Weekend reading links

1. Patrick Jenkins calls out corporate double standards,

When Bill Winters blogged last week about the “scourge of racism and discrimination” laid bare by the police killing of George Floyd, the Standard Chartered boss joined a line of corporate leaders expressing admirable support for America’s black community amid widespread revulsion at the way Floyd died. But it was striking that, in the same week, StanChart struck a very different tone when commenting on Beijing’s widely criticised imposition of a potentially repressive legislation in Hong Kong. “We believe the national security law can help maintain the long-term economic and social stability of Hong Kong,” the bank said in a generally supportive statement. It was not alone. HSBC, another British bank with an Asia focus, made a similar declaration. So did a number of other big companies with operations in the territory.

See also this on HSBC.

2. Atif Mian, Amir Sufi, and Ludwig Straub have a paper which points to another consequence of widening inequality, the "savings glut of the rich" (the after-tax income of the top 1% of the income distribution minus personal consumption of the top 1% of the income distribution, scaled by national income),

Rising income inequality since the 1980s in the United States has generated a substantial increase in saving by the top of the income distribution, which we call the saving glut of the rich. The saving glut of the rich has been as large as the global saving glut, and it has not been associated with an increase in investment. Instead, the saving glut of the rich has been linked to the substantial dissaving and large accumulation of debt by the non-rich.

Analysis using variation across states shows that the rise in top income shares can explain almost all of the accumulation of household debt held as a financial asset by the household sector. Since the Great Recession, the saving glut of the rich has been financing government deficits to a greater degree.

 3. More examples of corporate social responsibility in times of Covid 19, this time from US hospitals, for-profit and non-profit - furloughing lowly-paid frontline staff despite sitting on large cash surpluses, making them work without adequate protection gear, continuing to pay executives fat salaries and bonuses even as they receive large federal government stimulus. More here.

4. Debashis Basu writes about the implementation challenges to the recent agriculture market reforms. His suggestion,

The solution is for the NITI Aayog to select some of these states for a pilot project and get on board a few large business groups (Reliance, ITC, Mahindra, and others have enormous knowledge and can scale up quickly). Make them compete with each other to get the most modern technology at Indian costs, all with the ultimate vision of connecting the Indian farmer to the global market. This experiment must have positive feedback loops, embedded in the design, allowing sensible course corrections.

As I blogged here, the implementation challenges with these agriculture reforms are immense. Besides Bihar's experience, having abolished APMC Act in 2006, is not encouraging. Replacing a tightly regulated system with a completely deregulated system is not the answer.  

Business Standard has two articles here and here about the problems with the reforms. 

5. This from Jean Dreze is worth bearing in mind about India pursues its economic growth,

India’s poorest states are extraordinarily poor, with large sections of the population on the margins of subsistence. It is doubtful, for instance, that any country in the world has a higher concentration of extreme poverty and hunger than Bihar.

6. Rajamohan sums up India's China problem,

One is that China has long-standing claims, right or wrong, on the territories of its neighbours. The other is the dramatic shift in the regional power balance in favour of China. Unlike in the past, China now has the military power to make good its claims and alter the territorial status quo, if only in bits and pieces. This is what China is doing in the South China Sea. And the situation may not be any different in Ladakh.

A big bully flexing muscles!

7. Minxin Pei reads the tea leaves and concludes that Xi Jinping stumbled badly at the beginning of the Covid 19 outbreak, and what's more internal criticisms have been rising. His conclusion,

It is reasonable to conclude that for now Xi may have weathered the coronavirus crisis with limited damage to his grip on power, but the longer-term effects of the coronavirus pandemic will most likely weaken, rather than strengthen, his rule.

8. Pranab Bardhan makes the case for a UBI for India in three parts - here, here, and here.  

9. It does say something about the silence of liberals in the west when FT writes an editorial urging EU for a diplomatic tsunami against Israel to deter the country from annexing the Jordan Valley (which forms 30% of the West Bank) and Jewish settlements in the occupied territory. FT writes,

Yet while the EU was quick to condemn Russia’s 2014 annexation of Crimea and impose sanctions against Moscow, its response to Israel’s creeping colonisation has been meek.

10. Urbanisation facts from The Economist,

By 2016 more than a fifth of humankind was living in cities of 1m people or more. The largest 300 metropolitan areas now generate half the world’s gdp and two-thirds of that gdp’s growth. And New York remains at the tip of the top tier. At almost $1.8trn its gdp is the largest of any city in the world. It is home to as dense a cluster of globally important firms as you can find anywhere... Edward Glaeser, an economist at Harvard University, has shown that urban density increases workers’ productivity and minimises their carbon footprints. Americans who live in big metropolitan areas are, on average, more than 50% more productive than those who live in smaller metros. This holds true even for workers with the same education, experience, working in the same industry and boasting the same IQ. Much the same is true in other rich countries. In poorer ones the advantages of city life are even greater... According to Enrico Moretti, an economist at the University of California, Berkeley, each of the “knowledge jobs” that make cities like San Francisco or New York so successful supports five service jobs, some high paying—lawyers—some much less so—baristas.

And this about the impact of reduced mass transit use,

“A 1% decline in transit use into Manhattan would translate into a 12% increase in car traffic,” says Nicole Gelinas of the Manhattan Institute, a think-tank.

11. Interesting story in the same magazine about industrialisation in Africa. Sample this about the dominance of Chinese,

Consultants at McKinsey estimate that Chinese firms handled 12% of Africa’s industrial production in 2017, employing several million people. Only a few were eyeing exports to the West. Instead, 93% of their revenues came from local and regional sales.

In light of premature de-industrialisation and protectionism, value addition in the primary sectors may be a good opportunity for African countries,

“The scope for classic labour-intensive, export-oriented industrialisation is narrower now,” says Yaw Ansu, who advises the minister of finance in Ghana. “But countries like us can compensate by basing our model on adding value to our agriculture and natural resources.” One example is Blue Skies, a company near Accra. Its workers dice fruit sold in European shops. Another example is horticulture. In normal times, more than 400 tonnes of cut flowers are flown out of Nairobi every day, on average. In Ziway, an Ethiopian town, kilometre-long greenhouses sprawl like aircraft hangars beside the dust and donkey carts. Roses grow for transport to the Netherlands. Covid-19 has thrown many of these firms into crisis. But when travel and trade bounce back, so will opportunities. This is not classic manufacturing, but it is not subsistence farming either. Economists at unu-wider, a research institute, talk of these as “industries without smokestacks”. They include tourism and call centres. Africa’s diversity means there will be many routes to success. 

12. Finally, a good account of how the Chinese Communist Party managed the Covid 19 lockdown,

Lockdown in the neighbourhoods, now all but lifted in most cities, was not a matter simply of telling residents to stay at home. It involved deploying armies of people to act as guards, health monitors, helpers for the infirm and procurers of supplies. Central to these efforts were two organisations: residents’ committees and neighbourhood party committees (their memberships are often the same). The “two committees”, as they are often called, had their heyday in the Mao era as enforcers of the party’s will. Since then they have become less visible, focusing mainly on registering new residents, administering local clubs, distributing welfare payments and providing proof-of-address and other useful documents. 

