Weekend reading links

1. Europe too has its chokepoints over China and the US.

A group of experts called the Geostrategic Europe Taskforce last week published a report which “identifies 41 critical chokepoints where China depends on the EU for more than 80 per cent of its imports, and 67 such dependencies for the United States. These span essential inputs including insulin, pharmaceutical intermediates, medical technologies, and specialised machinery for agriculture, paper production, and industrial processing.” And the German economic think-tank Dezernat Zukunft has also just released a study highlighting that “Europe has more cards than it thinks. We control 80 per cent of US uranium imports. Siemens dominates the turbines US data centres desperately need.”

2. US and Western VCs are struggling to exit their China investments.

Ten of the biggest buyout firms with investments in China including KKR, Blackstone and CVC had zero publicly disclosed complete divestments from mainland Chinese portfolio companies in 2025, according to data from providers PitchBook and Dealogic.

3. Declining attention spans.

A 2022 survey by King’s College London found that 49 per cent of UK adults feel their attention span is shorter than it used to be. Forty-seven per cent feel “deep thinking” has become a thing of the past. Studies that monitor people’s attention in their real-world environment show that since 2004, the average time people stay focused on a single task has dropped from about 2.5 minutes to roughly 47 seconds, according to data tracked in Attention Span, a book by Gloria Mark, professor of informatics at the University of California, Irvine.

4. South Korean stock markets rose 76% last year to become the best-performing major market. 

Retail investors have bought a net Won6.3tn ($4.3bn) of locally listed stocks since the start of 2026, according to Korea Exchange, the country’s securities market operator. In addition, they have pumped Won13tn into Korean ETFs, helping boost the benchmark Kospi by 35 per cent this year and making it one of the world’s best-performing stock market indices for the second year running... The number of individual active stock trading accounts in Korea topped 100mn for the first time last month — the equivalent of roughly two accounts for every member of the population. Deposits held at retail brokerages, reserved for stock purchases, hit a record Won103tn this month, up from Won87tn at the end of last year. Margin balances (the funds investors have borrowed from brokerages to buy stocks) have also surged to a record at Won31.5tn.

5. The MAGA right and progressive left converge in their opposition to emerging AI trends.

AI opposition spans the political spectrum. Democrat Senators Bernie Sanders and Elizabeth Warren warn against corporate power concentration and job displacement, while Maga strategist Steve Bannon and Republican Senator Josh Hawley spread warnings about the dangers of empowering tech billionaires... The list of grievances being raised against AI is varied. At the local level, communities are fighting the construction of data centres that they worry will disrupt resources such as water, land and electricity... Meanwhile, in Hollywood, celebrities have launched the “Stealing Isn’t Innovation” campaign against the use of creative work for AI training, and parents, along with 37 state attorneys-general, are pressing for accountability after Grok, xAI’s chatbot, facilitated the generation of non-consensual nude images of women and children.

6. China announces restrictions on exports of rare earth magnets and other critical minerals, in the guide of "dual-use materials", to dozens of Japanese companies, especially vehicle makers.

7. Contrary to Elon Musk's claims that space-based data centres are three years away, they may be decades away.

Google’s satellite-based data centre initiative, Project Suncatcher, estimates that launch costs would need to fall below $200 per kilogramme (a sevenfold reduction from current levels) before this becomes economically viable. That threshold isn’t expected until the mid-2030s. Even if costs do fall, the components required — including radiation-hardened servers, on-orbit communications infrastructure and in-space servicing capabilities — do not yet exist at commercial scale. Adding to the conundrum, orbital data centres turn routine IT management into a complex space systems problem. On Earth, a failed server can be replaced in minutes. In orbit, that task requires either sophisticated in-space servicing or acceptance of degrading performance and stranded capital that becomes orbital debris as components age and fail. Burning satellites up when they become obsolete is not environmentally neutral: the process injects metal particles into the upper atmosphere where they can affect winds, temperatures and ozone chemistry.

8. On the importance of manufacturing for national economic development.

Most successful development stories — from Britain’s Industrial Revolution to South Korea’s transformation to China’s ascent — have run through the factory floor. Manufacturing drives productivity through economies of scale that services struggle to replicate. It generates innovation spillovers that ripple through entire economies. It enables countries to access global markets at a scale services cannot match. And contrary to fears about automation eliminating manufacturing jobs, countries like China demonstrate that manufacturing can absorb hundreds of millions of workers even as robots proliferate... Digital platforms, financial services, and business process outsourcing... cannot replace manufacturing’s role as the engine of sustained productivity growth and structural transformation...

Between 1750 and 1950, the West’s establishment as the world’s economic hegemon was fundamentally a process of becoming the world’s manufacturing hegemon. Since 1950, this pattern has persisted with remarkable consistency. A World Bank study published in 2008 identified 13 countries that sustained annual growth rates of 7% or higher for a period of 25 years or longer. Among these growth miracles, only two — Botswana and Oman, both small countries with highly idiosyncratic economic structures — achieved this without manufacturing-led development... recent data by the UN Industrial Development Organisation (UNIDO) arrive at similar conclusions. In their Industrial Development Report 2026, they highlight that 64% of growth episodes over the last 50 years can be directly attributed to manufacturing... Manufacturing firms spend heavily on research and development (R&D), generating strong innovation spillovers throughout the economy. In fact, manufacturing is attributed to 53% of global R&D activity. Manufacturing provides the material foundation for innovation, creates demand for new technologies, and enables the accumulation of productive capabilities that underpin further innovation.

