Weekend reading links

1.  Ruchir Sharma points to the attractions of investing in China.

China now has more than 250 companies with a market cap of over $1bn and a free cash-flow yield of more than 10 per cent; the US has fewer than 150. Of those 250-odd China stocks, all but about 20 are in sectors other than tech, led by industrial and consumer discretionary businesses, so the opportunities are not just in the internet and AI... But by some measures, capitalism with Chinese characteristics is more competitive than its US rival. Large caps account for a smaller share of listed companies in China, leaving more room for newcomers. Among the 11 leading sectors, seven are less concentrated in China than in the US, meaning the top five businesses constitute a smaller share of each sector’s market cap. China’s tech sector is much less concentrated, which means a private upstart such as DeepSeek could rise in an environment less dominated by giants.

2. Interesting that amidst all talks of green transition in the US under Biden, the country continued to increase oil and gas extraction at an increased pace since 2016.

3. Good description of the bear and bull case for US equity markets with associated numbers.

4. Microsoft announces a breakthrough in quantum computing by unveiling Majorana 1, the world's first quantum chip powered by a topological core architecture. 

Microsoft’s ability to exploit a new kind of matter to create a new type of qubit (or quantum bit) promises to accelerate the development of reliable large-scale quantum computing... It’s kind of a generational technology like moving from vacuum tubes to a semiconductor. The advantages of Microsoft’s topological qubits are that they are fast and digitally controlled. That should enable them to scale more reliably to the 1mn qubit threshold that researchers consider necessary for sophisticated quantum computation. But it will still take years of experimental engineering before the company can deploy its quantum processing units (QPUs) in data centres alongside the classical graphics processing units (GPUs) that are currently powering the AI revolution. Nevertheless, the company still hopes to build a utility-scale quantum computer by the end of the decade configured to tackle a set of problems that no classical computer can address. By exploiting the special properties of a quantum computer, Zander reckons researchers will be able to develop new catalysts to break down microplastics, enhance the fertility of soils or develop new forms of self-healing concrete, for example.

A summary of the latest on quantum computing chip development - Google's Willow, IBM's Heron, Microsoft's Majorana 1, Amazon's Ocelot, and others. It's estimated that we are 15-30 years from any commercial chip deployment. 

5. In a paradigm breaking shift from its more than two decades of fiscal conservatism, Germany looks set to amend its 'debt brake'

Chancellor-in-waiting Friedrich Merz late on Tuesday agreed with the rival Social Democrats (SPD) to exempt defence spending above 1 per cent of GDP from Germany’s strict constitutional borrowing limit, set up a €500bn off-balance sheet vehicle for debt-funded infrastructure investment and loosen debt rules for states. Deutsche Bank economists described the deal as “one of the most historic paradigm shifts in German postwar history”, adding that both the “speed at which this is happening and the magnitude of the prospective fiscal expansion is reminiscent of German reunification”.

The plan is expected to open €1tn of additional borrowing over the next decade, more than a fifth of the country's GDP, for defence and infrastructure spending. Given its far lower debt to GDP ratio of 63%, Germany fortunately has enough fiscal space to accommodate such spending which is expected to rise to 84% over the decade. It has precedents in so far as similar spending spike happened in the aftermath of the reunification and boosted economic growth in the nineties. 

At the core of the problem has been a “debt brake”, written into Germany’s constitution in 2009 at the peak of the global financial crisis, that limited the government’s capacity to take on new debt to 0.35 per cent of GDP — one of the most stringent anti-borrowing laws in history. Much of the fiscal space that did exist was spent on the welfare state and social benefits. Merz’s plans bypass the debt brake by enabling the exclusion of everything over 1 per cent of GDP spent on defence. Goldman Sachs anticipates that the plan will drive German defence spending to as much as 3.5 per cent of GDP by 2027 — up from 2.1 per cent in 2024 and a mere 1.5 per cent in earlier years... Even with a debt-to-GDP ratio of around 84 per cent, German public leverage would be “still pretty favourable” compared with most peers, said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, pointing to ratios of 115 per cent in France and 124 per cent in the US.

The markets reacted in all the positive ways to the announcement.

Markets are applauding. As a Kiel Institute policy brief notes, the increase in German borrowing costs after the announcement was accompanied by rising stock prices, an appreciating euro, a steeper yield curve and stable default insurance — all pointing to improved growth expectations.

6. It's a measure of the unprecedented global power wielded by Donald Trump that his tirade against Chinese ownership of Panama Canal has led to the Hong Kong based CK Hutchison has decided to sell its ownership of two ports at either end of the Panama Canal to BlackRock. The deal involves the takeover of 43 ports, including the two, by a consortium headed by BlackRock and includes Global Infrastructure Partners (the private infrastructure investment company purchased by BlackRock last year), port operator Terminal Investment Ltd (TIL), and the world's biggest container shipping line, Mediterranean Shipping Company (MSC).

7. Good primer on the effects of tariff increases. Interesting that it confines to short-term costs and does not talk about the gains and the long-term impacts.

8. Efficiency maximisation, Amazon edition.

Amazon’s fulfilment centre in Shreveport, Louisiana — its most technologically advanced warehouse — has demonstrated the type of savings it can achieve with automation. The 3mn sq ft facility, which opened in September, uses robots at every stage of fulfilment and has achieved a 25 per cent cut in costs, according to Amazon, following a tenfold increase in robotics compared with its previous generation of warehouses... Shreveport features a range of mobile drive units, which are used to carry items across the warehouse, and advanced robotic arms that pick and sort items, cutting down on the number of human workers in the warehouse. The tech giant is also investing in robotics talent as part of a wider push to deploy AI large language models in its warehouse robots... 

While its retail business continues to be profitable, Amazon has forecast more modest growth across the group in the first quarter of this year, with a strong dollar knocking revenues. The US ecommerce group is pushing to lower delivery times, particularly for users of its Prime subscription service. This includes separating its logistics network into specific regions to ensure inventory is in place for same day deliveries... The group has deployed more than 750,000 mobile drive units since it acquired robotic start-up Kiva Systems in 2012. In recent years it has introduced Proteus, a fully autonomous lift vehicle that navigates sites independently using a set of sensors having been trained using AI. The company has also partnered with chipmaker Nvidia to develop “digital twins” of its warehouses to enable it to run thousands of simulated situations before deploying an autonomous robot.

9. Bjorn Lomborg interview in FT. He appears to have 12 hanging fruits, drawn from deep research evidence, that would cost $35 bn to add $1.1 trillion to developing world output and save 4.2 million lives a year. 

His favoured educational reform, for example, is to improve outcomes in countries such as Malawi by teaching children according to their level, not their age. Many children, crammed into massive classes, fall hopelessly behind. Lomborg’s solution is to teach for one hour a day using tablets with adaptive software, giving children the benefit of a good curriculum delivered at their own pace. Implementing it, according to his think-tank, would cost $9.8bn and deliver a $604bn boost to income through better-educated children. “This is spinach for the world. I want people to know about it.”

Ahem!

10. Donald Trump, Elon Musk, neo-colonialism, and corruption.

Foreign companies operating in South Africa have to navigate Broad-Based Black Economic Empowerment (B-BBEE) regulations set by the Department of Trade, Industry and Competition, and in the case of certain multinationals, such as auto manufacturers, where ownership quotas can’t be applied, “equity-equivalent” programs require investments that drive Black participation in supply chains to meet empowerment targets. This doesn’t apply in the case of communications companies, though, which need to be 30% owned by “previously disadvantaged” people to qualify for a license.

