Weekend reading links

1. Chris Giles has three important graphics about trends in the world economy. The first is the rising importance of India so much so that it now rivals China in the contribution to the world economic growth.

While we fret about the inflationary pressures in the world economy, the decline achieved on inflation in the developed countries is remarkable. 

The final trend is the continuously declining estimations by the IMF of the five year potential growth rates of the world economy since the GFC. It has been continuously scaled down from 4% to 3%.

2. The European Union has promulgated a landmark legislation, Digital Markets Act that imposes new responsibilities on tech companies, including sharing data, linking to competitors and making their services interoperable with rival Apps. Popular software products and services of technology companies are being designated as gatekeepers and subject to these additional responsibilities. These rules become fully applicable from next spring. 

3. Groundwater exploitation is the major source of drinking water in many parts of England, with a third of all tap water coming from boreholes that tap into aquifers. Such water reduces the cost of supply for providers. 

The article points to some statistics about water supply privatisation in UK

Britain is... the only nation to have sold its water resources — including pipes, reservoirs, boreholes and treatment plants — in England and Wales to private sector owners, now mostly a clutch of sovereign wealth, infrastructure and pension funds. Those companies — which bought the monopolies with no debt and were handed £1.5bn to make improvements — have borrowed £60bn since 1989. Much of that has been used not for new investment but to pay more than £70bn in dividends to water company owners... The financial water regulator Ofwat noted that almost £200bn had been spent on system improvements since privatisation.

In simple terms, the UK companies that were handed over to private operators without any debt and £1.5 bn cash to make new investments in the late eighties and early nineties have paid out dividends and run up debts worth over £130 bn while investing just about £200 bn. In other words, excluding the debt, post-privatisation, for every two pounds invested in utility infrastructure, the UK water operators have paid out one pound in dividends!

This includes water distribution pipes that leak a fifth of the water they carry, a failure to build new storage capacity such as reservoirs, and the contamination of waterways with unknown quantities of raw sewage that depletes the stock of clean water.

A point of interest for policy makers in India is the licensing of drawl of water from rivers and aquifers. The UK's Environment Agency grants roughly 20,000 abstraction licenses across England and Wales. While there's over-exploitation and illegal usage, the licensing and oversight exercises some level of control over the use of an important public resource. 

4. Rents are rising across Europe creating a public policy problem for governments. This has been compounded by the rising interest rates that make mortgages more expensive. 

Home ownership levels are among the highest in Eastern Europe where the tenants ended up purchasing their rented government properties after the collapse of communism. It's interesting that outright ownership is the lowest in the Northern European countries. 

Germany has experimented with rent cap legislation in Berlin that was struck down by the Constitutional Court. But landlords in Berlin are still barred from increasing rents by more than 10% of a local benchmark rate in any fresh leases. Berlin has witnessed a sharp increase in population, thereby leaving supply struggling to keep pace with demand.  The result has been a steep increase in rents over recent years. Between 2018 and 2021, rents have doubled and even tripled in many localities across the city. 

5. On the government's efforts to expand India's tax base

In September 2019, the government announced a cut in the corporate tax rate for existing companies from 30 per cent to 22 per cent. Broadly speaking, that translates to a reduction of about 25 per cent (though in effective terms it differs). As per the government, the revenue loss on account of this was Rs 1.28 lakh crore in 2019-20 and Rs 1 lakh crore in 2020-21 (neglecting the impact of non-availability of exemptions under this regime). The corporate tax to GDP ratio stood at 3.5 per cent in 2018-19. By 2022-23, it had declined to around 3.1 per cent.

On the personal income tax front, in the interim budget of 2019, the government had announced that individual taxpayers with taxable income upto Rs 5 lakh would get a full tax rebate. While the personal income tax to GDP ratio rose from 2.5 per cent in 2018-19 to 3 per cent in 2022-23, the number of individuals with zero tax liability also increased from 2.9 crore in 2019-20 to 5.16 crore in 2022-23. Considering the most recent changes to the tax structure — the rebate limit has been raised to Rs 7 lakh under the new tax regime — individuals with zero tax liability may rise further, limiting the gains from an expansion in the tax base.