9. Britain has a peculiar worsening trend in graduate fortunes. 

10. Good illustration of how regulations may be stifling European business environment. From Pieter Garciano

The whole point of the AI Act, is to create an extremely consistent and level playing field across all of Europe to allow like companies to face a much larger market straight away. The problem is that because of directives, the actual enforcement of a given law is left to the member state and the member states are ordered to create their own regulatory bodies. So for example, in the case of the AI Act, every single member state is ordered to have a notifying authority and an enforcement authority... these different regulators, they talk to each other, but they’re not necessarily forced to agree with each other... And so you have cases where the Irish regulations happened with GDPR, the Irish Data Protection Authority said to Meta, this is excellent. You can do X or Y. And then the Austrian and German data protection authorities disagreed and then fine Meta billions of euros. And so, this is a case where the law, even if you agree with the intent of the law, the way it’s currently being executed, which is through directives, makes it so that you’re going to always get an extremely high friction and fragmented regulatory system... They currently have, I think the count is between these four laws, they’ve created 270 different tech regulators... And that of course has really distortionary effects as well for what kind of basically very large fixed cost. And so if you’re a large company, if you’re a Google or a Meta, you have a thousand guys in your Brussels compliance office and they’re really good at this. But if you’re a smaller company, then you actually really struggle with figuring out what the 270 different bodies want you to do.

European regulators have been influenced by beliefs against big corporations and their market power, which explains both their anti-trust actions against Big Tech and refusal to approve European mergers like those between Siemens and Alstom.  

11. China is leading the race for humanoid robots, including those which resemble human beings and mimic their facial expressions while talking. This is a real advance.

Galbot’s silvery humanoid folds T-shirts, retrieves a bottle of water from a shelf and rolls walnuts about in its hands. Developing multifunctional hands has been a major challenge for robot makers, requiring advanced sensitivity and a high density of mechanical components. The Beijing-based company says its robots can be used for household tasks or in retail contexts such as shops and pharmacies... Galbot, backed by Chinese battery giant CATL, also showed its humanoid picking up irregular shards of broken glass, suggesting “integration of perception, grasp planning, and controlled force and precision, differentiating the performance from purely staged movement”, according to analysts at Morgan Stanley.

12. Is the National Green Tribunal (NGT), the primary appellate authority against orders of the Ministries of Environment of state and central governments, becoming a captive of ease of doing business?

Between 2020 and 2025, of the 329 appeals filed by citizens and activists against the grant of clearances by the Government, only in 20% (65 cases), did the NGT rule in favour of the appeal. Conversely, when the project’s proponents appealed against the denial of clearances by the government, in nearly 80% (126 of 160) of the cases, they secured relief. This is not a historical norm. Data from 2016-2019 shows a more balanced era where relief for both sides hovered between 18% and 31%. This pro-project trend has accelerated sharply in the last 24 months. Between 2024 and 2025, only 7% of appeals challenging clearances were successful. In contrast, 88% of industry-led appeals against clearance rejections got relief... of the 264 unsuccessful citizen appeals during 2020–2025, a significant portion was dismissed on technical grounds, labelled “time-barred” for more than 90 days delay in filing. The rest were dismissed as “not tenable,” or lacking “any merit.”

13. Excellent article by Richard Hurowitz on how gum arabic, a sap that comes from the acacia tree, is fuelling the civil war in Sudan, joining Sierra Leone's blood diamonds and DRC's cobalt in fuelling their respective civil wars. 

Found in everything from soft drinks and candy to cosmetics and pharmaceuticals, gum arabic is a critical ingredient for Coke and Pepsi and gives an M&M its distinctive shell. Commonly listed as E414 on labels, it’s an ingredient in pet food, chewing gum, lipstick, pill capsules and throat lozenges... the groves of Sudan’s subsistence farmers produce 70-80 per cent of the global supply. And no one has yet found an effective synthetic substitute. Sudan exported some 60,000 tonnes of its “white gold” in the year prior to the conflict. It is no surprise, then, that multinationals have been stockpiling gum arabic since the civil war started... 

It is also, tragically, being used to finance what the UN has declared the world’s worst humanitarian disaster. Since April 2023, Sudan has been engulfed in a civil war between the government in Khartoum’s Sudanese Armed Forces and the rebel Rapid Support Forces. The war has drawn in foreign powers including Saudi Arabia, the UAE, Turkey, Russia and Egypt... The crisis in Sudan dwarfs any other current conflict on every measure... According to a former US envoy, over 400,000 people have died. More than 15mn have been displaced. Tens of thousands of Sudanese have been massacred, there is widespread sexual violence and a man-made famine has sent millions into starvation... Both sides have used the commodity to finance their efforts... and the SAF continues to export what it can while the RSF smuggles its supplies abroad... The RSF controls large portions of the main gum-producing regions in Darfur and Kordofan where they have looted warehouses, seized shipments and imposed fees on harvesters and traders. Tens of millions of dollars’ worth of gum arabic has been stolen, smuggled and sold to finance their military operations. At the same time, the SAF controls Port Sudan, where taxes on gum arabic exports fill its coffers with revenue.

14. The killing of Nemesio Oseguera, the leader of Mexico's Jalisco New Generation Cartel (CJNG) has once again drawn attention to Mexico’s pervasive drug gang problem.

Weekend reading links

1. Equity risk premium in US equities drops into negative territory for the first time since 2002. 

Investors are effectively willing to buy equities without any risk premium!

2. Indian farmers are among the only three major economies where farmers suffer a negative subsidy - they pay to the government!

3. The failure to capitalise on the booming stock prices of public sector units should count as one of the biggest public policy failures in India in the last five years.

Between May 2020 and February 2024, Indian Overseas Bank’s share price rose 10-fold, from Rs 7.25 to Rs 71 a piece! At Rs 71, the bank’s share was trading at five times its book value, making it probably the costliest bank in the world. Did the government seize the opportunity to divest? No. It’s not just state-owned banks. Other sectors, too, rocked but the government didn’t make hay while the sun shone.

4. Ruchir Sharma offers some numbers in the world of Donald Trump that point to a trend of growth in "trade without America".