Musk wants to launch his Starlink satellite-communications service in South Africa, but that requires him finding an equity partner for a South African operation to qualify for a license. “Change the laws,” Musk is said to have repeatedly told Ramaphosa during a Feb. 3 meeting. On Feb. 5, Musk’s SpaceX (representing Starlink) withdrew from the Independent Communications Authority of South Africa’s hearings into a proposed licensing framework for satellite services. Trump’s executive order blasting South Africa came two days later... Donald Trump’s Feb. 7 executive order decried the “egregious actions of the Republic of South Africa,” claiming its 2024 Expropriation Act, which allows the state to seize land without compensation in certain scenarios, has been used to dispossess White people of their property.

11. The best illustration that America is now a country of rule by law, where law is that decided by the President and his cronies, comes from the decision to cull USAID programs. 

In Afghanistan, women’s education programmes shut down. Health services were suspended for refugees from Myanmar taking shelter in camps in Thailand. In Colombia, anti-narcotrafficking helicopters were suddenly idle. But African countries were hit particularly hard. In Uganda, medical trials were halted. Life-saving medicines are gathering dust in warehouses in Malawi, where more than half of healthcare spending is dependent on US and foreign aid. Perhaps greatest of all has been the impact on the decades-long battle to end the Aids pandemic... The President’s Emergency Plan for Aids Relief, known as Pepfar, screeched to a halt. Launched by George W Bush in 2003, a year in which Aids killed more than three million people, the multibillion-dollar health initiative is based on a simple premise that everybody deserves access to antiretrovirals that suppress the spread of HIV... The initiative changed the trajectory of the Aids pandemic. To date, Pepfar has saved more than 26 million lives and prevented roughly 1,000 babies a day from being born with the HIV virus. Pregnant women can avoid passing on the virus to their babies by taking medications that either suppress their own viral load to undetectable levels, or pass through the placenta to the baby’s body... 

Mitchell Warren, the executive director of the Aids Vaccine Advocacy Coalition (Avac), a New York-based campaigning group, called Pepfar “inarguably the best investment ever in global health and development”. “We took 20 years to build up what has taken less than four weeks to dismantle,” he said, reflecting on the chaos caused by Trump’s move... Within days, the 340,000 global healthcare workers whose salaries depend on the Pepfar programme — doctors, nurses, lab assistants and community outreach workers — received “stop-work orders”. More than 20 million HIV-positive people like Samkelo no longer knew when their next dose of antiretrovirals would come. Already, since January 24, at least 15,000 premature deaths have occurred because of the funding gap, according to a Pepfar tracker set up to monitor the impact.

The surest sign of the phasing out of Rule of Law and phasing in of Rule by Law comes when one hears news like this.

Congressional Republicans, egged on by Elon Musk and other top allies of President Trump, are escalating calls to remove federal judges who stand in the way of administration efforts to overhaul the government. The outcry is threatening yet another assault on the constitutional guardrails that constrain the executive branch... “The only way to restore rule of the people in America is to impeach judges,” Mr. Musk wrote this week on X, his social media platform, in one of multiple posts demanding that uncooperative federal judges be ousted from their lifetime seats on the bench.

12. Two maps that convey the striking reversal of global trade leadership between the US and China.

13. Xiaomi does what Apple could not.

After nearly a decade of trying, Apple finally gave up its effort to produce an electric car last year, canceling a project that soaked up $10 billion. But last year in China, the electronics maker Xiaomi launched its first electric car after just three years of development and delivered 135,000 vehicles. It has vowed to double that number in 2025. Xiaomi’s ability to succeed where Apple could not shows how thoroughly China has come to dominate the supply chain for electric vehicles. Chinese companies have mastered electric vehicle manufacturing. By tapping that infrastructure, Xiaomi was able to get components quickly and cheaply. More Chinese electric vehicle companies — including Leapmotor, Li Auto and Seres Group — are starting to turn a profit after burning cash for years in their intense competition for the world’s largest auto market... The telecommunications giant Huawei, which the U.S. government has targeted with sanctions and legal action for years, is making autonomous driving software. Huawei has teamed up with multiple Chinese automakers, including Seres Group and the state-owned firms SAIC Motor, BAIC and Chery.

14. Two striking graphics about the masculinisation of the US society. First on gender roles.

The second on society becoming too feminine.

15. Javier Blas introduces a dose of realism to the debate on the critical minerals squeeze due to Chinese restrictions.

Beijing has targeted five metals: tungsten, tellurium, bismuth, molybdenum and indium. China is the biggest producer of all of them...My calculations suggest the US spends about $300 million importing tungsten; roughly $30 million on bismuth; about $90 million on indium; and less than $1 million on tellurium. The total annual cost for all four comes to less than $500 million... it’s the same trend as the one observed in the much-hyped rare earth elements sector. Fears abound, but the cost of importing the 17 metals that form that category is tiny. The US Geological Survey calculated rare earth imports at less than $200 million in 2023... 

The import bill of minor metals could increase by five, 10, 20, even 50 times, and not amount to more than a rounding error for the US economy. Prices, however, are lower today than they were a decade ago. Did you notice when they were high? Nope; for a reason. Indium, for example, traded as high as $800 per kilogram in 2011; it’s now at $345. The cost of the most common compound of tungsten, one of the much-hyped critical minerals, is trading 25% below its 2011 peak. Even if prices rise because of Chinese restrictions, recycling will increase, American engineers will work to reduce their use and alternatives will be found. High prices cure high prices.

This is a good primer on rare earth minerals and their refining (where, in particular, China has a 30 year headstart advantage). 

16. Some facts on employment increase in the Government of India, which rose 4% from 3.17 mn to 3.3 mn from March 2022 to March 2024. 

But what contributed to the rise in the civilian staff strength in the last three years? Note that over 86 per cent of the total civilian staff is accounted for by just four heads — Indian Railways, posts, central police forces, and tax departments... And even as the overall civilian staff strength has risen by over 489,000 in the last three years, the Indian Railways has seen a small increase during the same periods—about 3,000 employees. Of the four heads, the postal department and the police saw the largest increase by over 179,000 and 143,000, respectively, in the last three years. The two tax departments (overseeing direct and indirect taxes) have seen an increase in their staff strength by over 71,000, bringing their total strength to over 172,000.

17. As defence spending rises globally, it may be end of the peace dividend.

Industrial policy - the case of China's shipbuilding industry

Adam Tooze points to a very good paper on the Chinese industrial policy in the shipbuilding sector by Panle Jia Barwick, Myrto Kalouptsidi, and Nahim Bin Zahur. See also this. 

The shipbuilding industry has historically been dominated by industrial policy, including Europeans in the 1900s, Japan in the 1950s, South Korea in the 1980s, and China in the 2000s. 

The shipbuilding industry is characterised by “shipbuilding cycles” of booms and busts. Since building large ships takes years, supply takes time to materialise when there are demand spikes, whence shipping rates surge, leading to spike in orders, and excess capacity which becomes evident when demand cools. 

The paper points to the unique requirements of shipbuilding industry - a base on land, easy access to water (sea or rivers), materials such as steel and engines, (skilled) labor, integration between shipowners and shipbuilders - that favour some form of industrial policy. 

The US is an interesting case study. It mobilised massive shipbuilding capacity during the duration of both the First and Second World Wars, though it did not survive the Wars. It has had the cabotage restrictions through the Jones Act, prohibiting foreign vessels from transporting goods between US ports and the “construction differential subsidies” provided to US shipbuilders until the 1980s were between 30-50% of the cost. However, it has never managed to sustain a large shipbuilding industry. 

