Weekend reading links

1. WSJ points to different ways in which businesses raise prices by stealth,

The average domestic airline ticket price is about the same today as 25 years ago, $260, versus $284 in 1996. And that’s before adjusting for inflation. How is it possible that the airline industry hasn’t increased ticket prices in over two decades? It isn’t, really. Most of us are paying a lot more to fly today, thanks to a combination of three covert price increases. First, airlines have unbundled services so that fliers pay extra for checking luggage, boarding early, selecting a seat, having a meal and so on. The charges for these services don’t show up on the ticket price, but they are substantial. Second, the airplane seat’s quality, as measured by its pitch, width, seat material and heft, has declined considerably, meaning customers are getting far less value for the ticket price. And third, many airlines have steadily eroded the value of frequent-flier miles, increasing costs for today’s heavy fliers relative to those in 1996...

shrinkflation—the common practice in the grocery industry of reducing weight, quantity or volume of a package while maintaining price. It works effectively as a covert price increase, because consumers are far more likely to notice price increases than equivalent weight or quantity decreases. Less well known is a little psychological trick companies use with larger packages. Many shoppers assume that such packages with labels like “Party Size” or “Jumbo” will be cheaper on a per-unit basis. This is often not the case. Brands routinely exploit this common consumer belief by marking up larger packages more, and earning a greater margin on them. Researchers call this a “quantity surcharge.”

Another article writes about airline prices.  

2. Douglas Irwin of the Peterson Institute for International Economics has a paper that examines the reasons for South Korea's spectacular export success in the sixties. Its share of exports surged from about 1% of GDP in 1960 to more than 10% of GPD by end of the decade, and 20% by early seventies. The export liberalisation was introduced overcoming strong domestic opposition by the US whose aid financed most of the country's imports amounting to 10% of GDP. The US pushed hard for an export promotion strategy that devalued the currency and liberalised foreign exchange controls. 

The turning point was the reforms introduced in 1964-65 by the government of President Park Chung- hee. 

A slew of regulations and previous policies of import repression, all motivated by the need to conserve foreign exchange, were swept away or relaxed in moving toward a more open (if still restricted) system related to foreign exchange... Under the new system, exporters could retain or sell all of their foreign exchange earnings at a competitive exchange rate. The move marked a big change from the export-import linkage in which only exporters had access to a limited amount of foreign exchange at an overvalued rate. Henceforth, exports were to be promoted by indirect policies, including easy access to credit, duty free imported raw materials, and tax exemptions rather than export subsidies or preferential access to foreign exchange, both of which were abolished. As a result, the government no longer regulated imports by controlling the allocation of foreign exchange; the quarterly foreign exchange budgets, which made allocations to particular importers for particular products and amounted to specific quantitative restrictions on imports, were no longer necessary... 

The cornerstone of the new export promotion stance was maintaining a realistic exchange rate, a policy augmented by low-interest loans and reduced taxes for exporters, easy importation of raw materials, intermediate goods, and machinery needed to produce exports, and the removal of many bureaucratic obstacles to exporting. These incentives were not selectively applied to targeted industries but generalized to all exporters as long as they proved capable of selling abroad and earning foreign exchange. However, it was not a liberalization in the sense of removing all controls and price distortions or allowing foreign firms to compete in Korea’s domestic market. 

3. Robin Wigglesworth has a profile of Larry Fink and BlackRock, the world's biggest asset manager with a portfolio kissing $10 trillion. 

An interesting snippet is that BlackRock was founded in the late eighties with a $5 million loan from private equity firm Blackstone, which in turn took at 50% stake. In fact, its initial name was Blackstone Financial Management (BFM). It soon developed its iconic market leading bond trading service called Aladdin (Asset, Liability, Debt and Derivative Investment Network). Its split from Blackstone and naming was interesting,

All BFM’s funds had tickers — a code that identifies investment vehicles in regulatory filings and data providers — that started with the letter B. But an agreement with Blackstone stipulated that the new name could not include the words “black” or “stone”. Bedrock was considered, but made too many people think about The Flintstones. However, the founders loved the name “BlackRock”. They appealed to Schwarzman and Peterson, pointing out that Morgan Stanley’s 1930s split from JPMorgan burnished both firms. Peterson and Schwarzman were tickled by the idea of BlackRock as an homage to Blackstone, and blessed the new name. In 1994, Blackstone finally sold its stake in BlackRock for $240m to PNC Bank in Pittsburgh, which folded all its own money management operations into BlackRock and eventually listed it on the stock market. A long-mooted initial public offering finally arrived on October 1 1999, by which time BlackRock’s assets under management had vaulted to a hefty $165bn.