But during the height of the lockdown, between late January and mid-March, these committees played a prominent role. Their staff stood guard at entrances to housing compounds in China’s more than 100,000 neighbourhoods, policing who could leave or enter. They supervised self-isolators, sometimes using webcams and alarms. They organised deliveries of food and other essentials for residents and transmitted the government’s latest instructions via WeChat. But with each neighbourhood having only a handful of permanent staff to monitor and help hundreds of people, manpower was far from adequate. So the party called in reinforcements, including party members, local officials and volunteers. In many neighbourhoods “temporary party committees” were created to oversee these efforts, headed by officials from higher levels of the urban bureaucracy. The new committees established numerous other bodies: temporary party branches for each neighbourhood “grid” (an area often comprising a single residential compound) and party cells for each building.

Measuring impacts of cash transfers vs infrastructure investments, and 'sins of omission'

In an insightful paper that is a must-read for all methodological purists among academics, George Akerlof draws the distinction between 'hard' (read quantitative or rigorous) and 'soft' (read qualitative) methodologies to explain economic and other phenomena. He claims that economists’ preference for the latter creates ‘sins of omission’. These omissions include arguments and explanations which are not amenable to the ‘hard’ approaches. For example, ‘stories’ and ‘anecdotal accounts’, even with their often-misleading portraits, carry important insights which are missed by the ‘hard’ approaches.

I had blogged earlier about the paper here.

A very good example of this is the debate surrounding cash transfers, and something like say, the Millennium Villages Project, which focused on capital and inputs intensive integrated village development approaches. The 'hard' methodologists find no evidence from investments in physical infrastructure like roads and electricity, and instead argue in favour of the likes of cash transfers ("transformed the economy"!!) as a better use of aid money.

Consider two development strategies followed in backward rural settings. Plan A - investments are made in physical infrastructure - school and hospital facilities, transportation connectivity, and electricity. Plan B - conditional or unconditional cash transfers of equivalent amounts. Which is likely to be more impactful?

Using Akerlof's framework, clearly the 'hard' methodologies will invariably favour the latter over the former. The former will have long-term and path dependency effects - sustainable economic growth is not possible without capital accumulation, of which infrastructure is a sine-qua-non - but limited medium-term effect on quantitative measures like income and on human development. 

What if we qualify impact by making the distinction between poverty alleviation and economic growth? 

Then the former comes with the certainty of positive partial equilibrium effects but limited or no economic trajectory shifting general equilibrium effects. The latter is a sine-qua-non for economic growth, though its likely general equilibrium effects are also dependent on other factors. It takes the village to the starting line in being able to engage meaningfully with the world of economic opportunities outside. But it is unlikely to generate significant immediate poverty alleviation effects. 

In this framework, cash transfers are, especially when compared to investments in basic infrastructure, something like the Cheshire cats - the impacts disappear with time, without even having expanded the production possibility frontiers (PPFs). 

The path dependency part is important. An all-weather road and transport connectivity expands the PPF by opening up the local society and economy with outside and all associated net benefits (I hope we don't dispute that integration of any type of hinterland with the mainland is, on the net, beneficial). Similar is the likely general equilibrium impact of reliable three-phase electricity supply. The combined effects of both in terms of opening up new economic opportunities and markets, and facilitating better access to public services is undeniable. 

There is another important consideration, that of the quality of implementation at scale. A new study on the much derided Millennium Villages Project from Northern Ghana writes,

The project improved some MDG indicators but, with few exceptions, impacts were small and core welfare indicators, such as monetary poverty, undernutrition and child mortality, remained unaffected. We found no spillover effects of the project to neighbouring areas and no displacements of development expenditure by local government and NGOs. We assessed the cost-effectiveness of the intervention and concluded that MVP did not produce the expected cost-saving synergies. We attribute the lack of impact to poor project design, redundancy of the interventions, and excessively high expectations.

In other words, the details of the design and implementation, both intimately tied to state capacity, were the primary reasons for the lack of impact. But we also know that in such countries, state capacity is acutely weak.

So, if state capacity is weak, and it detracts from the state ability to deliver on pretty much anything, then it is only appropriate that we focus on improving state's capacity.

The poverty alleviation-economic growth framework and the weak state capacity (and the inability to incorporate such considerations) are examples of the 'sins of omission' associated with 'hard' approaches. 

That we are even seriously debating these non-issues should be a damning indictment of the global discourse on development. This is also despite reasonably 'hard' evidence that the beneficiaries themselves favour investments over cash transfers. 

In fact, a UKAid report on the latest MVP study unwittingly points to the deficiencies of these evaluations,

Of course, in the long run, the MVP may produce welfare gains. For example, health care service improvements during the MVP period may improve health later on; or other considerable investments in infrastructure (roads, health and school facilities) may have an impact on future outcomes.

There is another contributor to the 'sins of omission', that arising from the marginalisation of experience and latent knowledge and the de novo search for evidence. I have blogged about it here.

As to cash transfers, this blog's views are summarised here. The case for cash transfers as a substitute for in-kind public goods of any kind (infrastructure to vouchers for education and health care) is questionable on multiple grounds, especially in countries where state is present (even if capacity is weak, the objective then being to strengthen state's capacity). Despite experimental evidence on cash transfers not being diverted to wasteful expenditures, scale-effects can be unpredictable. However, a cautious case for some form of cash transfers can be made in certain settings - refugee camps, civil war torn regions, and where state is completely absent.

Weekend reading links

1. Arguably the story of the week has been the Renminbi breaching the psychologically important 7 per dollar mark, for the first time since 2008. The decision to not intervene to prop up the currency, which has been over-valued for a long time now, is also a retaliation to President Trump's latest announcement slapping tariffs on another $300 bn worth Chinese exports. Further, with economic activity slowing down, the weaker currency will boost Chinese export competitiveness.

Incidentally, the Government also issued an order to state-owned companies to stop Chinese purchases of US agricultural products.

2. More from FT on the ongoing turmoil in the world of auditing, one of the most important watchdogs of capitalism. Sample this defence by Grant Thornton boss David Dunckley when probed by UK MPs on the firm's audit of scandal-hit cafe chain Patisserie Valerie,

“We are not giving a statement that the accounts are correct... We are saying they are reasonable... We are not looking for fraud.”

And about the egregious accounting misdemeanours of KPMG,

Accounting rules do not stop auditors signing off on numbers divorced from reality. They allowed Carillion to treat £1.6bn of goodwill from acquisitions as permanent assets — 35 per cent of its total — and not write down any of the value despite signs the businesses were struggling. One, Eaga, had its goodwill valued at an unchanged £329m even as losses mounted and it was only kept solvent by Carillion’s financial support. Similarly, accounting rules allowed too much contract revenue to be recognised, profit from partnerships and joint ventures to be consolidated as the company’s own and early payment facilities to inflate cash inflows while obscuring true levels of debt. Auditors’ roles still do not include challenging a company more strongly on its ability to continue operating — new proposals are only being worked on. Nor are auditors’ roles any more separate from their employers’ consulting arms, which can earn big fees from audit clients — again, removing these conflicts are still only proposals.

3. What if there is a trade-off between the effectiveness of the roll-out of 5G spectrum and the government's revenues maximisation policy from spectrum auctions? FT points to a very interesting angle to the global 5G race - cost of ownership of spectrum.

