Wednesday, June 29, 2022

Some thoughts on inflation and central bank expertise

It's now clear that the inflation genie is out of the bottle. How long will it take to put it back remains to be seen.

The last two to three decades were characterised by a confluence of factors which had the effect of keeping prices down. Consider the following:

1. Trade liberalisation and container shipping - created a globalised market in goods, which allowed for large manufacturers to reap economies of scale and lower cost of production.

2. ICT advances and off-shoring - apart from driving the boom in off-shoring of services, it also allowed for the emergence of global supply chains in manufacturing, both of which further reduced production costs.

3. The emergence of China - China became the ultra-cheap factory of the world, emerging as the home of component manufacturers to contract manufacturers for all major brands and non-branded items in the world.

4. Savings glut and ultra-low interest rates - it sharply lowered the cost of capital and allowed businesses to pass on the reduced capital costs. 

5. Start-up and venture capital - the plentiful cheap capital spawned business models which prioritised customer acquisition and growth even at the cost of piling up losses, thereby benefiting customers with cheap goods and services. 

Derek Thompson captures the last part evocatively,

If you woke up on a Casper mattress, worked out with a Peloton, Ubered to a WeWork, ordered on DoorDash for lunch, took a Lyft home, and ordered dinner through Postmates only to realize your partner had already started on a Blue Apron meal, your household had, in one day, interacted with eight unprofitable companies that collectively lost about $15 billion in one year... As long as money was cheap and Silicon Valley told itself the next world-conquering consumer-tech firm was one funding round away, the best way for a start-up to make money from venture capitalists was to lose money acquiring a gazillion customers. I call this arrangement the Millennial Consumer Subsidy. Now the subsidy is ending. Rising interest rates turned off the spigot for money-losing start-ups, which, combined with energy inflation and rising wages for low-income workers, has forced Uber, Lyft, and all the rest to make their services more expensive... the heavily discounted prices of the 2010s aren’t coming back. The Millennial Consumer Subsidy is over, and for the foreseeable future, metro residents will have to go about living the old-fashioned way: by paying what things actually cost.

Now all these trends are starting to reverse, thereby increasing cost of production. Exacerbating the cost problem are the supply shocks from the pandemic and the Ukraine war in quick succession. 

Businesses which sought to absorb the prices initially, are not left with no option but to pass on the higher costs. They are doing it both directly and indirectly. 

Alexis Leondis wrote here about drip-pricing, the practice of unbundling costs and passing them on as fee-based add-ons to the basic product. Allison Schrager has a good article. Another practice is that of shrinkflation - smaller size for the same price. It has reached even India

This is also an apt moment to draw attention to the narrative that  central bankers and their supporters spun around the infallibility and expertise of technocrats objectively pursuing monetary policy actions. The FT wrote,

For the past two decades, central bankers convinced themselves the public believed them to be such wonderful price controllers that they could sit back and relax. No company would seek to push prices higher and no worker would seek inflation-busting pay rises because they knew it would be defeated by the central bank. They believed their credibility was rock solid, so low and stable inflation was a self-fulfilling prophesy. That theory has failed and they are now in a fight to regain public trust. It is not surprising, for example, that net satisfaction with the Bank of England’s inflation management has fallen to its lowest level on record. The result of these analytical failings and complacency has been the recent rapid rises in interest rates, designed to show central banks are serious about defeating inflation.

If the central bankers then claimed more than their share of credit for the Great Moderation even though the decline was more due to the aforementioned factors associated with the times, it's only appropriate that they now accept their abject failure to not only control inflation but also being caught completely off-guard by the rising inflation. It's a sobering reminder to the limitations of central bank expertise and the wisdom of experts in general.

Monday, June 27, 2022

The Great Reset - the crisis as an opportunity

Consider the macroeconomic trends facing developed countries. Public debt is nearing historic high levels and clearly unsustainable. Thanks to the pandemic, fiscal deficits have risen sharply. Inflation is rising and there are no signs of reversing. Globalisation has slowed and protectionism is on the rise. The Chinese growth engine may be on the rearview mirror.  

The debate on inflation comes even as the world economy is grappling with fears of recession with a stagflation, deglobalisation and protectionism, and re-shoring and friend-shoring of supply chains. Given that a crisis is an opportunity, all these trends may not be as bad as being made out. There is an opportunity for a Reset.

For example, to the extent that labour market tightness is conferring greater bargaining power to labour over capital, wage increases as the primary driver of inflation in the US is not a bad thing. The ultra-low interest rates of recent decades also ended up penalising savers and encouraging borrowers. Further, a higher inflation rate, like in the fifties and part of sixties, can help governments ride down their current high public debts. Finally, after having been entrapped near the zero-lower bound for over a decade, a dose of inflation is perhaps the right trigger to help breakout of the trap. 

There are other markers for a Great Reset. Here are some.

1. The all pervading search for efficiency in business practices and management must be replaced with an approach which marries efficiency and resilience. This requirement is cross-cutting and runs as a thread through most of the important trends of our times - good jobs against temporary jobs, automation to replace labour, concentrate suppliers, minimise inventories, exorbitant executive compensation, . 

2. Globalisation and financial liberalisation have gone too far as to be creating more bad than good at the margins. They manifest most commonly in the form of trade liberalisation and financialisation. The beneficial effects of  comparative advantage and financial market engineering articulated in orthodox theories fail to match up with realities. It was one thing to deregulate and liberalise thirty (or even ten) years back, but an altogether different case to be doing so even today. Finance has to become less innovative and more boring. 

3. Businesses have to rebuild their business models around local sourcing, diversified value chains, higher inventories, higher wages, and greater commitment to their local communities. As a corollary, consumers have to accommodate the resultant higher prices. All apparent free lunches come with paybacks. After all one of the greatest periods of modern economic history was the post-war era of high economic growth without anything remotely close to the current levels of globalisation and liberalisation. 

4. Arguably the most disturbing feature of our times is the trend of widening inequality which disproportionately concentrates wealth and incomes with a tiny sliver of people. There should be some proportionality between the compensation of executives and that of the median employees. An important contributor to this is the near complete loss of labour's bargaining power and the overwhelming dominance of capital interests. This has to be recalibrated. The pervasive stigmatisation and busting of unions should give way to some form of collaboration. 

5. Finally, some of the walls that separated business and government which have broken down should be urgently rebuilt. Practices like revolving doors whereby businessmen enter governments and vice-versa, excessive intimacy between business and government, consultants embedded within governments, regulatory capture etc have reached unhealthy levels and must be reversed immediately. 

What for developing countries? I can think of three imperatives to correct the excesses of recent decades:

1. Developing countries should avoid both imitating and/or being sucked into the western (read American) economic model. They need to adapt capitalism to their unique contexts and requirements.

2. Developing countries should calibrate their external market integration, both on trade and financial markets. There should be nothing ideological about liberalisation and financialisation. Such decisions should be evaluated on case-by-case basis. 

3. Developing countries should strive to develop a robust social and political compact which is able to blunt the sharper edges of the existing economic system.

In conclusion, for developing countries, the development of a productive domestic economy and conditions which support sustainable growth should be the sole objective, and free-market capitalism, liberalisation and external integration should be assessed from this perspective. 

