Public policy's gatekeeping problem

This post will examine the rise of an important but less-discussed trend in public policy, the emergence of a category of entities as gatekeepers in the form of agents who accredit, certify, validate, or authorise the quality or efficacy of specific tasks or entities. In short, gatekeepers signal compliance of a third party with some benchmark. 

Such gatekeepers are pervasive in the market economy. Their examples include credit rating agencies, process and financial audit firms, product certification entities, third-party authorisers for insurance claims, asset valuation entities, etc. In the context of public policy, such gatekeepers include institutional certification agencies, standards certification firms, infrastructure works quality certification, licensed professionals (like architects, town planners, surveyors, etc.), rankings, and so on. Each performs the roles of assessment/evaluation and/or certification/validation.

I’ll skip the role of gatekeepers who operate in well-established markets and whose problems are widely known. Instead, this post will focus on the role of these firms in public services and development sectors. Some observations:

1. Gatekeeping is a specific form of outsourcing, since it involves the parcelling and contracting out of a distinct activity hitherto done in-house. It has its basis in the private sector, where activities can be neatly parcelled out, quantification of performance is possible, accountability can be fixed, and contractual incentives are aligned. The same cannot be said about the public sector.

A critical difference between the use of gatekeeping in the private sector and the public sector is the absence of any market test in the latter. Specifically, since users don’t pay for these services (or pay only a small part of the cost), there’s no competitive pressure to ensure good quality. 

In this context, it would be useful to keep in mind the example of the Ease of Doing Business (EoDB) rankings. While the rankings have doubtless triggered policy measures to simplify procedures and reduce hassles for businesses, the absence of a complementary attitudinal and cultural change management focus has reduced it to a performative exercise. Now that it has played out, I’m not sure about its signalling value for prospective investors. 

2. In keeping with the theory of scaling in the private sector, it’s a widely held view that state capability constraints to rapid expansion can be overcome by the likes of standardisation, outcome-based financing, and targeting. Accordingly, enlisting gatekeepers has become a prop to skirt around state capability deficiencies and rapidly scale activities. 

A good example is cleanliness programs like the Open Defecation Free (ODF) scheme. Another example is the certification of various kinds of educational, vocational training, skilling, and healthcare institutions. Similarly, with the certification of self-help groups, farmer producer organisations, and co-operatives. The Government of India enlisted the services of the Quality Council of India to undertake many of these activities. 

Poor service or institutional quality exists due to fundamental constraints arising from personnel capabilities and resource deficiencies. No gatekeeper or ranking can help systems leapfrog these deficiencies and overcome those fundamental constraints. They require sustained accumulation of capabilities and allocation of resources. 

For this reason, the ISO certification that had become a fad in the 2000s among government offices in many states has since fallen out of favour. The ISO 9001 certified offices had the form of quality without its substance. It was classic isomorphic mimicry. A tickbox exercise of cosmetic infrastructure upgrades, procedural changes, and role clarifications cannot be a substitute for state capability improvement and good governance. 

3. Ironically, the very state capability deficiency that necessitated the reliance on gatekeepers is generally also the reason for the failure of the gatekeeping solution. In the absence of monitoring, gatekeepers are vulnerable to being captured by the same interests they are supposed to evaluate or certify. 

4. Certifications can add layers of costs to the total price of the product or service. Certification comes with additional compliance requirements. A green certification often comes with the need for solar panels, water harvesting structures, new lighting fixtures, and so on, which add significant incremental costs compared to business as usual. The value of at least some of these requirements, especially their universal application, can be questionable. For example, the requirement of backup power sources like a diesel generator and solar panels to meet certain standards adds considerable incremental costs.

These cost layers can become a problem in an emerging market. The higher cost shrinks affordability, reducing the market size needed for these nascent markets to emerge and grow. This is best seen in the affordable housing market, where the restrictive zoning regulations, when supplemented with desirable features like sustainability, add several layers of cost that make the struggling market even less likely to emerge. It’s the classic everything bagel liberalism. 

5. On a related note, there’s a possibility that gatekeeping, by differentiating the certified/validated products, results in a distortionary market evolution. Let’s take the example of a star rating, where a product or a building is rated from 1 to 5 stars. Since people are less likely to buy the 1 or 2-star rated products, the sellers are more likely to invest in the higher-rated products. This results in perverse incentives like cutting corners on compliance and distorting the market with the lemon problem. Further, the higher cost of the higher-rated products also shrinks the addressable market. 

It’s, therefore, important to weigh the pros and cons before embracing gatekeepers. One strategy would be to confine gatekeeping to the higher market segments where signalling is valuable and where affordability is not a concern. 

