Weekend reading links

1. Michael Anton has a nice article on the enduring relevance of the themes in The Godfather. This is a good description of the attributes of the Don and his three sons.

Coppola has said that he approached The Godfather as a sort of gangster King Lear, the saga of a great chieftain with three sons who each inherited one of his “qualities,” but none the whole package. (That isn’t really what Lear is about, but whatever.) Sonny has the don’s ferocity and courage, Fredo his compassion and warmth, Michael his cunning and patience. 

The don succeeds because he has all three. He manages Machiavelli’s quasi-impossible combination of being at once feared and loved. Sonny is feared by all, and loved by those closest to him, but not by the Corleones’ wider circle. Contrast that with the parade of supplicants to the don in the film’s opening sequence; all but Bonasera the undertaker don’t merely fear and respect, but genuinely love him. Part of the story is how Michael gradually, painstakingly acquires both respect and fear—first from his immediate family, by the end from everyone. But Michael is never loved, except by his father, for whom he is clearly the favorite.

This is an interesting take on statecraft.

In Machiavellian terms, Michael knows how to use “the fox and the lion.” A prince needs both natures, “because the lion does not defend itself from snares, and the fox does not defend itself from wolves. So one needs to be a fox to recognize the snares and a lion to frighten the wolves.” A more perfect description of Michael Corleone couldn’t be penned. Machiavelli immediately continues: “Those who stay simply with the lion do not understand this.” A more perfect description of Sonny Corleone couldn’t be penned... 

“The state is never impersonal but always ‘someone’s state.’”

The Corleone family is rather much more akin to—almost identical with—the personal state of Machiavelli. As Harvey Mansfield explains, for Machiavelli, “stato means both status and state; stato is the status of a person or group while dominating someone else.”... This, more than Vito’s sons’ lacking all his qualities, is the don’s ultimate succession problem, and the ultimate reason why Michael fails. The latter can, and arguably does, make the strategically and tactically correct move in every situation. But he can’t create the same web of loyalties that encircled and enriched his father. In the sequel, Michael explains to Tom Hagen, “All these men”—meaning his henchmen—“are businessmen. Their loyalty is based on that.” Could one say the same of Luca Brasi’s relationship with Vito? Of Nazorine the baker’s?

... As Machiavelli explains, while principality is necessary to found states, republican institutions best preserve them. The perpetuation of states is the hardest challenge in politics—more difficult even than founding. Michael not only held on tightly to his power; he constantly increased it. Machiavelli, by contrast, counsels against inheritance and even (contrary to his reputation as this may sound) against one-man rule—after, that is, the necessary foundations have been laid. Power must be shared. A republic will last only “if it remains in the care of many and its maintenance stays with many.”

This is an interesting snippet. 

As Leo Strauss put it, for Machiavelli, “the foundation of justice is injustice. The foundation of morality is immorality. The foundation of legitimacy is illegitimacy or, in our language, revolution. The foundation of freedom is tyranny.”

2. Here Anton makes a pessimistic case (from the conservative side) about the future based on his reading of the present. This is an important reality

We still choose, sort of, but that hardly matters, because the people we nominally elect do not hold real power. And when they do, they often use it for unconstitutional ends. America’s real rulers are not the constitutional officers we nominally elect, and certainly not the American people, whom our understanding of political legitimacy asserts to be sovereign. They are, rather, a network of unelected bureaucrats, revolving-door Cabinet and subcabinet officials, corporate-tech-finance senior management, “experts” who set the boundaries of acceptable opinion, and media figures who police them.

This is a very good summary of the conservative case on a social, economic, and political crisis. Note that on many issues there will be convergence with the left. 

3. Nikkei Asian Review has a good story on why US technology companies will struggle to shake-off dependence on China. You can't replace such levels of revenue dependence in any time soon.

4. One area where China lagged behind India till end of 2020 was in the export of cars. In less than three years, its exports have rocketed, past even the US, and is now competing with Japan and Germany. 