Sunday, June 26, 2022

Weekend reading links

1. Ruchir Sharma makes an important point about why China's financial market power remains still-born,

The hurdle is trust: foreigners are wary of a meddling state, but more importantly, the Chinese distrust their own financial system. China has printed so much money to stimulate growth over the past decade, the money supply now dwarfs the economy and markets. That capital may flee when given the chance. When Beijing was facing significant outflows seven years ago, the government imposed controls to prevent capital flight. It has yet to lift them.

He points to several signatures of China's stagnation as a financial market power,

Since 2015, the renminbi share of payments through the Swift network for international bank transactions has fallen by a fifth, from an already negligible level under 3 per cent. A widely followed index that ranks 165 nations by capital account openness puts China at 106th, tied with tiny states like Madagascar and Moldova. While Chinese investors are restricted from investing abroad, foreigners are scared away from China by erratic government attempts to control the market. That helps explain why unlike in other nations, stocks in China do not rise and fall with economic growth. Economist Jonathan Anderson recently wrote that, considering its volatile prices and the vastness of its money supply relative to its markets, China is less comparable to emerging markets such as Brazil and Thailand than to frontier markets like Kazakhstan or Nigeria — and “should not be part of a standard EM portfolio.” Often it is not. Foreigners own about 5 per cent of stocks in China, versus 25 to 30 per cent in other emerging markets, and about 3 per cent of bonds in China, compared to around 20 per cent in other developing nations. Global doubt about China’s markets limits the renminbi’s appeal. Today, over half of all countries use the dollar as their anchor, a soft peg to manage their currencies. None use the renminbi. About 90 per cent of foreign exchange transactions involve the US dollar, while only 5 per cent use renminbi.

2. Brexit appears to have had a serious negative impact on UK economy,

The Office for Budget Responsibility, the official British forecaster, has seen no reason to change its prediction, first made in March 2020, that Brexit would ultimately reduce productivity and UK gross domestic product by 4 per cent compared with a world where the country remained inside the EU. It says that a little over half of that damage has yet to occur... By June 2018, a team of academic economists at the Centre for Economic Policy Research calculated that there had been a Brexit inflation effect, raising consumer prices by 2.9 per cent, with no corresponding increase in wages... While the UK was still in the EU and during the Brexit “transition phase”, there were no significant effects on trade flows. But this has changed since stricter border controls were introduced at the start of 2021, imposing no tariffs, but significant checks and controls at the formerly frictionless border... Red tape caused a “steep decline” in the number of trading relationships after January 2021, according to a study by the Centre for Economic Performance at the London School of Economics. The number of buyer-seller relationships fell by almost one-third, it found... “Brexit increased average food prices by about 6 per cent over 2020 and 2021,” according to the research.

3. Business concentration in the financial markets, asset management industry edition

At the end of 2021, Vanguard, BlackRock and State Street, the three biggest index fund providers, together control on average 18.7 per cent of S&P 500 companies, according to Lazard. Their ownership of smaller companies is even more concentrated. By the end of last year, they held 22.8 per cent of shares in the midsized S&P 400 index, and 28.2 per cent of the small-company S&P 600 benchmark.

4. Power sector reforms is like the whack a mole problem. Sample the outcome from the latest effort,

According to the recommendations of the 15th Finance Commission, the Centre has provided more fiscal room for states to borrow from the markets. The condition is the money has to be spent on power reforms. The leeway is for an additional borrowing space of 0.5 per cent of their Gross State Domestic Product (GSDP) over and above the 3.5 per cent limit. In FY22 states raised Rs 282 billion under this head. But in the name of reforms all that money is going towards expenditure meant to square off the past debt liabilities of the distribution companies. Net of those debts, no fresh money has been spent as capital expenditure to beef up capacity in the energy sector. Yet there is a demand to spend money to improve the quality of the distribution networks, including provision of metering capacity, or installing sub stations for renewable energy to feed into the grids. The states have also not taken any steps to rationalise power tariffs

5. In the context of India's public recruitment drive

Between 2003 and 2020, the central government staff strength has shrunk. In March 2003, there were 3.57 million employees. By March 2012, this fell to 3.15 million, before inching up to 3.18 million in 2020... The staff count in March 2020 was 11% below the staff count of March 2003. However, during this period, both the government’s wage bill and pension payout have grown at a compounded annual rate of 16%. That’s roughly doubling every four-and-a-half years. The share of these two heads in the government’s total expenditure is projected to increase from 7.1% in 2003-04 to 12.1% in 2022-23.

The two big central government hirings were in 2003 and 2013, both before the election year, same as now.

6. The importance of China as a trading partner,

And the importance of trade to the fortunes of many countries, including developed countries.

World trade growth outstripped output growth over the past two decades.  

7. From John Mauldin, the US retail inflation index for the five biggest items in the consumption basket.

8. Finally, fascinating set of maps identifying the culinary specialities of various regions/states of India. This being mango season, the mango map 

Thursday, June 23, 2022

Circular deals in PE - financialisation gone rogue

This blog has held the view that the vast majority of financial engineering we see today not only does not contribute anything significant to improving economic productivity and output but also has corrosive impacts and subtracts value from the economy. The financial engineering undertaken by private equity firms are among teachable examples. 

The FT has a long read on circular trades undertaken by PE firms in the UK. 

Belron and The Access Group are both long-established businesses that are far from the image of hot start-ups with revolutionary products. Located on the outskirts of Egham in the south-east, Belron repairs and replaces car windscreens; The Access Group, based just outside the Midlands town of Loughborough, sells back-office software. Over the past six months, investors have given both companies valuations that place them among Britain’s biggest companies — €21bn for Belron and £9.2bn for The Access Group. Belron’s valuation has climbed 600 per cent since 2017 and The Access Group has risen an eye-watering 3,800 per cent since 2015. Yet neither group has been exposed to the cut and thrust of public markets. Instead, their valuations were set in a new and controversial type of transaction that is fast becoming the private equity industry’s hottest trend in the US, UK and several other markets — deals in which a buyout group in effect sells a company to itself. Such deals have partly been a consequence of the tidal wave of cash that has flooded private markets during the long era of low interest rates... The deals — a way for buyout groups to return cash to their original investors within a pre-agreed 10-year time period, without the need to list companies or find outside buyers — have been growing in popularity since the early days of the Covid-19 pandemic, when a market freeze prompted a search for new options...
In the private equity industry, selling a company to yourself can take multiple forms, and dealmakers struggle to decide what to call the process. It is sometimes labelled a “continuation fund” or even, in the industry’s often-inscrutable jargon, a “GP-led secondary” or “adviser-led secondary”. A common feature is that a stake in one or more portfolio companies is sold from one fund to another, both of which are controlled by the same private equity firm. Deals worth $65bn were carried out this way last year, up from $27bn in 2019, according to Raymond James’ Cebile Capital unit...
In order to buy their own companies, private equity firms often raise money from a little-known group of specialist investors known as “secondary funds”... Secondary funds raise cash from pension and sovereign wealth funds — the same institutions that invest in buyout funds. They are flush with cash, having raised $78bn in 2020 and $37bn in 2021, a jump from $24bn the previous year... Many of these funds are in fact run by units of private equity firms themselves, with Blackstone, Ardian, Carlyle and Ares among those that have significant so-called secondaries businesses. The upshot is that these private equity groups are providing the funds that make it possible for other buyout groups to sell their own companies to themselves... private equity firms often arrange continuation fund deals without running a competitive sale process in which corporations or rival buyout groups are invited to bid. In those deals, the pension plans and other investors in the older fund selling the company say they cannot be sure they are getting the highest-possible price.