6. Finally, in weak disciplining environments, like in the case with public sector institutions, gatekeepers are amenable to being captured and becoming handmaidens of vested interests. This distorts the gatekeeping signals and offers misleading information. 

There are several examples of this. Independent engineers and third-party quality audit firms becoming captured by the work contractors is not an uncommon feature in engineering works, especially in lower and mid-value works. Perhaps the most common are the several examples of rankings (of individuals in functional roles, institutions, administrative units, etc.) that are supposed to convey quality and performance. They have unfortunately become captives of unhealthy quid pro quos between the ranking agencies and those ranked. 

The Insolvency and Bankruptcy Code (IBC) in India triggered a new market for insolvency resolution professionals (IRPs), one that grew at a pace faster than the supply side could keep up with. The result is a system with a surfeit of poor-quality IRPs who have contributed to the lowering of the credibility of the process itself. The recent Supreme Court judgment in the case of the IBC-intermediated takeover of Bhushan Steel by JSW is a case in point (it’s perhaps more about the incompetence of the IRP than capture). 

For this reason, policymakers must be cautious and gradual in the adoption of gatekeeping in any sector.

Weekend reading links

1. For all practical purposes Apple appears to be a Chinese company. Tim Cook has ensured the near complete surrender of the company to the Communist Party. Jay Newman writes in FT Alphaville that the biggest driver of its share price may be the close relationship Cook has cultivated with China.

Entente cordiale with the Chinese Communist party affords Apple a charmed existence when it comes to manufacturing and selling products in China... Cook has embedded Apple ever deeper in China over the past 20 years. After inking a secretive 2016 agreement to invest $275bn in China’s economy, workforce, and technological capabilities, the iPhone became a best-seller. In reality, Apple is now as much a Chinese company as it is American. Almost a fifth of its revenue comes from sales in China, and operating profits in greater China — Hong Kong, Macau, Taiwan, and the mainland — topped $31.2bn in 2022. That’s a hefty chunk of Apple’s earnings (though given the near impossibility of getting large sums out of China, those profits may not even be money good). Apple provides more than cash and intellectual property. Relations are enhanced by the credibility Apple’s brand bestows on a repressive, autocratic state, and the (cough) flexibility it demonstrates in supporting CCP objectives. When it comes right down to it, Apple just can’t say no...

Apple is tiptoeing — frantically — towards the exit: moving production of iPhones to India, AirPods to Vietnam, Macs to Malaysia and Ireland... But these efforts seem futile: Apple likely will never be able to completely exit China. Even small shifts risk retaliation by Chinese overlords who might retaliate by turning Chinese consumers against Apple products. Will China — which has contributed hugely to Apple’s success — allow it to slink away? Why would they? These are problems Apple made: for the foreseeable, Apple has no choice but to do what China wants.

I would not be surprised if Apple becomes an example of how corporate greed and lack of foresight brought about the downfall of the world's largest company and its most famous brand.

2. In another article Newman and others points to the problem of US companies in China not being able to repatriate their profits back. 

As a practical matter, from the perspective of capital investment, that makes China a roach motel: you can get money in, but you can’t be sure of how, when, or at what value you’ll be able to get it out. The renminbi isn’t freely convertible. So, as a threshold matter, Chinese regulators not only control the price of the currency but, implicitly, the value of investments. More important: withdrawal of capital and the repatriation of profits through dividends are discretionary. Chinese law forbids anyone from sending more than $50,000 out of China in any given year without government approval, and the Chinese state controls an extensive bureaucracy that administers those rules. If the CPC is feeling anxious about hard currency reserves, the payment of dividends to foreign investors may not be its highest priority. And, if a sanctions regime against China or Chinese entities expands further, all bets are off... There is nevertheless an argument for Western companies’ Chinese cash to be viewed as a stranded asset — and accounted for as such. In the event of a hotter Cold War, foreign investments in China could be held hostage, and the ability to repatriate significant amounts of capital could devolve, without much warning, into coerced transfer of technology and a geopolitical quagmire.

The reason why US companies continue to invest in China appears to be because the financial markets value it

Even without much evidence as to how much Chinese revenues actually contribute to the bottom line, financial markets appear to prize it. Back-of-the-envelope calculations suggest Western investors ascribe significant value to Chinese revenue on the books of Western companies — far more than the value ascribed to equivalent sales by their Chinese counterparts. A simple price-to-sales ratio points to Chinese revenues booked by Western companies being worth 50 per cent more than they would be on the books of Chinese entities...

Through the magic of arbitrage, international capital markets can be used to transform Chinese revenue from indistinct income statement entries into opportunities for Western executives and shareholders to sell their shares on American and European stock exchanges. Stranded revenue from sales within China has been a boon to the share values of Western companies: illusory Chinese renminbi have become dollars and euros.