The Japanese and South Korean dominance coincided with the heavy industrialisation thrust of the respective governments. While Japan provided subsidised financing, export credits, and protectionism, South Korea gave low-interest loans and government debt guarantees, as well as direct investment in shipbuilding facilities. South Korea targeted shipbuilding as an export sector. While Japan dominated the production of bulk carriers, South Korea dominated the production of higher-end, specialised oil tankers and containerships. 

The Japanese, Korean, and Chinese industrial policies could be counted as a success to the extent that they propelled each of them to start from virtually nothing to come to be the dominant global shipbuilding power. In contrast, the European and American examples show the limitations. 

The rise of Chinese shipbuilding industry can be traced back to the 2003 decision to build three shipbuilding based in the Bohai Sea area and the East Sea area. The 11th Five Year Plan 2006-10 made shipbuilding a “strategic industry” in need for “special oversight and support”. 

The authors categorise Chinese support for the industry into three groups. “Entry subsidies” like below-market-rate land prices along coastal regions and simplified licensing procedures encouraged new shipyards. Regional government owned banks provided shipyards with “investment subsidies” in the form of favorable financing like low-interest long-term loans and preferential tax policies. The government also gave “production subsidies” in the form of subsidized material inputs (cheap steel), export credits, and buyer financing (the last two made Chinese shipyards attractive to global buyers). 

Between 2003-09, China’s shipbuilding market share rose from 14% to 53%, on the back of the entry of 173 new firms. At the peak of the boom, China had more than 250 shipyards. Unlike the large conglomerates who got industrial policy support in Japan and Korea, the Chinese policy led to several small firms who focused on the least high-tech ships bulk carriers of smaller sizes and avoided the more sophisticated containerships and oil tankers. 

The shipbuilding boom in 2000s also coincided with the period of surge in Chinese imports (commodities) and exports (manufactures), whose transportation also provided a captive market for the shipyards. The trade surge led to scarcity and rise in prices, which made shipowners place large orders, which led to an investment boom in 2006-10. Then the Great Recession struck, leading to idling of shipping fleet and closure of many shipyards. In response, the government initiated the “2009 Plan on Adjusting and Revitalising the Shipbuilding Industry” which stopped all new entry, restricted support towards firms selected based on performance criteria in a “White List”, and encouraged industry consolidation. 

Once consolidation started, the Chinese shipbuilders also started to move up the value chain into larger sized bulk carriers and smaller containerships. Since 2013, China has been the world’s leading shipbuilder accounting for 54% of tonnage delivered in 2022 to 28% for South Korea and 18% for Japan. It’s also the leader in containerships though they tend to be smaller sized. 

The paper builds a structural model of the global market for ships using historic data from 1998-2014. They use the model to back out the extent of Chinese subsidies. 

We know that China’s subsidies for shipbuilding started in 2006. We use data from all countries before 2006 to estimate a shipbuilding cost function. This cost function should then continue to predict shipbuilding outside of China after 2006; however, it can only match China’s shipbuilding after 2006 by including a measure of what subsidies must have been… We are particularly interested in whether this cost function exhibits an abrupt and otherwise inexplicable change around 2006 that makes Chinese ship- yards’ production costs all of a sudden lower. The idea is to essentially ask whether Chinese firms are “over”-producing, compared to our prediction from the earlier production function…

Our estimates suggest that China provided $23 billion in production subsidies between 2006 and 2013. This finding is driven by the cost function obtained from this analysis, which exhibits a significant drop for Chinese producers equal to about 13–20 percent of the cost per ship. Simply put, Chinese shipbuilding firms were “over”-producing after 2006 compared to our prediction of output without subsidies… there are no “breaks” in the estimated cost functions of Japanese or South Korean shipyards. In addition, the results are robust to many different specifications, as well as different ways of accounting for temporal changes.

They have a very good summary of the magnitude of Chinese subsidies

Our estimates suggest that China provided $91 billion in subsidies along all three margins—production, entry, and investment—between 2006 and 2013, averaging over $11 billion per year, which totaled nearly 50 percent of Chinese shipbuilding industry revenue over that period. This is considerably larger than the $23 billion that (according to our estimates) was provided in production subsidies alone. Thus, all firm decisions—entry, exit, and capacity investment in addition to production—matter in evaluating the impact and effectiveness of industrial policy. Indeed, entry subsidies were 69 percent of total subsidies, while production subsidies were 25 percent, and investment subsidies accounted for the remaining 6 percent. This empirical pattern reflects that shipbuilding firms “over-entered (recall the astonishing entry rates during the boom years of 2006–2008) and “over-invested” (recall the striking increase in investment during the bust)…

Our structural model suggests that China’s industrial policy in support of shipbuilding boosted China’s domestic investment in shipbuilding by 140 percent, and more than doubled the entry rate: 143 shipbuilding firms entered with subsi- dies versus 64 without subsidies from 2006 to 2013. It also depressed exit. Overall, industrial policy raised China’s world market share in shipbuilding by more than 40 percent.

Its welfare impacts and efficiency gains are nuanced.

First, 70 percent of China’s output expansion occurred via taking business from rival countries. From a global perspective, Chinese subsidies reduced South Korea’s world market share from 48 percent to 39 percent and Japan’s market share from 23 percent to 20 percent during 2006–2013, with profits earned by shipyards in these two countries falling by ¥144 billion (in US dollars, roughly $21 billion). There is evidence (backed by our cost estimates) that Chinese shipyards are less efficient than their Japanese and South Korean counterparts; thus, the transfer of shipbuilding to China that occurred constitutes a misallocation of global resources. Second, China’s industrial policy for shipbuilding led to considerable declines in ship prices. Lower ship prices benefited world ship-buyers somewhat, though only a modest amount accrues to Chinese ship-buyers, as they accounted for a small fraction of the world fleet. 

Finally and most importantly, although China’s shipbuilding subsidies were highly effective at achieving output growth and market share expansion, we find that they were largely unsuccessful in terms of welfare measures. The program generated modest gains in domestic producers’ profit and domestic consumer surplus. In the long run, the gross return rate of the adopted policy mix, as measured by the increase in lifetime profits of domestic firms divided by total subsidies, is only 18 percent, meaning that for every $1 the government spends, it gets back 18 cents in profitability. In other words, the net return when incorporating the cost to the government was a negative 82 percent, with entry subsidies explaining a lion’s share of the negative return.

While none of the subsidies can be justified in terms of life-time profits, production and investment subsidies can be justified on revenues maximisation objective. They are also more common given the ease of setting and monitoring quantity and revenue targets. Entry subsidies are the most inefficient, also because it leads to the entry of small and weak firms, industry fragmentation, and over-capacity. In fact, while 82% of production subsidies and 68% of investment subsidies were allocated to more efficient firms (than the median firm), they got only 49% of entry subsidies. Further, since more than 80% of the ships produced were exported, most of the subsidies leaked out to benefit foreign buyers. 

Furthermore, while counter-cyclical subsidies (subsidies given during downturns) were more beneficial, they formed a smaller share. As an example, 90% of the total subsidies were handed out between 2006-08, whereas just 10% went between 2009-13.

Interestingly, the consolidation policy adopted after the financial crisis was a success. The “white list” of prioritised firms for government support was in keeping with the standard Chinese industrial policy playbook - encourage and support large scale entry and intense competition, then step in to consolidate by allowing the weak to fail and supporting the strong to emerge as national champions who can compete globally. The “white list” firms generated gross rate of returns of 71% of subsidy, compared to 37% for all firms. However, since the “white list” was dominated by state-owned firms, inefficiencies persisted. But the “white list” approach of targeting is doubtless more efficient use of industrial policy. 