Over the past eight years, more than four of every five nations — developed and developing — have seen trade rise as a share of their national GDP. Gains of more than 10 percentage points have been chalked up in more than a dozen major nations, from Japan, Italy and Sweden to Vietnam, Greece and Turkey. The big exception is the US, where it has dipped to around 25 per cent of GDP. The US has been growing faster than most of its peers — but with no boost from trade. America may be increasingly dominant as a financial and economic superpower but not so much as a trading power. Its share of global equity indices has exploded to almost 70 per cent. Its share of global GDP has inched up to more than 25 per cent. Yet its share of global trade is under 15 per cent, and has declined significantly in the last eight years... over the past eight years, as the locus of global trade shifted away from the US and towards the Middle East, Europe and Asia, nations registering big share gains included the United Arab Emirates, Poland and, above all, China. Of the 10 fastest-growing trade corridors, five have one terminus in China; only two have a terminus in the US.

5. What's possibly driving Trump's interest in Greenland?

Global warming is melting ice and opening up the Arctic in unprecedented ways. Arctic shipping has increased 37 per cent over the past decade, and the US, Russia and China are all eyeing new northern shipping routes that pass alongside Greenland. The geostrategic considerations and future mining opportunities are driving US President Donald Trump’s interest in acquiring the territory...

Greenland is another expected climate winner. In addition to being located along anticipated future international shipping routes and hosting a more temperate climate, it is believed to be home to valuable untapped mineral resources including iron ore, lead, gold, rare earth elements, uranium and oil. While only small parts of the island have been explored so far, mineral exploration and mining concessions are increasing as the ice melts. Large-scale mining is on the horizon and could be a key in making the transition to green industries.

The article also points to a second land reshuffle after colonialism induced by climate change, with countries like Canada standing to benefit and those in tropics and coasts set to lose.  

6. In the eyes of the Indian news media, all ills of the world and all solutions to them lie at the doorsteps of the government. Sample this from Business Standard on the implications of DeepSeek

India’s policymakers should take note. Indian engineers are good at this sort of adaptation. What they may need is incentives. Incentivising AI-related research in India by offering targeted schemes could serve as a powerful accelerator. The rapid scaling up of India’s data centre capacity, alongside the substantial domestic market and large digital economy, could make India an excellent test bed.

Not a word on the failings of India's much-hyped software ecosystem which has been caught napping as much as the US Big Tech.  

7. On UK universities and their commercial startup spinouts. 

Universities, founders and investors clash frequently. All would agree that value resides in intellectual property, but where the IP itself resides is a knottier issue. At Cambridge, the university gets first dibs. Compare that with Sweden’s Uppsala University, which usually confers ownership on the originator. One case, involving the University of Oxford, wound up in court. That is just one hurdle. Extricating spinouts can be laborious; academia moves slowly. As the UK government’s 2023 review noted, panels are composed of committees that only meet irregularly and lack commercial experts. The average spinout took 10-12 months; for 16 per cent it was more than 16 months. Universities are reluctant to cede much of their innovations: one in four spinouts began negotiations demanding a 50 per cent equity stake. Investors balk at being accorded just crumbs. This is improving — the average university equity stake at spinout fell to 18 per cent in 2023, from 25 per cent a decade ago — but there is scope for further loosening of the reins.

8. KP Krishnan has a good summary of the regulatory systems put in place in the aftermath of the economic liberalisation in India. 

9. When debt levels are rising globally, the one country which ought to be borrowing more to finance infrastructure investment, Germany, has its debt-to-GDP level going in the reverse direction.

Germany has an estimated €600bn in investment demand, according to a joint study by IW and IMK, an economic think-tank.

10. The stock prices of the magnificent seven have done great.

But productivity statistics do not reflect any such magnificence. 

11. Interest payments absorb 61% of Pakistan's government revenues!

12. India income tax facts

For assessment year 2023-24, 99.1 million individuals filed income tax returns or paid income tax through the TDS route in India. Of these, 75.5 million filed a return. Of the latter, 47.3 million filed a nil return, suggesting that less than 30 million filed a return with a positive tax payment... all of whom have annual incomes above Rs 5 lakh... Personal income tax in India was forecast to reach 3.6 per cent of gross domestic product (GDP) in the Budget for 2024-25, supporting a gross tax collection-to-GDP ratio of 11.66 per cent for the Union government.

13. India's tax revenues as a share of GDP has remained the same over the last two decades.

14. India's unorganised sector has grown over the years.

15. Finally, Rwandan backed M23 rebels have occupied the Eastern Congolese city of Goma in an escalating civil war in the DRC. 

The DRC has called it a “declaration of war” by Paul Kagame’s Rwanda... Kagame appears to have calculated that a change of US administration is a good time to strike... M23 rebels control increasingly large areas of eastern Congo, with its reserves of minerals needed by the world’s electronics giants. It has been an open secret for years that gold and metals such as coltan, used in smartphones and other devices, come from militia-controlled mines in eastern Congo but are retagged as Rwandan exports. Kinshasa says it is losing $1bn a year in smuggled minerals, claims that have been at least partly substantiated by UN expert reports...

Felix Tshisekedi, DRC’s president, who has vowed to retake Goma, has contrasted the west’s indulgence of Rwanda with its condemnation of Russia. It is true the west has gone easy on Kagame, Rwanda’s gifted, ruthless and autocratic president. Guilt over inaction during the 1994 genocide — in which up to 1mn Tutsis and moderates from the majority Hutu ethnic group were slaughtered by Hutu extremists — has made western governments reluctant to criticise Kagame, whose arrival ended the slaughter. They have sympathised with his view that eastern Congo is lawless and overrun with militias, some of which threaten Rwanda’s security.

Wars and state competition in Europe led to emergence of strong states

David Schonholzer has an excellent article in the latest edition of Works in Progress where he attributes Europe's early modern advancement to wars. Channelling Charles Tilly who wrote that "war made the state, and states made war", he argues that apart from building state capabilities to raise and collect tax revenues and manage the logistics of an army, wars also led to a winnowing of effective states and strong institutions. 

He and his co-author, Eric Weese, have a paper here that uses maps in the Centennia Historical Atlas to highlight the continuous redrawing of boundaries in Europe in 1000-1800 as a Schumpeterian "creative destruction" process through wars and the emergence of stronger states. He also layered the maps with data on populations of 2206 cities in the 800-1850 period. 