The arrival of the electric vehicles has been behind the surge in Chinese exports. What does the stagnation in its exports compared to China's boom inform us about India's domestic automobile industry?

5. Smartphone usage across the world has been rising and stands at 4-5 hours per day.

See this report.

6. Interesting factoid about the UK economy - London's outsized importance in its total output. 

Removing London’s output and headcount would shave 14 per cent off British living standards, precisely enough to slip behind the last of the US states... By comparison, amputating Amsterdam from the Netherlands would shave off 5 per cent, and removing Germany’s most productive city (Munich) would only shave off 1 per cent. Most strikingly, for all of San Francisco’s opulent output, if the whole of the bay area from the Golden Gate to Cupertino seceded tomorrow, US GDP per capita would only dip by 4 per cent.

If you take out London, the GDP per capita of UK will be lower than that of the poorest US state of Mississippi! 

7. UK water privatisation facts of the day

After being privatised without debt in 1989, and given a £1.5bn government handout to make improvements to the network, water companies had ramped up £60bn in borrowing by March 2022 and paid out more than £70bn in dividends while presiding over leakage and pollution failures, including unknown quantities of untreated sewage pouring into coastal waters and rivers.

8. An FT editorial advocates restrictions on the tax deductibility benefit for interest payments,

The bias in the corporation tax system towards debt should be reduced. Debt interest payments can be deducted from taxable corporate income, whereas equity financing receives no such treatment. This encourages businesses to load up on debt. Higher corporate indebtedness leads to lower investment and innovation, and greater economic volatility. Allowing full expensing as well only raises the subsidy for debt-financed investment. One option would be to gradually curb the amount of interest that can be deducted, which would help cushion the short-term outlay of extending allowances too.

9. Interesting snippet about copper mining in Zambia

In the early years of independence from Britain after 1964, Zambia produced more than a tenth of the world’s copper. After nationalising the industry in the 1970s in order to fund development, Kenneth Kaunda, Zambia’s founding father and its first president, proudly declared that its citizens were “born with a copper spoon in our mouths”. The move paid for nation-building ventures that define Zambia to this day, such as the Tazara railway line to Tanzania, the hydropower that is the country’s primary energy source and the education of future generations of mine engineers. 

By the 1980s, that birthright was spent. Global copper prices tumbled. ZCCM, as the manager of mines, could not finance investment. Kaunda’s one-party regime crumbled in 1990, not least due to resistance from unions and voters in the Copperbelt. The mine privatisations that followed were slow to turn around the disrepair and came with what are now seen as one-sided tax breaks. Exploration died off.

Zambia borders DRC, the current leading global copper miner, and the government of President Hakiainde Hichilema has now committed to more than tripling production to 3 million tonnes by 2032. And that requires certain things to be addressed.

To even come close, Hichilema, a businessman who was elected in 2021, needs to attract deep pockets for new exploration but also investors with the appetite to turn around old underground mines that have faced high power costs to sustain. “Every tonne counts,” he said in March. The other thing that matters is geography. Zambia shares the same high-class copper endowment as the DRC, but its copper must travel 1,800km or more, largely by truck, to ports such as Namibia’s Walvis Bay or Dar es Salaam. It does, however, enjoy far more political stability in comparison.

Given the post-independence success with nationalised mining and disaster with privatisation, there's a strong case that mining activity in Africa should be done by state-owned companies. Yes, state-owned companies run the risk of corruption and cronyism. But privatisation runs the equal risk of corruption and aggrandisement by foreign mining companies. 

Under the circumstances, the strategy should be to figure out a mechanism to strengthen and insulate state-owned mining companies and enable more transparent management of the mining profits. 

10. Devastating expose of David Solomon, Goldman Sachs CEO, by Jen Wieczner. It's stunning how such leaders are allowed to get away in these times. Another example of the hypocrisy of liberals?