The paper points to two possible externalities from China’s industrial policy support for shipbuilding.

China became the world’s biggest exporter and a close second largest importer during our sample period… Shipbuilding subsidies reduced bulk carrier freight rates by 6 percent and containership freight rates by 2 percent between 2006 and 2013. Using trade elasticities from the literature, the industrial policy raised China’s annual trade volume by 5 percent ($144 billion) between 2006 and 2013. This increase in trade was certainly large relative to the size of the subsidies (which averaged $11.3 billion annually between 2006 and 2013)… 

Second, China’s military ship production might have benefited from industrial policy with regard to shipbuilding. Military ship production is concentrated at state-owned yards, especially at 13 subsidiaries of China State Shipbuilding Corporation (CSSC) and China Shipbuilding Industry Corporation (CSIC), the two largest conglomerate shipyards that are state-owned. These subsidiaries are typically dual-use, producing both commercial and military ships in the same complex… the annual deliveries of naval and commercial ships from 2006 to 2013… experienced a several-fold increase… providing suggestive evidence that China’s supportive policy might have benefited its military production as well.

On Chinese industrial policy, this and this are good articles on how China came to dominate the solar industry, this, thisand this on how China came to dominate the EV industry, how BYD came to dominate the EV and battery market, and this about its dominance in clean energy minerals production.

State capability - role of bureaucrats in Korea's industrial promotion

People matter just as much (or perhaps more) in governments as in the private sector. Especially people in leadership positions and critical functional roles. In their search for better outcomes in public policy, governments tend to expend effort and resources on financial support and regulatory measures while overlooking personnel choices. This bias is also reflected in public commentary and academic research that shapes public narratives. 

If they are intent on reform and impact, personnel choice decisions are the lowest hanging fruit for governments. In most policy areas, the range between the opportunity cost of a bad personnel choice and that of a capable personnel is perhaps greater than any other policy intervention or reform. 

In this context, Philipp Barteska and Jay Euijung Lee have a most impressive new paper which examines the impact of the bureaucratic capabilities (of export promotion officers) on the effectiveness of industrial policy in terms of export performance in South Korea. They use historical data drawn from the three-year rotation of officers (Director) posted in the overseas offices of South Korea’s Trade Promotion Agency (KOTRA) to lead trade promotion activities. After its founding in 1962, KOTRA opened 75 country offices in two decades. 

Their headline finding is striking

We exploit the three-yearly rotation of managers of South Korea’s export promotion offices in 87 countries between 1965 and 2000 to show that a one standard deviation increase in bureaucrat ability boosts exports by 37%. Under higher-ability bureaucrats, South Korean exports respond more strongly to a country’s import demand, suggesting a more effective transmission of market information. Higher-ability bureaucrats are also more likely to serve multiple appointments, consistent with first appointments functioning as screening devices for bureaucrats. Lastly, bureaucrat experience matters – the products a bureaucrat is exposed to during their first appointment also see export increases in subsequent appointments. This signifies that while organizational capacity can grow endogenously, it might also exhibit path dependence.

The study uses a context with a clear causal identification pathway.

The bureaucrats we study… manage offices targeting a common outcome variable, defined at a geographic level: exports to the country where the office is located. This setting allows for a unique quantification of the role of bureaucrats in industrial policy implementation during a growth miracle.

They make three important contributions

First, we provide evidence that the effect of an industrial policy on export promotion crucially depends on the ability of the directors of overseas export promotion offices. Second, we find empirical support that the policy’s effect can be increased by screening bureaucrats based on performance in their first appointment. Third, we show that learning-by-doing can build a bureaucrat’s capacity, implying a novel channel for path dependence in organizational capacity.

They provide resounding evidence on the impact of export promotion activities. 

We use the offices’ staggered roll-out to estimate the effect of opening an office. Exports increase by 38% in the ten years after an office opening. Our main result demonstrates that the effect of the policy on exports strongly depends on the bureaucrat assigned to manage a country office. We use a movers design in a two-way fixed effects framework… We find that increasing bureaucrat ability by one standard deviation increases exports by 37%. In combination with the estimated effect of an office opening, this suggests the policy of overseas export promotion through these offices would have no effect if implemented by bureaucrats one standard deviation below average…

The large differences between the abilities of office managers are explained by one key mechanism: Better bureaucrats transmit timely market information more effectively. We show that, upon the appointment of a high-ability bureaucrat, exports of a product rise much more responsively to simultaneous growth in the product’s import demand (or export supply)… we show that bureaucrat experience in certain products raises their exports relative to other products… Similar to differences in bureaucrat ability, experience in a product causes exports to increase more strongly when import demand (export supply) goes up… the country fixed effects represent much more than just the overseas offices. The country fixed effects encapsulate time-invariant gravity variables, such as distance and market size, which have been found to be very strong predictors of bilateral trade volume. We find a negative correlation between bureaucrat and country fixed effects, suggesting that better bureaucrats work in smaller countries. Overall, bureaucrat and country fixed effects jointly explain around 90% of the spell-level variation in exports (after removing product-year trends).

The headline finding from the study is the outsized importance of bureaucrats in driving export performance.

Bureaucrats explain a substantial amount of variation in Korean exports… they explain around 14% of the variation. Furthermore… one standard deviation of bureaucrat ability is estimated to be 0.318, implying an increase in the dollar value of exports of 37%. Moreover, the magnitude is comparable to the policy’s average effect – the effect of opening an office – of 0.321 (38%)... Hence, opening an office would not impact exports if the office is headed by a bureaucrat whose ability was one standard deviation below the mean. To put the magnitude into perspective, we compare the effect of a one standard deviation increase in bureaucrat ability to that of geographical distance. Assuming an elasticity of trade to distance of -1, it amounts to roughly the effect of reducing trade distance from London-Seoul (8,900km/5,500 miles) to Mumbai-Seoul (5,600km/3,500 miles)… An alternative way of quantifying the effect size is to consider how much more attractive a KOTRA office makes a country as a destination for South Korean exports. This suggests an office opening makes Ecuador – a country with a fixed effect at the 25th percentile – as attractive as Greece – a country at the 50th percentile. At the same time Greece with an office is as attractive as Spain – a country at the 75th percentile… 

Korean ambassadors… have broad diplomatic responsibilities, making export promotion just one, if at all, of many duties. In contrast, KOTRA overseas office directors are solely focused on increasing exports… our decomposition exercise… shows that while ambassadors do explain some variation in exports, they account for a much smaller share of the total variation (4%) than KOTRA directors (14%)… there is a strong drop in exports upon the appointment of an ineffective bureaucrat. However, this drop is only relative to South Korean exports to other countries.

They point to the mechanism of impact as the posting of an effective bureaucrat

We show that upon the switch to a more effective bureaucrat, Korean exports increase more strongly for products that see increasing import demand in a given country-year. They also increase more strongly for products that see increasing export supply to other countries from Korea. Our findings suggest that most – but not all – of the effect of high ability bureaucrats comes from more effectively exploiting market conditions, e.g., by relaying information about destination market demand… Switching to a more effective bureaucrat causes a sharp increase in the elasticity of South Korean exports to market conditions. Losing an effective bureaucrat causes a sharp decrease of similar magnitude…

We find a sharp change in the elasticity of South Korean exports to market conditions in line with the new bureaucrat’s fixed effect and going against the old bureaucrat’s fixed effect. The response of South Korean exports to market conditions increases by around 5 percentage points when the bureaucrat ability increases by one standard deviation. This implies an increase in the reaction of South Korean exports to market conditions by around 20% (from a base of around 25%). 