A successful state grows its cities’ populations by attracting immigrants from other states; by preventing deaths from war, disease, and poverty; by seeing more births; and through internal immigration... Among states with at least one city, the average state survived less than a century... These states did not last in the ruthless market for governance, but their ‘deaths’ were matched by an inflow of ‘newborn’ and expanded states that arose out of the remnants of their forebears... This steady churn was accentuated by periods of mass extinction of states, such as when Napoleon swept the German lands after the French Revolution with his iron broom (including both the Prince-Bishopric of Liège and Austrian rule in Belgium). But even putting these periods aside, the European state system was constantly in flux throughout the entire period between 1000 and 1850.

He compares it with Schumpeterian creative destruction,

The process of displacement and reinvention of states throughout European history resembles the process of creative destruction popularized by economist Joseph Schumpeter: ‘the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one’. In models of creative destruction, companies develop new technology over time to gain an edge over their competitors. This leads to three effects: firstly, technology improves as businesses with better technology enter the market; secondly, those with worse technology leave, freeing up the resources they had been using for other companies to use instead; and thirdly, firms with superior technology gain market share at the expense of their less effective rivals.

All three of these forces are at work in competition between states as well. New states come into existence based on rules that allow for a more favorable economic environment, for example when the mercantile Dutch Republic replaced the absolutist Habsburg Monarchy in the Low Countries. Existing states may be more likely to disappear (through war or revolution) if they are unable to raise taxes to pay soldiers to defend themselves, or otherwise cannot command the loyalty of their population and control their territory. Finally, better states may foster more economic growth, funding military and diplomatic efforts to gain territory at the expense of rivals.

They also point to the prohibitive costs of too much switching of states across empires.

In fact, out of more than 2,000 cities whose populations we can track in the 1000-1800 period, 80 percent changed hands at least once. Many cities saw several government changes, and some of them went through dozens. The two European regions with the highest number of switches are Northern Italy and the Low Countries, which includes cities like Ghent... Having grown rich from maritime trade during its Golden Age from the twelfth to fifteenth centuries, Ghent was not able to recover to its peak population size until the nineteenth century. During the intervening years, it had the bad luck of being conquered many times, and governed by a near constant parade of unstable, low-quality rulers. This is where Smith’s edict of peace as an essential feature of good governance shines through most clearly: perhaps Ghent would be a major European city today, in terms of population size, had it enjoyed more stable rule... On average, cities that switch – so often through revolutions or conquests – see population drop by almost 30 percent relative to cities that did not switch at that time. Remarkably, in the time before the switch, these cities grew at the same speed as other cities.

Our evidence suggests that the gains from switching from one state to another decrease the more a city does it. While being invaded once a century may shatter ossified patronage networks keeping the city back, a revolution every decade is more likely to put it into a state of permanent chaos and drive people into exile. That suggests there is a competition sweet-spot. 

This is a great summary of the trade-off between the costs and benefits of creative destruction in terms of the average gains for cities of a given length of switching sequence against the costs of switching. The solid line shows the total gross benefits of state competition, and the hashed line takes into account the costs of switching. Once a city switches states three times or more, the decreasing marginal benefits of switching kick in.

The paper contrasts the histories of Ghent and Leipzig.

And the positive effects of switching

After accounting for the transitory cost of switches, switching to another state is associated with a permanent 20 percent increase in population size. We find three sources of benefits due to territorial competition: first, some of the benefits are due to better, or more effective, states taking over more cities over time. The French occupation of the Rhine during the Napoleonic Wars makes for a striking example of these benefits. In the 1690s, the region was burdened by toll booths that required payment of different state customs duties every six miles. The French did away with this remnant of the Holy Roman Empire, which allowed for easier trade and subsequent city growth in the region.

Second, cities end up being matched with states that seem to be a better fit for them, perhaps because they care more about the city for religious, nationalistic, or other ideological reasons. For example, the creation of the Dutch Republic put the cities of the Low Countries under the stewardship of a state that cared deeply about their welfare – unlike the Spanish Habsburgs, who had ruled the region before the Dutch Revolt and who had little regard for anything other than the tribute they sought to extract from these cities... And third, some benefits to switching seem to be due to a pure change-in-governance effect: possibly, the breakup of patronage networks in the city tied to the former state in power helps to set free previously suppressed productive forces, no matter the quality of the state or of the match. For instance, after the demise of the Old Swiss Confederacy in 1798, the Helvetic Republic briefly took over governance in Switzerland. Although many Swiss resented it for its centralism and forced a partial reconstitution of the Swiss Confederacy, many oppressive political arrangements of the Old Confederacy that stymied city growth had been permanently removed.

The paper also looks at the new institutional features while switching that contribute to better city growth

One of the correlates with higher estimated state effects on city growth is the extent to which the state had an active parliament. Parliaments offered a forum for rulers to bargain over peace guarantees and property rights in exchange for tax revenues – part of Adam Smith’s recipe for high-functioning states. Cities switching to states such as Britain, and England before it, in which Parliament convened roughly every other year, grew faster than those switching to states like Denmark, in which parliaments were nearly nonexistent during this period. These estimates suggest that going from no parliament to one that meets every year leads cities in the state to grow almost nine percent faster per century.

Of course, this relationship is not perfect: some states had a positive impact on city growth even without a powerful parliament. If the ruler of a high-quality state was not constrained by parliament, they often had access to other capacities that fostered growth. In particular, higher-quality states had higher fiscal capacity: they were able to maintain more debt at a lower interest rate than other states. This helped to secure internal peace in times of crisis and invest into productive capacities such as infrastructure once the Industrial Revolution took off...