Chinese operators have picked them up for free — part of Beijing’s attempt to have a national rollout of 5G. Yet in parts of Europe recent auctions have been so expensive that at least one company has had to cut shareholder dividends. In the US — where President Donald Trump has declared that “the race to 5G is a race that America must win” — spectrum licences are being sold at historically low prices... For the telecoms operators the licences are the “ticket to ride” — access to the infrastructure that will be critical to their future success, even existence. For governments they are no less important yet some cash-strapped administrations have been sending out mixed signals over how to strike a balance between raising billions from a sector already straining to reduce costs while stimulating investment in the rapid deployment of 5G services... China granted its spectrum licences to the country’s telecoms networks in June rather than selling them off. The US then unveiled its biggest ever sale of spectrum in July boasting of a plan to auction off, by the end of the year, more airwaves than the country’s combined mobile industry currently employs. It has set the bidding for some of the very high frequency bandwidth at a value of one 10th of a cent per megahertz per capita making those airwaves some of the cheapest ever sold.

This has strong resonance in India where telecom operators are struggling to make investments on the face for an ultra-competitive market coupled with exorbitant prices paid for spectrum ownership. But it is unlikely to stop the government in India,

Other governments see spectrum — the airwaves used to carry mobile phone and other electromagnetic signals — as a cash cow. India’s telecoms regulator has just proposed selling blocks of spectrum for 5G at a price that is 40 per cent above what was charged in other Asian markets. Auctions in Italy and Germany have raised huge sums. Vodafone was forced to cut its dividend for the first time in its history following the German sale, amid industry warnings that the more they spend on spectrum, the less they have to spend on building the network via new masts, servers and base stations.

For a country whose telecoms sector is struggling, an expensive 5G spectrum auction can be one too far. But will the government, equally struggling to balance the fisc, realise this and exhibit some temperance?

4. Eswar Prasad has a very good article which summarises the costs of currency wars. For the US, it is hard to imagine any scenario where the US Dollar would end up depreciating,

The US has shown little interest in any fine distinctions between market-driven currency depreciations versus targeted policy-driven devaluations, viewing all currency depreciations relative to the dollar as hostile economic acts. A currency war would do little to boost US growth prospects. It is much harder for the US to push down the value of the dollar, ironically because of the currency’s dominant presence in global financial markets. It would be difficult to engage in unilateral intervention on a scale sufficiently large materially to affect the dollar’s value against other major currencies — especially if the Federal Reserve stayed on the sidelines in such an endeavour. Besides, such a move would incite a broader currency war, with other countries stepping up their own retaliatory intervention. The resulting turmoil in financial markets could actually firm up the dollar’s value if investors turn to it for safety.

5. Daron Acemoglu has the best summary of the case against UBI that I have read,

UBI, which is parachuted from above as a way of placating the discontented masses. It neither empowers nor even consults the people it aims to help. (Do workers who have lost their middle-class jobs want government transfers or an opportunity to get another job?) As such, UBI proposals have all the hallmarks of the “bread and circuses” used by the Roman and Byzantine Empires – handouts to defuse discontent and mollify the masses, rather than providing them with economic opportunities and political agency. By contrast, the modern social welfare state that has served developed countries so well was not handed down by tycoons and politicians. It aimed to provide both social insurance and opportunities to people. And it was the result of democratic politics. Ordinary people made demands, complained, protested, and got involved in policymaking, and the political system responded. The founding document of the British welfare state, the World War II-era Beveridge Report, was as much a response to political demands as to economic hardship. It sought to protect the disadvantaged and create opportunities, while encouraging civic engagement.

The whole argument in favour of ideas like UBI and (certain forms of) direct cash transfers is lazy, and borne out of ignorance, a naive belief in the value of efficiency over other considerations, and lack of any understanding of how the real world works. 

6. FT has this on rising elderly bankruptcy in the US,

The elderly are far more visible in US bankruptcy courts these days than in previous generations. Baby boomers aged 65 and older are racking up far higher levels of debt than their parents, who were raised during the Great Depression, and a growing minority are finding themselves tipping over from desperate financial trouble into bankruptcy. The culprits are vanishing pensions, soaring healthcare costs and tens of thousands of dollars in unpaid student loans for themselves, their children and even their grandchildren... In 1991, over-65s made up only 2 per cent of bankruptcy filers, but by 2016 that had risen to more than 12 per cent... Over the same period, elders grew as a percentage of the US adult population too, but only from 17 per cent to 19.3 per cent... In 1989, only one in five Americans aged 75 or older were in debt; by 2016, almost half were, according to the most recent US Federal Reserve survey of consumer finances.

7. Finally, Noah Smith on how the rules of the game can be tweaked to bring greater role for workers in wage setting. Proposals include multi-employer or sectoral wage bargaining, wage councils or wage boards, German-style industry and regional level collective bargaining through worker's councils etc. 

Weekend reading

1. Talk about likely Cheshire cats and Uber edition, as the company prepares for its IPO,

Excluding certain one-time items, including the sale of some of its businesses, Uber’s losses for the quarter rose 88 percent from the previous year, to $842 million. The losses were a result of Uber’s increasing its spending as it tries to outmuscle competitors, many of which have intensified their efforts to add riders and drivers. Uber has responded by offering bigger incentives and more promotions to fend off rivals like DoorDash, Lyft and other ride-hailing and food-delivery services... Some of the company’s losses have been overshadowed by its explosive growth. In 2018, Uber increased its total bookings — what it charges customers for rides and food delivery — to $50 billion, up 45 percent from 2017. Net revenue was $11.3 billion, a 43 percent increase... But Uber’s profit margins have declined as it cut prices to match competitors and spent money on expanding its food-delivery business, Uber Eats. The margins are also smaller on Uber Eats orders because the company pays commissions to restaurants as well as delivery drivers.

Despite this the company is valued at $70 bn, with investment bankers suggesting even $120 bn.

More likely this is a pricing of Uber than its valuation. When asked about Uber's astronomical 'valuation', valuation guru Aswath Damodaran had this to say,

Pricing. It’s a pricing issue. The reason people pay $60 Billion for Uber is because they think that when it goes public it will be worth $100 Billion. There doesn’t need to be a fundamental rationale for value. All you need in the pricing game is someone else willing to pay a higher price for the company. As long as momentum is on their side, it’ll keep pushing the pricing up. It’s got very little to do with fundamentals, and everything to do with “is there somebody else out there who will pay me a higher price for this company”.

Btw, Aswath Damodaran values Uber at between $25 bn and $35 bn. 

Ahem!

2. So Amazon has pulled the plug on its Queens second head quarters which promised 25000 new jobs and $3bn in local tax concessions. What does it say about modern capitalism that its favourite corporate brand is forced to abandon its plans to establish its second headquarters in a city which is perhaps the capital of modern capitalism?

Now what happens to the vast trove of data that Amazon has accumulated about cities during the bidding process?

3. Special economic zones (SEZs) come in several forms, and there is little to suggest that, in general, they offer value for money. Consider this about 'opportunity zones' in the US, 

Based on recommendations from state governments, the United States Treasury has designated more than 8,700 eligible census tracts in urban, suburban and rural areas across the country. The opportunity funds are the vehicles for investing in these zones. The idea is that investors get federal tax breaks, while the neighborhoods get new businesses and upgraded properties, like apartment buildings, retail shops and hotels... Opportunity funds let investors postpone federal taxes on recent capital gains until the end of 2026; they can also reduce the taxable portion of those gains by as much as 15 percent, after seven years. Further, investors can eliminate taxes on additional gains from investing in the fund itself, if they hold the investment for 10 years. So, if you have investments that have appreciated, you can defer capital gains taxes by selling the investment and reinvesting the money into an opportunity fund within six months. Almost any sort of capital gain qualifies, whether from the sale of stocks or mutual funds, or other investments, including the sale of real estate or a business. Just the gains on an investment — rather than the entire proceeds of a sale — must be reinvested in the opportunity fund.