They offer some very useful policy implications relevant to the postings of officials.

Underperformers in 1st Appointment are not Reappointed… The study finds that residualized exports during a bureaucrat’s first appointment, part of their estimated fixed effects, are predictive of bureaucrats’ careers… We find a positive significant effect of residualized exports during a bureaucrat’s first ap- pointment on number of appointments of 0.240 (standard error: 0.112)… We find that a bureaucrat’s first appointment typically is to less important countries, while third appointments are to the most significant markets. The opening year of a KOTRA office and a country’s fixed effect serve as proxy for a country’s importance… the organizations experiments with bureaucrats by initially appointing them as managers of less important country offices. While these offices may contribute little to aggregate Korean exports, observing bureaucrats as managers of these offices allows the organization to acquire information about managers’ abilities. An appointment as manager of a small country office plausibly is much more informative about a bureaucrat’s ability than a subordinate role in a more important country. 

The paper points to some very interesting counterfactuals that serve as policy insights.

First, Korean exports would rise by 6.8% if single-appointment bureaucrats were as good as multi-appointment ones. This is a relevant counterfactual as KOTRA could operate an additional set of offices in smaller countries to experiment with bureaucrats prior to appointing them to the countries in our data. The estimated difference in ability implies a 25%51 increase in Korean exports from replacing a single-appointment bureaucrats with the average multi-appointment bureaucrat. 30% of appointments are of single-appointment bureaucrats, increasing exports by 6.8% averaging across all appointments.

Second, Korean exports would decrease by 7.1% if ability did not predict a bureaucrat’s number of appointments, i.e., if there was no selection on ability. Replacing a single-appointment bureaucrat with the average across all bureaucrats increases exports by 11%. Doing the same for a multi-appointment bureaucrat decreases exports by 13%. As there are more appointments of the latter type of bureaucrats, the overall effect is negative. Together, these two counterfactuals suggest that the organization is exploiting just above half of the possible gains from selecting bureaucrats in line with its screening ability. Third, Korean exports would decrease by 16% if all bureaucrats were as negatively selected as the single-appointment bureaucrats. 

It also points to the importance of bureaucratic experience.

We find that… the point estimates translates into an increase in exports by 3% in products in which a bureaucrat is experienced relative to those products in which the bureaucrat is not experienced… This is the first evidence regarding learning-by-doing as a channel for increasing bureaucratic capacity… Learning-by-doing in an organization also points to a novel source of path dependence in organizational capacity. A bureaucracy will be most effective at carrying out familiar tasks. Expanding into policy areas in which the bureaucracy has no recent experience builds capacity but is less likely to bring immediate policy success…

Similar to the effects of a higher ability bureaucrat, we show that upon the switch to a bureaucrat who is experienced in product p, South Korean exports increase more strongly if this product sees increasing import demand in a given country-year. They also increase more strongly for products that see increasing export supply to other countries from South Korea. Allowing for this triple interaction makes the estimated main effect of experience much more noisy – suggesting that most of the effect of bureaucrat experience comes from more effectively exploiting market conditions, e.g., by relaying information about destination market demand.

This is a brilliant paper. The authors have painstakingly created a database, analysed the context, identified some theories of change, tested several valuable hypotheses, and done robustness checks on multiple aspects to validate their results.

It would be great if someone could do a similar study of the effectiveness of Economic Counsellor Divisions in Indian Embassies and High Commissions and measure the performances of bureaucrats posted there. 

It’s also the sort of paper that has messages of first-order relevance to policymaking. It uses quantitative evidence to show that export promotion offices increase exports; good bureaucrats improve the effectiveness of these offices; the performance in their first posting is a good screening for the career management of bureaucrats; learning-by-doing can improve the expertise of bureaucrats; and experienced bureaucrats are more effective. Most importantly, it brings hard evidence on the magnitude of impact made by officer quality in generating outcomes. 

An increase in exports by nearly two-fifth with just one standard deviation increase in bureaucratic capability tells us that the quality of officials might matter more than (or at least as much) fiscal incentives and regulatory changes.

Levelling the playing field - incentivising exports

In the context of China’s stifling dominance across manufacturing supply chains, and as industrial policy interventions proliferate globally and the WTO is rendered comatose due to the dysfunction of its Dispute Settlement Body (DSB), it may be time for India to re-assess its industrial policy instruments, especially concerning export promotion. 

The WTO’s Subsidies and Countervailing Measures (SCM) Agreement categorises two kinds of “prohibited” subsidies - those “contingent on export performance” (Article 3(1)(a)), and those “contingent on the use of domestic over imported goods” (Article 3(1)(b)). It allows for subsidies that are specific to enterprises, industries, and regions. 

When the SCM and other WTO Agreements were being negotiated in the nineties, it was thought that only the subsidies contingent on export performance would be trade-distorting in any significant manner. It was thought that the subsidies specific to enterprises, industries, and regions (or the economy as a whole) could not be sustained at the scale required to distort trade in particular products much less global trade in general. 

Nobody anticipated China’s extraordinary scale of economy-wide industrial policy subsidies. It’s estimated that China spends 5% of GDP annually on its industrial policy, compared to 0.4-0.6% of GDP for US, Japan, and France and 0.9% of GDP for South Korea. India’s annual expenditure on its flagship production-linked incentive (PLI) scheme is a modest 0.15% of GDP. In the 2000-18 period, Chinese Government Guidance Funds have given over $1 trillion in capital and guarantees to more than 28,000 companies. As part of the Made in China 2025 initiative, the government committed nearly $300 bn in 2018 with an additional $1.4 trillion after Covid 19 to achieve technological self-sufficiency and global leadership in critical sectors. All told, in sectors like semiconductors, steel, and aluminium, China makes up 80-90% of all global subsidies.

Its domestic policies artificially suppress business costs and give its firms an unmatched competitive advantage. Its financial repression keeps the cost of capital suppressed, the hukou system has depressed wages, and intense competition by local governments has kept land and utility costs low. Add to this all the direct state support of the kind mentioned above and the massive economies of scale, and it becomes almost impossible to compete with Chinese firms. Further, the scale and scope of these subsidies have allowed even loss-making firms to expand production and flood the market at deeply discounted prices. 

Accordingly, Chinese firms have built up production capacities in steel, cars and electric vehicles, EV batteries, solar panels, metro railways, heavy equipment etc., that are far in excess, often in multiples, of domestic demand. In many of these sectors, they make up 50-90% of the global production capacity. Finally, with the domestic economy slowing and demand weakening, these firms have come to rely even more on exports and further discounting to capture foreign demand. There cannot be any doubt that China’s excess capacity and discounted sales that render its trade partners uncompetitive should be treated as “prohibited subsidy”. 

In this context, two IMF papers by Lorenzo Rotunno and Michele Ruta examined the trade spillover impacts of domestic subsidies generally and specifically by China. They quantify the significant impact of domestic subsidies on exports from G20 EMs. Exports of subsidised products increased for eight years since its introduction relative to exports of other products, whence the growth rate of exports of subsidised products is 15% higher. Similarly, at extensive margin (new products being exported), domestic subsidies increase the probability of a new product being exported by 3 percentage points relative to other products. 

They also quantify the impact of Chinese subsidies.