See also this

For the PE firms, in times of plenty of cheap capital, investors accustomed to high returns, increasing difficulty of exits, and with scarce high-return investment opportunities, such circular trades offer several attractions. For one, it helps to deploy the vast amounts of dry powder mobilised and sitting idle. Two, it helps to generate high returns in a difficult environment. Three, it helps to redeem their existing investments. Four, it inflates transaction values and capital gains thereby increasing their fee returns, besides various other kinds of advisory fees. 

Such transactions are not limited to the same PE group, but within the incestuous eco-system. Given the close links between PE fund managers and executives across leading firms, a system where you-scratch-my-back-and-I'll-do-yours (you buyout my entity and I'll yours) rife with conflicts of interests is not uncommon. 

The incentive distortions and conflicts of interests possible are several. Capital is plentiful, investors too many, investments diffuse, fund managers not penalised for losses, and sorely inadequate regulatory oversight with whatever little being itself captured by the regulated themselves. Then there are the two big principal-agent or fiduciary disconnects - between the individual investors and the managers who deploy those funds; and the corporate entity of the private equity firm and its individual fund managers.

Capping it all is a permissive environment where, a la tax evasion and avoidance, what have traditionally been considered abusive and fraudulent practices done by stigmatised brokers in dark and shady corners have come to be feted as financial engineering conducted by Ivy League educated pin-striped executives in brightly lit swank offices. Underlining this, in recent weeks, Vincent Mortier, the Chief Investment Officer of Europe's largest asset manager Amundi warned that the inflated valuations make parts of the private equity industry looks like a pyramid scheme.

Tuesday, June 21, 2022

Lant Pritchett interviews

Two excellent interviews of Lant Pritchett by Shruthi Rajagopalan. This and this

The two interviews carry several insights which have been a constant themes in many of my blog posts. So I am extracting several parts in a longish post. 

On fractional migration,
I think people feel they need to stay on their land to protect their claim to it. I think there’s a lot of partial migration to where somebody needs to stay on this plot that this family owns because if we leave for a year or two years, we can’t really expect that someone won’t essentially expropriate it from us. When we looked at, for instance, Dalit migration, there was a lot more migration among Dalits than among the land-owning castes... I think a lot of people in India in the rural areas have something to lose. Hence it freezes them in place because they can’t get a good return out of it and take the lump sum and move to the city. They can’t, as a family unit, as a census-counted unit, move to the city without just the risk of losing their property. Somebody has to stay at home. I think you get a lot of fractional migration, meaning parts of the household move. My conjecture is the census radically undercounts that.

However, he makes an important claim, one which I'm inclined to agree,

I would guess India is pretty near equilibria, and there aren’t these huge gains to releasing Biharis to go work in Tamil Nadu.

He advocates rotational migration instead of the politically divisive issue of open-borders and liberalised migration,

My big thing is if we actually had rotational mobility, in which people could come and perform the labor services but not necessarily instantaneously be on the path to citizenship, this could be a big thing that would be a win-win-win. It would be a win for the countries that need the labor. It would be a win for the workers that move. It would be a win for the sending countries... I think a well-regulated industry that does rotational mobility is a massive, massive opportunity. I just wrote a paper that I think I made everybody angry because I pointed out the gains from rotational mobility are bigger than the losses from climate change... if you could make rotational migration be region-specific, I think that would change the political dynamics a ton. If you could give a person a visa to come work in the United States, but they could only work in designated YIMBY areas, then, of course, the whole national dynamic that everybody worries, that all the migrants want to go to Silicon Valley or all the migrants want to go to New York, could be addressed.

A long-time critic of the $1.95 poverty line, he makes his point with two striking illustrations,

Well, my fundamental problem is it’s claiming there’s this objective function, where the derivative of that objective function with respect to income gains goes to exactly zero above the poverty line. Now, you could say marginal utility of income is well approximated by a zero at some line because above that, we’re all into positional consumption and Veblen-esque excess positional consumption. We could say that there is a line above which marginal utility of income is so low that it’s well approximated by zero and have a line... The thing is, to imagine that marginal utility income is exactly zero at $1.95 a day is just morally obscene. People at that level of income have dire material shortages in nearly every dimension of their lives, and to act as if additional income to those people isn’t enormously important and valuable is just obscene... 

There is no line. One way I put this is, if we take a $1.90 poverty line, nobody has ever held a $1.95-a-day party. Who’s ever, “Holy moly, I’m at $1.95 day with my latest raise. Oh, let’s have a big old party. I’m out of poverty.” It’s just absurd. Imagine marginal utility of income really were well approximated by zero at $1.95 a day. Then why the hell people are working 45 hours a week at really demanding and dangerous and dirty occupations at those income levels? Why are people scrambling around to continue to improve their material circumstances at those levels?

The interviewer Shruti Rajagopalan makes an important point on the issue of poverty line,

I think it also changes how governments and development economists and policy people think about this. What I like about the $20 poverty or prosperity line is, you cannot redistribute your way out of it. There is no option except economic growth. Whereas at the $1.90 line, you can make some minor adjustments and redistribute and give some transfers and rations, and manipulate that whichever way you want. I think it also changes how policymakers think about the problem. There’s a question of aiming high versus aiming low, and maybe increasing that line globally will bring the conversation back to growth and convergence.

And Lant amplifies it, 

... the marginal utility of a person just above the poverty line is exactly the same as the marginal utility of a person just below the poverty line. And yet the way we calculate leakage in poverty programs, it assumes that if a unit of transfer goes to somebody at $1.95 a day, it’s not benefiting poverty. And if it goes to somebody at $1.85 a day, it is benefiting poverty. That’s just crazy stupid. The marginal utility of those two individuals is exactly the same, and it creates all kinds of crazy politics and crazy obsession with how do we correctly target that aren’t good politics. They’re not good economics. They’re not good anything. It’s just wrong.

About the four-part Pritchett test for any development intervention,

One, rich countries should have more of it than poor countries. If something’s really good for level of income, then rich countries should have more than poor countries. Two, countries growing fast should have a lot more of it than countries growing slow. Three, countries that are now rich—we should have a lot more of it in countries that are now rich than when those same countries were poor. Four, and when you see substantial changes in it, we should tend to see accelerations.
When this is applied to something like RCTs,
First of all, no country that is developed is doing radically more RCTs than the developing countries—Denmark, Sweden, France, Japan. There’s no movement to do RCTs in those countries, nor did doing RCTs play any significant role in the way they become rich and develop. Neither RCTs as a movement nor the individual topics, in which if you look at the 3,000 RCTs being done, meet the Pritchett test at all...
I think we did that because we lost the purpose around broad-based prosperity and productivity in the first place, and we moved into this dollar-a-day poverty. Then that allowed you to think in a programmatic way about pushing people just above or below this line. I see RCTs as a symptom, not the disease, in the sense that they’re an opportunistic infection... I see RCTs as an opportunistic infection in the body of the development community.