But the zones, notified last year, are already there are serious question marks about whether many of the notified zones deserved to get any fiscal concessions since they were already gentrifying. 

4. Leveraged loans, borrowings by those with relatively high debt, which has more than doubled to over $1 trillion since 2010, have for some time been signalling red. 

Highly leveraged loan deals (when debt is more than five times earnings before interest, tax, depreciation and amortisation) account for about half of new US corporate debt. That growth is partly a result of securitisation. Roughly half of investor demand today comes from packaging loans into collateralised loan obligations, or CLOs, and slicing them into different tranches of risk. Rising demand has shifted the balance of power from investors to borrowers, and contributed to a watering down of covenants embedded in loan agreements that traditionally protect investors. According to Moody’s, about 25 per cent of the leveraged loan market was considered “covenant-lite” before the global financial crisis. Now that figure is 80 per cent. The implications in a downturn could be severe. Covenant-lite lending is like swimming without the ability to spot seals (where there are seals, there are sharks looking to feed). Stricter covenants improve transparency and help investors identify underlying problems with borrowers; now some covenants are so weak that nothing short of insolvency will trigger a default. If problems finally show up, investors will stampede out of the asset class, creating a systemic liquidity crunch... Leveraged loans probably won’t spark the next recession, but they will almost certainly deepen it, because they are an important source of corporate funding for deals and share buybacks.

5. The debate about the merits and distortions associated with universal basic income (UBI) is likely an endless one. And it is also an activity that is likely to keep academics busy for generations. The present stage of evidence generation is focused on its efficacy, and given the need to tease out general equilibrium effects, this is the likely agenda for at least the coming decade. The evidence is likely, as is mostly the case with such problems, to be mixed. The next stage of debate will move to what is the right amount, then what is the right amount for a particular context, and so on.

Echoing this, a new paper for UBI in advanced countries finds,

A UBI would direct much larger shares of transfers to childless, non-elderly, non-disabled households than existing programs, and much more to middle-income rather than poor households. A UBI large enough to increase transfers to low-income families would be enormously expensive. We review the labor supply literature for evidence on the likely impacts of a UBI. We argue that the ongoing UBI pilot studies will do little to resolve the major outstanding questions.

6. It is a well-known fact that infrastructure contractors bid aggressively to bag the contract since they are confident that they can come back and renegotiate the contract. There is a massive body of literature on this. The latest addition is on the renegotiations in power generation contracts in India. 

7. What if users of Facebook were shut off from accessing the social media site? An RCT evaluation of the welfare effects of US Facebook users show,

Using a suite of outcomes from both surveys and direct measurement, we show that Facebook deactivation (i) reduced online activity, including other social media, while increasing offline activities such as watching TV alone and socializing with family and friends; (ii) reduced both factual news knowledge and political polarization; (iii) increased subjective well-being; and (iv) caused a large persistent reduction in Facebook use after the experiment.

8. Finally nice article by Pilita Clark bemoaning the disappearance of (now politically incorrect) bluntness in offices, and the mistaking of bluntness for unacceptable behaviour. 

End of fertilizer price decontrol?

It was with great fanfare that the Government of India launched the Nutrient Based Subsidy (NBS) regime for fertilizers in April 1, 2010. It effectively dismantled the administrative control over fertilizer prices. The subsidy was to be fixed, based on the nutrient content of each fertilizer, and then transferred as a back-end subsidy to the manufacturing companies. It gave companies full freedom to fix Maximum Retail Prices (MRPs), though there was an informal understanding to keep price hikes within 'acceptable' limits.

It went off relatively well in its first year, raising hopes of further reforms in the subsidy regime. However, following the steep increases in global petroleum prices in recent months, the wheels seem to be coming off the NBS regime. The manufacturers have been left with no option but to increase the MRP to cover for the increased import prices. As I have blogged earlier, in response the government has been forced into revising the subsidy for 2011-12 three times already.

Faced with continuing rise in fuel prices, the Government has issued directions to the fertilizer companies to restrict the MRP increases to a band. The Businessline points to a recent circular issued by the Department of Fertilisers asking firms to limit the increase in the MRP of di-ammonium phosphate (DAP) to Rs 600 a tonne for the kharif season ahead. It writes,

"Since the MRP, prior to April 1, averaged Rs 10,750 a tonne, a Rs 600 rise works out to Rs 11,350 a tonne. To this, if the 1.03 per cent excise-cum-education cess imposed in the 2011-12 Union Budget is added — this is recoverable from farmers — the new admissible MRP would be roughly Rs 11,470. Against this, companies like Coromandel International, Indian Farmers Fertiliser Cooperative and Zuari Industries have already declared MRPs of Rs 11,700 to Rs 12,000 a tonne, exclusive of State-level and local levies. It remains to be seen if they will now have to roll back their MRPs to the May 5 circular-prescribed levels."

The NBS regime for fertilizers is a test case for cash transfers with PDS. It highlights the challenges in subsidy administration posed by price volatility. However, unlike the fragmented food grains markets, fertilizer market is more integrated. Therefore it is possible to develop an index, also linked to global crude prices, that is a reasonable reflection of fertilizer prices. The subsidy payable to manufacturers or distributors could be calibrated with respect to this index, so as to avoid the repeated ad-hoc revisions. This does create a slight fiscal uncertainty, though the variation is not likely to be so much as to imbalance government finances.

Cash transfers and negative income tax credits

Cash transfers are the flavour of the season in India. The two commonly discussed cash transfer strategies are direct cash transfers to replace subsidies (as in case of food grains, kerosene, fertilizers, cooking gas etc) and conditional cash transfers to incentivize social outcomes (immunizing, sending children to school, maintaining nutritional standards etc).

In both cases, it is proposed that the cash can be transferred using the Aadhaar identity number to the beneficiary's Aadhaar-linked savings bank account. Though this will not completely resolve the problem of beneficiary selection, the issues of pilferage (by ghost and duplicate beneficiaries) and administration of the transfers will be satisfactorily addressed.

Apart from the two aforementioned types of cash transfers, there is a view, still marginal, that advocates direct payment of cash to all those below the poverty line. Such a universal minimum income guarantee, it is argued, should replace all subsidies and, if delivered through biometrically validated Aadhaar-linked accounts, will simplify program administration, minimize leakages, and limit incentive distortions.

I am not interested in this post to get into the relative merits of the three approaches to cash transfer. Needless to say, there are some very formidable challenges with a universal minimum income guarantee cash transfer. However, if this is adopted, the most effective strategy to implement it would be to package it as a negative income tax (NIT) scheme.

An NIT is reimbursed to the income tax assessee whose income falls below the basic minimum income level for which no one pays income tax. Just as tax payers pay tax at a percentage of their positive taxable income, NIT assessees can be reimbursed, into their Aadhaar-linked accounts, at a percentage of their income deficit (or shortfall from the basic minimum level at which tax kicks-in, the negative taxable income).

Milton Friedman had first proposed the NIT in the late sixties to replace all other welfare programs for the poor. A variant of this, the earned income tax credit (EITC), was introduced in the US in the seventies for the working poor.

The NIT has several benefits in the Indian context. Apart from the numerous benefits arising from dispensing with all other subsidies, the NIT, by making every individual file his income tax returns, would be big step in legitimizing all income streams. Though there will be the risk of people under-reporting incomes, it will open up a large part of the massive parallel economy in India.

