Weekend reading links

1. For all talk of AI focus, it does not appear to be showing up in Infosys's personnel hiring over the last six months. 

Amidst all the investment frenzy in the US and elsewhere over AI, Infosys is spending Rs 18,000 Cr buying back its shares, on top of spending Rs 95,000 Cr on buybacks and dividends over the last five years. 

2. China's dominance of the wind turbines market increased sharply since 2020! (HT: Adam Tooze)

As recently as 2020 the global wind turbine market was still a two-horse race with the US not out of the running. Today, China produces more than double the turbines built by the US and Europe put together.

3. It must remain a matter of big concern that even as the world economy has financialised, the cost of sending hard-earned and pitifully small amount of remittances remains elevated at an astronomically high 7.9% for Sub-Saharan Africa (HT: Adam Tooze). 

Additionally, the cost of sending remittances to Africa remains the highest in the world, which dampens the benefits from migration that accrue to Africa. Remittances are one of the most tangible ways for countries of origin to realize the development benefits of migration. Despite the technological advancements in recent decades, the cost of sending remittances remained at 6.2 percent globally in the second quarter of 2023, more than twice the Sustainable Development Goal target of 3 percent. This is largely due to the fees and foreign exchange margins that migrants and their families must pay in origin and destination countries. SubSaharan Africa was the region with the highest cost of remittances in 2023, at 7.9 percent, whereas South Asia had the lowest cost, at 4.3 percent. Figure 3.3 shows that in 18 of Africa’s 29 core countries and seven of Africa’s nine periphery countries for which data are available, the cost of sending remittances is higher than the global average.

The low rate for South Asia is one of the less discussed successes of India's financial market evolution. 

4. France's public debt has risen alarmingly since the GFC.

5. Adam Tooze points to the scale of Friedrich Merz's fiscal stimulus (via TS Lombard). 

Clearly, Germany is stimulating its economy with vengeance, and it appears to have enough space to do so.

6. Unit economics of AI solutions in India is not very attractive.

Netflix, a video-streaming service, costs as little as $1.69 a month in India, compared with $7.99 in America. For cloud services with a low marginal cost, this is no great sacrifice. But running AI queries is expensive. Processing costs for typical users currently hover at around $0.07 per million “tokens” (the units of data processed by AI models) and the response to a single query can run to hundreds or thousands of tokens. That expense is the same whether the user is in Bangalore or the Bay Area.

7. This sums up the challenge with making money in India.

While India’s large population offers scale, it is a difficult market to monetise. According to digital market researcher Sensor Tower, Indians led the world in 2024, downloading 24.3bn apps and spending 1.13tn hours on them. However, their spending was not even in the top 20, at less than $1bn.

8. Palestine is rapidly disappearing.

9. The Economist has an issue focusing on gig workers, who number 200 million in China (40% of urban workforce) of whom about 84 million rely on platform-based employment (delivering parcels and food, and driving bikes and cars) and another 40 million are freelance factory workers. There are some emerging trends in gig work in China.

Lately gig work in China has spread to its vaunted manufacturing sector. The regimented proletariat is gradually being replaced by millions of casual workers who fill jobs “on-demand”, flitting from one factory floor to another at the direction of giant recruitment platforms. The jobs often require no skills beyond a knowledge of the Roman alphabet. The workers may stick with them for no more than a few weeks or even days. Researchers put their number at perhaps 40m, a third of China’s manufacturing workforce—and more than three times the size of America’s.

One reason for the rise of this gig army is that firms want flexibility. Employers prize the freedom to scale their business up or down, responding to seasonal demand, the vagaries of the market and the shifting winds of geopolitics. Technology has played a role, too. Smartphone apps help match customers’ orders with available delivery drivers; in manufacturing, technology has automated away many tricky tasks that used to need experience. Even as this has created jobs for highly skilled engineers, it has left gaps in assembly, packaging and inspection that any warm body can fill. Flexible employment of all kinds suits many workers. Those who are adept at navigating the platform economy can earn more by job-hopping than they could from a single employer.

This is an important snippet about the gig workers.

The average age of factory gig workers is 26. About 80% are male; 75-80% are single and childless. In manufacturing hubs increasing numbers of young workers sleep in parks and under overpasses.

10. FT reports of failures by subprime auto lender Tricolor Holdings and car parts supplier First Brands Group that raise questions about lending and gatekeeping standards. 

Tricolor had won pristine triple-A ratings as it borrowed in credit markets, while First Brands may have amassed as much as $10bn in debt and off-balance sheet financing and was close to raising even more last month... Both companies made use of asset-backed debt, with Tricolor bundling up subprime car loans into bonds and First Brands tapping specialist funds to provide credit against its invoices. At its core, asset-backed finance is the ability to lend against a specific asset or loan, including consumer credit card balances, leases on railcars and solar panels, aircraft and music royalties...

US investment firms have in recent years pushed deeper into asset-backed debt, often pitching it as a safer product than the loans to junk-rated companies that are their bread and butter. But Tricolor is now being probed over fraud allegations by the US Department of Justice, while some investors have long had questions around First Brands’ financial reporting and use of invoice factoring, with lenders now concerned that they lacked visibility about the scale of off-balance sheet financing... Several large banks have also been caught up in the collapse, including JPMorgan Chase and Fifth Third, which are exposed to losses on hundreds of millions of dollars' worth of auto loans. A second investor who has since sold their position in packaged-up Tricolor loans said they had no idea how potential financial irregularities went unnoticed by JPMorgan Chase, one of the banks that underwrote debt offerings.

These kinds of news are now a recurrent staple of financial markets.

11. Michael Moritz comes out all guns blazing at the decision to levy $100,000 fees for H-1B visas.

Every day the Oval Office seems closer to becoming the equivalent of what the sidewalk outside Satriale’s Pork Store used to be for Tony Soprano: a place where a dubious cast of characters spawns brutish extortion schemes and hit jobs... As usual with the Trump administration, the announcement was chaotic and half-baked... Set aside the drama, the announcement demonstrated yet again the fragile grasp the president and his acolytes have about why the US — especially its technology sector — has worked so well. The large tech companies hire foreign nationals because they possess particular skills. They also retain them to perform tasks in areas where the US has labour shortages.