On the academic success of RCTs and its persistence,

In part, you need the next big thing. Meaning RCTs came along at a period in which other previous methods, like general equilibrium modeling and growth regression empirics were becoming burnt-over districts, and it was hard to get that. I think part of the issue is if you go to a graduate student, I think a typical—first of all, you shouldn’t underestimate how much academic fields get driven by the needs to produce new Ph.D.s. An incredibly high fraction of all the research out there is produced at very early stages of academic careers, including Ph.D.s. What a graduate student says is, “Tell me what to do such that you’ll give me a Ph.D. and I’ll get a job.” RCTs provide a really wonderful answer to that, or at least have.

If I come in as a critic of RCTs, I don’t come in with the next greatest thing. Like, “No, no, no, don’t do an RCT. Do this specific, concrete, wrap-your-head-around-it, methodologically straightforward thing, and I’ll give you a Ph.D. and get you a job.” If I come along and go, “No, no, no. We need to worry about growth diagnostics, and we need to worry about deals versus development. And we need to worry about things that Daron Acemoglu and [Douglas] North and other great thinkers of various stripes are worried about.” I’m a grad student, I’m like, “No, no, no. I’m not going to hitch my fortune on becoming Daron Acemoglu. It’s like, he’s that, but I’m not that. I want to do something I know for sure is going to produce a determinate outcome in a limited period that’s going to produce something that people will call a dissertation. Boom, they’ll stamp it and I’ll go.” Until we solve that problem, I think RCTs are here to stay and independent of the critiques, because the critique that they’re no use to people in the world—when have academics really ever cared a lot about that?

One of the big problems with development economics research is the complete marginalisation of priors. It's as though world starts from the day one starts to examine the issue and conduct research. Lant describes it as "feigned ignorance",

The game that got played in graduate seminars and economics is, I’m going to disbelieve what you say unless my prior—my Bayesian or otherwise prior—let’s not even say that it’s Bayesian; it’s just a prior. I’m going to play this academic game in which my prior is that what you’re claiming, that whatever you’re talking about has zero impact. And then the dynamics of my prior or subset—I’m not going to change my prior unless you present super gold-standard evidence... Where did your prior come from? The prior that was tightly centered on zero, that I would only be willing to move off it with completely pure identification, wasn’t a well-formulated prior based on the understanding of theory, evidence and the reality of the world. It was an arbitrarily chosen prior of zero. 

Having a prior based on an understanding accumulated of reconciled evidence, and then not being willing to move that prior without record evidence, that’s a reasonable way to be. Picking an arbitrary prior with no justification, Bayesian or otherwise, and then not moving off that prior unless you have perfect evidence, that’s being an asshole. There’s no side scientific justification for arbitrarily choosing a prior and then being stubborn about changing your mind. That’s just being a goof. “I’ve chosen to believe X, and I won’t stop believing X. The burden is on you to prove that I’m wrong.” The idea that you could say, “Oh, we’re going to create the pretense,” I call this feigned ignorance. “We’re going to pretend that no one really knows that if you build more schools, kids will go to school because there hasn’t been rigorous evidence of that. So I’m going to choose that my prior about the impact of building schools on enrollment zero. And then I’ll only move off that prior if you show me an RCT.”

On what Vietnam got right in succeeding with its education system and where India falls short,

After pushing our Vietnam team to say, “What was the answer? Why did Vietnam do so well?” in the end, one of our researchers, who I have a lot of respect for, he said, “Look, it’s just—they wanted to. They wanted to, and because they wanted to, they found a way to do it.” So you’re pressing for proximate determinant causes that aren’t the ultimate causal driver of this. If you want to know why Vietnam has really high learning performance among the students, it’s because they consistently, coherently wanted to. If you don’t want to, knowledge of the type of this program versus that program, it’s just not necessarily going to work as designed when you implement it. Because it’s not going to get implemented, or it’s not going to be implemented as well...

Yes, you got to want to, and if you don’t want to—and I think what India got wrong is India, as a society, as a government, was never really (and still to this day isn’t truly) committed to the belief that every child can and should achieve a relatively high level of learning performance. They’ve never really committed to it, still aren’t. There’s still the belief that education is a process of choosing the elite few who are good at it and devil take the hindermost, even inside Indian classrooms today. I think India is in the process of coming around to the “you got to want to” stage where there is generating a lot more social concern over this. But until India gets there, as we saw with SSA [Sarva Shiksha Abiyaan] was this massive, massive investment. During that whole period, as best the evidence can tell, overall learning per year of schooling of children was on a stagnant at best, but probably declining trend during that whole period.

This from the first interview

The only way it can work—and this is going to be very difficult, so this is why I’m cautious about optimism—is if the seriousness and direness is acknowledged. And you really say, “We’ve got to bring this organization back from the brink, and we have to reinvigorate this system with purpose.” I do think that you could potentially reinvigorate it if you acknowledge that this has been a selection system, and we are going to become an education system. That we’re going to radically remake Indian elementary education, as a first go, from a selection system to an education system. 

About how exit by important stakeholders reduces the interest in reform,

A parent can’t stand and advocate for their child for years on end while their child can’t learn how to read and write or basic numeracy. The best way to deal with it is just to pull their kids out of school and send them to an okay school. Not that much better than the one they’re already at, just marginally better. They’re not going to have a dramatically better life, but they’ll be somewhat better off. But what that ends up doing in the larger scheme of things is that the only people advocating in front of the secretary of education or the ministry of education are schoolteachers’ unions, people who are getting construction tenders for building new schools and stuff like that. It’s not really the people who are using the services...

My friend Junaid Ahmed... was like, “Why do Indian cities not have 24/7 water?” Then wanted to reform and municipal and corporatize. It was like, I always just said to Junaid, “Everybody who really is politically powerful does have 24/7 water. The way they’ve created 24/7 water is, they put a tank on the top of their house that is filled by the public water when it’s available, filled by a private tanker when it’s not.” Once they’ve made the capital investment in a purely privatized system of providing 24/7 water to them, getting them to exercise voice and loyalty in a system in order to have a municipal provide reliable 24/7 water universally just isn’t on their agenda. Moreover, it’s like, well, wait a second. Once I’ve made this capital investment in a public sector capability-substituting investment, until that investment’s amortized, it doesn’t benefit me in the short run.

More from the first interview. This on economic growth,

One of my views is, very strongly, up to about 25,000 GDP per capita countries just need growth in order to be able for all their citizens to have access to what anybody would reasonably consider the material basics of an adequate lifestyle. I think the focus on dollar-a-day poverty has just been morally obscene... Second, I think the potential for redistribution to improve livelihoods is just radically overestimated for poor countries. One of the things about being poor is your economy tends to not be in the position to have the levers to generate large amounts of revenue. One way in which developed countries generate 40% of GDP in revenue is they have a large, formal, highly productive economy that, therefore, is easy to observe, easy to tax in relatively low-cost economic ways. That’s precisely what poor countries don’t have, so we should expect total revenue yield to be low as a fraction of GDP...

Changes in GDP per capita give you more private things that people spend on stuff they like—like sanitation, food, housing, more adequate transport. Just how revolutionary having a scooter is to people just cannot be overestimated. Imagine if your life is really circumscribed to how far you can walk. That’s how nearly all of humanity lived for nearly all of history, and all of a sudden you have the scooter—not even a car, just a scooter. Anyway, A, I think you have more private income. B, all of the data suggests at least unit elastic, if not more, buoyancy of revenue with expected GDP. So the government has more.