Our results point to significant effects of China’s subsidies on its trade flows. On the export side, exports of subsidized products are 0.9% higher (relative to non-subsidized products) after China’s subsidies… This average effect masks significant heterogeneity across destination markets and sectors. Our estimates suggest that exports of subsidized products from China to other G20 emerging economies (G20 EMs) are 2.1% higher after the subsidy than exports of other products to the same destinations. Furthermore, the export effects of China’s subsidies vary considerably across sectors. Within electrical machinery – one of the new ‘strategic’ sectors – for instance, exports of subsidized products are found to be 7% higher than exports of other products after China’s subsidies.

On the import side, China’s subsidies are found to depress imports of targeted products relative to imports of non-subsidized products – an effect that is not found for other countries. Across origin countries, the implied effect on imports of subsidized products is stronger for Advanced Economies (AEs) – a 3% and 4.8% decrease in imports of subsidized products from G20 AEs and other AEs, respectively. Electrical machinery and metals are among the sectors where China’s subsidies have strong import-substitution effects. Our estimates therefore suggest that China’s subsidies have increased the country’s share in export markets and reduced its share in import markets of subsidized products.

The effects of China’s subsidies are amplified by supply-chain linkages… the exposure of downstream sectors to subsidies in upstream industries (through cost shares) and the exposure of upstream sectors to subsidies in downstream industries (through sales shares)… The results reveal strong effects of subsidies propagating from upstream industries. More subsidies given to supplying industries are associated with higher exports in the buying industry… consider the case of subsidies provided to the steel industry, which is the main supplier of inputs to the automotive industry (10 % of its total costs). The empirical results imply that increasing subsidies to steel by the number observed over 2015-2022 is associated with a 3.5% increase in exports of autos from China. These indirect effects are concentrated on exports to G20 AEs. The findings on the indirect effects of subsidies are consistent with upstream industries expanding supply and lowering their prices following the deployment of subsidies. This upstream effect allows industries downstream to become more competitive in export markets. Results from import regressions point to a negative effect of upstream subsidies on imports in downstream sectors. This result suggests that upstream subsidies allow downstream industries to also expand domestically and substitute for imports.

Subsidies form the overwhelming share of Chinese industrial policy instruments, representing 95% of all trade-distorting policies implemented in the 2009-22 period. This compared with 60-65% for other emerging economies in G20. Further, 98% of subsidies are monetary transfers to firms - state aid and grants.

Chinese subsidies are focused on the manufacturing sectors.

The significant impact of domestic subsidies on exports in general (for all subsidising countries) and the especially higher impact of domestic subsidies observed in case of China is a reminder on the limitations of the SCM Agreement and WTO provisions in containing trade-distorting subsidies. As industrial policy interventions proliferate and as China exports its excess capacity aggressively, fixating on a narrowly defined set of subsidies that are “contingent on export performance” is meaningless. Other trade-distorting subsidies are allowed to expand without infringing on any WTO provision. 

This is a matter of great significance for developing countries like India with limited fiscal space to provide subsidies at anything remotely close to China, and also especially because the Chinese subsidies are having a greater impact on exports to G20 EMs and imports from them. 

As it seeks to expand its manufacturing base, India faces an onerous challenge across sectors. Competing with Chinese manufacturers requires significant levelling of the playing field to balance the massive subsidies that its exporting firms receive. This may no longer be confined to competition with exports coming directly out of China, but even those from countries like Vietnam. As FT reports, Vietnam is rapidly becoming an off-shore site for Chinese manufacturers, fuelling a third of all new investments in the country. 

India’s industrial policy response has been to support its domestic manufacturers with its own subsidies, mainly through the PLI scheme and Basic Customs Duty (BCD) tariffs on imports. 

But this has its limitations for at least two reasons. One, given the extent of the competitiveness gap, these subsidies and tariffs may not be adequate in many industries. Two, shorn off the BCD support, Indian firms fall behind even further in the export markets.

The first can be bridged to some extent by increasing the domestic value addition. This can help domestic manufacturers lower costs and increase their competitiveness. However, given the limited component manufacturing ecosystem, this can only be done in a phased manner. A possible strategy in this regard would be to target a handful of products with high domestic demand volumes and double down on the creation of a component ecosystem, thereby maximising domestic value addition. It might be required to provide a higher level of incentive than currently provided under the PLI for products to encourage component ecosystems to relocate. Once a critical mass of the component manufacturing ecosystem emerges, it may become possible to expand the base faster. 

The second point on levelling the playing field on exports is equally important. Like maximising domestic value addition, another channel to improve the competitiveness of Indian manufacturers is economies of scale. Here, the small size of the Indian domestic market is a problem. For all its population size, India does not have the domestic market size to be able to generate the scale of demand required to reap the benefits of large economies of scale in most export market segments. This means that capturing export markets is an essential requirement. But the competitiveness gap is even higher in the export markets. 

It is, therefore, essential that these domestic firms have some form of export subsidies. An option is to provide a higher level of incentives such that they are enough to match the competitiveness gap after excluding the BCD. But that would require a higher fiscal allocation and would also entail giving excess incentives for domestic sales. Another option would be to provide concessional trade finance or reimburse taxes on exports. Other instruments from the Table above could be considered. 

In conclusion, for domestic industrial policy to be effective in expanding the domestic manufacturing base, it must necessarily include both some form of import protection and export incentives. Notwithstanding their WTO commitments, this choice is unavoidable for any country.

Weekend reading links

1. Shang Jin-Wei makes some important suggestions on how countries can mitigate the Trump trade shock.

First, they must devise effective retaliation strategies. The European Union’s (EU’s) Anti-Coercion Instrument provides a useful model for applying economic pressure without directly harming domestic industries. For example, these measures could allow the bloc to suspend intellectual-property protections for US software and streaming services or restrict US banks and financial-service providers from operating within EU markets. Developing countries might find such measures especially attractive, because the US tends to run large trade surpluses in intellectual property and financial services.

China’s mineral-export restrictions offer another example... A number of other countries have market power in some key products they export, and might explore a similar approach. Governments must also consider the indirect yet significant impact of interest-rate and exchange-rate fluctuations from Mr Trump’s tariffs. For emerging markets and developing economies, this means keeping short-term foreign debt at sustainable levels. Globally, companies must prepare for the possibility that interest rates will remain elevated for longer than anticipated... Strengthening regional economic integration by removing trade and investment barriers within existing trade blocs would be much more productive than raising tariffs on US goods.

2. Important emerging threat, the security of undersea cables and pipelines. 

In October 2023, the Chinese-owned container ship Newnew Polar Bear performed a mysterious trip during which several undersea installations in the Baltic Sea were damaged. First, the Balticconnector gas pipeline connecting Finland and Estonia lost pressure, then a cable sustained mysterious damage. Authorities discovered that another cable had been damaged hours earlier.

A few months after that, the Joint Expeditionary Force — a regional military grouping comprising the UK, the Nordic nations, the Baltic nations and the Netherlands — announced a new initiative to track precisely such threats to Baltic Sea infrastructure. Last month, after a further string of suspicious cut cables, the group announced it was activating the initiative, called Nordic Warden. Just a week later, Nato unveiled Baltic Sentry, an operation with naval vessels patrolling the waters above undersea cables and pipelines. Although Baltic Sentry is a Nato operation, it was conceived by Baltic Sea leaders at a meeting in Helsinki. Like Nordic Warden, it is an entirely European undertaking.

