Chinese force — in part by design, since the exercises are intended to test officers and war planners. In a game simulating a war around 2030, reported earlier by Defense News, the “blue” team struggled even when given new advanced fighter planes and other weapons still on the Pentagon’s drawing board. The classified game culminated with China launching missile strikes against American bases and warships in the region, and then staging an air and amphibious assault on Taiwan, according to a Defense Department official. The officials concluded that Taiwan, backed by the United States, could hold out for maybe two or three days before its defenses crumbled. The Pentagon’s annual assessments of China’s military have since 2000 chronicled its evolution from a large but ineffective force into a potential rival. Its latest report said Chinese capabilities have already surpassed the American military in some areas, including shipbuilding, conventional ballistic and cruise missiles, and integrated air defense systems. All three would be essential in any conflict over Taiwan...

“This really is the grimmest time I’ve seen in my more than 40 years working in the military,” Taiwan’s minister of defense, Chiu Kuo-cheng, told lawmakers on Wednesday. China already had the means to invade Taiwan, though still at a high price, he said. “By 2025, the cost and attrition will be squeezed lowest, and so then it could be said to have ‘full capability’.”

The point is about what's going on in the minds of the top leadership about Taiwan. Do they think that they've enough strength to overwhelm US and annexe Taiwan? Do they think that the Americans would find the damage of a direct confrontation unacceptably high as to not back Taiwan the full hog in case of a war? Do they think that the Biden administration's increasing level of diplomatic and military support will embolden Taiwan and increase the resolve of pro-democracy forces in Taiwan.

9. Latest in the (un)ease of doing business in China, chinfrom the travails of Microsoft's LinkedIn,

Microsoft Corp.’s LinkedIn is shuttering a localized version of its professional networking platform in China, becoming the last major U.S. social media provider to pull out of the country and marking the demise of a rare U.S. tech success there. LinkedIn said it made the decision in light of “a significantly more challenging operating environment and greater compliance requirements in China.” ... In exchange for being allowed to operate, the company agreed to restrict some content to adhere to state censorship rules. The service had about 52 million users on mainland China. Other U.S.-based social media platforms such as Twitter Inc. and Facebook Inc. have long been banned.

Signs of turbulence for Microsoft emerged in March. LinkedIn said then that it had paused sign-ups for new members in China while it worked to ensure compliance with local laws. Earlier that month, China’s internet regulator reprimanded LinkedIn executives for failing to control political content, according to the New York Times.In May, a prominent critic of China based in the U.K. said LinkedIn froze his account and removed content criticizing the country’s government, the latest in a series of allegations that the networking website had censored users — even outside of the Asian nation — to appease authorities in Beijing.

10. New Yorker has a fascinating profile of CORE (Curriculum Open-Access Resources in Economics), an initiative anchored by a free online introductory text book The Economy, created by a team led by Samuel Bowles and Wendy Carlin, and which seeks to "teach economics as if the last thirty years had happened", 

Compared with other textbooks, “The Economy” sometimes seems to reverse foreground and background. “Principles of Economics,” written by the Harvard economist N. Gregory Mankiw, declares that “markets are usually a good way to organize economic activity”; “Macroeconomics,” by Paul Krugman and Robin Wells, tells students that “markets move toward equilibrium.” Bowles and Carlin, in contrast, present market failure as far more pervasive, and not as a rare deviation from a generally efficient and desirable status quo. Most economics textbooks, they argue, in a recent paper on economics pedagogy, lead students to “reasonably conclude that the economy is about interactions in competitive markets (a positive statement) that function pretty well (a normative one) and in which governments ought not to meddle.” core provides reasons and evidence to challenge all three positions. 

Recently, Bowles and Carlin published a statistical analysis, comparing the relative frequency of topics in core’s “The Economy” with other textbooks. Some of the words that appear more commonly in “The Economy” are “Gini” (a measure of inequality), “bargaining,” “environment,” “global,” and “democracy.” Their analysis also shows that core offers greater coverage of economic history and thought, game theory, behavioral economics, and comparative international development. It’s not that the other textbooks omit these topics entirely but that core foregrounds them. Bowles told me about an informal rule among publishers that no more than fifteen per cent of the material in a new textbook should deviate from the dominant ones. He estimates that the figure for core is closer to seventy per cent.

11. The returns generated by US University endowments,

The Massachusetts Institute of Technology reported that its endowment had gained 56 percent in its most recent fiscal year, which ended in June. Yale also published its latest returns Thursday, with its endowment up 40 percent over the same period, its third-highest annual return since 1970. Dartmouth posted a return of nearly 47 percent. Duke reported a 56 percent return. Harvard, which runs the biggest endowment (worth $53 billion), said Thursday that its fiscal-year return lagged many of its rivals, rising a mere 34 percent... A big reason for the gains is investments with private equity firms, which in some years have received more in fees than endowments have paid out in tuition help. Harvard’s private equity investments, worth a third of its total portfolio, returned 77 percent in its latest fiscal year. Venture capital funds are also recording huge returns: The University of North Carolina logged a 142 percent return from that portion of its $10 billion endowment.