Another important takeaway is that not only may Europe have had close to the ‘Goldilocks’ amount of competition between states, but it also benefited enormously from the ability of states to copy the successful innovations of others through means other than through annexation, and a relatively unified collective intellectual culture. Waves of institutional innovations brought about by newcomers forced other states to adapt and learn if they wanted to survive, just as with useful and technological innovations. The introduction of parliaments, the rise of fiscal capacity, and later on executive constraints and the rule of law went hand in hand with enhanced military might, leading to a virtuous cycle of better governance coupled with larger shares in the market of governance...

In sum, Europe’s secret to early growth may lie in the delicate balance between the costs of war and the creative forces unleashed in the competition between states. Many cities faced destruction throughout European history. But out of their ruins rose, gradually and by no means irreversibly, the foundation for better governance.

The paper compares Europe's experience of state building through wars and state competition with that of China and India. 

While Europe may have experienced close to the optimal level of creative destruction in its state system, China and South Asia present two cases that may have been exposed to insufficient and excessive creative destruction, respectively. Due to China’s early unification under a single state after the establishment of the Qin dynasty and especially the Han dynasty around 200 BC, the Chinese state faced only infrequent threats from other states.As a result, Chinese cities were exposed to much less upheaval than European ones, but in turn the Chinese state may have ossified and the quality of governance may have failed to improve. 

On the other hand, South Asia experienced nearly one hundred “supra-regional” or “pan-Indian” states that have ruled over substantial portions of the region... the only city that was reliably a center of political power in South Asia was Delhi, and that numerous other capitals appear randomly scattered about the sub-continent. This contrasts substantially with the state system in Europe, where Rome, Constantinople, Vienna, Lisbon, Paris, and London served as capitals of European states for most of the last thousand years. It seems plausible that the extreme variability in the number and location of states on the Indian subcontinent, perhaps caused by the lack of easily defended peninsulas and protective mountains, led to the repeated capture and looting of cities and thereby delayed capital deepening. If this were indeed the case, then South Asia would be an example of a state system where control of cities was too ephemeral, perhaps causing slower economic progress due to an excess of creative destruction.

See this map of centres of powers in India from the Schwartzberg Atlas referenced in the paper.

On the issue of state capability in India, I have blogged earlier referencing Francis Fukuyama's argument that India never experienced the kinds of brutal wars and intense inter-state competition that characterised Europe, and which necessitated strong state capabilities. Schonholzer and Weese qualify this and argue that South Asia while did have too many wars (perhaps not as brutal) there was too little state competition. 

The subcontinent never got unified into large kingdoms occupying the major part of the region even during its biggest empires. Besides the caste divisions came in the way of the diminution of kinship loyalties and the emergence of economic interest groups with society-wide representation. This is a compelling argument to explain the absence of strong state capability in India today.

Weekend reading links

1. As Work from Home (WFH) becomes a norm, Scott Galloway points to the risks of it contributing to widening of inequality. In particular, sample this correlation between remote workability and median hourly wage. 

Clearly, the low paid workers in general have to go to their work places, while their higher paid colleagues can work from their homes.

2. Do high fee colleges generate proportionately higher earning power for their students?

Three years ago, in an examination that should have received a lot more attention, the center-left think tank Third Way put all available data for all higher education institutions together. It found that at 52 percent of the schools, more than half of the enrollees were not earning more than the typical high school graduate six years after they began their studies. After 10 years, the figure was still 29 percent.

This is the Third Way website. 

3. FT long read on the success of low cost drones in ariel warfare, especially for Ukrainians in their ongoing war with Russia. The article is about Bayraktar TB2, a sleek unmanned aircraft with a 12 m wingspan, costing just about $5 million, which can stay in air for uptown 27 hours, fly at 7600 m, and can carry a heavy enough weapons load. 

It's manufactured by Baykar Technology, a newish Turkish defence firm, which by 2021 became the country's top arms exporter, by selling $664 m worth drones to foreign buyers in nearly 20 countries. The company has become a matter for local pride for Turks and much sought after by small and poor country governments seeking a low-cost option to put down internal conflicts. Incidentally, one of the two brothers who own the company is married to President Erdogan's youngest daughter. Turkey has used the drone extensively in its war on PKK in Kurdistan, with great success. 

In addition to heralding Turkey’s ascendancy in global defence, the TB2 embodies a new phase in the era of drone warfare in which lower-cost technology becomes increasingly accessible to regimes that cannot buy from the world’s more-established arms producers... But their role in the Ukrainian campaign against Russia has been a coup for Baykar. Many of the foreign buyers the company is courting lack sophisticated air forces of their own or are interested in using drones against adversaries without advanced air defences. “Drones allow states that don’t necessarily have the resources to buy advanced fighter jets to have that capability,” says Erik Lin-Greenberg, an expert on emerging military technology at MIT. “A TB2 isn’t going to substitute for a fighter jet. [But] many states view drones as allowing them to leapfrog generations of tech.”

4. News about UK inflation prospects,

But with Europe’s gas crisis escalating in August, Citi predicted on Monday that inflation would reach 18.6 per cent in January. Continental European gas prices are more than 14 times their average of the past decade. The benchmark European gas price rallied almost 10 per cent on Monday to €278 per megawatt hour ($81 per million British thermal units), the highest closing price on record and taking the rise over August to 45 per cent. Examining the wholesale figures, Citi predicted that the UK’s retail energy price cap — which limits how much households pay for heating and electricity — would be raised to £4,567 in January and then £5,816 in April, compared with the current level of £1,971 a year. It added that the shifts would lead to inflation “entering the stratosphere”. The bank’s projected rate would be higher than the peak of inflation after the second Opec oil shock of 1979 when CPI reached 17.8 per cent, according to estimates from the Office for National Statistics.

Energy prices have such an outsized role in today's inflation. This raises questions about the efficacy of monetary policy in containing inflation.

5. Another odd thing about the current economic environment is the persistence of strong retail sales growth with weakening consumer confidence.