6. As Chinese aggregate exports decline, one area where their exports have boomed is cars. 

Chinese households’ appetite for spending — on new cars and almost everything else — has waned as real estate prices have fallen. Consumer confidence has shown few signs of recovering even after the lifting of nearly three years of stringent “zero Covid” policies.

When Chinese households buy cars, they increasingly choose electric vehicles from local manufacturers, which lead global production of EVs. The result is an immense supply of gasoline-powered models that Chinese consumers no longer want but that still sell abroad. Chinese carmakers are stuck with unused factory capacity to build about 15 million gasoline-powered cars a year. They have responded by sending more than four million cars this year to foreign markets, at bargain prices.

Interestingly most Chinese cars are going to Europe and nothing is going to the US.  

7. Varian Rule of Technology Diffusion,

A simple way to forecast the future, the economist Hal Varian wrote, is to look at what the rich have today and assume that middle-income people will have the same in 10 years and poor people will have it another decade later.

I don't think this applies to complex issues and contexts like Edtech or driverless vehicles.

8. Excellent NYT article on declining share of low income students at elite US colleges. It analysed enrolment data for more than a decade from almost 300 colleges that educate roughly 2.7 million undergraduates every year. 

We focused on Pell Grants, which college students in the bottom half of the income distribution generally receive... At most colleges in our analysis, the number of Pell recipients has fallen over the past decade. The decline in the share of students who are Pell Grant recipients has been especially notable at public universities. Many states deeply cut funding for higher education after the recession of 2007-9 and never fully restored it. Universities also spent heavily in recent years to construct new buildings and hire more administrators, a recent investigation by The Wall Street Journal documented. Together, these trends have led colleges to raise tuition and recruit higher-income students who can pay it. At the University of California, San Diego, the share of first-year students receiving Pell Grants plummeted from 47 percent in 2010-11 to 24 percent in 2020-21... Most private universities have likewise become less economically diverse during this period, also partly for financial reasons.

The declining economic diversity of the country’s top colleges has broad consequences. These are the schools that have the most resources and the highest graduation rates. Attending one of them is typically an excellent investment. College graduates fare far better in modern America than people without a bachelor’s degree. They earn more money and are less likely to lose their jobs. They are healthier and happier on average. The gap in life expectancy between the two groups has widened in recent years. Some of these differences are causal, social-science research has suggested: College teaches people both hard and soft skills that are useful in today’s complex economy. All of which means that the recent enrollment trends contribute to rising inequality and diminished social mobility.

This general decline contrasts with a surprising increase in diversity in the top colleges, which otherwise remain bastions of elite privilege as documented by this recent Opportunity Insights study

At most of the 50 or so richest colleges — those with the largest endowments per student — the number of undergraduates from lower-income families has risen, sometimes substantially. At Harvard, the share of first-year students receiving Pell Grants rose to 22 percent in 2020-21, from 18 percent in 2010-11. At Princeton, the share rose to 18 percent, from 11 percent. These differences amount to several hundred students at each college. There were also significant increases at Claremont McKenna, Middlebury, Northwestern, Pomona, Swarthmore, Vanderbilt and Yale. 

... elite campuses enroll hundreds of students from the top 1 percent of the income distribution (which starts at about $600,000 a year in income). Elite colleges remain far less economically diverse than many public colleges with fewer resources. Even so, most highly endowed colleges have increased their enrollment of lower- and middle-income students over the past decade. They have done so in response to criticism that they are bastions of privilege rather than engines of upward mobility. The colleges have hardly become pure meritocracies, but they do look more like America than they did a decade ago. And although they are small relative to the rest of higher education, they matter. They send a disproportionate share of their graduates into the nation’s leadership class, across government, business, science and media. One way to create a more diverse American elite is to diversify the training grounds of that elite.

Even with this increased diversity, several elite colleges enrolled more students from the top 1 per cent than from the entire bottom 60 per cent. The Times article chronicles how Duke University has become an extreme example of this rich privilege.