12. New Zealand appoints Anna Bremen, a Swedish economist who has been the first deputy governor of the Sveriges Riksbank since 2019, to head its central bank, the Reserve Bank of New Zealand. 

13. Akash Prakash has some striking numbers about the AI boom in equity markets in the US.

The Magnificent Seven (Mag-7) holds a 32 per cent weight in the S&P 500. In January 2023, just after ChatGPT was launched, this number was only 18 per cent. Nvidia, with an 8 per cent weight in the S&P 500, now has the largest single-stock weight in the history of the index. Its current market capitalisation is equivalent to 15 per cent of US gross domestic product... If we look at the top 10 companies in the S&P 500 (basically the Mag-7, Broadcom, Berkshire and JPMorgan), they account for a record 40 per cent share of the index and 25 per cent share of corporate earnings. We have never seen such concentration of company size and earnings... Since January 2021, 55 per cent of the entire gain in the S&P 500 was accounted for by the top 10 stocks... In 2023 and 2024, the Mag-7 saw earnings growth of about 35 per cent within the S&P 500, while earnings for the remaining 493 stocks grew only 3 per cent...

The Mag-7 and Oracle account for over 35 per cent of total S&P 500 capex. US hyperscalers (the major tech companies) have doubled their share of private domestic investment since 2023. For these hyperscalers, capex has now crossed 20 per cent of sales, compared with under 10 per cent previously. Even on operating cash flow, they are using over 65 per cent to fund data centre buildouts. To put this in perspective, their capex-to-sales ratio is 20 per cent, and research & development-to-sales is 15 per cent, meaning 35 per cent of sales is being reinvested into growth. Truly unprecedented numbers... At their peak in 2000, telecom companies’ capital expenditure accounted for 0.8 per cent of US gross domestic product. Today, hyperscalers’ capex is already at 1.2 per cent of US gross domestic product (GDP), with the current projection being that this number will cross 1.4 per cent by 2028.

14. Countries that have managed to increase their tax to GDP ratio significantly between 2000 and 2022.

15. Very interesting snippet about the impact of superstitions.

In 1966 — a hinoeuma, or “fire horse”, year under an astrological superstition — the fear of giving birth to a wild, destructive and unmarriageable daughter induced a nationwide collapse in pregnancies... The number of babies born in Japan in 1966 plummeted by 463,000 from the previous year, representing a 25 per cent drop. To reduce opportunity risk, marriages also tumbled by 10 per cent. By the end of 1967, with the threat lifted, births had rebounded by an astounding 42 per cent. On historic charts, the spasmodic V-shape makes 1966 look like a colossal data error... Hinoeuma years, which combine the animals of the Chinese zodiac with 10 celestial signs, come around on a 60-year cycle. The next one is 2026.

16. The Magnificent Seven now make up a third of the US stock market capitalisation. 

Nvidia's $4.3 trillion capitalisation exceeds the $3 trillion value of UK FTSE 100.

17. A China Labour Watch (CLW) report has found that more than half the factory staff assembling iPhones at Foxconn's largest factory at Zhengzhou were seasonal staff known as "dispatch workers", despite Chinese law capping their use at 10% of companys workforce. 

US-based CLW also found that dispatch workers faced staggered payment schedules that withhold part of their wages to deter them from quitting during peak production. These staff were not entitled to the same benefits as full-time employees, such as paid sick leave, paid holiday and social insurance that includes medical coverage and pension contributions. CLW also claimed that there is systematic discrimination in hiring certain ethnic minorities and pregnant women... Foxconn uses the flexibility afforded by temporary contracts to adjust to fluctuating demand cycles and, in recent years, to respond to Apple’s shifting requirements about where iPhones should be made... Dispatch workers get a base salary of Rmb2,100 per month, the minimum wage in Henan, but the bonuses make their salaries competitive in the manufacturing sector. These bonuses are typically paid out after three to four months to ensure retention. Many workers preferred the flexibility of short-term contracts and higher hourly wages. However, many said that they had to work a lot of overtime to bolster their hourly wages, which can be as low as Rmb12 for some workers, but range between Rmb25 and Rmb28 for most, depending on experience levels and hiring cycles. CLW found that many staff work 60 hours per week and others up to 75 hours.

18. Stunning graphic that shows the scale of Nvidia stock's performance.  

Thoughts on Affordable Housing XII

Social rental housing is a significant share of the total housing stock across many European cities. The OECD data puts the share at 8% for the EU as a whole, 34% for the Netherlands, 24% for Austria, 16% for the UK, 14% for France, and 3% for Germany.

Paris, under its Socialist mayor, Anne Hidalgo, is making efforts to buy land and expand its social housing stock to 40% of primary residences by 2035. About 30% will go to people with no or very low incomes, and 10% for those on middle incomes. And it’s a radical plan.

To get there, the city government led by Socialist mayor Anne Hidalgo is expanding its arsenal of interventionist tools that it casts as the only way to correct market failings, especially those wrought by short-term tourist rentals and vacant apartments. Paris is also doing more “pre-emption deals” in which it blocks a planned real estate transaction to instead buy the building itself to convert into social housing. Under its new land use plan, the city has labelled some 800 buildings, one-third offices, as candidates for expropriation. Developers must also include a significantly higher proportion of social housing — half in cities deemed in “hyper-deficit” — in all new-builds. Even office owners are now required to add social housing units when they build or do major renovations…

In Paris, the lack of buildable space, prohibitions on building height, and historical protection rules make it difficult for any developer to build new housing. Private companies and institutional investors have largely been scared off by rent controls, poor yields and rental bans that are slowly being phased in on homes with poor energy efficiency. For these reasons, converting existing structures like offices, car parks and government-owned buildings into new housing has been a welcome solution. Paris is also putting pressure on rich areas, such as the 6th, 7th and 16th arrondissements where the proportion of state-subsided housing ranges from 2 to 7 per cent, compared with 42 per cent in the poorer 19th and 20th arrondissements…Paris has recently set an annual housing budget of around €800mn a year, nearly double that of five years ago, and four times the amount budgeted by the central government.

Sample this illustrative example of how these efforts work.