Consumer confidence surveys, usually a reliable source of advance warning on which way spending is heading, could not paint a much more dire picture of the outlook as the Federal Reserve scrambles to tame rising prices. The University of Michigan’s index of consumer sentiment hit a record low in June as inflation topped 9 per cent. Even after a slight rally, it still suggests that consumers are more gloomy now than they were during the worst of the Covid-19 pandemic, the global financial crisis or any other moment since the series began in 1952. Other surveys support this trend, with McKinsey finding twice the number of economic pessimists in July as in March. Yet this pessimism is not showing up in the sales story being told by Walmart and its rivals. For all the evidence that high petrol and grocery prices are squeezing those with the tightest budgets, or that pandemic-weary Americans now prize holidays over home goods, the retailers’ figures suggest that spending remains strikingly robust... US retail sales rose more than expected in July, once fuel and car purchases were stripped out. Americans are getting less for their dollars, but they are still spending them. That shopping basket-half-full message has been echoed by executives from Visa and Mastercard to General Motors and Starbucks this earnings season. “Consumer sentiment is all over the map . . . But we have so much excess demand,” observed Tesla’s Elon Musk. Inflation, it seems, has severely affected consumers’ morale but has yet to affect their actual buying behaviour to anything like the same extent.

What's driving this divergence?

The clearest explanation is what John Leer, chief economist of data group Morning Consult, calls an unprecedented divergence between inflation and unemployment. Even as small business optimism scrapes recession-like levels, unemployment remains near record lows. The stimulus payments which helped employers keep staff on also allowed consumers to shore up their savings. US households have twice as much cash to hand as they did at the end of 2019, McKinsey noted.

6. Fascinating long read in Nikkei about the tenuous nature of the supply-chain in semiconductor chip industry.

An assessment by BCG suggests there are at least 50 chokepoints in the semiconductor supply chain across design tools, manufacturing, packaging, materials and equipment. These points are defined as areas where 65 per cent or more of a particular item is concentrated in a single country or region. The US dominates chip design tools and at least 23 types of essential equipment, it found. Japan is a leader in the production and critical formulation of critical materials that include wafers as well as photoresists. Europe is the leader in industrial gas...  

There is almost no part of the chipmaking process that does not require deep specialisation and no part of the supply chain that can be simply and quickly duplicated... Chemicals and solvents used in chip plants need to reach the so-called part-per-trillion (PPT) grade — one particle to 1tn drops. Gases need to reach a purity of up to 99.9999 per cent — the so-called 6N — when it comes to cutting-edge chip production. For silicon wafers, the basic substrate materials that chips are fabricated on, all need to be as pure as 9N, or 99.9999999 per cent, an executive with the chip material distributor Wah Lee Industrial told Nikkei.

Fluoroplastics are a critical ingredient, and suppliers are limited.

7. The rise of tangible assets in the valuation of S&P 500 firms (HT: Adam Tooze)

8. Fascinating graphic about the trends in within and across country inequalities over the 1820-2013 period. (HT: Adam Tooze)

It's been between country inequality that has been driving global inequality.

9. Theodore Papageorgiou has a paper in AEA which examines the wage premium of larger cities and finds that the greater number of occupations in these cities is a major contributor. 

Confirming a common observation, there were more occupations available in large cities than in small cities. For instance, the largest cities had more than 450 occupations, whereas small cities had fewer than 200. And in general, the number of occupations increased by 70 as city-size doubled.

Weekend reading links

1. The late Ezra Vogel compares Xi Jinping and Deng Xiaoping. He points to the need to evaluate them in their respective contexts. 

Because of the changes introduced by Deng, Xi Jinping inherited a China that was far stronger than China during Deng’s era. Deng’s approach for dealing with foreign relations, ‘taoguang yanghui, juebu dangtou, yousuo zuowei’ (avoid the limelight, never take the lead, and try to accomplish something) was well-known. In the 1980s, Deng held back on increasing military expenditures in order first to build up an economic base. After 1995, the Chinese began to increase military expenditures even more rapidly than the economy was growing. Thus by the time that Xi Jiping came to power, since China had much greater economic and military power than during the period of Deng’s rule, he could take a much stronger stand in dealing with foreign countries.

His summary is apt,

To summarize my perspective as one views Xi from the perspective of Deng, I conclude that Xi could be considered a stronger leader than Deng in three senses. He ruled a stronger country that could take a stronger stance in dealing with other countries. Secondly, as a micro-manager, he personally exercised more direct personal control over daily activities. Thirdly, he spent more time and effort in controlling developments in local areas. But I would argue that in three areas Deng was a stronger leader. As one with such a broad background in so many areas, he had more personal knowledge and confidence in shaping broad overall policies. Secondly, as a person who had held so many high positions and had so many former subordinates, he could achieve more through macro-management because of his experience and the readiness of former subordinates to implement Deng’s policies. Thirdly, as one who had such broad experience and such broad perspective, he conceived and implemented changes that had far more impact on the course of China’s development and thus had a far greater role in shaping the course of China’s history.

2. Anna Weiner has a fascinating profile in The New Yorker of the polarising figure of Peter Thiel. This is interesting,

Dodge the rules, skirt the law, shiv your business partner, abandon your friends: Chafkin argues that the Silicon Valley edition of this playbook was written at PayPal.

3. One signature of the distress in the rural and informal sector is the persistently high demand for NREGA jobs. 

Data available on the MNREGS portal show that 2.07 crore households availed of the scheme in September — which was 3.In fact, the monthly figure for households availing of the MNREGS has been hovering over two crores since December last year. In the last 18 months, or since the pandemic hit, the numbers have been below the two-crore mark only thrice — in April 2020 (1.10 crore), October 2020 (1.99 crore) and November 2020 (1.84 crore). In pre-Covid times, the number of households availing of the MNREGS would cross two crores only in the months of May and June.85% higher than for the same month in 2020 (coming after the first wave and the severest restrictions of the pandemic), and as much as 72.30% higher than September 2019, the last non-Covid year. The monthly average figure for households availing of the MNREGS was 2.36 crore in the first half of the financial year 2021-22 — higher than the monthly average of 2.28 crore for the whole of 2020-21. In 2019-20, the figure stood at 1.56 crore.