The formidable challenge, as mentioned, will be to get people to report their incomes with reasonable degree of accuracy. Rigorous analysis of the massive database so created would itself provide ample information that can further uncover the parallel economy.

In any case, this would be a definite improvement over a direct minimum income transfer where cash would be transferred without any pre-conditions to all the identified beneficiaries. But with NIT, the government would be benchmarking all transfers to the reported incomes of the individual.

Phasing the cash transfer roll-out

I have an op-ed in Mint today that calls for small pilots to test the cash transfer implementation strategy for each product before the program is fully rolled out.

Who are the eligible beneficiaries?

In my previous post, I had drawn attention to the debate about whether the Aadhaar identity would help more effective targeting of welfare beneficiaries. I had argued that Aadhar-based identification would not help screen out those beneficiaries who do not meet the eligibility requirements.

In this context, one of the comments pointed to the psychological deterrent effect of any Aadhaar-based identity in screening out the ineligible. This works on the presumption that since Aadhaar localizes the identity and makes it easy to trace individuals, the possibility of being noticed when drawing benefits would deter the ineligible from accessing those benefits.

I am not sure about the effectiveness of such deterrent for two reasons. First, the margins between the eligible and ineligible are never cut-and-dry. For example, it is impossible to accurately avoid inclusion errors (ineligible getting included) when identifying people below or above the poverty line based on the standard income parameter. What should be the cut-off income? How do we quantify that income? Second, given the widespread poverty in the country, the numbers of people who straddle the blurred boundaries of eligibility are considerable.

In other words, a large number of people face the ambiguity about whether they are eligible or not to receive certain welfare benefits. In the circumstances, the deterrent effect gets considerably diluted. Where is the need to fear when many of your neighbours belong to the same category? In any case, given the difficulty with income quantification, how can anybody establish that you are not income poor (especially when the major share of incomes of those under scrutiny generally comes from the informal sector)?

This challenge will remain with or without Aadhaar and raises the question of what is the most appropriate method to identify welfare beneficiaries. In this context, I am reminded of George Akerlof's famous paper that advocates the use of "tagging" - which tags (identifies) people and then makes specific transfers (or concessions) to them - in taxation. Tagging eliminates the ambiguity arising from eligibility parameters (like income) and enables easier differentiation of the eligible from the ineligible.

What are the most effective tags to identify poor people eligible to receive welfare benefits? The commonest tags are height, weight, looks, gender, age, educational qualifications etc. These are all, for obvious reasons, unsuited for identification of the income poor.

Among the more effective likely tags could be the nature and/or size of ones house. For example, a person living in a temporary or semi-permamnent house could be treated as income poor. Alternatively, the carpet area of the house, discounting for locations, could be used as tags for income levels. Either way, it becomes possible to verify and mark out a person who claims benefits despite failing the eligibility norm. Though administration of house-type based tags too raises concerns, it does look a more promising approach to screen beneficiaries than the current practice of identification based on incomes.

It is possible there are more effective tags, especially for certain subsidized products. In any case, irrespective of whether Aadhaar is used or not, the problem of beneficiary identification, with a reasonable degree of accuracy, has to be satisfactorily resolved.

Pitfalls in cash transfer implementation

The decision by the Union Government to replace the current subsidy regime in fertilizers, cooking gas and kerosene with a system of cash transfers in a phased manner has triggered off an intense debate about cash transfers. This post will summarize the most relevant and common objections to cash transfers and critically examine each of them.

1. It does not resolve the targeting problem

The biggest criticism of Aadhaar is that it leaves the critical issue of beneficiary identification, or targeting, unresolved. The Aadhaar identification merely validates whether the particular individual has come to receive his welfare benefit. It does not say anything about whether the individual is, in the first place, eligible to receive the benefit itself. The means testing of the beneficiary for his or her eligibility is essentially an administrative process.

There are four possible sources of leakages in any welfare program – beneficiary impersonation, ghost, duplicate, and ineligible beneficiaries. Aadhaar-based identification can easily eliminate the first three possibilities. It ensures that benefits are transferred only to the registered beneficiaries. However, ineligible beneficiaries cannot be immediately addressed with Aadhaar. The concern about failure to ensure targeting is therefore only partially correct.

Aadhaar-linked processes are a definite and significant improvement on the prevailing system of beneficiary identification and benefit disbursement. Its effectiveness will improve incrementally as Aadhaar is adopted by a critical mass of user departments so that databases can be shared to screen out the ineligible. In any case, Aadhaar cannot be a substitute for the administrative failure in keeping the beneficiary selection process honest.

It also provides governments an excellent second-best tool to effectively target benefits on petroleum products like cooking gas and fertilizers that are currently universally subsidized. Any such change in regime will be a qualitative and substantial improvement on the current universal subsidy regime.

2. Cash transfers cannot factor in price volatility

The most serious concern about cash transfers, one that deserves the strongest consideration, is on the issue of price volatility. Critics point to the possibility of sharp and sudden price fluctuations, especially for food grains, and argue that this would adversely affect the consumer’s purchasing power. They argue that unless subsidy amounts are calibrated real-time to in response to local market price, a virtually impossible task given the diverse and fragmented nature of rural markets, the cash transfers will fail to achieve its objective.

It is undeniable that prices of commodities, especially food-grains, fluctuate sharply across regions (even within districts, between the head quarters and rural interiors) and over even small time-periods. I have blogged about this here and here. To the extent that the ultimate objective is food or fuel security, or making available these commodities at affordable prices, price volatility poses serious problems.

The new nutrient-based fertilizer subsidy regime overcomes the problem of price volatility by providing a large enough subsidy to act as a buffer against reasonably large manufacturing cost increases. The subsidy transferred to the manufacturers, which is fixed once a year, is deliberately kept high so as to discourage manufacturers from indulging in any market manipulation. It is also hoped that with this subsidy, even if costs increase, the subsidy will cover the increased costs and keep fertilizer prices affordable. However, it has to be admitted that this approach may not be practical for products like food grains and other products.

In the circumstances, at least in the initial phases, it may be more appropriate if cash transfers for products like food grains are restricted to areas where the volatility is least. Urban markets experience less price volatility and they are also more closely integrated into each other. Therefore, an arrangement where the subsidy amount is indexed to the relevant inflation measure is likely to address most of the concerns on price volatility. It has to be admitted that this strategy does not address local price shocks and sudden spikes which cannot be accurately captured on a pan-Indian inflation index.

3. The cash transferred will be frittered away on wasteful expenditures

One of the long-held opposition to cash transfers revolves around the premise that recipients are likely to fritter away their cash on wasteful expenditures. This is all the more so in rural areas, where men are more likely to manage household finances. The widespread self-control problems that bedevil human beings, as highlighted by research in behavioral psychology, adds credence to this claim.

Consider the case of a beneficiary who receives cash transfers on fertilizers and cooking gas into his account, besides NREGA wages and other welfare transfers. There is the possibility that these multiple and often lumpy inflows into a single account would be diverted for other purposes, especially on wasteful expenditures, thereby defeating the purpose of such transfers.

Such concerns can be effectively addressed through vouchers, smart cards, and structured savings bank accounts. The retailers can be reimbursed their subsidy on production of the vouchers for the subsidized product received from the beneficiaries. Debit cards with purchases restricted to only the prescribed commodities can also be used to administer cash transfers. Transfers to the account of the woman family member can also help address such concerns to some extent.