The car park conversion on rue Nollet in the 17th arrondissement is one of about 40 such projects the city has undertaken, which also dovetails with its efforts to reduce cars in Paris. The city paid for more than a third of the €12.3mn cost with the rest coming from 40- to 50-year-long state-backed loans, without which the conversion would not be economically viable. The agency that built and will operate the building under contract for the state expects a roughly 40-year payback time, far longer than commercial developers would accept.

Paris is part of the French government’s efforts to promote social housing,

In 2000, the government enacted a law, known as the SRU, which required many cities and towns to reach 20 to 25 per cent social housing by 2025. The criteria were set to spare very small towns, but some mayors still think they are too rigid. In addition to billions of euros in government subsidies, the pivotal player has been the Caisse des Depots, a state-owned financial institution, that provides roughly two-thirds of the funding to build. The money for these long-term guaranteed loans comes from the popular regulated savings account called the Livret A, in which most French citizens invest. 

European countries have traditionally pursued policies that favoured the development of social housing units.

Places like the Netherlands and Austria, which have century-old systems that have relied on government-owned developments and non-profit housing associations, have also intervened more in the market than places like the UK or Germany where a bigger role is given to commercial developers… In the UK, after a wave of postwar construction, much of the council housing stock was sold off to the residents in “right to buy” schemes starting in the 1980s. The country now largely relies on a requirement for developers to add affordable units in new-builds, with a typical request in London of a minimum of 35 per cent. But developers can also do less by instead building public facilities like parks or municipal pools…

Vienna and Amsterdam are among the cities that have gone the furthest to reaching over 40 per cent of social housing. From the outset, they avoided a key pitfall: they built homes in city centres instead of on the periphery, thus avoiding the gradual development of poverty traps and high crime areas. European cities that built social housing on the outskirts became plagued with problems. Paris was especially bad. Over time, the banlieues, or suburbs, became home to new migrant communities and gradually lost their original mix of residents from different socio-economic classes. It has left those living there with poor transport links and sub-par schools and public services, leading to the periodic explosions of social unrest. “It was wrong to focus social housing on the edges of cities since it led to segregation and disconnection for the people who live there,” says Tadashi Matsumoto, the head of sustainable urban development at the OECD. He believes housing policies should not just be city-based, but co-ordinated with nearby suburban communities where there is more space. 

But social housing comes with its own set of problems.

But while increasing social housing in cities can help more people on modest incomes find a place to live, there are also downsides when private developers are constrained and the private rental market shrinks, says van Bortel, the Delft academic. In Amsterdam, where three-quarters of rentals are social housing or subject to strict rent controls, the rest of the private market has become very expensive as owners cannot raise rents elsewhere… those who are lucky enough to get subsidised Parisian apartments become loath to leave — only 6 per cent of apartments in the social housing stock change residents each year. The city does not force residents to move even if their incomes increase or if their family size changes.

A few observations:

1. It’s interesting that the cities in rich countries solve their affordable housing problems by constructing social housing, whereas developing countries tend to pursue market-based policies on affordable housing. 

There is no concept of public-supported rental housing in India, and all subsidised housing stock would be a tiny proportion of all urban housing stock. Even in slums, housing supply is market-driven. This is unlikely to change given the fiscal constraints facing governments.

2. Given the scarcity of land in urban areas and the absence of high-rise public housing, the weaker section public housing programs (like the IAY and PMAY) are largely confined to smaller towns and in the far-flung suburbs in the case of the larger cities, where there’s land available to construct single or low-rise units. Even in the largest cities, these low-rise (3-4 floors) colonies are geographically distant (from the city) and socially and economically cut off from it. They have become the Indian version of Parisian banlieues. 

3. In the absence of social housing, there are limits to what can be done to make housing affordable, especially given the already massive and further widening housing affordability gap in the large cities. Other policy concessions like credit subvention schemes (like the CLSS) or planning mandates (like 5-10% affordable housing mandates in large developments), only bridge the gap by a small amount to benefit the Indian middle class. None of these concessions can bridge the gap sufficiently to meet the requirements of even the lower middle-class, much less the poor. This reality must be acknowledged. 

4. In this backdrop, with public housing likely to play a marginal role for the foreseeable future, the only meaningful way to address the problem of affordable housing in Indian cities, especially for the lower-income group of urban immigrants (where household income is less than, say, Rs 20,000), is to bring all policy levers together. 

This would entail making public land available at subsidised rates, increasing the buildable area within the land, and lowering the cost of construction. Given the limited extent of public lands available, the first lever would be limited. However, supply can be augmented by using planning mandates on earmarking land for affordable housing. I’ll blog on this separately. The second lever can significantly offset the land cost by multiplying the extent of buildable area within the available land. 

Reducing the construction cost would require significantly lowering land registration and planning permission fees, GST, subsidising the cost of capital, and expediting all approvals and permissions for all affordable housing construction. This could be supplemented with some property tax concessions for, say, five years. A proposal for a scheme along these lines for state governments is discussed here. The revenue loss from these concessions should be counted against the subsidy that should have been required for social housing. 

5. Finally, like the European cities, there’s a need to focus on rental housing in urban areas. The Government of India came up with an Affordable Rental Housing Policy in 2015 and the Affordable Rental Housing Complexes (ARHC) scheme in 2020. Both need prioritised attention. However, it may not be advisable to leave the catalysis of the market in affordable rental housing to the private sector alone. State governments may have to play a direct role in derisking them by having State Housing Boards and public entities develop, lease, and manage such properties. The Government of India could incentivise with interest subvention and even some direct subsidy for capex. Once derisked, this can become a high-volume real estate segment, one that genuinely serves the Bottom of the Pyramid market.

Weekend reading links

1. Emaar, the Dubai property developer whose major shareholder is Dubai Investment Corporation, is considering expanding outside UAE. And an interesting possibility in India.

Emaar already has a sizeable presence overseas, owning more than 175mn sq ft of land outside the UAE at the end of 2024, excluding a 1.1bn sq ft “economic city” project in Saudi Arabia. Alabbar said Emaar’s current total land bank — an industry term referring to land owned by developers and reserved for future use — was at 1.87bn sq ft, including the UAE. India, where Emaar owned 122mn sq ft of land at the end of 2024, could provide a testing ground for Emaar’s overseas strategy and its subsidiary there was discussing a potential joint venture with local developers, including the Adani Group, Alabbar said. Alabbar dismissed reports that Emaar had been discussing the sale of its business in India to Adani. “We’re not selling,” he said. “We actually were looking for local partners to do a local [joint venture].” Adani did not respond to a request for comment.