It's only a matter of time before the high valuations of US companies investing in China would revert to their true valuations. Apple may be the biggest loser. 

3. In a definitive break from the past, the US National Security Advisor Jake Sullivan made it clear that it's not the US Government's responsibility to protect US business interests in China, thereby signalling a clear discouraging of US business investments in that country. 

“Our priority is not to get access for Goldman Sachs in China,” Sullivan said at the White House. “Our priority is to make sure that we are dealing with China’s trade abuses that are harming American jobs and American workers in the United States.”

4. Europeans tighten scrutiny of Chinese investments in Europe

Chinese investment into Europe fell to its lowest point in almost a decade last year as European countries tightened rules to stymie a slew of Chinese acquisitions. The 22 per cent decline in investment in 2022... reflects Europe’s recent moves to police the sale of assets to China after years of enthusiastically courting investment from Beijing. The researchers found that at least 10 out of 16 investment deals pursued in 2022 by Chinese entities could not be completed in the technology and infrastructure sectors, principally because of objections raised by authorities in the UK, Germany, Italy and Denmark. Several of the aborted deals, such as proposed semiconductor acquisitions in Germany and the UK, were blocked following reviews into the specific technology targeted by the Chinese investor... The overall level of Chinese investment into the EU and UK declined 22 per cent to €7.9bn in 2022, the report said. The level of investment was a fraction of the €47.4bn recorded in 2016 and the lowest total recorded since 2013. The totals include investment into new operations as well as mergers and acquisitions.

5. The Chinese government has made it an art to say one thing in public and pursue another thing in private. The latest is the efforts to woo back private investments being accompanied by restricting access to information and raids on foreign companies. Sample this about raids on the expert network group Capvision which was shown primetime on national television,

Capvision specialises in connecting international investors and management consultants, such as those from Bain and McKinsey, with its network of 450,000 subject specialists. More than 500 of the 700 employees of the company, which was founded in 2006, are based in the mainland, according to public records... Billed by state media as part of a nationally co-ordinated campaign to clean up the consulting industry in the world’s second-largest economy, it follows other raids in recent weeks on blue-chip US firm Bain & Company and due diligence group Mintz. The campaign is making it more difficult than ever for foreign investors to glean even basic information on potential acquisitions, Chinese partners or suppliers. That is at least partly by design as Beijing also methodically curtails foreign access to once openly accessible public data such as academic theses and business ownership records. The clampdown comes despite a charm offensive by Li Qiang, China’s second-ranked leader after President Xi Jinping, to woo foreign and private investors back to the country after coronavirus pandemic controls crushed growth last year...

The clampdown on expert networks comes as China has cut off foreign access to data, ranging from shipping transponders that relay global supply chain information in real time, to public databases. Last month, the country’s largest academic database CNKI, home to university theses, dissertations and other academic papers, began blocking foreign access. Private and government-run databases with Chinese corporate information, patent information, court records and procurement tenders have also snapped shut.

These raids and their public screening have been sought to be rationalised as over-kills by the lower level bureaucrats on directions from the top. To an extent lower level bureaucrats tend to overdo stuff. But in a tightly run ship as China is, if the over-kills end up hurting the purpose of the leadership to attract back foreign investors then it's difficult to believe that they would not rein in such overkills. Besides, the airing of the raids on primetime television should leave us in no doubt about the intentions of the Chinese authorities to send out a strong message to its own citizens against sharing any information with foreigners. 

Beijing believes that it can pull off the contradictory actions of wooing investors on the one side while undertaking raids and clamping down on ease of doing business for foreigners, because it feels foreign investors are greedy and short-sighted and will collectively overlook such actions when wooed individually by the Chinese government.   

See also this long read on how restrictions on travels and information access is making it difficult for Americans to understand the latest trends and issues in China.

6. Rana Faroohar has some numbers on China's concentrated market power in important sectors,

According to a 2022 US-China Economic and Security Commission review, 41.6 per cent of US penicillin imports came from the country, which also has 76 per cent of global battery cell manufacturing capacity within its borders, 73.6 per cent of permanent magnets (a critical component of electric vehicles), and from 2017 to 2020, supplied 78 per cent of US imports of rare earth compounds.

Given the pervasive concentration in markets, Faroohar writes

I’m beginning to think that we should institute a new market principle that Barry Lynn, the head of the Open Markets Institute, an antimonopoly think-tank in Washington DC, calls “a rule of four”. In crucial areas, from food to fuel to consumer electronics, critical minerals, pharmaceutical products and so on, no country or individual company should make up more than 25 per cent of the market. What’s more, countries should apply this rule both locally and globally.