Finally, there are multi-tier savings bank accounts. Insights from recent research in behavioral economics show that use-directed sub-accounts within the main account, designed to take into consideration people’s "mental accounting choices", may be more effective at optimal management of multiple inflows. Accordingly, savings accounts, with say, food or fertilizer sub-accounts, can combat people’s behavioral urges to spend their cash transfer incomes on other expenditures.

In any case, there are doubts on the assumption itself. A study of unconditional cash transfer schemes in 15 Eastern and Southern African countries by S Devereux, J Marshall, J MacAskill and L Pelham indicates that the fungibility of cash transfers does not necessarily undermine the intended outcomes. They also found that recipients used the freedom of choice provided by unconditional cash transfers in a wide range of ways that directly or indirectly benefited children, from purchase of food, groceries, health and education services to investments in farming or small enterprise.

4. It does not address the issue of consumer choice

Another serious objection comes from those pointing to the limited consumer choice in most Indian markets. Since cash transfers are meaningful only when citizens have choice, what use is this cash when people have little or no choice with schools or hospitals? It is a reality that many parts of the country and millions of people have no access to hospital facilities. Further, such presentation of choices, far from creating competition among service provides, only adds to the rent-seeking opportunities. It amplifies the power of the entrenched sub-optimal interests.

Similarly, in most parts of rural India there are typically just one or two retailers for any product. The resultant lack of competition renders any claims of choice disingenuous. If the exclusive government outlets, say ration shops, are closed down, the possibility of price gouging (atleast on certain occasions) by the local kirana shop owner cannot be ruled out.

This concern loses its relevance outside the rural context. Even the smaller cities offer enough choice with retailers, schools and hospitals. Urban residents, who enjoy such choices, can therefore benefit from cash transfers. In any case, given the widespread prevalence of predatory practices like hoarding among retailers even in the smaller towns, such policies will have to be complemented with strong administrative actions to curb these practices.

5. It is a smokescreen to roll-back Government

The strongest critics from the left view a "roll-back the government" agenda behind the cash transfer movement. They see cash transfers as the first step in a systematic campaign to divert attention from more fundamental issues. They express the fear that the focus on cash transfers would slowly displace critical basic welfare issues like investments in primary education and health care, food and fuel security, and so on.

They portray cash transfers as a convenient excuse for governments to abdicate on their responsibilities, "We have done our side of the bargain. We provided you cash, now you go and buy whatever you want". Governments, they argue, will transfer cash to students, patients, and farmers, and leave investments in schools, hospitals, and irrigation to the vagaries of market forces. Similarly, cash transfer in place of food grains, run the risk of seriously imperiling food security. Such ideological arguments are never easy to refute. It may be more effective to tackle them on similar ideological grounds, though its success is not assured.

In conclusion, the concerns of price volatility and choice are not easily refuted. They also remain formidable obstacles to widespread adoption of cash transfers. However, urban markets, which are less susceptible to random and local price shocks and may offer adequate choice, are best placed to receive cash transfers.

Accordingly, it is preferable that the first phase of cash transfers be implemented in towns and cities and for products with less price volatility and choice problems. Food grains distributed through PDS are vulnerable to sharp price fluctuations. The concerns of food security raised by skeptics are not easily refutable. Besides, any failures arising from cash transfers in food grains could become a rallying point for opponents calling for aborting the cash transfer scheme. Cooking gas and fertilizers, and less so kerosene, with their centralized distribution network, are less vulnerable to these concerns.

It is undeniable that urban areas are more suited for cash transfers in all these products. However, this dual subsidy regime, wherein city residents get cash transfers whereas villagers continue to receive subsidies through the conventional channels, may generate its set of problems.

This will be all the more so for food grains and kerosene, and especially during periods of price volatility. In this context, it is important that subsidy benefits are disbursed to consumers in all areas through an Aadhaar-linked system, irrespective of whether they receive cash or not.

Fixing the free power problem

I have an op-ed in today's Mint on a possible strategy to address the challenge of free-power.

Efficient subsidy transfers - cash transfers Vs dual pricing/price controls

In a recent post explaining the unique nature of the market for health care services, Prof Uwe Reinhardt draws attention to Kenneth Arrow's seminal work on welfare economics. Professor Arrow had argued that for any given initial distribution of income and wealth, a perfectly competitive market (full information among sellers and buyers about price and quality, no entry barriers for sellers, and no single buyer or seller can influence the market) will settle down at a unique equilibrium, a state from which no potential buyer or seller would want to move.

The First Optimality Theorem claims that in such equilibriums, the traded good or service is allocated among buyers in such a way that it would be impossible through any reallocation to make someone happier without making someone else less happy. In other words, such allocations are Pareto efficient.

The Second Optimality Theorem states that "any particular Pareto optimum can be achieved through competitive markets by simply prescribing an appropriate initial distribution of factor ownership and a price vector". In other words, specific politically desired social/economic outcomes can be achieved in a welfare-maximizing manner using the market mechanism by an appropriate initial distribution of incomes and wealth. In Prof Reinhardt's words,

"If on ethical grounds society wished to distribute a good or service (for example, education or health care or food or beach houses) among people in a particular way — like egalitarian principles — it need not have government directly involved in producing or distributing that good or service. The desired distribution could be attained by redistributing income and wealth among the citizenry in a way that would drive the perfectly competitive private market to achieve the desired allocation of the good or service among the people. Better still, it would do so in the welfare-maximizing way."

Let me illustrate this by taking the classic example of a market for any goods/service which is regulated - either in the form of dual-pricing (food grains through PDS) or price controls (petrol or diesel). The incentive distortions and inefficiencies in such markets have been discussed in earlier posts. Prof Arrow's theorems would have it that the specific social/political objectives (say, food security) can be achieved through the market mechanism and by transferring the proportionate cash subsidy directly into the hands of the targeted beneficiaries.

Such subsidies are ubiquitous in India - public transport, public utility services, farm inputs, weaker section housing etc. Assuming Arrow's theorem to be correct, then the way forward would be to dismantle the price controls and target the equivalent subsidies directly to the bank accounts of the intended beneficiaries.

The benefits would be two-fold. One, the market distortions caused by price controls would immediately disappear and the suppliers (including private ones) could compete to deliver services efficiently. Second, benefits would now be more effectively targeted, thereby avoiding much of the wastage and pilferage that characterize the current arrangement.

However, I foresee two major problems with this approach - one on the implementation side and the other on more theoretical considerations.

1. Targeting presumes perfect knowledge about the identity of the beneficiaries. Maintaining the accuracy of beneficiary identification has traditionally been the 800-pound gorilla in India's welfare administration. The complex nature of India's society and polity, heavily politicized welfare administration, and widely-pervasive and excruciating poverty exacerbates the beneficiary identification challenge.

2. The assumption of competitive markets in these sectors is questionable. Many infrastructure segments are classic monopolies and capital intensive and therefore not easily amenable to efficiency promoting competition. Further, given the under-developed markets, the often weak supply-side may not be able to always match up to the massive and increasing demand.

However, there are answers to such challenges. If the UID/Aadhar gets rolled out according to plan, then targeting suddenly becomes easier. In fact, UID-linked bank accounts have the potential to be a game-changer in the transfer of subsidies directly as cash. Further, the only thing worse than a market with monopolistic structure is one that is not only monopolistic but is also inefficient (due to price controls). To that extent, there is a very strong case to be made that the subsidies should be reimbursed to the targeted beneficiary instead of having a dual-price market. In any case, cushioning supply shocks will always require governments to often step-in with an active role with various policies, including maintenance of buffer stocks and aggressive open market operations on it.