2. An illustration of how worsening demographics are going to hit Japan's logistics industry.

3. Private equity funds face declining exits and are resorting to the likes of continuation funds. 

In the first half of this year, private equity firms sold companies they owned back to themselves at a record-setting pace, providing a way out of (or back into, whichever you prefer) some $41bn of investments in the first six months of 2025, according to investment bank Jefferies. That is close to a fifth of all sales in the industry, and is 60 per cent above the level last year, and it comes as private equity groups find themselves sitting on $3tn worth of assets that they are unable to get out of, either by selling to another company or by listing them... Torsten Sløk at private markets group Apollo, noted this week that on top of the steady flow of companies delisting from public stock markets, those companies that do opt for an IPO “are getting older and older”. (Sigh, aren’t we all?) “In 1999, the median age of IPOs was five years,” he wrote. “In 2022, it was eight years, and today, the median age of IPOs has increased to 14 years.”

4. France is facing a pensions crisis. However, the political economy of reform is perilous. 

Not only do French pensioners receive larger cheques from the government than their counterparts anywhere else in the west, they start getting them several years earlier. The result is a situation in which over-65s now have higher average incomes than the working age population — unique both internationally and in France’s own history. Even the rumour of threats to this arrangement is met with mass public outrage and opposition from left and right. Macron’s proposal to nudge the retirement age up towards the lower end of western norms was met with nationwide protests. Barnier’s suggestion of a six-month delay to the latest scheduled increase in pension payments led to the first of two collapsed governments in the past 10 months. Bayrou’s refusal to scrap the same pledges brought about the second. In a particularly stunning statistic highlighted by French political analyst François Valentin, pensions play such an outsized role in the country’s public finances that they accounted for one-sixth of the ministry of defence budget last year, and without them France would not meet Nato’s 2 per cent target for military spending.

5. The latest ASI data show that the share of contract labour in India's organised manufacturing sector workers has reached 42% in 2023-24, up by 8 percentage points in the last ten years. Such contract labour have lower wages and no benefits (paid leave, social security benefits, longer tenure), and are typically hired through third-party agencies. 

Global studies have shown varying levels of contract employment in different countries. A 2023 study pegged it at 10.8 per cent in the US. Latin American countries like Brazil and Argentina have seen numbers ranging from under 10 per cent to 20 per cent at various times, according to a 2016 study, which pegged the number in Europe at 12.3 per cent.

6. Problems with GDP estimations in India. 

7. As Pakistan and Saudi Arabia sign a landmark mutual defence pact, this is an important insight.

Since the 1960s, Pakistan has received more aid from Saudi Arabia than from any nation outside the Arab world, the Brookings Institution estimated. The funding — which was never directly for support of Islamabad’s covert nuclear programme — included direct aid to the government as well as financing for schools, mosques and other Islamist charitable programmes.

8. Trump finally imposes a $100,000 fee for H1B visa applications for skilled foreign workers, the main pathway through which Silicon Valley firms hire engineers and IT professionals. The current visa charge is $215 to register for a H-1B visa lottery and an additional $780 for employers that sponsor visa applicants. Abut 400,000 such visa applications were approved last year, with the majority for those renewing their visas and 75% in 2023 being from India. 

Between October 2022 and September 2023, 72 per cent of the nearly 4 lakh visas issued under the H-1B programme went to Indian nationals. During the same period, top four Indian IT majors with a presence in the US — Infosys, TCS, HCL, and Wipro — obtained approval for around 20,000 employees to work on H-1B visas, as per the latest US Citizenship and Immigration Services (USCIS) data. The share of IT workers in the H-1B program grew from 32% in 2003 to an average of over 65% in the last five fiscal years.  Given the average salary of the H1-B visa holder is $66,000, the fee is certain to almost finish the use of these visas. 

Goes to the point I have been making on Trump's completely transactional policy making. It's important that India keeps this in mind as it navigates a modus vivendi with the US under DJT. Unlike China or Russia, India is not big enough either economically or militarily to deter Trump from acting on his core agenda. Besides, India falls in the firing line on many of those core areas. We should not be surprised if GCCs are the next. 

9. One of the definitive legacies of the Russia-Ukraine war will be the emergence of drones as an important weapon. This is a good summary of how the war evolved in terms of what weapons were being used.

Back in 2022, when Russia started its full-scale invasion, Kyiv had to use its existing Soviet-style kit plus Javelin shoulder-fired anti-tank missiles. Then came western donations of weaponry like Abrams tanks and Himars (high mobility artillery rocket systems). Next, Ukraine’s army of software engineers started using hobby drones, made by Chinese companies such as DJI, first for surveillance, then attacks and defence. Now they are innovating to dramatically extend drone flight range, increase attack capabilities, “swarm” and avoid electronic jamming by using fibre optic cables, balloons and (most crucially) AI. The Russians are doing the same. And that has transformed the nature of war: a world where cheap drones can destroy ultra-expensive ships and planes changes the power dynamics and economics of combat...

Equally startling, while China has been responsible for 80 per cent of global drone production, Ukraine is now racing to become “China free”... Last year it produced more than 2mn drones. It could go above 10mn next year, if it has the funds. That means over half of Ukraine’s drones are now domestically sourced — and China is no longer the only global drone king. This is critical for Ukraine’s defence, and might generate badly needed future export revenues too. Indeed, Ukraine is already considering exporting underwater drones, which it has used to push Russian ships out of the Black Sea so successfully... Nato officials now want to collaborate with Ukraine via partnerships, licensing and private capital investments. They are particularly keen to access the treasure trove of data collected by its drones to train future AI models.

10. A rare example of an infrastructure project completed on time and without much cost overrun is the Thames Tideway Tunnel, a 25 km sewage tunnel passing under Thames. It took nine years of construction and cost £5 billion, and used an innovative financial model, where a surcharge on customer bills will fund the construction cost over 50 years. 