This on how philanthropic capital have been critical in the success of RCTs,
What a philanthropist says is, “I want to spend a very limited amount of money in the grand scheme of things. I want to have attribution of the outcome to me, and I don’t want to mess with politics because I’m a small player. I know I have to work with the cooperation or tolerance of the host government, so I want to be apolitical. I want to have attribution, and I want to spend a small amount of money.” They’re the only people to whom the RCT can give a reasonable answer about what you should do. In my mind, we never ever should lump together philanthropists, the governments or even development agencies because development agencies historically didn’t regard themselves as philanthropists.

They regarded themselves as development, by which they meant national development, and by which they meant they were partners to government about what government should be doing, and what the society as a whole, and what the rules of the game should be, and how much private-sector actors should be involved, and what the policy stance was with respect to private-sector actors and all of the big-picture questions. I agree that if we slice off philanthropists, they have a case. I want to spend a small amount of money; want to do it with the tolerance of, but not necessarily the cooperation of, the existing government; and I want to have attribution. Okay, then you’re doing TOMS Shoes giving away a free pair of shoes, and wanting to realize the impact of that is silly.

This on the donut organisations and the importance of filling the core as a starting point in any meaningful education reform in India,

Most organizations, they have these shell of service functions: IT, procurement, HR, around a core. The core is purpose and practice. Here’s a purpose to which the organization is committed. Here are the practices that we feel reach those purposes. I’m describing generically a university, a religion, an NGO, a unit of the armed forces, the police. The problem is, if you don’t have purpose and practices aligned and at the center, then—I call this the donut—you’re trying to fix the organization, but it becomes a donut. Because all there is a shell of HR is hiring teachers and procurement is buying desks. These service functions are continuing to service a hollow core. Reform of the Indian education system has to start with revivifying the core of, what can we agree is the purpose of it? What can we say are the practices that lead to that purpose?... We really need to revivify the whole thing around purpose and practice and rebuild it from the core out.

This post is a right place to point to two remarkable things on Lant Pritchett. One, he's able to internalise development contexts like an insider. I don't know of too many even foreign-based Indian researchers who have the capability to exercise similar good judgement about issues in India's development context. Second, he's able to communicate difficult concepts with clarity and simplicity, in a provocative enough manner as to not not trigger thinking about the concept. 

Wednesday, June 15, 2022

Some interesting reads

Several very good articles in the latest edition the Works in Progress.

1. On the decline and rise of polyester fabric,

Four decades later, polyester rules the textile world. It accounts for more than half of global fiber consumption, about twice that of second-place cotton. Output stands at nearly 58 million tons a year, more than 10 times what it was in the early ’80s. And nobody complains about polyester’s look and feel. If there’s a problem today, it’s that people like polyester too much. It’s everywhere, even at the bottom of the ocean... The problem wouldn’t be about the cloth but about the wearer’s body. The fabric had to be more than color-fast, clean, or cheap. It had to keep the user cool or warm or dry, undistracted by physical discomfort and the energy toll of weight. The imagined customer wasn’t a housewife tired of laundry or a fashionista looking for the next big thing. It was a skier, a jogger, or a basketball player. Polyester triumphed by becoming a performance textile... By answering the demands of outdoor enthusiasts and athletes, polyester developed attributes that pleased just about everyone... Made from polyester, the new material could keep mountaineers warm for long periods, and it dried quickly. Unlike wool or cotton, polyester resists rather than absorbs water... Polyester makes it possible to clothe a world population of nearly 8 billion people at a much lower toll on land and water than cotton or wool would exact. 

2. London transportation history facts,

... the same team had become world leaders in making it hard to drive around London. They brought in London’s first pedestrianized streets and bus lanes. They implemented the world’s largest parking control area and invented the concept of residents-only parking – both ideas designed to discourage car use. They began constructing London’s most recent new Tube line and planned a ‘Crossrail’ twice the size of the line destined to open later in 2022. They pioneered policies which would be considered best practice by their successors today, like integrating land use and transportation planning so as to minimize pressures on the network. They even had plans for a system of road pricing that were so far along that they’d had a draftsman design the permits that would go in car windscreens. As for Peter Stott – the head of the GLC’s transportation department and London’s answer to Bulldozer Bob – he was a shy engineer who seemed painfully conscious of the damage that traffic was doing to London. As early as 1969 – well before it was fashionable – he was trying to convince his counterparts at the Ministry of Transport that the best use for London’s expensive new system of computer-controlled traffic lights would be to slow traffic down, rather than speed it up, in order to balance the flow of traffic across the city as a whole. He was even so worried about exhausting the national supply of trees suitable for roadside planting that he convinced the council to buy its own tree nursery.

The article is about how the grand three Ringways project of the sixties and seventies failed to take off, and in turn replaced by a series of small projects

Despite abandoning its roads, London does possess one of the world’s best public transport networks; Londoners who drive into the central area are freakishly rare. More broadly, car engines are around 10 times quieter than they were; air pollution, though a serious problem, has declined to 20 to 30 percent the level of 1970 even after factoring in all those extra cars... The policy measures that made this happen were nothing like the Ringways – big, bold, and high-risk. London’s buses and Tubes were revived by patient managerialism that focused on providing the public with a service they’d choose to use, rather than glitzy new capital projects. The car was partly scared away from the center by the introduction of a congestion charge in 2003, but much more by the sheer expense and impracticality of finding anywhere to park. Vehicle emissions and noise standards are set to take effect over decades, and are so dull that even post-Brexit Britain has no plans to do anything other than copy its neighbors. Not a single person working on these policies would think they were saving London; but quietly, year by year, they did.

3. Interesting read about how while the kitchens have remained physically more or less the same since the 1960s, though what gets made there and how it's used has changed in very significant ways. 

There was a series of key kitchen appliances that were invented in the early 20th century, facilitated by the introduction of electricity and running water. These included the domestic refrigerator, the electric stove and oven, the dishwasher, the blender, the kettle, and, in 1947, the microwave. Although it took time for many of these to make their way into normal people’s homes, the changes meant that, as the story goes, by the 1960s, home kitchens looked completely different to how they had in 1900... The new wave of cookbooks led to higher ambitions for home cooks, who wanted to create fine food at home... In the kitchen, the new cookbooks made it possible for cooks to replicate traditional recipes at home. But focus tended to be on how to best replicate those recipes that were born in professional kitchens, not to figure out what the home was best suited for. By the 1980s, a new idea began to emerge: that home cooks could even best restaurants if guided by a scientific approach... recipe writers, and sometimes even home cooks themselves, began to wonder if they could improve on traditional techniques instead of just copying them... So began an explosion of popular food science.

4. Another on the heights of buildings

Initially, the practical functionality is limited by the technology itself – what’s built and used is close to the limit of what the technology is physically capable of doing. As the technology develops and its capabilities improve, there’s a divergence between what a technology can physically do and what it can economically do, and you begin to see commercialized versions that have lower performance but are more affordable. Then, as people begin to build within this envelope of economic possibility, capability tends to get further constrained by legal restrictions, especially if the new technology has any (real or perceived) negative externalities... Construction technology also shows this dynamic, with engineering, economic, and legal maximums diverging. The economic height of buildings is lower than what’s physically capable of being built, and once that economic height rises high enough we will start to see legal restrictions spring up that further limit building height.