Also, sample this from 2015,

Last year, Yale paid about $480 million to private equity fund managers as compensation — about $137 million in annual management fees, and another $343 million in performance fees, also known as carried interest — to manage about $8 billion, one-third of Yale’s endowment. In contrast, of the $1 billion the endowment contributed to the university’s operating budget, only $170 million was earmarked for tuition assistance, fellowships and prizes. Private equity fund managers also received more than students at four other endowments I researched: Harvard, the University of Texas, Stanford and Princeton.

12. Finally, India's market regulator appears to be doing what should already have been done in scrutinising and penalising the actions of credit rating agencies (CRAs). World over, the CRAs have largely got a free pass despite egregious failings and culpability in many incidents, including the global financial crisis. 

Markets regulator Securities and Exchanges Board of India (Sebi) has decided to cancel the license of one CRA—Brickwork Rating—and ban from the markets two former senior officials of another—CARE Ratings... At Brickwork Ratings, the regulator found egregious violations on two counts—lack of independence of the rating committee and lapses in following procedures while rating instruments. CARE Ltd’s two former senior officers—former managing director Rajesh Mokashi and former chairman S.B. Mainak—will be barred from the securities markets owing to the lack of independence and checks while they rated the debt instruments issued by IL&FS group or its subsidiaries... In the case of Brickwork, there is a case of repeated lapses and lack of independence... 

There are seven registered credit ratings agencies in India—CRISIL, CARE, Acuité Ratings & Research Limited, Brickwork Rating, India Rating and Research and Infomerics Valuation and Rating. The global biggies—S&P, Moody’s and Fitch—don’t rate Indian corporate bonds. CRISIL is majority owned by S&P. Such severe action on a credit rating agency is rare globally. The only big example is a 2013 ban by US Securities and Exchange Commission on Egan-Jones Ratings Company and its president for 18 months. Even then the bar was for omissions in statements while seeking registration and not for lapses in the ratings process.  

This about the relationship between Brickwork and Essel Group is at the heart of SEBI's ire,

The Sebi investigation report in the matter, which will form part of the impending order, cites issues in ratings of papers issued by companies such as Diamond Power, Great Eastern Energy Corp. and firms that are part of the Essel group—namely Essel Corporate Resources and Zee Entertainment Enterprises Ltd. The issues ranged from delay in downgrading to not assigning any rating while the ratings were withdrawn due to so-called non-cooperation by the company... It again goes back to the controversial agreement between mutual funds and Zee promoters in January 2019. Seven mutual fund houses who held Essel group papers in their various debt schemes came to an agreement that although the companies were unable to stick to the repayment schedules of the debt papers, they will be given a lifeline. The funds would not invoke the underlying shares and dump them into open market. They instead extended the maturity dates of the papers from these companies. 

The market regulator has been particularly angry at this. Kotak Mahindra Mutual Fund and HDFC Mutual Fund have both faced regulatory orders over this. While HDFC MF settled the matter, Kotak Mahindra MF was slapped with a ₹50 lakh fine and a ban on launching fixed maturity plans for six months. The regulator in its investigation report has noted that the rating agency downgraded the two instruments only by one notch when ordinarily such breach of obligations should result in a multi-notch downgrade or default.

Also this about Brickwork,

In a previous order on Brickwork in August 2018, Sebi had found a flagrant conflict of interest. It found that D. Ravi Shankar, founder director at Brickwork, was both involved in rating as well as in approving the fee charged for this service—a practice deemed a complete no-no in the ratings industry. This practice happened in 71 cases involving a rated amount of around ₹86,842 crore. 

Another stunning instance involved the rating of debt instruments issued by Cox and Kings. On 24 June 2019, both CARE and Brickwork reaffirmed their highest rating of A1+ for Cox and Kings’ commercial paper (CP) issue. Brickworks even highlighted high receivables. Both CRAs also gave a ‘Stable’ outlook, which indicates a low possibility of rating change over the medium term. Yet a mere 3 days later, on 27 June 2019, Cox & Kings defaulted on ₹150 crore of payments on CP. It was only after the default that ratings were downgraded by several notches to default.

This about CARE merited cancellation of its license too,

In the case of CARE, some of the conflicts were first highlighted by a July 2019 audit report by Grant Thornton. As per CARE’s shareholding pattern between 2007 and 2013, IL&FS Ltd and ILFS Financial Services (IFIN) were equity shareholders and held a 5-9% stake. During the same period, CARE was rating instruments of IFIN, IL&FS and IL&FS Transportation Networks Ltd. “It appears that the rating agencies were potentially aware of the issues in the IL&FS group. However, the various strategies deployed by the then key officials of IL&FS group and certain favours/gifts provided to rating agency officials suggest the possible reasons for consistent good ratings provided to IL&FS group during the period June 2012 to June 2018," said Grant Thornton in the audit report.

This is all excellent work. It's also worth pondering whether any financial market professional could have had the courage to undertake such actions. So kudos to the SEBI leadership for cracking down on CRAs.