Tideway was project managed by US group Jacobs, while each of the three geographical sections was overseen by a different engineering consultancy. Each employed “hundreds and hundreds” of contractors and subcontractors supplying the labour. All 25,000 people working on the project were fully employed and paid the London living wage as a minimum, in contrast with much of the industry, where staff are employed on zero-hour contracts or by the day. Workers were also kitted out in full Tideway uniform and protective equipment and given training and holidays... Juliano Denicol, director of the Megaproject Delivery Centre at UCL, said Tideway would be studied for decades as an “exemplar case of ‘how’ to deliver multibillion infrastructure programmes”...

Tideway, which as a company was able to lure investors including Allianz, Dalmore Capital and Amber Infrastructure after the government offered guarantees against any cost overruns. The 16mn households served by Thames Water have paid £617mn towards the project since construction began nine years ago, more than the £510mn in equity injected by Tideway shareholders in 2015. The shareholders also loaned the company £764mn at an interest rate of 8 per cent, which has grown to £972.6mn, while the company’s total debts have risen to £4.6bn, with the remaining borrowings held by third-party lenders. Although construction is complete, Thames Water’s households will continue to pay for the project through a surcharge on their bills — now £26 a year — potentially for the 120-year lifespan of the tunnel. The cost — drawn up under a modified version of the Regulated Asset Base model — piles pressure on customers, who are already faced with steep bill increases from the UK’s largest water company, which could yet be renationalised.

Thoughts on international development VIII

This is in continuation of the series that has been consolidated here. 

This post will argue that, in addressing complex development challenges, comprehensive design and end-to-end planning (both in the realm of technical expertise) are, while logically appealing, far less important than starting simple, improvising, and expanding gradually. Complexity emerges from simplicity. 

For example, the implementation of any program with a significant non-logistical (or quality or behaviour change-focused) aspect would necessarily require starting with a basic and simple version of the program and then continuously iterating and adapting to address the problems and issues that invariably emerge in the course of implementation. 

Similarly, a monitoring Dashboard of a large program in any sector cannot emerge suddenly from a one-time planning and software development exercise. There are too many emerging scenarios that must be captured as implementation progresses. Accordingly, it must arise from continuous iterative improvement on the basic version over an extended period of use by its stakeholders. 

On the same lines, a high-performance school (or hospital) system in a district or state emerges from one that performs its basic functions well and then builds on them. Alternatively, it’s almost impossible for a bad school (or hospital) system to be transformed into a good one using technology and innovations without first getting its basic functions right. 

Or, a city’s urban planning system must be grounded on a simple set of basic planning rules that can be effectively enforced by it. On this, gradually, elements of complexity can be introduced, like high floor area ratios, land value capture instruments, transit-oriented development, etc. Poor planning rules cannot be offset by innovation and ideas. 

This is the same in the private sector, too. Most famously, Amazon did not emerge into its current complex behemoth form by starting with a comprehensive design and plan. It began as a simple online bookstore and has improvised and evolved to expand its business opportunistically. Much the same can be said about any large company of today.

A common thread in all these cases is that a mature, sophisticated and complex system (which in turn is effective in generating outcomes) in development must necessarily start from that which is basic and simple and must emerge through a process (that is generally long drawn). 

The point about starting with the basic and the simple is a universal truth. 

A sportsman perfects his skills through continuous and long practice. A good writer starts with certain basic skills and then hones them over time. A good design is essential before you start building anything. You cannot make a good curry without getting its ingredients right. You cannot start developing software without an algorithm. 

Similarly, successful development interventions must start with a simple basic design. It’s the Minimum Viable Product (MVP) which then undergoes iteration to become more complex. 

The point about progression is also critical.

EL Doctrow famously said, “Writing is like driving at night in the fog. You can only see as far as your headlights, but you can make the whole trip that way.” 

The progression from a basic and simple system to a mature and complex one takes time, follows a messy process, involves constant improvisation, is driven by opportunism and entrepreneurial spirit, and requires certain capabilities and attributes. 

Unfortunately, the mainstream discourse on development glosses over the point about starting simple and the centrality of gradual progress through improvisation and opportunism. 

In fact, one of the most deeply entrenched beliefs in development discourse is that a system can be transformed by supplanting new ideas, innovations, technologies, process reengineering, and so on, and by following a well planned process. The boring process of getting its basic functions right and the struggles of the transformation are mostly overlooked.

The challenge facing liberals in the US

Donald Trump’s upending of long-held conventional wisdom in the polity and economy has shed light on the faultlines and failings of the US politics and society. 

It has dramatically exposed the limitations of the supposed bulwarks of institutional checks and balances in the US government. Apart from this, the Republican Party is captured, the Democratic Party is in shambles, corporate America has fallen in line without any murmur, and public intellectuals in the prestigious and normally vocal academic institutions and think tanks in the US have gone eerily quiet. In fact, when the history of Trump 2.0 is written, it’s most likely that the leaders and scholars of the hallowed Universities will be apportioned as much blame as the Supreme Court for their roles in compromising and allowing the government near-unimpeded pursuit of its goals. Even the civil society seems to be missing in action. 

This accommodation should not have come as a surprise. There’s a strong case that American liberalism was standing on weakening foundations. As an illustration, for a country with a per capita income of $85,000, America suffers from embarassingly high levels of deprivation and poverty, and struggles with the poorest human resource development outcomes among advanced countries. The extent of elite capture of rule-making processes and institutions is perhaps the greatest in the US democratic system. The opinion makers and experts among the liberals who have played important roles in fashioning the economic consensus over the last three decades and have facilitated these outcomes are as much to blame as the policies that have generated them. 

I have blogged on several occasions, highlighting how the public intellectuals in the US have let down liberal democracy and have largely become co-opted by Big Tech and Wall Street. Given that the intellectual establishments in the US (academia and think tanks) are dominated by liberals, it’s surprising that they have allowed the trends of widening inequality, business concentration, and the general political capture by Big Tech, Big Pharma, Wall Street, and other corporate interests to go largely unchecked. 

There are some possible explanations for the lack of even a fight on the face of the ongoing assault on liberal ideas. One argument is that of a society that has not faced any serious existential adversities for long and has been dulled off its collective will and resolve to push back. Since the War, the society has settled into a comfortable equilibrium where all the fundamental requirements of liberal democracy and capitalism - rule of law, free speech, free markets, restraints on untrammelled power, recourse to redressal of grievances, etc., - have come to be taken for granted. Generations have been brought up without having to even think about them, much less fight for them.