This about the outsized influence wielded by BlackRock and Larry Fink,

BlackRock, Vanguard and State Street are by some distance the world’s biggest purveyors of passive, index-tracking investment vehicles, whether traditional benchmark-hugging mutual funds or ETFs that can be bought and sold throughout the day. The inexorable shift towards such funds has handed the industry’s so-called Big Three enormous sway in many corporate boardrooms. Lucian Bebchuk of Harvard Law School and Scott Hirst of Boston University estimated in a 2019 paper titled “The Spectre of the Giant Three” that the trio’s combined average stakes in the 500 biggest listed US companies had vaulted from about 5 per cent in 1998 to over 20 per cent. Their real power is even greater — and growing. Given that many shareholders don’t actually bother to vote at annual meetings, BlackRock, Vanguard and State Street now account for about a quarter of all votes cast on average, which will rise to 41 per cent over the next two decades, the academics estimated... In reality, calling it the Big Three is a misnomer. State Street’s inclusion is the legacy of its invention of the ETF, and its size and growth rate is far more modest than BlackRock or Vanguard’s. In practice, there is an emerging duopoly, and BlackRock’s pole position — and Fink’s willingness to throw its heft around more than Vanguard — has made it a target across the political spectrum... A host of former government officials work at BlackRock, and others have departed for plum jobs in the Biden administration. To some critics, BlackRock is the new Goldman Sachs.

4. Sometime back I blogged that India's economic weakness of recent times has its roots in pursuing economic orthodoxy. Shang Jin-wei appear to think that the same may be true with China's impending economic slowdown,

Some of the reduction in growth stems from China’s zero-tolerance policy toward COVID-19, which calls for more frequent lockdowns than in most other countries... But the pandemic is not the only factor behind the slowdown. The government’s green industrial policy, tighter regulation of the property sector, and blacklists of online platforms also have collectively curtailed growth. Following its pledge to halt the rise in China’s carbon-dioxide emissions before 2030 and achieve net zero by 2060, the government has forcefully and often abruptly reduced electricity generation in coal-fired power plants, sometimes by 20%... In addition, the “three red lines” policy, initiated in August 2020 and intensified this year, sets ceilings on property developers’ debt-to-asset ratio, debt-to-equity ratio, and debt-to-cash ratio. Because many of these firms could not meet one or more of the red lines, and banks and capital markets are reluctant to provide new financing, they must sell assets, scale down operations, or both... Lastly, the authorities’ decisions to blacklist online-education companies, ratchet up antitrust enforcement, and enact a broadly worded data-protection law have helped to halve the stock prices of many listed digital-economy companies over the last 12 months. And falling equity valuations are merely the tip of the iceberg, as many digital firms and their suppliers have had to scale back their ambitions and plans.

5. One of the surprisingly less used instruments in infrastructure financing is credit guarantees. It's an instrument that can help unlock domestic lending to risky projects.

In this context, the FT reports that the European Union intends to mobilise upto 300 billion euros by 2027 for infrastructure projects for a Global Gateway that responds to China's Belt and Road Initiative. 

The draft says... the plans also hinge on the use of “innovative financial instruments to crowd-in private capital”, including guarantees to cut the risks of private sector investments. About €135bn of investments will be enabled by guarantees from the EU’s new European Fund for Sustainable Development Plus programme. The Luxembourg-based European Investment Bank would also be involved. Grant financing of up to €18bn will come from other EU programmes. Half of the targeted spending of up to €300bn will come from European financial and development finance institutions, according to the draft.