On a different note, Business Standard reports of a new study which points to delays in timely payments of NREGA wages.

Wage payments were delayed for 71 per cent of the transactions beyond the mandated seven days, 44 per cent of the transactions beyond the mandated 15 days and 14 per cent of the transactions beyond the mandated 30 days. The study was conducted on about 1.8 million transactions between April 2021 and September 2021 by randomly sampling 10 percent of the Fund Transfer Orders (FTOs) from one block per district per state for 10 states... 

Normally, the MGNREGA payment process consists of 2 Stages. After work is completed, a Funds Transfer Order (FTO) with worker details is digitally sent to the Central Government by panchayat/block. This is called Stage 1 and it’s the state’s responsibility. The Central government then processes the FTOs and transfers wages directly to the workers’ accounts. This is called Stage 2 which is entirely the Central government’s responsibility. As per the Act’s guidelines, Stage 1 must be completed in 8 days and Stage 2 must be completed within 7 days after Stage 1. Workers are entitled to delay compensation for each day’s delay beyond 15 days.

4. Some graphics about India's telecoms market. Spectrum charges are among the highest in the world.

While data charges are the cheapest.

And average revenues per user remains woefully small.

It is believed that the industry can become sustainable only if the near-term monthly ARPU rises to about Rs 200. 

5. Vivek Kaul writes that India's covid recovery may be a case of glass half full. 

The total priority outstanding home loans of banks as of August 2021 had stood at ₹4.71 trillion. A year back, in August 2020, this stood at ₹4.73 trillion. This means that in the past one year, banks have largely funded non-priority sector home loans... Further, as of August 2021, the outstanding loans of banks against gold jewellery have gone up by a whopping 66% to ₹62,926 crore compared to August 2020. Between August 2019 and August 2021, these loans have gone up by 137%... A recent survey by the National Restaurant Association of India stated that around 25% of the restaurants across India may have shut down permanently during the last financial year. Around 230,000 jobs may have been impacted... As per the Centre for Monitoring Indian Economy (CMIE), the labour participation rate—the size of India’s labour force as a proportion of the population aged 15 years or above—stood at 37.88% in urban India in September this year. It was 40.48% in February 2020, before the start of the pandemic. When it comes to rural India it was at 42.08% in September and 43.67% in February 2020.

6. FT on Korean halyu,

In turns saccharine, brutal, and dazzlingly original, Korean content has since bulldozed its way into the global cultural consciousness. Girl group Blackpink has the most YouTube subscribers of any musical artist in the world, while boy band BTS has a following so organised and devoted that Chinese authorities have come to regard it with the kind of suspicion historically reserved for religious groups like Falun Gong. More recently, South Korea’s merciless social satires have conquered the heights of film and television respectively. Bong Joon Ho’s Oscar-winning Parasite and Netflix sensation Squid Game — the streaming service’s most-watched show ever — have given global exposure to traditional Korean preoccupations with economic precarity and social violence.

7. The airports, alongside national highways and ports, are a great example of successful infrastructure PPPs. Sample this,

The Airports Authority of In­dia (AAI) can make over Rs 650 crore annually as concession fee from the six brownfield airports that have been won by the Adanis... This is more than four tim­es the income that AAI made in 2019-20 from the same airports, at Rs 142.72 crore, by running them on their own... AAI has also earned Rs 29,300 crore in 13 years from the concessions of the greenfield Delhi and Mumbai airports under the private-public partnership (PPP) model. How­ever, in both these airports, the concession model was not based on bid per passenger as has been the case for new PPP airports but on a revenue-share model. So, while Delhi pays 45.99 per cent of its annual revenues, Mum­bai forks out 38.7 per cent. In contrast, the earnings (profit from operations) that AAI made from these airports when it was running them between 2001 and 2007 was collectively only Rs 3,000 crore. However, in just one year (2019-20), under the PPP model, AAI’s earnings from Delhi and Mumbai together was at Rs 3,052 crore. And, this of course does not include the increase in valuation of the 26 per cent equity that it holds in these two airports.

8. The arrest of former SBI Chairman, Pratip Chaudhuri, supposedly a very honest official, on very questionable and flimsy grounds is sure to exacerbate decision-paralysis within the banking sector. Most worryingly it goes to the heart of decision-making on NPAs in their valuation, transfers, and resolution. 

Consider this. An asset becomes NPA. It's taken up for resolution. The lender follows the due process and sells the asset to an ARC. The original promoters (the borrowers) question the transaction at DRT, NCLT, High Court, and Supreme Court. All were dismissed. Now the promoters press a fraud charge and get one Director of the ARC arrested without even issuing a summons! 

This raises the question of accountability. One cannot but help wondering whether the Chief Judicial Magistrate of Jaisalmer will be held accountable for this decision, and the damage it does. 

Two very good articles on the issue here and here. 

9. India's exports may hit the $400 bn mark.

Business Standard reports that the fact that it's significantly contributed by rise in exports of sugar, cotton, and iron ore means its sustainability is doubtful. 

10. The Federal Reserve finally announced the beginning of the long-awaited tapering of its massive $120 bn monthly bond purchase program. The FOMC announced that it will keep reducing its purchases of Treasuries by $10 bn a month and of agency mortgage backed securities by $5 bn every month. The process will start in mid-November and the stimulus will cease in June 2022. It also said it'll calibrate the taper based on changes in the economic outlook. It however said nothing about rate hikes, saying the economic bar for the was much higher. 

“It is time to taper, we think, because the economy has achieved substantial further progress toward our goals,” Powell said. “We don’t think it’s time yet to raise interest rates. There is still ground to cover to reach maximum employment, both in terms of employment and in terms of participation.”

In recent days, the Reserve Bank of Australia and the Bank of Canada have led the way in reversing monetary accommodation and raising rates. The Bank of England is expected to follow suit next week by raising rates for the first time since 2018. 