This has an important implication at a time when the US has been actively disassociating itself from European security

The Baltic Sea countries have cobbled together a Baltic Sea maritime presence that — while not yet large enough — doesn’t depend on America... on a daily basis, the nations look after their waters. Making America redundant was never their intention; they just knew that constabulary services in their region were not a top US Navy priority. If Trump were to announce tomorrow that America is pulling out of the Baltic Sea, little would change. One might even ask whether anyone would notice. This approach is likely to extend elsewhere as allies assemble enough resources (and some form of nuclear umbrella extended by Britain or France) to render the US good-to-have rather than need-to-have.

3. BYD is upending the extant business models in the global car market by providing advanced driver assistance systems a standard feature across most of its models at no additional cost. 

For years, carmakers have looked to driver assistance software as the key to offsetting declining hardware margins. This held promise as a cash cow, much like tech companies monetise cloud services, a high-margin add-on that would generate billions in new revenue. Tesla, for example, charges $8,000 for its driver assistance software in the US as of April. Mercedes-Benz and GM are among many carmakers banking on monetising assisted driving technology. There are inherent risks to self-driving software, from technology failures to potential cyber security threats. But unlike fully autonomous vehicles, which remain controversial and unproven at scale, advanced driver assistance systems — which enhance rather than replace human control — have already demonstrated their value. 

Studies suggest that these systems, which include highway and traffic assist systems, automatic emergency braking and forward collision warnings, could significantly improve road safety. Research from the Insurance Institute for Highway Safety has shown that cars with these features can reduce rear-end collision involvement rates by up to 50 per cent. Wider adoption could reduce accident frequency by around a quarter, according to research in the UK, while the most common types of accidents would be reduced by 29 per cent with full deployment. Assuming a conservative 30 per cent adoption rate and a $5,000 fee per vehicle, a carmaker selling 10mn cars annually could potentially generate $15bn in revenue a year from self-driving features alone. Some carmakers have introduced subscription models: Tesla, for example, charges $99 a month, which helps generate recurring revenue long after a car is sold. Scale that adoption further — as technology advances and consumer scepticism declines — and the financial potential becomes even more compelling. That explains why automakers have been so eager to monetise the technology. Safety sells. 

The question now is: can it still be sold? BYD is making that question harder to answer. By including advanced driver assistance systems as standard across its line-up — even on its $9,500 Seagull EV — BYD is challenging the pricing strategy that rivals have relied on. Automakers will find it increasingly difficult to justify charging for software in markets where BYD is offering it as standard. The longer-term consequences could be even more disruptive. If BYD’s move forces rivals to slash software prices — or abandon paid models entirely — the industry’s vision of AI-powered, high-margin profits may never fully materialise... Now, with each new market it enters, BYD won’t just be selling more cars, it could start to redefine industry expectations. History suggests that once a technology becomes indispensable, the premium disappears. Power windows, anti-lock brakes, rear-view cameras — all were once luxury features that have become standard. Once consumers get used to something as standard, there is no turning back. Just like seatbelts.

4. Meanwhile, amidst increased competition from Chinese EV makers and delays in the mainstreaming of EV's, European car makers are returning focus on ICE vehicles. 

Global new model launches of ICE and hybrid vehicles are expected to rise 9 per cent this year from 2024, according to S&P Global Mobility. Carmakers are expected to introduce 205 petrol models, down 4 per cent from 2024, while hybrid launches are predicted to rise 43 per cent to 116 models.

5. Germany faces an erosion in manufacturing, especially pronounced among car makers, industrials, and chemicals.

The contraction of Germany’s industry is evident in the fall of market value in the sector. Together, Dax constituents Volkswagen, Thyssenkrupp and BASF have lost €50bn, or 34 per cent, in market capitalisation over the past five years. From 2010 to 2014, carmakers on the Dax index were more valuable on average than their peers in any other sector, but valuations have slipped as demand has started to falter. VW’s deliveries to customers last year slumped by nearly a fifth compared with the pre-pandemic year of 2019. In other industrials, steelmaker Thyssenkrupp has announced plans to reduce its production capacity by up to a quarter and cut 40 per cent of jobs. BASF is looking to cut costs at its Ludwigshafen headquarters, the world’s largest chemical site, by €2bn a year.

An important contributor is the high electricity prices, higher than in competitors.

Production in energy-intensive industries is 20% below pandemic levels, with the country's world-leading chemicals industry being among the worst hit..

According to Destatis data, roughly 40 per cent of jobs and more than half of revenues in Germany’s chemical industry are tied to so-called base chemicals, most of which are derived from gas and crude oil. Producers of the materials, used in plastics, fertilisers and coatings, rely on cheap energy to maintain narrow margins in a highly competitive market... And the sector, which supplies other industries, has long been a bellwether for industrial demand. 

6. Good graphical summary of the problems facing Germany's railways. Deutsche Bahn's intercity service is now less punctual than the continent's worst operator in Britain.

About 72 per cent of Deutsche Bahn’s intercity trains arrived within 10 minutes of their scheduled arrival time in the year to January 2025, compared with 78 per cent of British long-distance trains, according to the FT analysis. Any interaction with the German rail network is also one of the biggest factors affecting the punctuality of long-distance rail travel in central Europe. Services from Germany to Amsterdam, for instance, are delayed by an average of almost 13 minutes, while trains coming to the city from elsewhere are typically within two minutes of their scheduled arrival time... The analysis is based on more than 1.9bn train arrivals at stations that were tracked by the websites from February 2024 until the end of January 2025, amounting to more than 5mn a day... The performances of the rail networks in both the UK and Germany lag far behind some of their European peers. In Austria, Switzerland and the Netherlands, punctuality consistently exceeds 90 per cent. Germany’s neighbours also suffer from Deutsche Bahn’s patchy performance, as its delayed trains have knock-on effects for timetables across central Europe.

In Basel’s central station, trains originating in Germany arrive with an average delay of more than 12 minutes — 12 times higher than those coming from elsewhere. The Swiss network, renowned for its punctuality, has resorted to stopping some late-arriving German services at the border to prevent them disrupting local operations. Deutsche Bahn told the FT that infrastructure was “the key to more punctual railways”, adding that 80 per cent of all delays were caused by the poor state of its network. The company described its infrastructure as “too crowded, too old and too prone to disruptions”... For decades, Germany skimped on maintenance and infrastructure upgrades as successive governments put a higher priority on fixing roads and balancing budgets. According to data by Pro-Rail Alliance, a German railways lobby group, the German government in 2023 spent just €115 per citizen on railway infrastructure, compared with three times that amount in Austria and four times in Switzerland. Andreas Geissler, a transport policy expert at Pro-Rail Alliance, told the FT that investment surged to €190-€210 per citizen in 2024. Over the past 15 years on average the investment stood at just €73 per citizen. 

Deutsche Bahn has labelled 16 per cent of all German railways infrastructure as “poor”, “deficient” or worse. The investment backlog that needs to be dealt with grew by €2bn in 2023 to €92bn, according to Deutsche Bahn estimates.

7. The US federal government paid $18 bn to consulting firms in 2024. 

Elon Musk's cutting of the traditional consulting firm contracts may well result in their replacement by those like Palantir.

Palantir, an analytics firm chaired by Peter Thiel, who worked with Mr Musk at PayPal, has gained a foothold in the Department of Defence and is spreading quickly across the federal government. Among other things, it helps organisations feed their data into artificial-intelligence (ai) tools. In the final quarter of 2024 its revenue from America’s government grew by 45% year on year. Its share price has been on a remarkable ride, more than doubling since Mr Trump’s election in November. Booz Allen Hamilton’s has fallen by a third. Unlike most other software providers, Palantir embeds teams of engineers with its clients to help them make use of its technology. For now, it works on many projects alongside firms such as Accenture and Deloitte. But some also view it as a potential competitor to the big consultancies, particularly when it comes to ai. Mr Thiel has described conventional consulting as a “total racket”.