Let me describe the current subsidies-based arrangement as S and the proposed cash-transfer based one as C. The balance sheet for S is that while it is easy to implement, it creates considerable market distortions and massive pilferage/wastage. In contrast, though C is difficult to implement, it avoids many of the market distortions, besides being more cost-effective in terms of the net public expenditure. On the balance, it cannot be denied that C produces far less incentive distortions than S. In simple terms, C is superior to S if its net benefits exceeds that of S.

Let C(d) be the incentive distortions caused by C and S(d) that caused by S.
Let C(w) be the wastage/pilferage generated by C and S(w) that by S.
Le C(i) be the measure of logistics of implementation of C, and S(i) that of implementation of S.

On the balance, the net cost of implementation of S is a measure of S(d) + S(w) + S(i), and that of C will be C(d) + C(w) + C(i). Further, as is clear from the aforementioned reasoning, C(d) < S(d), C(w) < S(w), and C(i) < S(i). Adding them

S(d) + S(w) + S(i) > C(d) + C(w) + C(i)

(S(d)+S(w)+S(i))-(C(d)+C(w)+C(i)) > 0

Therefore, the total cost of S will always be larger than C for any S or C interventions.

The choice of policy alternatives becomes very clear with this formulation. With UID-linked bank accounts, C(i) stops being a major problem, and to that extent the cost differential between S and C widens. As already discussed, the incentive distortions and wastage/pilferage is much less with cash transfers than with subsidized regimes. On the balance, cash transfers score over price controls and dual-pricing.

Delivering welfare benefits

Here is my Mint op-ed on using UID-linked TFI bank accounts to deliver CCT-based welfare assistance. See also this.

CCT, UID, and TFI

Recent government initiatives on total financial inclusion (TFI) and unique identity number (UID) makes it possible to design a strategy that unties the gordian knot on effective delivery of goverment's welfare programs to intended beneficiaries.

The leakages in government welfare programs for the economically deprived are mainly two-fold - targeting of beneficiaries and pilferage in the actual delivery of benefits. The former gets manifested in the form of ineligible, duplicated and even fictitious beneficiaries, and the latter in the form of beneficiaries getting less than their actual benefits.

Administering the delivery of welfare benefits in a massive and complex country like India poses enormous challenges. Policy makers designing programs for the entire country are faced with conflicting choices and a difficult trade-off between ensuring efficiency in delivery and minimizing corruption. In an effort to eliminate leakages and target the delivery, they design programs with multiple layers of monitoring mechanisms, uniform standards for beneficiary selection and strict guidelines outlining the process of delivering benefits to the consumers. Unfortunately, the result is a tangle of bureaucracy that ironically enough increases inefficiency and spawns both rent-seeking and wastage, broadly in the form of the aforementioned leakages.

Designing a program that avoids getting entrapped in the bureaucratic tangle of norms, components and guidelines, while preserving the basic administrative requirements to effectively monitor and ensure that the program meets its objectives, is one hell of a challenge. Simplistic prescriptions like people's participation and local decision-making, while easy to preach are very difficult to implement.

A paradigm shift in the delivery of welfare benefits can be achieved with a combination of unique identity and bank account for each citizen, and delivery of welfare benefits in the form of cash transfers. Fortunately, recent developments make it possible to implement all three policy alternatives and realize the expectedte benefits in effectively targetting social welfare programs.

The government have already initiated a high-profile Unique Indentification (UID) project to allot a unique number to all citizens over five years. The equally ambitious Total Financial Inclusion (TFI) project seeks to provide access to formal credit mechanisms by giving them a bank account to everyone below poverty line. The missing piece is conditional cash transfer (CCT) programs that directly transfers cash to the recipients, conditional to their achieving certain health, educational land nutritional outcomes.



CCT schemes are based on the premiss that each family knows what is best for them, what are their needs and wants and how the money can be most effectively spent. They are already the most discussed idea in development policy making, rising to prominence with its considerable successes in Brazil and Mexico during the last decade. Nancy Birdsall of the Center for Global Development has described CCTs as the "closest you can come to a magic bullet in development" and they are gaining widespread acceptance as the most effective poverty-fighting strategy.

A UID number is the most fool-proof method of ensuring targeting of beneficiaries and would also save the massive transaction and administration costs associated with the process of selecting beneficiaries. The various welfare benefits - from CCT programs, pensions, NREGS wages, interest and other subsidies, loans etc - can be directly transferred into the respective accounts of beneficiaries and thereby eliminate pilferage of benefits.

This "magic bullet" triptych of UID-TFI-CCT would considerably enhance the ability of governments to assist specific categories of economically and socially deprived citizens with customized welfare programs. A whole series of assistance measures, hitherto thought difficult or even impossible to administer, can be delivered easily and effectively. Instead of messing with prices through the plethora of market distorting price controls (for food, fertilizers, seeds, kerosene, petrol and diesel), it becomes possible to deliver subsidies as direct cash transfers to respective individual accounts. Similarly, tax credits can be provided to specific categories of people.

This triptych also enables the economically deprived people to more easily access the wider market and private businesses to penetrate the massive market at "the bottom of the pyramid". It increases the efficiency and reduces the costs for private businesses to deliver certain services, especially to economically deprived people who were most likely to have been denied access to this market.

The UID number, with related bio-metric identification mechanism, will ensure that only the intended beneficiary avails of the benefits. With time and the network effect arising from the expansion in the use of UID database for delivery of different welfare and other (even private) services, it also becomes possible to means test and screen beneficaries for their eligibility to access various benefits.

The TFI bank account will ensure that payments are delivered directly to the individual, cutting through the different layers of bureaucracy, without pilferage at any level.

CCT programs, by directly transferring money, will ensure that the commonplace wastages associated with government procurements and service delivery are avoided or atleast minimized. More importantly, direct transfers through CCT programs involving cash or vouchers (for say education, housing, health care, food grains, employment training etc) minimize market distortions arising from practices like dual pricing, with its resultant corruption and emergence of parallel markets.

Taken together, TFI and CCT enables the government to deliver a wider range of welfare assistance - interest subsidies, matching contributions, tax credits, lump sum transfers, externality credits etc - in addition to the regular types of subsidies. It also helps the use of technologies like mobile phones and internet to be more widely used to target and deliver assistance to the target beneficiaries.

This tryptich will radically enhance the effectiveness of delivery of the myriad government programs like delivery of pensions, self-employment benefits, PDS, education loans, health insurance, farm subsidies, and so on. They deliver much greater bang for the development buck by lowering transaction costs, ensuring better tragetting, removing ineligible beneficairies, and minimizing the costs arising from market distortions due to direct government interventions that tinkers with prices.

With such policies it becomes possible to deliver subsidies without tinkering with the price signals and distorting incentives. The government can deliver subsidies directly into the TFI bank accounts of the beneficiaries after validating their UID numbers. The subsidy can be for a fixed quantity of the product or service at a pre-defined flat rate on its price. The beneficiary will purchase the product or service from the market by paying the regular market price. This subsidy can be redeemed either by presenting vouchers or consumption bills. In order to account for inflation, the subsidy rates can be benchmarked to the Consumer Price Index (CPI) or some other price index.

While the PDS will continue to deliver foodgrains, fuels like kerosene and LPG can be delivered using vouchers. These vouchers can be used to purchase kerosene and LPG from the retail market, then produced at the Fair Price Shops (FPS) and redeemed after UID validation of the smart card. The subsidy can be transferred directly to the UID-linked bank account.