7. Quiet transformation in the Business Process Outsourcing sector in Philippines.

Before the pandemic, 75% of the Philippines’ IT professionals worked in Metro Manila—the centre of BPO companies since the early 1990s. Now, it’s down to 50%, according to real-estate services provider KMC Savills... In 2022 alone, it generated a revenue of US$32.5 billion, more than 8% of the national GDP... The exodus is spreading BPO facilities across the nation as prospects for growth emerge in other regions... The migration from Manila started in 2020. However, the homecoming of workers has accelerated only recently... In 2022, 31% of BPO jobs were located outside Manila, 17 percentage points higher than in 2021... BPO companies are relocating because of a basket of reasons. One main motivator is that their staff have stronger spending power outside of Manila, and costs for those operators are lower in other major cities. It’s an equitable situation for everyone involved. Meanwhile, a new breed of companies—knowledge outsourcing process services like animators, game developers, and telehealth providers—is slowly filling in the physical void left behind by BPOs that have departed Manila... KPO service providers handle tasks that cannot be automated and require more specific skill sets, such as animation, game development, and telehealth.

8. More signals of worsening trends in American health care industry. This time NYT reports that large corporations and health insurers are gobbling up small primary health care practices.

CVS Health, with its sprawling pharmacy business and ownership of the major insurer Aetna, paid roughly $11 billion to buy Oak Street Health, a fast-growing chain of primary care centers that employs doctors in 21 states. And Amazon’s bold purchase of One Medical, another large doctors’ group, for nearly $4 billion, is another such move. The appeal is simple: Despite their lowly status, primary care doctors oversee vast numbers of patients, who bring business and profits to a hospital system, a health insurer or a pharmacy outfit eyeing expansion... The growing privatization of Medicare, the federal health insurance program for older Americans, means that more than half its 60 million beneficiaries have signed up for policies with private insurers under the Medicare Advantage program. The federal government is now paying those insurers $400 billion a year... It’s a one-stop shop for all your health care dollars...

The absorption of doctor practices is part of a vast, accelerating consolidation of medical care, leaving patients in the hands of a shrinking number of giant companies or hospital groups. Many already were the patients’ insurers and controlled the distribution of medicines through ownership of drugstore chains or pharmacy benefit managers. But now, nearly seven of 10 of all doctors are either employed by a hospital or a corporation, according to a recent analysis from the Physicians Advocacy Institute. The companies say these new arrangements will bring better, more coordinated care for patients, but some experts warn the consolidation will lead to higher prices and systems driven by the quest for profits, not patients’ welfare.

Insurers say their purchase of medical practices is a step toward what is called value-based care, with the insurer and doctor paid a flat fee to care for an individual patient. The fixed payment acts as a financial incentive to keep patients healthy, provide more access to early care and reduce hospital admissions and expensive visits to specialists. The companies say they favor the fixed fees over the existing system that pays doctors and hospitals for every test and treatment, encouraging doctors to order too many procedures.

Under Medicare Advantage, doctors often share profits with insurers if the doctors take on the financial risk of a patient’s care, earning more if they can save on treatment. Instead of receiving a few hundred dollars for an office visit, primary care doctors can be paid as much as $14,000 a year to manage a single patient.

More evidence of the corrosive effects of private equity in health care. Envision, a hospital staffing company owned by KKR is lurching towards bankruptcy after "crumbling under the weight of a $7 billion debt load it accumulated as part of its 2018 buyout".

9. After oil, the new area for tension between India and west could be on diamond trade. The west, led by the US, is exploring ways to establish traceability and restrict diamond exports from Russia, the world's largest diamond miner. Russian diamonds, from the world's largest diamond mining company Alrosa, find its way into Surat which polishes 90% of the world's diamond supply. Russian diamonds, which are smaller in size and therefore require more people to cut and polish, are the main source of employment in Surat. The diamond industry employs around 1 million people in India.

10. TT Ram Mohan examines the US Federal Reserve's report on the Silicon Valley Bank failure and draws lessons for India

The RBI's... intrusive approach is a better safeguard for banking stability than the light touch elsewhere. However, supervision can only be a third layer of defence against bank instability. Regulations are the primary layer, followed by the board. The RBI must find ways to get bank boards to do a far better job. A radical change would be to alter the way independent directors are appointed at banks. At present, the promoter or CEO has the dominant say in the appointment of independent directors (at both private and public sector banks). The RBI may want to insist that, for instance, one independent director be chosen by institutional investors and another by retail shareholders (from a list of names proposed by the Financial Services Institutions Bureau). Until we have independent directors who are distanced from the promoter and management, it’s unrealistic to expect board oversight to improve.  