8. Impact of US aid freeze on Kenya is severe.

Business at hotels, car rentals and shops — even a nail bar — in aid-dependent areas of Kenya has fallen in the weeks since Donald Trump suspended funding to USAID... Hotels were refusing bookings for NGO workers, fearing they wouldn’t be able to settle their bills... Staff working on US-funded projects had begun pulling children from school, abandoning rental properties and heading elsewhere, she added... Hundreds of expatriate aid workers, either directly or indirectly employed by USAID, are languishing without pay, uncertain about schooling for their children, and in some cases poised to leave the country. Estate agents are anticipating a dip in rental markets in leafy neighbourhoods of Nairobi, while financial analysts predicted a slight softening in the value of the shilling. In 2023, the last year for which official data is complete, Kenya received $850mn in US aid, backing more than 230 projects to varying degrees. Projects in higher education, hospitality training for orphans, drought mitigation and water sanitation, all stalled at the stroke of Trump’s pen. Banks are declining to provide emergency loans, uncertain if the tap will ever be turned back on. The agency subcontracted a growing proportion of its work to Kenyan organisations, many of which are not equipped to survive three months without core funding. Please use the sharing tools found via the share button at the top or side of articles. Hardest hit has been healthcare, which at $402mn received nearly half of the US funding.

9. India holds just 0.23% of the world's AI patents.

India ranks 13th globally in AI talent concentration, with 0.42 per cent of LinkedIn members saying they have skills in the technology. The rank positions it behind smaller but technologically advanced nations of Israel, Singapore and South Korea. Despite its vast population and network of science and engineering colleges, India's AI talent pool is not as deep as one might expect... India is experiencing the biggest AI talent exodus in the world, with a net migration rate of -0.76 per 10,000 LinkedIn members who have AI skills, according to the Stanford report.

10. Thanks to shale oil and Canadian imports, US oil imports from Saudi Arabia has been on continuous decline and has now hit its lowest since 1985. 

11. US Treasury Secretary Scott Bessent makes an economic partnership proposal to Ukraine.

Ukraine is endowed with natural resources and other national assets that can drive its postwar economic growth, but only if its government and people are armed with sufficient capital, expertise and the right incentives. The terms of our partnership propose that revenue received by the government of Ukraine from natural resources, infrastructure and other assets is allocated to a fund focused on the long-term reconstruction and development of Ukraine where the US will have economic and governance rights in those future investments... The terms of this partnership will mobilise American talent, capital, and high standards and governance to accelerate Ukraine’s recovery and sends a clear message to Russia that the US is invested in a free and prosperous Ukraine over the long term... The proceeds from future revenue streams would be reinvested back into key sectors focused on unlocking more of Ukraine’s growth assets. The terms of this agreement would also ensure that countries that did not contribute to the defence of Ukraine’s sovereignty will not be able to benefit from its reconstruction or these investments... The US would not be taking ownership of physical assets in Ukraine. Nor would it be saddling Ukraine with more debt. This type of economic pressure, while deployed by other global actors, would advance neither American nor Ukrainian interests. In order to create more value over the long term, the US must be invested alongside the people of Ukraine, so that both sides are incentivised to gain as much as possible.

12. Signatures of reversing consensus on climate change forged at the Paris Agreement 2015

Friedrich Merz... warned that German economic policies had been “almost exclusively geared towards climate protection”, and that “we will and must change that”. Decommissioning coal and nuclear power plants without an adequate replacement in place would “massively jeopardise Germany as an industrial location”, and thus was “out of the question”... the US may abandon climate action at the federal level altogether... (in China) the construction of new coal-fired thermal power plants on the mainland reached a 10-year high in 2024, with almost 100 gigawatts of additional capacity being added to the pipeline. Fewer plants are being shut down as well; about 13 gigawatts of capacity went offline in 2020, as compared to 2.5 gigawatts in 2024... The premium for green bonds — which represents how much extra investors are willing to pay for environmentally-sustainable investments — almost vanished in 2024. Meanwhile, issuances of green bonds from US-based sources are half of what they used to be, and dollar-denominated green bonds now represent only 14 per cent of the global green bond market.

13. Janan Ganesh writes that the pendulum on the anti-woke movement may have swung too far.

Until recently, conservatives put forward a case that had lots of voters nodding: that woke-ism is illiberal dogma; that liberals themselves are too weak to stand up to it. Now, having prevailed, this argument is sliding into free speech absolutism, scolding of the insufficiently patriotic and a general obsession with culture for which the public appetite is smaller... Having rejected woke, voters will be increasingly protective of other liberal gains. Misreading this, and high on themselves, conservatives will end up weirding people out in a major way. We can’t predict the exact form of the over-reach — the right’s equivalent of Defund the Police — but some fatal gilding of the lily is coming. These people don’t know how to take Yes for an answer. It is a wonder that such enthusiasts for western culture should ignore one dictum of it, inscribed on the Temple of Apollo as an eternal warning. “Nothing in excess.”

14. More on the K-shaped recovery facing the Indian economy. On SUV sales

SUV sales grew 14 per cent in 2024, more than double the overall passenger vehicle market’s 5 per cent, according to GlobalData. They accounted for 56 per cent of the car market, up from 51 per cent the previous year.

15. Rana Faroohar has an important point about the Trump administration.

There is a notable silence on these topics from Republican senators and business leaders alike. Plenty of people will say privately that they are worried about Doge’s slash-and-burn techniques. But no one wants to run afoul of Musk or Trump in public for fear of retribution (indeed, I will say that in my 33 years of journalism, I’ve never had as many sources want to speak only on background as they do now).

Max Hastings echoes 

The fear — and it is indeed fear — that suffuses much of the world after these first weeks of the Trump presidency derives from a belief that the great engines of American democracy are being shut down. A supine Congressional majority and a partisan Supreme Court decline to check Trump’s absolutism, and he marches roughshod over the law. He aspires to be a Sun King — contemporaries’ name for France’s Louis XIV (1638-1715) — making all those around him captives of his rays, and doomed if his warmth is withheld.

16. Germany presents a fascinating political experiment in so far as it contains two parts which were in opposing ideological and political factions before the Berlin Wall collapsed. The FT has a good graphic that captures the divide.

This also shows that if this were a first-past-the post voting system, the CDU/CSU would have swept the West and Afd the East. As Times writes, in the recent elections, the two parts voted as different countries.  

If East Germany were still its own country, the hard-right Alternative for Germany, or AfD... would have scored a convincing win in the elections on Sunday, with nearly one in three voters there casting ballots for it. Only two of 48 voting districts outside of Berlin in the former East Germany were not won by the AfD. In a handful of districts in the east, the AfD got nearly 50 percent of the vote... The vote tally in the east mirrored state elections in three eastern races in September... That division... has become a persistent feature of Germans’ voting habits... only 42 percent of Germans in the east voted for traditional West German parties... In the former East, the AfD is increasingly visible. Many members are active in civil society — including several mayors — which means even people who do not vote for the party come in regular contact with it.

And this may owe to the persisting differences between the two parts even after nearly 35 years of reunification.

The vote also signalled the sharply contrasting fortunes of AfD and SPD (which did its worst performance since 1887).

The youngest voters shifted sharply to the Left and AfD.