This approach can address the problems posed by free-power to farmers. A fixed amount of electricity can be given to farmers at subsidized rates by transferring the subsidy into their bank accounts after validating their UID numbers and their consumption bills. This arrangement give the flexibility to target the amount of subsidies for specifically the harvest period and deny the same for off-seasonal activities. The same approach can be adopted to deliver subsidies for water and various agricultural and industrial equipments and inputs. Fertilizer subsidies too can be delivered through this arrangement.

Update 1
Interesting figures from here. Responding to a Parliamentary Question in December 2009, the Minister of State for Consumer Affairs, Food and Public Distribution revealed that 2006, 5,300,000 bogus ration cards had been identified in West Bengal, 1,046,000 in Andhra Pradesh. Orissa was amongst the lowest at 250,000. A recent UN Population Agency (UNPA) found that a mere 8% of beneficiaries under the Janani Suraksha Yojna (JSY) - a program that entitles pregnant women with a cash transfer (at the time of delivery) if they undergo an institutional delivery - in Bihar received their money when discharged while Orissa topped the list at 20%.

Update 2 (26/6/2010)

The penetration levels and access to finance across the country are quite meager - six out of 10 Indians do not have access to a bank account; home mortgage as a proportion to GDP stands at barely 7%; and insurance penetration is under 4%.

Update on CCT programs

Ever since first making their mark in the nineties, Conditional Cash Transfer (CCT) programs have become the most discussed idea in development policy making. Nancy Birdsall, of the Center for Global Development, calls CCTs "as close as you can come to a magic bullet in development". CCTs work on the twin ideas that inter-generational poverty is, at least in part, a "behavioral" problem that can be modified through free-market incentives and that providing direct cash to the recipients is the most efficient way of distributing welfare benefits.



Via Chris Blattman, the two latest developments on Conditional Cash Transfer (CCT) programs - analysis of a CCT trial in New York City and a World Bank study on the evidence from CCT programs across the world.

In September 2007, New York Mayor Mike Bloomberg launched the Opportunity NYC as a three year experimental CCT program, on the lines of the hugely successful Oportunidades Prgram of Mexico, for a broad range of health, education, and work-related activities. It is funded entirely by private philanthropies (including that of Mr Bloomberg), is being evaluated by a non-profit research firm, MDRC, using a random assignment research design and is administered by Seedco, a nonprofit community development organization. Families are rewarded with $200 per family member for annual doctor's visits and $50 per child every two months for good school attendance. Parents can receive from $40 to $100 a month if they keep up with their responsibilities with the education and health of their children.

A recent evaluation of the program reveals many positive things. Only 43 percent of families had a bank account when they enrolled in the program; now over 90 percent of the families have accounts, a requirement for receiving the payments. It has so far paid $10 million to 2,400 families living at or beneath 130% of the poverty line - about $22,000 for a family of three, and the typical participating family earned just under $3,000 during Opportunity NYC's first year.

Mexico's Oportunidades program, started in 2002 and covering 5 million households now, providing cash payments to families in exchange for regular school attendance, health clinic visits, and nutritional support, has become the touchstone for Conditional Cash Transfer (CCT) programs across the world.

The World Bank report (full report pdf), the first comprehensive evaluation of CCT programs across the globe, finds that these programs "can reduce poverty both in the short and long term, particularly when supported by better public services". The World Bank, whose lending support for CCT operations now covers 13 countries, expects to lend about $2.4 billion this year to start or expand CCT operations in Bangladesh, Colombia, Kenya, Macedonia, Pakistan, and the Philippines.

Unlike traditional anti-poverty and development programs, since their inception CCT programs have been followed by a vibrant culture of documentation, monitoring and evaluation that have contributed immensely towards course corrections, designing program components, and impact assessments.



Every Latin American country, Bangladesh, Indonesia, and Turkey, have large scale CCT programs while there are pilot programs in Cambodia, Malawi, Morocco, Pakistan, and South Africa. Bangladesh has programs for getting back out of school children, to incentivize unmarried girls who have completed primary schools attend secondary schools, and for primary school going poor children. India, stuck up with Self Help Groups (SHGs), micro-loans, and subsidies, remains alone among the major developing countries without even a pilot CCT program (apart from a small one in Haryana, and that too badly evaluated).

Update 1 (4/1/2010)

Tina Rosenberg assesses CCT programs in Brazil and Mexico.

Pensions for SHG members

With elections round the corner, the the government of the state of Andhra Pradesh in India have announced a landmark three-in-one pension cum insurance cum scholarship scheme for women Self Help Group (SHG) members and their families, Abhaya Hastham or Indira Kranti Patham Pension scheme.

Nearly 12.5 million women are expected to benefit from the scheme, which promises pension of Rs 500-2000 to every SHG memeber above 60 years. The members have to contribute a minimum of Rs 1 per day, which will be matched by the State government, and the money so accumulated will form a pension fund, to be managed by the Life Insurance Corporation (LIC). Besides the pension, the scheme also covers its members with life insurance and student scholarship for their children. The government has earmarked Rs 365 Cr in the budget for the program.

The scheme can deliver greater social bang for the buck if its subscription is made conditional to the members achieving certain specific social desirables like sending children to school, universal immunization for children, provision of nutritional supplements to children, adoption of birth control operations, attending adult literacy programs etc. It can also be linked to the thrift activity of the group. The scholarship part of the scheme too can be structured in a manner so as to incentivize better school performance. Monitoring the fulfilment of these conditions, while difficult, is not impossible.

CCTs and winning elections

Here comes fairly compelling evidence to show that Conditional Cash Transfer (CCT) schemes are not only efficient means of transferring development assistance but are also vote-winners! Chris Blattman points to a fascinating study of CCT schemes by Marco Manacorda, Edward Miguel, and Andrea Vigorito, which finds evidence that such programs generate greater political support than other welfare spending programs.

They studied the impact of the Uruguayan PANES CCT program, consisting mainly of a monthly cash transfer for a period of roughly two and half years, on political support for the government that implemented it. Their findings include

1. Beneficiary households are 21 to 28 percentage points more likely to favor the current government (relative to the previous government).
2. The impact of the same nominal cash transfer is "larger among poorer households and for those near the center of the political spectrum", consistent with the "probabilistic voting model in political economy" and the fact that "the marginal utility of consumption is highest for this group".
3. The "effects persist after the cash transfer program ends".
4. They estimated that the "annual cost of increasing government political support by 1 percentage point is roughly 0.9% of annual government social expenditures".

Intutively too, cash transfers, being more direct and salient, are more likely to catch the immediate imagination of its beneficiaries than the more indirect methods like subsidies or in kind assistance. Surely, it provides more direct exposure for the politician to deliver the subsidy for fertilizers or crop price support or health insurance as direct cash transfers instead of the regular method providing poor quality seeds or fertilizers or health care.

In fact, one of the greatest attractions for politicians (and Governments) in promoting Self Help Groups (SHGs) and micro-finance in states like Andhra Pradesh, has been the symbolic political value attached to the regularly held loan disbursement melas. The flagship poverty alleviation programs of both the previous (Velugu program) and present (Indira Kranti Pathakam and Pavala Vaddi loans) governments in Andhra Pradesh have revolved around direct cash transfers in the form of micro loans to SHG members.

Many shrewd politicians have realized that they derive more political mileage from these direct cash disbursements than the old IRDP-style asset distribution! CCTs are only a small step ahead from the SHG loan disbursements. Now, atleast this should spur some of our own politicians to embrace them!