The RBI is hosting a conference for bank directors later this month. Here are two suggestions. One, in the interests of transparency and accountability, the RBI may want to commission a review of the failures at IL&FS and Yes Bank. Two, it may prescribe the FRB’s review of SVB’s failure as one of the “readings” for the conference. It may also include the report of the UK’s Financial Services Authority on the failure of Royal Bank of Scotland during the GFC. At least, bank directors can’t say they weren’t warned.

11. Latest data from the implementation of the IBC

According to the Insolvency and Bankruptcy Board of India (IBBI), 611 insolvencies that yielded a resolution plan by the end of December 2022 took, on average, 482 days. Similarly, about 1,900 cases that went for liquidation took, on average, 445 days. There is clearly a need to reduce the amount of time taken to resolve insolvencies.

12. India warehousing market facts of the day

India’s warehousing stock of grade A and B facilities has grown to 330 million sq ft today, from 140 million sq ft in 2017, according to estimates by JLL, a property advisory... The US added 333.8 million sq ft of new warehousing space in 2022 alone—that’s higher than India’s overall warehousing stock as of now... ... while 51.8 million sq ft of warehousing space was leased in 2021-22 in the eight primary markets, through grade A and B warehousing, another 15 million sq ft was leased across India’s 13-15 secondary markets.

13. Vivek Kaul points to the latest data set on India's small consumption class,

As the Indus Valley Report 2023published recently pointed out, 1% of Indians take 45% of flights, 2.6% of Indians invest in mutual funds, 6.5% of users are responsible for 44% of UPI transactions, and 5% of users account for a third of the orders placed on Zomato. As Zomato recently reported: “Customers with annual order frequency >50 as a % of annual transacting customers have increased from 1.4% in 2018 to 4.7% in 2022." Basically, this means around 5% of Zomato’s customers order from it at least once a week. So, as the Indus Valley Report points out: “Much of the consumption is driven by a tiny super-user set… [The] broad user base narrows sharply when it comes to paying users."

This is the Indus Valley Report 2023 mentioned. This graphic is interesting and highlights the point about the small consumption class.  

Working papers compilation - I

1. Outsourcing creates a trade-off - outsourced workers experience large wage declines while domestic outsourcing may raise aggregate productivity. This paper finds, 

Three implications arise. First, more productive firms are more likely to outsource to save on higher wage premia. Second, outsourcing raises output at the firm level. Third, contractors endogenously locate at the bottom of the job ladder, implying that outsourced workers receive lower wages. Using firm-level instruments for outsourcing and revenue productivity, we find empirical support for all three predictions in French administrative data. After structurally estimating the model, we find that the rise in outsourcing in France between 1996 and 2007 raised aggregate output by 3% and reduced the labor share by 0.7 percentage points. A 9% minimum wage increase stabilizes the labor share and maintains two thirds of the output gains.

The point is then about an appropriate minimum wage that can stabilise labor share without significantly denting output gains.   

2. Another paper discusses the economic, social and development impact of Covid 19 by summarising the findings of various studies done so far. It has a nice summary of all the various kinds of micro-impacts, especially across low and middle income countries (LMICs). 

3. One more paper highlighting the importance of access to opportunities in the form of big push like investments to help people break out of the poverty traps. The paper studies a 11 year panel in rural Bangladesh on the impact of an asset transfer and finds,

People stay poor because they lack opportunity. It is not their intrinsic characteristics that trap people in poverty but rather their circumstances. This has three implications for how we think about development policy. The first is that big pushes that enable occupational change can play a role in alleviating the global poverty problem. Small pushes will work to elevate consumption but will not free people from the poverty trap. The magnitude of the transfer needed to achieve occupational change may be much larger than is typical with current interventions, though importantly it can be time-limited. The fiscal cost of permanently getting people out of poverty through a large, time-limited transfer might therefore actually be lower than relying on continual transfers that raise consumption but have no effect on the occupations of the poor.

The second is that big push policies can have long-lasting effects. Our analysis of long-run dynamics indicates that the asset, occupation and consumption trajectories of above-threshold beneficiaries diverge from those of below-threshold beneficiaries over time. This finding is important as it indicates that, by engendering occupational change, one-time pushes can have permanent effects.

The third is that poverty traps create mismatches between talent and jobs. We have shown that misallocation of labor is rife among the poor in rural Bangladesh. Indeed, we show that the vast majority of the poor in rural Bangladesh are not engaged in the occupations where they would be most productive. They are perfectly capable of taking on the occupations of richer women but are constrained from doing so by a lack of resources. The value of eliminating misallocation is an order of magnitude larger than the cost of moving all the beneficiaries past the threshold. This is important as it implies that poverty traps are preventing people from making full use of their abilities and indeed it is the mass squandering of people’s abilities that is the key tragedy of poverty.