The arrival of tall buildings,

Two technologies allowed these (historical) limits to be exceeded. The first was the metal skeleton (first iron, later steel), which dramatically increased the height that structures could physically be built. The Eiffel Tower, with its wrought iron skeleton, reached a height of 981 feet, approaching double the height of the previous tallest structure, the Washington Monument. The second was the elevator, which made it feasible to reach those upper floors. These developments dramatically increased the height that buildings could economically reach, enabling the construction of the first skyscrapers. Prior to the metal skeleton, the tallest buildings and structures were built using load-bearing masonry. The taller the building got, the thicker the walls needed to be at the bottom to support the loads above, meaning every additional floor reduced the available space on the floors below... Prior to the elevator, upper floors on tall buildings tended to have lower rents since accessing them was more difficult (this is still true in buildings without elevators, such as New York walk-ups), giving diminishing returns to building taller even if you were physically capable of doing so. The elevator reversed this dynamic and made upper floors, with their better views, and their isolation from the noise and smells of the street below, more valuable.

By the late 1880s these technologies had been fully developed. The Bessemer process, invented in the 1850s, allowed large quantities of steel to be produced in minutes, rather than days. The addition of the Thomas basic process in the 1870s, which removed phosphorus impurities that would make the steel brittle, relaxed the restrictions on the quality of ore required. This allowed steel to be mass-produced economically – the price of steel dropped from $170 per ton in 1867 to $32 per ton in 1884. And while the idea of the elevator wasn’t new (the Colosseum had elevators for raising animals into the arena), the development of the steam engine (and, later, electricity) provided a means for efficiently powering them, and the first steam-powered elevators began to appear in the early 1800s. But it was the development of Otis’ safety brake in 1853 (which prevented the car from falling if the cable snapped) that made them safe enough for passenger use, and commercial buildings with elevators began to appear in the early 1870s.

How externalities brought about restrictions,
As the number of tall buildings in New York increased, residents became increasingly concerned about their negative effects. Tall buildings blocked views and cast shadows, important in an era where nearly all buildings were lit using natural light. People worried about increased congestion, insufficient access to fresh air, and fire safety. New York passed its first zoning code in 1916, which placed limits on building massing. Prior to this, a developer faced no restrictions on how tall or large they were able to build on a parcel of land, allowing for huge buildings that completely occupied their lots... After the 1916 zoning law, a building’s height remained unrestricted, but only up to ¼ of the lot – any construction on the remainder of the lot was required to have a series of step-backs as the building got taller, resulting in a distinct “layer cake” style.

It's interesting that the American cities like New York and Chicago already had several tall buildings at the turn of the 20th century before it started imposing zoning restrictions on height. In contrast, Indian cities have been imposing height restrictions even at their low baseline levels. 

About the economically viable height frontier,

Building taller requires more complex mechanical and plumbing systems, due to the higher water pressure and the complexities of handling outside air (which may, for instance, be moving at a high speed). It requires larger and more expensive lateral resisting systems and foundations. While the building is under construction, it takes more time to move workers and materials to the upper floors, resulting in higher construction costs. This all combines to make construction more and more expensive as the building gets taller. The result is that you see a distinct parabolic shape in the returns on investment for a tall building. The point of maximum return varies depending on the city, the type of construction and the location of building, and real estate professionals go to great effort to determine the economic building height for a given case. For an office building on a piece of valuable urban real estate, this has traditionally been considered to be in the neighborhood of 60 to 70 storeys tall... Lateral design controls building height for a few reasons. For one, while gravity loads increase linearly with building height, wind- and earthquake-induced bending moments rise with the square of building height – doubling your building height increases bending moments by a factor of 4. Deflection and lateral sway is even worse – it rises in proportion to the height to the 4th power. Doubling height (while keeping everything else unchanged) increases lateral deflection by a factor of 16.

And this on the case for taller buildings,

Glaeser et al. 2005... found that the cost of rent in Manhattan was approximately twice the marginal cost of an additional floor, concluding, “the best explanation for why [developers] do not take advantage of this opportunity is the reason they tell us themselves: New York’s maze of building regulations effectively cap their building heights.” Cheshire et al. 2007 found similar magnitudes of rent-to-cost ratios in a variety of major European cities. When Glaeser et al. tried to estimate the size of building height externalities in New York, they concluded it was nowhere near the magnitude of the rent/construction cost difference, suggesting current height limits are far stricter than necessary. 

5. It's widely accepted that the major share of the value of an innovation cannot be appropriated (William Nordhaus estimated just 2% of the long run value is appropriable by the innovator), thereby creating the need for intellectual property protections. This long read discusses the possibility of "buyers of first resort" being able to get new technologies off the ground. Matt Clifford calls them "venture buyers".

It is this idea – of helping to bridge the gap between development and adoption – that being a Buyer of First Resort aims to solve. Most innovation policies focus on the supply side by funding basic research or giving companies subsidies or grants. These are crucial elements, but replicating the success of a lab like Bell Labs may require supporting every stage of the process – including making sure the product makes it to market. This can complement other ways we support early-stage R&D. Subsidising early-stage research via grants or tax credits does not imply that any of this will be successfully translated into useful applications. Subsidising only patentable applications through intellectual property institutions and buying finished products may lead to free riding on basic research. Generating an optimal level of research may require an ecumenical approach that works at all points of the process. Buyers of First Resort work in two key ways that other R&D support systems cannot: speeding up technology transmission and scale-ups, and encouraging firms to apply their technologies in risky ways.

Governments have typically been buyers of first resort. One example from NASA's commercial orbital transportation service program (COTS) which ran from 2006-12 to encourage private sector to provide for resupply on the International Space Station after the space shuttle was decommissioned. In simple terms, it was an attempt to get the private sector to acquire space launch capabilities. 

This was a risky proposition for private companies... To overcome this problem, NASA agreed to be the cornerstone user of launch services provided by the companies it contracted with for a pre-agreed number of years after the shuttle was decommissioned, in order to provide reasonably stable market demand for the successful companies... Because NASA was a Buyer of First Resort, and because it used milestone-based funding that reduced risk for the companies involved, the project was appealing to a wider variety of companies, including, unusually for a contract this size, many startups. One of those startups was SpaceX... Not only did COTS create a global power in the space industry, but it led to a rocket – the SpaceX Falcon 9 – that was ten times cheaper than what NASA would have paid to develop the system in-house itself.

It was replicated in the Covid 19 vaccine development efforts

Buyers of First Resort have also been a crucial part of efforts to develop vaccines for Covid-19. Operation Warp Speed, the American programme to support vaccine development, acted as a Buyer of First Resort when it used advanced purchase contracts to channel funding to vaccine candidates before they were viable in the market. Other countries such as the UK also bought vaccines well in advance of their being approved, shifting future demand to the point at which it was needed to guarantee a higher level of supply.

6. Finally on gender pay gap, this essay points to a study in Denmark which compared the earnings of women who were successful in their first IVF treatment with unsuccessful women (but may have had children subsequently). Its findings highlight the "motherhood pay gap"

This accumulates in the form of a gender pension gap

Monday, June 13, 2022

The dissonance between Econ 101 and reality

The latest bout of inflation in the world economy has generated intense debate and search for explanations. One of the important contributors to the rising inflation is the excessive price mark-ups by companies in important sectors, more than what's required to cover rising costs. This tendency, especially pronounced in sectors dominated by large corporations, is being described as greedflation. 