11. FT has a long read on the rise of green parties.

Green parties now have a share of power in six European coalition governments: Austria, Belgium, Sweden, Finland, Ireland and Luxembourg. They are on track for an even bigger prize in Germany, Europe’s largest economy, where they are in talks to form a three-way coalition government after winning 14.8 per cent of the vote in September’s election. That is more than double the 6.7 per cent of votes the Greens won in 1998, when they first entered a ruling coalition with Gerhard Schröder’s Social Democrats, in a move that made their leader, Joschka Fischer, foreign minister.

Green activism is heightened by the increasing trend of floods, droughts, and forest fires across the world. Scientists have shown that emissions must halve by 2030 and reach net zero by 2050 to limit global warming to 1.5 degree celsius, the safest temperature goal in the Paris agreement.

Crucially, scientists have shown that emissions must nearly halve by 2030 and reach net zero by 2050 to have a good chance of keeping global warming to 1.5C, the safest temperature goal in the Paris agreement. 

12. It hard not to feel that Mark Carney, as UN special envoy on climate and finance, is doing a great dis-service to the cause of climate change activism by leading the mother of all greenwashing with his claim that "we have all the money needed" to achieve net zero greenhouse gas emissions. He is leading $130 trillion of private sector assets, supported by more than 450 banks and Wall Street titans, committed to achieving net zero emissions by 2050 through the Glasgow Financial Alliance for Net Zero, or Gfanz.

13. In a brilliant article Simon Kuper points to a fascinating phenomenon - climate gentrification. 

The Little Haiti neighbourhood is barely five miles from glitzy Miami Beach, but it feels a world away. There’s no whiff of ocean here. Miami remains largely segregated and almost all the people sweating their way down Little Haiti’s streets are black... A new high-end development, Magic City, is arising on top of what used to be a mobile-home park. Hipster shops are opening: Scarab handmade cycles and Booktanica, a wine bar that sells books. House prices are shooting up. In 2012, according to Zillow, the average home in Little Haiti cost $99,600, just 38 per cent of Miami Beach. Today the price is $414,000, fractionally more than Miami Beach. Many new buyers in Little Haiti are investors using limited-liability corporations. They are betting on a future when this neighbourhood will benefit from a previously disregarded asset: its elevation. An average of seven feet above sea level, Little Haiti should outlive Miami Beach. If so, today’s poorer residents will be priced out. Miami is Ground Zero for a new phenomenon that will reshape the world’s coastal cities: climate gentrification...

Miami real estate agents used to ignore rising sea levels, then pretended the problem had been fixed by what look like waist-high garden walls. But lately Miami market thinking is shifting from “Location, location, location” to “Elevation, elevation, elevation”... What starts in Miami will go global. About 40 per cent of humanity lives within 100km of a coast, and many coastal cities share Miami’s social structure: rich neighbourhoods on the beach, poor ones inland. Think of Rio de Janeiro, Los Angeles or Cape Town. As seas rise, the most expensive places are at the highest risk. In Istanbul, for instance, the choicest coastal bits of the Kadiköy neighbourhood could go under.

Miami, built on porous limestone, is described as the world's most vulnerable major coastal city, and may be gone by 2100. 

14. Is Ethiopia going the Afghanistan way with the Tigray People's Liberation Front going to do a Taliban on the Oromo dominated government of President Abiy Ahmed? 

On the one-year anniversary of war between the federal government and the Tigray People’s Liberation Front, Tigrayan forces are intimating they could march on Addis Ababa, the capital, and eject Abiy from power. The TPLF, which ran the country for 27 years until 2018, is no Taliban, however brutally it governed and whatever its detractors say. But like the Taliban, banished from government and criminalised, it could now bludgeon its way back to power.

Ethiopia's recent history has been complicated,

Most of the regions into which Ethiopia is divided — including Tigray, Amhara and Oromia — regard themselves as nations with their own languages, cultures and competing versions of history. Transfer of control involves profound shifts in the balance of power between constituent nations of the “Ethiopian empire” and is rarely less than traumatic. Haile Selassie, who oversaw a feudal system, was deposed and later executed after a student-inspired, Marxist-led uprising in 1974. The regime that followed, the Derg, dismantled feudal land structures but imposed a “red terror” that culminated in man-made famine. After decades of perceived Amhara domination, it was a rebel army from Tigray that led the 1991 overthrow of the Derg. The TPLF, though it represented a region with only 6 per cent of Ethiopia’s population, held power until 2018. Abiy is from Oromia, the most populous region with more than one-third of Ethiopia’s population, but which has traditionally stayed on the margins of government. His election followed years of protests against Tigray’s outsized influence on politics. He promoted national unity. To some, that promised modern, ethnic-neutral democracy; to others, it spelt a return to the suppression of ethnic rights.

15. As inflationary pressures mount, on the back of rising energy prices comes the sharp rise in food prices. 

Global food prices have surged because of bad weather, such as droughts in North and South America and heavy rain in Europe, and the supply chain problems that came with the easing of coronavirus restrictions. The FAO food price index rose at an astonishing annual rate of 31 per cent in October. The IMF’s food and beverages commodity index rose at a similar rate. In real terms, after taking into account inflation, global food commodity prices are now higher than their 2008 and 2011 peaks, just before the Arab spring protests that were partly caused by soaring food costs.

16. Interesting snippet about how migration of high tariff consumers through open access and captive power plants is shrinking the cross-subsidy margin available for discoms, 

According to research by Prayas (Energy Group), with high tariff consumers beginning to move away, the share of cross-subsidy in discom tariff support (the other part being state subsidy) has declined from 29 per cent in 2017-18 to 23 per cent in 2018-19 — a decline of 6 percentage points in one year.

With the increased share of renewables, this trend will only hasten. And this is a stunning statistic,

As of March 2020, the net worth of all public sector distribution utilities in the country put together was a negative Rs 61,757 crore (though it was positive in states like Gujarat and Maharashtra). In comparison, the combined net worth of the few private sector discoms that exist in the country was a positive Rs 24,965 crore.