Its empirical findings comparing across programs,

Assuming the household works each of the 100 days they are entitled to, the value of NREGA is 0.13 of annual per-capita expenditure. BRAC typically offers entry microloans between 100 USD and 200 USD, which correspond to 0.18 and 0.3 of average annual per-capita expenditure. Thus, two of the main programs designed to tackle poverty are too small-scale to make a long-term difference for the majority: our simulation suggests that they would allow fewer than 20% of households to escape poverty... In a first set of simulations, we resimulate the model under the assumption that all households are given a transfer equal to an increasing percentage of annual per capita consumption expenditure, until the point at which misallocation equals zero. This exercise suggests that the value of misallocation — measured as before against the maximum payoff available at the upper mode of the distribution of productive assets excluding land — would be zero if all ultra-poor households were given a transfer equal to 3.95 times the average level of baseline per capita consumption expenditure among ultra-poor households.

It's headline policy finding,

Our results point to the existence of a poverty threshold such that households with a starting level of productive assets below that threshold are trapped in poverty while households who are able to get past the threshold accumulate capital and approach the asset level of the richer classes. This allows them to switch occupations from casual laborers to the more productive business activity of livestock rearing, which in turn facilitates further asset accumulation. The existence of such a poverty threshold has important implications for policy design. Transfer programs that bring a large share of households above the threshold will see large effects on average, while transfers that fall short of this might have small effects in the long run.

The takeaway is that a large enough cash or asset transfer can provide the big push to get people over the threshold and into an enabling path to access different livelihood opportunities. There are at least two problems. One, the fiscal cost of such transfers (3.95/0.13 = 30 times the NREGS transfer) is prohibitive and clearly off the table. Two, more importantly, the economic system's ability to absorb such large shocks (even if staggered in a reasonable manner) by providing the requisite economic opportunities in a sustainable manner is deeply questionable. 

And I am not even talking about the numerous and unanticipatable second and further order consequences of such large asset or cash transfers. 

The point is that cash or asset transfer based pathways out of poverty are at best marginal and unscalable interventions and there is no substitute to sustained economic growth and broad-based development for poverty elimination. 

4. This paper examines the impact of distortions in land rental markets across Indian states on their agriculture productivity. In 2010, the real-value added per Indian worker in non-Agriculture activities was 32% of that in the US, whereas the ratio was just 5% in use of agriculture workers. Besides, the variation in GDP per workers in agriculture across states in 2011-12 is a factor of 13.5. The paper's findings,

First, we show that an efficient reallocation of land can substantially increase agricultural productivity in all states, even relative to Punjab, the state with the least distorted land market in our sample. On average, an efficient reallocation of land increases agricultural productivity by 33 percent (15 percent relative to Punjab). In Tamil Nadu and Karnataka, the increase in agricultural productivity is 89 and 49 percent (63 and 34 percent relative to Punjab)... Such an increase in agricultural TFP would have a much larger effect on agricultural labor productivity because of the reallocation of labor away from agriculture and other productivity enhancing effects such as better selection into agriculture, investment in productivity, the adoption of modern technologies, among others... Second, we decompose the contribution between farm-and state-specific distortions and find that farm distortions contribute to about one-third of the reallocation gains, whereas state-level land wedges contribute the remaining two-thirds. We also show that an efficient reallocation of land would involve substantial increases in both the share of farmers renting (participation in the rental market) as well as the share of land operated by the most productive farms... The largest TFP gains are in states with the least active rental markets.

The paper has an informative table summarising the status of tenancy reforms in various Indian states, including the nature of restrictions on leasing land.

5. How does going public impact the performance of companies?

Public attention to a firm may provide valuable monitoring, but it may also have a dark side by constraining management’s decisions and distracting it. We use inclusion in the S&P 500 index as a positive shock to public attention. Media coverage, Google searches, SEC downloads, SEC comment letters, shareholder proposals, analyst coverage, and lawsuits increase following inclusion. Post-inclusion performance falls and is negatively related to the increase in attention. Included firms’ investment and payout policies become more similar to those of index peers and the increase in similarity is positively related to the size of the attention increase.