11. Windfall taxes are on the rise in Europe. 

Data from KPMG and the Tax Foundation show that more than 30 windfall taxes, several of which now cover multiple sectors, have been introduced or proposed across Europe since the start of 2022. A total of 24 EU countries have announced, proposed or implemented a windfall tax on energy companies, which European Commission officials put forward after energy prices soared at the start of 2022. The UK has also imposed a levy on profits made from the extraction of oil and gas from the North Sea. 

But banks have increasingly become a target, with the Czech Republic, Lithuania, Spain and now Italy imposing charges on the sector. Latvia could follow... Hungary has imposed levies on all financial institutions, including insurance companies, as well as pharmaceutical groups. Portugal introduced a 33 per cent levy on food distributors with excess profits generated in 2022 and 2023. Croatia has gone further still, introducing a windfall tax that potentially applies to all companies that report a revenue above K300mn (€40mn) for 2022. Bulgaria is also planning an economy-wide windfall tax... The IMF has also argued in favour of levies on excess profits becoming a permanent feature of the tax system.

This about historical examples

Before the outbreak of war in Ukraine, such taxes had not been widely used in decades. The levies were first introduced over a century ago in Europe during the first world war. In 1915, Denmark introduced the Gulasch tax, named after the German stew, on Danish food exporters that continued to trade with Germany during the war. At least 22 countries, including the UK, US, France, Italy and Germany, adopted some form of extra tax on “excess” corporate profits during the conflict. The second world war also saw the use of windfall taxes by the UK, Canada and the US. Other more recent examples include a windfall tax on crude oil enacted by the US government in 1980 and a 1981 one-off bank levy introduced by Margaret Thatcher’s British government. The UK’s Labour government also brought in a windfall tax on utilities in 1997, arguing that the previous Conservative government had sold off the companies cheaply.

This is the IMF report supporting some form of institutionalised windfall taxes.  

12. Akash Prakash has a good summary of the bullish case for India.

No other large EM country can grow real gross domestic product (GDP) at 6 per cent plus for an extended period irrespective of the economic environment in the West. No other large EM has spent the last five years rebuilding corporate and bank balance sheets. Corporate confidence and the private capex cycle are visibly improving. From a relative perspective, there are limited alternative choices in the EM world where you can deploy capital in size. Geopolitics has never been more favourable, and India finally seems to have a chance to build a credible manufacturing story. The country is far more relevant today, a top 10 market for virtually every product, among the fastest-growing, and a clear alternative to China for sourcing everything except the very basic assembly operations.

He also points to an interesting financial market paradox

One has never seen a bigger divergence between enthusiasm for the top-down view of the country and the ability to deploy capital on a stock-specific micro perspective. Almost every investor I talk to is finding it difficult to find new ideas. Markets are expensive, and the well-known quality stocks even more so.

13. The Biden administration continues its squeeze on China as part of its "small yard, high fence" approach of restricting access to advanced technologies. A new executive order limits US investment into China into strategic national security related areas like semiconductors, quantum computing, and artificial intelligence. It also restricts US private investments into these sectors in China. US funding into China-focused VC and PE fell to $14 bn in 2022 from $95 bn in 2021. 

14. Good timeline in The Ken highlighting Byju's slow decline.

The company's valuation has dived from $22 bn to $8.4 billion, and it looks set to continue. Its 2021-22 accounts are yet to be filed. 

There's now a Byju's stigma for ex-employees in the job market!

Some companies have specifically told recruiters not to look at Byju’s employees as they are concerned about their ethics... “When giving hiring mandates, certain companies have specifically told us not to look at Byju’s employees,” said Vivek Mehta, Partner at ABC Consultants... These people are not viewed as coming from a great organisation or company They have taken shortcuts to growth, shown inflated sales, and now this is what is coming to bite its employees. It’s not universal, but it has made recruiters cautious.

15. Tallying the competitiveness of Pharma API manufacturers in India and China.