The inflation episode is also a good example of the dissonance between economic theory and reality. This NYT report highlights the issues,
Basic economic theory teaches that charging what the market can bear will prompt companies to produce more, constraining prices and ensuring that more people have access to the good that’s in short supply. Say you make empanadas, and enough people want to buy them that you can charge $5 each even though they cost only $3 to produce. That might allow you to invest in another oven so you can make more empanadas — perhaps so many that you can lower the price to $4 and sell enough that your net income still goes up. Here’s the problem: What if there’s a waiting list for new ovens because of a strike at the oven factory, and you’re already running three shifts? You can’t make more empanadas, but their popularity has risen to the point where you would charge $6. People might buy calzones instead, but eventually the oven shortage makes all kinds of baked goods hard to find. In that situation, you make a tidy margin without doing much work, and your consumers lose out.

This has happened in the real world. Consider the supply of fertilizer, which shrank when Russia’s invasion of Ukraine prompted sanctions on the chemicals needed to make it. Fertilizer companies reported their best profits in years, even as they struggle to expand supply. The same is true of oil. Drillers haven’t wanted to expand production because the last time they did so, they wound up in a glut. Ramping up production is expensive, and investors are demanding profitability, so supply has lagged while drivers pay dearly... This is especially evident in industries like shipping, which had record profits as soaring demand for goods filled up boats, driving up costs for all traded goods. Across the economy, profit margins surged during the pandemic and remained elevated... “In the inflationary environment, everybody knows that prices are increasing,” said Z. John Zhang, a professor of marketing at the Wharton School at the University of Pennsylvania who has studied pricing strategy. “Obviously that’s a great opportunity for every firm to realign their prices as much as they can. You’re not going to have an opportunity again like this for a long time.”

This dissonance between Econ 101 theory and reality is a feature of today's capitalism. The likes of Ha Joon Chang have brilliantly and definitively written about this dissonance. 

Take the example of the idea of free-trade. The theory of comparative advantage informs that all sides benefit from trade. But in reality, trade inflicts disproportionate costs on some segments/countries while similarly disproportionately benefiting others. And any idea of compensating the losers by appropriating some of the gains of the winners, while good in theory never materialises. 

Or take the example of taxation. The theory suggests that lower corporate taxes will encourage businesses to invest more, and higher individual taxes will discourage effort by entrepreneurial and highly productive individuals. In reality, lower corporate taxes have encouraged businesses to undertake more share buybacks, higher dividend payouts, and larger executive compensation, and all at the cost of investment. And there are several studies which show 

Or take the example of disciplining powers of markets. Theory tells us that financial markets enforce discipline by channeling finance towards the most efficient and productive corners of the market. Theory also educates that markets reward good performing executives and punish those not performing well. Again evidence from the real world points overwhelmingly to the contrary. 

I have written with V Ananthanageswaran explaining these dissonances, especially but not only in the context of financial markets.  

There are at least four important cross-cutting reasons for the clearly observed difference between theory and reality. 

1. Theories are built on assumptions. The assumptions include no entry barriers, perfect competition, negligible transaction costs, and so on. These assumptions invariably breakdown in the real world. Reality is riddled with entry barriers, business concentration, lop-sided playing fields, co-ordination problems and high transaction costs etc. The network effects that digital economy presents is a salient and powerful example of how nature of the market itself limits competition. 

2. There is a difference between partial and general equilibriums. A partial equilibrium is the immediate response of the system to the change, whereas the general equilibrium is the outcome which emerges at steady state after all adjustments get made. Econ 101 tells us that while the partial equilibrium may be inefficient, the dynamics of the market clears out all the inefficiencies and ushers in an optimal general equilibrium.

The problem is that real-world markets have so many frictions, overcoming which takes an inordinate amount of time. In fact, some of the frictions cannot be overcome, leaving the markets to remain inefficient. As it's said, the markets can remain irrational for longer than the investor can stay solvent. Or businesses can stay monopolistic for long enough to corner massive rents while inflicting prohibitive economic and social costs. And, to paraphrase Keynes, in such long-runs, we're all dead!

3. Theory underestimates the importance of the political economy. As I have blogged several times, the biggest problem with business concentration and widening inequality is in terms of capturing the rules making process and eroding the social contract itself. All of these in turn weaken capitalism itself. Political economy also ensures that market adjustments like compensating losers of trade or increasing labour's bargaining power while being good in theory are virtually impossible in practice. 

4. Finally, there is the Iron Law of free-market systems. In the absence of any regulation, in a free market of any kind, competition will invariably end up favouring the more endowed (with resources, capacity, influence etc) at the cost of the less endowed. This Mathew Effect is a universally observed feature of any free market system. This means that market adjustments rarely happen on their own (and the political economy prevents regulatory interventions). 

The result of all these is the dissonance between theory and reality. 

Sunday, June 12, 2022

Weekend reading links

1. The low level of industrial R&D has been a persistent problem for India. From an interview of Naushad Forbes, sample this about the software industry,

In the software industry, which is this huge profitable industry that we have in India, we invest roughly one percent of sales in R&D. The top 10 firms in China, which, again, are software services firms, invest 8%. Why do we invest one-eighth as much as Chinese software firms? It’s clear to me that we underinvest in R&D, but when I’ve gone around and talked to my friends in industry, they don’t think so. They think we invest a lot in R&D. The first thing that needs to change is this mindset, and to recognize that there’s this big gap between where we are in Indian industry and where the world is and where the top firms in the industry are.

Forbes also describes an analytical framework to think about innovation in the economy,

Firms largely learn by looking at what other firms do and learning from them, and then you do something better. Then learning by analysis also includes analyzing what you do, so, documenting work processes. Turning tacit knowledge that reflects the skills that are in people’s hands into something that’s more documented and scripted, and because when you write something down, then that’s a basis for further improvement... They (South Koreas firms) disassemble and reassemble the cars, and then they did the same thing with microwave ovens from GE. It’s this crazy thing where they’re literally disassembling and reassembling the same product. They practice this until they can do it as efficiently as the Japanese company that they got the car from and the American company that they got the microwave oven from. That kind of learning by a very clear, focused attention is quite unusual, but it’s very powerful in fostering that competitive approach to manufacturing. The last category is R&D because R&D is also a form of learning... You need to invest in a certain amount of knowledge creation yourself to be able to understand the cutting edge of knowledge creation elsewhere, so R&D becomes the firm’s formal learning unit. It then also becomes the firm’s formal creating unit, but before it can create, it has to be the firm’s formal learning unit...

If we talk about a new technology, artificial intelligence, robotics, et cetera, I think we should think in terms of that learning hierarchy. Start with learning by doing, then learn to do efficiently by analyzing. Then learn through looking at what others are doing, and taking things apart, and reverse engineering, and so on. Then learn by some actual explicit practice to become more efficient, and then R&D.