6. The moral hazard from seat belt use is more than offset by its safety benefits, 

Using data from the Fatality Analysis Reporting System for the period 1983-1997, Cohen and Einav (2003) found that mandatory seatbelt laws were associated with a 4 to 6 percent reduction in traffic fatalities among motor vehicle occupants. After successfully replicating their two-way fixed effects estimates, we (1) add 22 years of data (1998-2019) to capture additional seatbelt policy variation and observe a longer post-treatment period... investigate pre-treatment trends and explore lagged post-treatment effects. Consistent with Cohen and Einav (2003), our updated estimates show that primary seatbelt laws are associated with a 5 to 9 percent reduction in fatalities among motor vehicle occupants.

7. Gabriel Kreindler has a paper examining the likely impact of congestion pricing on traffic congestion in Bangalore,

I study the peak-hour traffic congestion equilibrium in Bangalore. To measure travel preferences, I use a model of departure time choice to design a field experiment with congestion pricing policies and implement it using precise GPS data. Commuter responses in the experiment reveal moderate schedule inflexibility and a high value of time. I then show that in Bangalore, traffic density has a moderate and linear impact on travel delay. My policy simulations with endogenous congestion indicate that optimal congestion charges would lead to a small reduction in travel times, and small commuter welfare gains. This result is driven primarily by the shape of the congestion externality. Overall, these results suggest limited commuter welfare benefits from peak-spreading traffic policies in cities like Bangalore.

The relative lack of impact from congestion pricing in Bangalore is understandable and important to be borne in mind. In most developing country contexts, infrastructure augmentation by way of new roads, widenings etc continue to remain relevant and higher priority than ideas like traffic congestion. This however does not mean that traffic congestion policies are not important. In specific areas, where the demand elasticity of response is likely higher, congestion pricing can have significant impacts. 

8. A new working paper finds that Amazon systematically manipulates its algorithms to favour its private label brands in its search results.

We study whether Amazon engages in self-preferencing on its marketplace by favoring its own brands (e.g., Amazon Basics) in search. To address this question, we collect new micro-level consumer search data using a custom browser extension installed by a panel of study participants. Using this methodology, we observe search positions, search behavior, and product characteristics. We find that Amazon branded products are indeed ranked higher than observably similar products in consumer search results... All specifications shown, as well as a number of additional checks, including specifications with interaction terms and machine learning approaches, indicate that carrying an Amazon brand is a meaningful predictor of greater prominence in search. The effect of Amazon brands tends to be 30% to 60% as large as the effect of sponsoring.

There is no one right thing in development - in-house Vs outsource

There are several phenomenon in the world whose universe of possibilities involve either multiple equilibriums or take U or inverse U-shapes. All such phenomenon manifest in multiple forms depending on time and/or location and/or other contextual factors. Let's call these multi-form phenomenon. In fact, most phenomena in the world manifest this way.     

The multi-form phenomena teaches us a few things:

1. There is no unique model to explain the phenomena. There are several models. We need to select the model which is appropriate for the specific context and time. 

2. It's not possible to ex-ante claim with any degree of conviction that we'll be successful, even if the implementation is done well. 

3. When all's said and done, there is an inordinately huge element of fortune associated with many phenomena we see around us. We need to do all the things that's required to make it happen, and then hope that things will fall into place and the desired outcomes will manifest. That's all can be done. 

I'll henceforth occasionally document such phenomenon I come across in the public policy space. This post will focus on the idea of outsourcing activities in engineering departments. 

A conventional wisdom in economics and management thinking is that of core-competence and transaction costs. It follows that we should identify activities which can/should be done in-house and those which can be outsourced. The New Public Management school of public policy advocate the importance of attributes and factors like core-competence, transaction costs, efficiency, value for money, delegation, and so on. 

Accordingly, like elsewhere, outsourcing of tasks or activities has become common in governments too. Three questions follow. One, can this task be outsourced? Two, whom can it be outsourced to? Three, how should the contract be managed?

In this context, take the example of an engineering work. The chain of activities involve the following - administrative sanction, estimates or detailed project report (DPR) preparation, technical sanction, tender process,  work award, contract management, work recording and check measurements, quality audit, work monitoring, renegotiations or time extensions or cost-escalations, bill payments, and work closure. In case of large works, most of these activities are outsourced to project management consultants and third party quality control agencies. 

In theory, it's unexceptionable that at least certain activities like estimates or DPR preparation, work recording and check measurements, quality audit be outsourced, just as certain others like administrative and technical sanctions, work award, monitoring, renegotiations, and bill payments be done in-house. But, as I blogged earlier, reality eats theory and logic for breakfast.

Take the case of work recording and check measurements. Consider the context of a bitumen road being laid in an Indian village by a capacity constrained and often corrupt Local Government Engineering Department. It's a reality that most often (in many states) the work recording is done by the agent of the contractor or a contractually employed work inspector, and a complicit and/or over-burdened Assistant Engineer (the lowest functionary) is merely affixing the signature. The sample check measurements by superiors to the AE is either small or absent. 