6. Tamal Bandopadhyay points to the process of bank's market share being taken over by mutual funds and insurance, 

The credit deposit ratio of the Indian banking industry in the fortnight ending November 5 was 69.56 per cent. This means for every Rs 100 worth of deposit, the banking system has lent just Rs 69.56. This is the lowest since the fortnight ending December 9, 2016, when it had dropped to 69.29 per cent. Barring this aberration, in the past decade, the CD ratio roughly varied between 72 and 78 per cent. You have not mentioned this but the fact is the banks have already started losing the working capital business to the mutual fund industry whose assets under management in October were Rs 37.33 trillion, having grown more than five-fold in the past decade. During this time, bank deposits have grown around three times, to Rs 160.49 trillion. For long-term financing, the insurance industry, with a money bag of around Rs 45.5 trillion, is stepping in.

7. Pratik Datta makes important observations on the implications of using the IBC on discoms,

The US bankruptcy code explicitly preserves the regulatory agencies’ rate-setting authority under a plan of reorganisation. There is no similar provision in the IBC. Therefore, clarity is needed on the NCLT’s power to approve a discom resolution plan that proposes a tariff change. If the NCLT could do so, tariff changes through resolution plans would be binding on the State Electricity Regulatory Commission (SERC). The policy on this issue may have significant implications for discom resolution. 

Insolvency of such utility service providers may need special treatment to ensure continuity of supply. Wide-scale disruption of such services could have disastrous consequences for an economy. For this reason, the UK restricts the rights of energy suppliers and their creditors to initiate insolvency proceedings. They must first notify the financial distress to the Secretary of State and Ofgem, the energy regulator. Ofgem assesses whether a supplier of last resort could be appointed to take over the responsibility of the failed supplier. If that is not feasible, Ofgem or the Secretary of State may apply to the court to initiate a special administration regime that ensures continuity of supply.

Even assuming the PPAs being outside the scope of NCLT (and therefore the risks of governments remaining saddled with the high cost PPAs), any haircuts on debt will translate into lower debt servicing costs which, in turn, will have to be passed on to consumers thereby implicitly revising the current tariffs.

8. On wealth creation by India's pharmaceuticals industry,

Of India’s estimated 237 billionaires, 40 have made their fortunes from pharmaceutical companies, according to the latest Hurun India Rich List, released in September. Of the 1,000 or so Indians on Hurun’s list — for which the cut-off is assets of about $140m — 130 are in pharmaceuticals, highlighting the depth of the sector. Other Indian healthcare entrepreneurs have prospered in the pandemic, as demand for their services surged. According to Hurun, India has seven billionaires who founded hospital chains, diagnostics labs or other healthcare services.

9. Business Standard writes about grade inflation in Class XII marks,

While there has been a consistent 8 per cent increase in students appearing for the Class XII exam every year, the number of students scoring over 95 per cent has jumped 58 times for the Central Board of Secondary Education (CBSE) examinations held between 2010 and 2021. In 2010, only 1,202 students appearing for CBSE Class XII had secured over 95 per cent. This year, the number was 70,004. While students scoring over 95 per cent had increased 118.7 per cent in 2020, the increase in 2021 was 80 per cent... This has also resulted in colleges posting near-perfect cut-offs for their courses. In 2010, the average cut-off for BCom (Hons) and BA (Hons) Economics at Shri Ram College of Commerce — a top-ranked Delhi University college — was 91.75 per cent and 91 per cent, respectively. This year, the college put out a near-perfect cut-off of 99.5 per cent and 99 per cent, respectively, for the courses.

In response, the Government of India is planning to have a SAT-style centralised Common University Entrance Test (CUCET) for all undergraduate and graduate courses for all the 45 central universities to start with. 

10. India digital advertising fact of the day,

At Rs 23,213 crore, their (Facebook and Google) combined ad revenues is higher than the combined ad revenues of the top 10 listed traditional media companies at Rs 8,396 crore... Together, Facebook India and Google India corner up to 80 per cent of the domestic digital advertisement revenues... For the last financial year, Zee Entertainment Enterprises, which has the largest market capitalisation among listed media entities, reported total revenues of Rs 7,729 crore. Of this, revenue from advertisements were 48 per cent, or roughly Rs 3,710 crore. In comparison, Facebook India alone reported gross advertisement revenues of Rs 9,326 crore for financial year 2020-21, while for Google the same was Rs 13,887 crore.