On the economy, the great recession in the aftermath of the global financial crisis turned a new page in monetary policy adventurism with a radical expansion of the tools that central banks and governments were willing to use to stabilise the economy. Zero interest rates, quantitative easing, purchases of Treasuries and even corporate bonds, forward guidance, and so on entered the lexicon of central banking. This allowed central banks to keep rates, pump liquidity, and backstop asset prices, thereby propping up both the financial markets and the real economy. Market expectations have been shaped by a giant central bank put, one arising from a belief that if things get out of hand, the central bank will step in as a buyer or lender of last resort. Just like American citizens, its markets too have come to overlook uncertainties and take for granted economic stability. 

Another plausible explanation for the Trumpian backlash could be that, over time, liberalism gravitated to extreme fringes on a variety of issues. On important issues like the traditional family and social values, race relations, immigration, LGBTQ, etc., the liberal positions came to be hijacked by those at the extremes. It’s one thing to accept people’s privately held views that deviate from social norms, but an altogether different matter to decry the social norms and elevate those deviant views as the new norm. The latter is a big social and political shift, and can happen only when the majority or a significantly large representative proportion of the population is willing to embrace it. In its absence, and especially if they are being sought to be imposed by a small progressive vanguard, there will be strong and often violent resistance. Noah Smith has a good blog post here describing how the liberals have lost the plot.

Yet another explanation may be the increasing ideological alienation of Democrats (and liberal parties elsewhere) from their left-of-centre views, given the general shift towards the centre in the post-communist era. I blogged earlier about this here.

Centre-left political parties like the Democrats in the US under Bill Clinton, the Labour Party in the UK under Blair, and the Socialist Party in France under Emmanuel Macron (he split the traditional left and right parties and created a new Renaissance Party of the centre) have sought to widen their electoral base by moving to the centre. From being a counter-point to their economically rightwing (capital-favouring) opponents (Republicans in the US, Conservatives in the UK, and The Republicans in France), these centrist parties sought to embrace the market while also retaining their core working class (labour) bases. From hindsight, this move to the centre appears to have been a fatal mistake. In the delicate reconciliation of the interests of labour and capital, the latter has become dominant. The leadership and the intellectual core of these parties have become captives to the interests of the capital. In the process, the new centrist avatars have alienated their core support base in the labour. The labour base has drifted to the populist camps.

The value of centrism as a mobilising ideology is questionable. Centre has its relevance only with respect to some reference points (the right or the left, liberal or conservative). In itself, moderation cannot be an ideology. On the contrary, it can become a cloak for opportunism and hypocrisy. Further, when faced with the power of capital, a strong ideological base may be essential for political mobilisation. Most worryingly, centrists groups often end up being captured or at least perceived as being captive of the opposite ideological group. As I blogged here, this is a greater risk to the liberals, whose courting of capital can end up with capture by the capitalists (and therefore alienation of its core working-class base). The Democratic Party in the US may be the best exhibit in this regard.

In this backdrop, I point to three articles that highlight some of these challenges. 

The first article goes to the heart of an important theme of the Trump populism - the demonisation of DEI initiatives and the stigmatisation of liberalism. In this context, Eugenia Cheng, a mathematician, makes a very bold and compelling case for DEI initiatives.

A metric is a way of measuring the distance between two points but not necessarily physical distance; it could be how much time it takes with traffic as a factor or how much energy will be expended, depending on whether you’re going uphill or downhill. A distance cannot be measured on the basis of the position of a single point. It requires the effort of measuring the distance between two points. This may sound redundant, but it’s an important clarification: Metrics can be measured only by taking into account the starting point and ending point, as well as relevant features of the journey — the whole story.

When we evaluate people, we could do the same. Instead of just looking at what they have achieved, we could also look at where they started and be clearer about how we are measuring the metaphorical distance they have come and whether we are taking into account the support they had or the obstructions they faced.

If we are selecting sprinters for a track team, we might look at their best times for the 100-meter dash. But if someone had, for some reason, only ever run races uphill or against the wind, it would make sense to take that into account and not compare that runner’s times to others’ directly. We would be treating those people differently but only because their paths were different; really we’d be evaluating their paths fairly relative to their contexts. 

Other forms of achievement are not as straightforward to measure, but the idea is analogous. If someone achieved a certain SAT score after months of tutoring and someone else earned the same score having never seen an SAT before, it would be reasonable to be more impressed with the latter result and think that the second test taker has more potential. We should think of D.E.I. efforts as the best versions of this and aim to design systems that can measure the fuller picture of someone’s professional journey, not just the current result… It shouldn’t be called sexist to help people overcome sexism, and it shouldn’t be called racist to help people overcome racism, but if we give this help too crudely, then we leave ourselves open to these criticisms. Math teaches us that D.E.I. initiatives should be about carefully defining the metrics we use to measure how far people have come and thus how far they have the potential to go. They should be about uncovering when some people are constantly running uphill or against the wind, which can inform us how to give everyone an equal tailwind and an equal opportunity to succeed.

On DEI, by taking it to absurd extremes, the liberals have allowed even the idea of diversity to become contentious. Cheng attempts to retrieve some of the lost ground by trying to anchor the debate in terms of measuring merit and achievement more accurately. 

Cheng’s op-ed is also a testament to the abdication by the liberal intelligentsia, those opinion makers occupying important positions of influence and authority, like in the reputed universities and think tanks. When faced with the assault from the right, the ideological and institutional defenders of liberalism appear to have gone missing. 

In the second article, Ruchir Sharma calls for caution in cutting interest rates given the prevailing conditions.