He points to the utility of a productivity metric,

For many, many years, our company mission statement was to be a developed company in a developing country... The enterprises will need to get there first, and that means that, in terms of value-added per person, individual productivity, our value-added per person needs to catch up with the world as a company first. And if it happens for enough companies, then it will start happening for India, and value-added per person at the country level, as we know, is GDP per capita. It’s the same thing, it’s productivity per person. It’s a clear productivity metric... I use value-added per person and compare different industries, different firms. It’s a very powerful metric. It really tells you how well you are doing as a company on all the key elements—margin, productivity—does your margin, does your value-added percentage keep rising? That’s a reflection of how good one’s R&D is, how innovative one is.

But for some ideological blindspots, the interview is a good read.

There is one thing which caught my attention. In supporting the 2% CSR funding, Forbes writes,

We’re India with very limited state capacity, which means the state has less ability to implement useful policies at the last mile on the ground. There’s a role, it seems to me, for those who have implementation capability, which is the firms in the country, to engage with education and education outcomes for schoolchildren, public school children, the most disadvantaged public school children; to engage in public health issues; to engage in women’s empowerment issues... we need to get enough companies in India that converge with the world. As that happens, India will converge with the world. It needs to happen across industry, across enterprises

The substitutability of project execution in private sector and program implementation in public sector contexts is a common blindspot among those in the private sector. Since the private sector can execute a business model well, it's argued, they are also well-placed to support or even implement programs in school education, public health, or women's empowerment. This misplaced belief is a major contributor to private sector's illusions about themselves and their perceptions about governments (and public policy issues in general). 

As a comparison of misplaced hubris, I am tempted to think of Esther Duflo's claim that economists are better placed to understand and diagnose the plumbing of public policy and program implementation than bureaucrats. This is another interesting snippet which reveals more about entrenched mindsets, 

I don’t think India would have survived the COVID lockdown without the CSR money, to be very honest.

Smoking dope? 

2. On the anti-trust case against Google

In 2020, the U.S. Justice Department and 38 states and territories filed antitrust lawsuits against Google, charging that it was abusing its dominance in online display advertising (ads that appear on other websites, not on Google results pages). They claim that Google holds a monopoly in display ads because it owns the biggest platform for ad buyers, the biggest ad exchange and the biggest platform to publish ads. That makes them the biggest buyer, seller and broker of display ads. 

Hosting the largest ad exchange gives Google access to the bids and bidding histories of other ad buyers and sellers. The suits claim that Google uses this information to undercut rival bids when the company buy ads to market its own brands and services, and to raise the auction floor when selling ads. Google, in its role as an ad broker, is also accused of charging publishers exorbitant fees... The case is scheduled to go to trial in September of 2023.

3. Nice reporting on the challenges faced by teachers in classrooms as they grapple with distracted and disturbed students with acutely deficient learning outcomes. The Delhi government's decision to focus only on the basics of literacy and numeracy for the first 2.5 months in Classes 3-9 is a step that should be emulated by all states. And this on the encouraging results from such catch in Math.

4. US equity ownership fact of the day

Consider, for example, how the landscape of public company stock ownership has changed in recent decades. In the US in 1950, only 6.1 per cent of such stock was held by institutions — the rest was owned outright by individuals who voted on matters such as who should sit on a board. Today, institutional middlemen like pension funds, mutual funds, hedge funds and so on, own 70 per cent of those shares.

5. Good summary of the supply and demand-side contributors to the current bout of inflation.

6. I've blogged earlier expressing scepticism about fintechs. I had blogged (here and here) that while they can offer some services to traditional banks, their limitation is on the asset side and fee services. 

In this context, TT Rammohan has this article where he feels apart from forcing banks to pull up their socks and improve productivity, fintechs are unlikely to do much. He's not convinced by the threats likely to regular banks from full-fledged digital banks

Digital banks don’t quite take banks head-on. They typically target high risk customers that banks tend to avoid. These include: Individuals with lower incomes or lower credit scores, commercial real estate and unsecured lending. Despite the higher risks they take, digital banks have a lower provision coverage than traditional banks. Their yields on loans are about the same. They have a less loyal depositor base but their liquidity ratios are lower. Digital banks’ potential for fee income is lower because they deal with lower income clients. You might think they would have lower operating expenses because of the absence of brick-and-mortar. Not at all. What they save on branches is more than offset by huge marketing expenses. Not surprisingly, most are loss-making. So much for digital banks threatening traditional banks and taking away market share from them. Digital banks are connected with banks through the inter-bank market and also through the various services they provide. They are lightly regulated at the moment. But as they grow bigger, regulation will have to be tightened, as the GSFR report observes. Digital banks are a threat, not so much to banks, as to banking stability on account of the systemic risk they pose.

7. John Gapper points to the decision by the European Parliament this week to harmonise charging standard on all mobile devices (phones, cameras, headphones, portable game consoles etc) by adopting USB-C connector port by 2024.  

It estimates that it could save European citizens €250mn and eliminate thousands of tonnes of environmental waste each year... The European Commission has been on a long campaign against consumer electronics groups to end this frustration, starting with a voluntary agreement in 2009 to converge towards USB industry standards. This has had an effect: there were more than 30 proprietary chargers in use then and it has nudged that down to three. Now it wants to ensure what Thierry Breton, EU single market commissioner, calls “full harmonisation”.

Gapper questions the legislative harmonisation process

While the EU believes in enforcing unity, consumers are complex: we favour a single charger, except for when we don’t... for all the appeal of USB-C, it is imperfect. USB may one day unveil a magnetic standard that both charges and connects devices but until then, it is preferable to have a choice... I prefer simplicity but I also like innovation, even in the mundane business of power. As technology goes wireless, a tussle over connectors may become less pressing, but the principle is important. A harmonised world that only had a single charger is very tempting, but we would not know what we were missing.

This is a classic dilemma. The pursuit of pure efficiency (and profits) maximisation means that large companies like Apple will be encouraged to offer different connector ports for its own different devices. It creates the problems that we face today. Addressing this is a co-ordination issue which will not get solved through market-based approaches. In the real world it requires regulatory engagement. It can be argued that instead of themselves choosing the standard, the regulators should lay down some broad principles and nudge the industry to choose from among the standard and make the choice only if the industry fails to reach a consensus. 

But this accommodation of the market preferences over regulatory engagement is a slippery slope. In the last several decades, we've slipped considerably down that slope to arrive at a world where this fig leaf (and its efficiency maximisation ideal) has become the default test for regulatory interventions. And its outcomes have not been pretty. 

8. FT has a good interactive inflation tracker for several countries. Interesting that it's perhaps a rare time in history when global inflation is higher than India's inflation.

9. More from an FT review of David Gelles' new book on Jack Welch.

The Man Who Broke Capitalism, which will be published in the UK next month, is good at tracing former GE executives’ trajectories after they moved on to run other companies: a sharp upward tick in the short term, as job-cutting and GE-style efficiency measures took hold, followed by a slow decline in the share price, the culture, or both. GE alumni tried to apply Welchist management at organisations as varied as Boeing, manufacturer 3M and do-it-yourself chain Home Depot. At the last, Bob Nardelli, a runner-up in the race to succeed Welch, oversaw a decline in the retailer’s share price and a surge in his own pay, culminating in the award of a $210mn exit package. Gelles even finds the former GE boss’s fingerprints on the chain of mistakes that led to the fatal Boeing 737 Max crashes in 2018 and 2019. Former GE executives occupied key roles at the aircraft maker.