But this is important in terms of tax avoidance,

Both Facebook India and Google India, however, lag on aspects such as net revenue and net profit, when compared to traditional media companies. For example, while Facebook India reported a net revenue of Rs 1,481 crore, and Google India reported a net revenue of Rs 6,386 crore, Zee Entertainment Enterprises reported a net revenue of Rs 7,729 crore. The main reason for this is that Facebook India and Google India operate on an advertisement reseller model in India, which means that they buy inventory from a global subsidiary of the firm’s US headquarters and then re-sell that ad space to their client in India. For this, they pay a share of their gross advertisement revenue to the global subsidiary from whom they purchase the ad space... Industry sources said that while Facebook India pays up to 90 per cent of their gross advertisement revenues to the global subsidiary, Google India pays up to 87 per cent.

11. The Economist has an excellent primer on the Omicron variant of SARS CoV 2 virus. 

In the simplest terms, this is what makes it dangerous,

It might be better at getting into human cells than its relatives were. It might also be better at avoiding the attentions of antibodies from vaccination or an earlier infection. Virologists had long thought that a variant which combined both those advantages “would be a pretty dangerous thing”, according to Noubar Afeyan, a co-founder of Moderna... Now “Omicron is exactly that”, Mr Afeyan says... The most worrying of Omicron’s mutations are in the gene that describes the spike protein. This is the tool the virus uses to bind itself to cells and enter them. Delta probably owes its greater transmissibility in part to the fact that it sticks better to cells. Its mutations produce a spike in which nine of the amino acids in the 1,273-amino-acid-long chain from which the protein is made are distinctively different. The mutations in an unnamed variant called C.1.2, which boasted one of the most mutated spike ever seen until the past few weeks, changed 14 of the amino acids. Omicron’s mutations change 35; ten of the mutations have never been seen in any of the variants of concern to date. Almost half of the 35 changes are in the receptor-binding domain, the business end of the protein when it comes to entering cells and also the part targeted by the most effective antibodies. By changing the shape of this part of the protein, the mutations could make Omicron better at getting into cells and also less easily recognised by antibodies that work against a different version of the spike.

This about the uncertainty of the impact of mutant versions,

The reasons a variant spreads in one place and not another are, like much of the rest of evolution, thought to be largely environmental. For SARS-CoV-2 a crucial part of the environment is the immune system, and immune systems are different all over the world. How different genes, endemic infections, general levels of health, microbiomes and more end up stopping one variant from displacing another is largely uncharted territory.

The good news,

Western countries where double vaccination is common are providing more booster shots. That makes sense even if it turns out that the antibodies the immune system generates in response to existing vaccines are not as well-tailored to Omicron as they were to earlier variants. The boosters will not make better antibodies, but they will spur the body into making more of them, at least for a while. Studies have found that the quantity of antibodies against sars-cov-2 matters even if the antibodies are not specific to the variant... Because the vaccines get cells to make spike proteins according to the recipe used in the earliest genomes to be sequenced, the neutralising effect of vaccine-elicited antibodies will be lower for Omicron. But... it is not clear how great the reduction will be... immunological protection is not provided by antibodies alone. Vaccines engage the immune system’s T-cells as well. These are lymphocytes that respond not just to finished proteins, as antibodies do; they also recognise protein fragments. Because 97% of Omicron sequences are identical to the original virus found in Wuhan... these T-cell responses should still work... most fully vaccinated people with boosters should at worst fall only moderately ill if infected with Omicron. Alessandro Sette, an immunologist at the La Jolla Institute for Immunology and his colleagues have shown that T-cells preserve 93-97% of their targeting capacity when faced with a new variant.

The most impressive outcome from the Covid 19 pandemic has been the remarkable speed of lab to market translations,

BioNTech is working on a vaccine using mRNA that describes the Omicron spike. So is Moderna. Both companies have been down this road before, developing tailored vaccines against Beta and Delta. They did not go into production because they did not, in the end, prove necessary; the original vaccines held up well... Morgan Stanley, a bank, reckons that both firms could make about 6bn booster shots next year. When studying vaccines against Beta and Delta, both firms worked to develop procedures that would allow modified versions of their jabs to be approved quickly by regulators. Ugur Sahin, the boss of BioNTech says that if a new vaccine does turn out to be needed, his firm could deliver it within 100 days: the estimate includes regulatory approval.

12. Finally, Interpol capacity fact of the day,

Interpol's annual budget is just €145m ($164m)—less than that of the New Orleans police department.