Financial conditions are very loose. The economy is still resilient. The basic Fed lending rate is not restrictive. Signs of job market weakness are minor compared with the evidence that inflation has become entrenched. And cutting rates with AI mania gripping US markets risks driving them to greater heights… Capital pouring into the US stock market has driven valuations close to historic highs. Venture capital is pouring into profitless tech firms. Credit growth is surging, particularly in private markets. Junk firms can borrow at rates only marginally higher than solid ones or even the government; the premium they pay over Treasuries is as low as at any point in the last half century… 

Trump aides want to stimulate an economy that doesn’t need help. Despite the tariff shock, GDP is on track to expand by more than 2 per cent this quarter. Regardless, juicing up growth is not the central bank’s job. Its mandate is to control inflation while maximising employment. And standard guidelines on how to achieve this, such as the Taylor rule, show that the Fed’s basic lending rate is not currently restrictive…the unemployment rate is still just 4.3 per cent, close to historic lows. Meanwhile, consumer price inflation has exceeded the Fed’s 2 per cent target for five years running and is expected to remain stuck at an elevated pace for the foreseeable future. It’s also a mistake to ignore prices for stocks, homes and other financial assets… 

By easing every time the markets falter — including as recently as last August — the Fed has been fuelling asset price inflation and wealth inequality. Now, it seems poised to go further, easing in a boom. Tech investment is following the path of past bubbles: at nearly 6 per cent of GDP, it roughly matches investment in tech at the 2000 peak as well as investment in real estate at its 2007 peak, and greatly exceeds investment in oil at the 2013 commodity boom peak. Speculators focusing on the least profitable and most expensive stocks are amped up on AI too. Their share of US trading is now approaching the dotcom era high. The “asymmetry” of Fed policy — always rescue but never restrain the markets — is tilting further towards promoting bubbles… What’s needed is a return to symmetry, including periods of restraint.

In this context, I’m reminded of the metaphor of forest fires and avalanches. It’s a well-known principle that allowing small fires and small avalanches is critical for avoiding big fires and avalanches. Small fires prevent the accumulation of large detritus that can lead to big fires. Small avalanches prevent the accumulation of large fault lines in snow mountains that contribute to large avalanches. 

The central bank's interventions are effectively preventing the kinds of smaller recessions that are required to weed out zombie companies and recalibrate expectations among investors about risks and uncertainties. It’s triggering moral hazard by making a generation of investors and market participants less vigilant about risks. 

A current example of how the dominance of Wall Street interests in financial market policy-making comes in the way of throwing sand on the wheels of financial engineering is the ongoing rise of private credit. With private equity having peaked and interest rates being high, private credit has become an attractive alternative to finance emerging areas like data centres. But it’s rapidly becoming clear that private credit is now spawning excesses, and given the increasing levels of exposure of public pension, insurance and endowment funds to private capital, could be a source for the next financial crisis. 

Finally, Edward Luce makes an important point that the Democratic Party should discover its agenda not by reacting to Trump but by imagining that Trump did not exist. It should emerge from a genuine introspection about where it has alienated its traditional support base of blue-collar workers, blacks, and Hispanics (who have increasingly gravitated to the Trump camp). He writes,

The practical difficulty is that the party is shaped by elite professions, particularly law, government, media and academia. Such types often have a hard time concealing their distaste for those who voted for Trump… They are the party of corporate America. No party in history could ever boast of so many expert fundraisers and humane philanthropists… If Trump did not exist, would Democrats want to reform the US administrative state? They should want to reinvent it but are now its militant defenders… If Trump is attacking something, it must be defended to the hilt.

As Luce writes, the Democratic Party is not alone in this struggle to reinvent. The Labour Party in the UK and the Social Democratic parties in continental Europe are sailing on the same boat. 

The challenge before the liberals is to tailor a coherent agenda that addresses the concerns of the vast majority of the population, who feel socially, economically, and politically marginalised and alienated, and mobilise a sufficiently broad and credible coalition. This would require making hard choices. For example, it might in turn require marginalising the currently vocal defenders of liberalism (or the woke vanguard). It’ll also require breaking free from the incestuous elite stranglehold on liberal thought leadership. Unfortunately, there’s little on the horizon that points to a possible regeneration. 

Weekend reading links

1. Some facts about how increasing intermittent renewable power is upending the electricity market in India. 

Real time market (RTM) volumes exceeded Day Ahead Market (DAM) volumes for the first time ever in Q1FY26 – a reversal, since DAM volumes have been much higher than RTM volume in the past. In June of Q1FY26, DAM prices fell from record peaks of around ₹6.95/unit in Q2FY24 to below ₹4/unit. Nine of the last 10 months have seen month-on-month declines in DAM prices. In the RTM market, prices dropped to nearly ₹0/unit between 7 am and 1 pm, and spiked to as high as ₹5/unit between 8 pm and midnight. This seems to be the norm during April-October. The diurnal variations are huge. On the same days, RTM units were sold at a few paisa/unit and also at above ₹5/unit... During sunlight hours, there are big surpluses. At night, shortfalls occur as solar no longer contributes and price surges. Peak RTM demand in summer typically occurs between 2000 and 2400 hours (8pm and midnight). Solar is off at that time. On most days in Q1FY26, night-time supply was 10 per cent below demand, with shortfalls reaching 90 per cent sometimes. Conversely, during peak solar hours (0700–1700 or 7 am–5 pm), supply was nearly three times the demand. RE capacity is scaling up at 25-30 Gw per year. There’s a case for a big push on the storage front, to ensure surplus solar units can be used at night.

2. Distribution of teachers between different school management.

3. India's cost advantage in medical procedures is clear.

4. FT long read about how a wave of middle-class Chinese migrants to Tokyo, described as Run-ri, seeking permanent residency in Japan, is slowly transforming the city. 

Chinese buyers propel Tokyo property prices beyond the reach of many Japanese. The government has been pushed to tighten the requirements for the “business manager” visas on which so many Chinese secure their residencies. Some predict a full nationalist backlash, pointing to the klaxons of xenophobia audible in July’s upper-house election campaigns… The number of foreign residents rose by an average of roughly 1,000 per day over the course of 2024, of which about 10 per cent were Chinese. By next year, according to some projections, the total Chinese population of Japan is likely to hit a million… 

There has also been a surge of Chinese enquiries for places in Tokyo’s international schools, to as much as 60 per cent of the total in some cases… the Branz tower, a huge block of high-end flats overlooking Tokyo Bay, of which about 20 per cent are believed to have been sold to people with Chinese names, according to local estate agents. A listing for a three-bedroom flat in a nearby tower displayed in the window of a Chinese-owned estate agent in Roppongi, has an asking price of ¥350mn ($2.4mn). Other newly built developments nearby, including a vast complex built as the athletes’ village for the Tokyo 2020 Olympics, have similar ratios of Chinese buyers…

As the Chinese community in Bunkyo has expanded, the children have begun to group together and do not speak Japanese outside school. Within school, it is already becoming a distraction… The most tangible impact has been on property prices in Tokyo — one issue over which populist Japanese politicians have been able to stoke public anger. The prices of higher-end apartments in the capital, and the land in central wards on which low-rise houses can be built, has risen significantly since 2022.

5. More from the brilliant John Burn-Murdoch, this time on how the progressives may be ceding ground to the conservatives by having less children.

Recent studies find that the left’s lack of concern over falling birth rates is likely to be pushing societies in a more conservative direction. Extending previous analysis of the interplay between political ideology and family formation, I find that the assumption that birth rates are falling across society in general is not really true. From the US to Europe and beyond, people who identify as conservative are having almost as many children as they were decades ago. The decline is overwhelmingly among those on the progressive left, in effect nudging each successive generation’s politics further to the right than they would otherwise have been. This may ultimately mean more curtailing of individual freedoms, not less. Of course, children do not inherit their parents’ politics wholesale, and each successive generation has historically tended to be more liberal than the last on social issues. But it is well established that children’s values are strongly shaped by those of their parents. A growing left-right birth rate gap will slow that liberalising conveyor belt, and could result in societies and politicians that are less liberal and less concerned with the environment than would otherwise be the case.

6. China dominates EV sales across the developing world, with Vietnam and India being the exceptions. This is data from 2023 and 2024. 

7. The rise and rise of government bond yields.

8. Nvidia's market cap now exceeds FTSE, CAC, and DAX! (HT: Adam Tooze)

9. The importance of Airline loyalty programs in the US.

In a 2023 report, Mr. de Boer and a colleague estimated that Delta’s SkyMiles program was the world’s most valuable loyalty plan, worth about $28 billion. Investors value Delta itself at around $40 billion, based on its stock price. The loyalty program at American is worth about $24 billion, while United’s is worth $22 billion, according to the report. At Southwest Airlines, which started as a low-fare airline but has become one of the country’s biggest carriers, the loyalty program is worth around $9 billion.

The airlines share little publicly about their loyalty programs, but American and Delta each received about $7 billion from frequent-flier programs last year and United about $6 billion, according to an analysis of financial filings by Jay Sorensen, who runs IdeaWorksCompany, a consulting firm that works for airlines and other aviation businesses. Those programs are supported in part by the millions of people who use airline credit cards and then earn airline points for spending. The banks that issue those cards buy those points from the airlines in bulk, typically spending many billions of dollars every year... Banks recoup that money by charging interest and fees to card users and from fees paid by retailers, restaurants and other merchants every time customers pay with credit cards. For the banks, airline cards bring in many customers who fly and spend a lot.

Last year, consumers spent about $186 billion on Delta-branded credit cards, according to an analysis of securities filings of American Express, the airline’s credit card partner. That was about 12 percent of global spending on cards issued by the bank. Delta said in a financial filing that cash sales of loyalty points to American Express were $7.4 billion in 2024, an 8 percent increase from the year before. 

Many travelers love the cards and loyalty programs. By earning status, they can board planes early, enter airport lounges and enjoy other perks. Racking up points for dream vacations or seat upgrades is a powerful motivator, too. Those benefits create what Dwight James, Delta’s senior vice president of loyalty, calls “an emotional bias” toward the airline... Loyalty programs have become so valuable that during the pandemic, American, United and Delta each used their programs as collateral to borrow billions of dollars. The companies were struggling because they had to ground many planes and others flew largely empty.

10. New York City is a big outlier among US cities, thanks to its intra-city mass transit and high FAR.  

11. India's declining foreign capital inflows

These numbers point to large amounts being taken out by foreign investors who invested earlier and have been exiting their positions.  

A lot of FDI that flowed into India from roughly the middle of the last decade, peaking in 2020-21, were in the form of private equity (PE) and venture capital (VC) investments – in diverse sectors, from retail, e-commerce and financial services to green energy, healthcare and real estate. Those who put in this money are now cashing out by selling the shares they had originally bought, either to other firms engaged in the same business or via initial public offerings by the investee companies. Such exits by investors seeking to monetise their profitable “mature positions” were valued at $24 billion in 2022, $29 billion in 2023 and $33 billion in 2024, according to Bain & Company. The American management consulting firm reckons about 59% of PC/VC exits in 2024 to have been through public markets that were, in turn, enabled by the rich stock valuations in India.

12. Labour-intensive exports made up 35% of India's exports to the US in FY25, down from 50% in FY19. However, the share of the US in each of them have risen in the period. 

Textlies and food processing, in particular, are major employers.

And also forms a major share of manufacturing wages.

13. Tej Parikh writes that the US economy is already in recession based on several of NBER's economic indicators. 

While private investment has shrunk, AI investments have propped up net investment. Total private fixed investment rose by about 3 per cent year on year in the second quarter, but it would have fallen by around 1.5 per cent if AI-related components were excluded.

Health care and social assistance jobs made up 86% of the 598,000 jobs created in this Trump term till date.

And household spending has been propped up by the well off households who also have been the beneficiaries of the stock market boom. 

14. China and the US compared economically.

Its economy, while slowing, is still nearly 30 percent larger than America’s when one accounts for purchasing power. China has twice the manufacturing capacity, producing vastly more cars, ships, steel and solar panels than the United States and more than 70 percent of the world’s batteries, electric vehicles and critical minerals. In science and technology, China produces more active patents and top-cited publications than the United States. And militarily, it has the world’s largest naval fleet, a shipbuilding capacity estimated to be more than 230 times as great as America’s and is fast establishing itself as a leader in hypersonic weapons, drones and quantum communications.

The balance changes when compared with allies.

Together with economies such as Europe, Japan, South Korea, Australia, India, Canada, Mexico, Taiwan and others, there is no competition. This coalition would be more than twice China’s G.D.P. when adjusted for purchasing power, more than double its military spending, the top trading partner of most countries in the world, and would represent half of global manufacturing to China’s one-third. It would possess deeper talent pools, create more patents and top-cited research, and wield a degree of market power that could deter Chinese coercion. Allied scale would win the future.