In the circumstances, there is a logical attraction to argue for dispensing with recording and check measurements by officials and outsource it. After all, recording and check measurements in case of large projects and by better managed public organisations like the National Highways Authority of India (NHAI) are outsourced. Why not simply formalise what's anyways the reality?

I'll hesitate for at least five reasons. One, the large numbers and small size of these works, coupled with weak institutional oversight mechanisms, mean that the likelihood of fraud and corruption is much higher than with large and fewer works managed by the likes of NHAI. Two, the context and political economy of these works is more complex and more vulnerable to capture by rent-seeking interests. Three, outsourced recording and check measurements are effective when coupled with strong complementary safeguards like strong quality audits, which are likely to be even less rigorous in these works. Four, even in a system where deviation is the norm, the mere existence of a form of recording and check measurement acts as a moral suasion and deterrent to ensure that the entire process is not captured. Five, the presence of a formal requirement also strengthens those committed among engineering officials at various levels in forcing their sub-ordinates to necessarily record and check measure their works. 

So, we are faced with the real possibility that, in case of scattered works and where weaknesses in state capacity really show up, the logically appealing idea of outsourcing could end up worsening things. The legal formality of an AE mandated to do recording and check-recording by superior others may be the basic minimum requirement to ensure that atleast some good engineers insist on the same and thereby ensure that the whole thing does not fall apart.

But, it's possible that in some cases (say, a Department or a city or even a State) the outsourcing approach could work. For example, a Department which initiates outsourcing of an activity and is lucky to have a succession of good leaders with commitment to making the reform work. Even here, it would require dollops of plain good luck for things to miraculously fall into place and the reform to stick. 

Who knows? But a teachable example of how there is no one right thing in public management and how judgement plays an important part in decision-making, and judgement, by its very nature, can be flawed, and therefore the need for constant revisions of priors.

Do we outsource and hope that all those things will hopefully fall into place, or retain in-house since the contextual constraints are too many to make it unlikely that the reform will work? This is a tough judgement call, and it's purely an exercise in judgement and hardly an outcome of theoretical and logical contemplation.   

Weekend reading links

1. On reshoring and localisation of production,

Large companies that can afford to own more of their entire supply chain have been moving towards vertical integration as a way to smooth disruptions and the inflationary pressures that result. Companies of all sizes are looking for ways to localise more production wherever their consumers are, no matter which country or region they are in. Many smaller “maker” firms in New York have benefited during the pandemic since they source locally, but the technique is also being picked up by big name brands that simply want more buffers against shocks of any kind — be they geopolitical or climate-related.

2.  Russia and Ukraine's exports of cereals and commodities,

3. TN Ninan questions the rich lists put out by various agencies and points to India's missing millionaires  

India as a whole is said to have 140 dollar-billionaires. According to Credit Suisse, there were 764,000 dollar-millionaires in India in 2019, i.e. those with wealth of Rs 7.5 crore and more... And in the same 2019, all of 316,000 filed tax returns declaring income of over $70,000 (or Rs 50 lakh)... Again, there is no central data point, but checks with companies in the business suggest annual purchases and bookings of fewer than 3,000 residential properties that are individually worth Rs 5 crore and more. Even if one were to lower somewhat the bar for unit value, the number of transactions would remain decidedly modest in relation to the reported numbers of millionaires... Sales for the top three German luxury-car makers peaked at 32,500 in 2017 and have fallen since. In 2021, they were just 22,500 -- affected partly by Covid and then the shortage of chips. Allowing for that, and adding on the numbers for Jaguar-Land Rover and top-end Japanese models like the Lexus, the total is unlikely to cross 40,000. The mismatch with the reported number of dollar-millionaires is obvious.

4. Larry Fink and Howard Marks feel that globalisation is on the retreat. Marks points to the examples of problems created by Europe's dependence on natural gas and oil imports from Russia, and the world's dependence on TSMC for computer chips as important triggers for this retreat. 

5. John Micklethwait and Adrian Wooldridge have an excellent essay in Bloomberg signalling that the war could ring in the close of the current era of globalisation. Two graphs on trade stand out. One on the declining trade share of global GDP

Another on the spectacular growth of merchandise trade since the millennium

They conclude with an exhortation for American leadership,

Biden needs to reinforce the Western alliance so that it can withstand the potential storms to come... Biden needs to recognize that expanding economic interdependence among his allies is a geostrategic imperative. He should offer Europe a comprehensive free-trade deal to bind the West together; it could be a slightly remolded version of the rejected Transatlantic Trade and Investment Partnership, based on regulatory convergence (under which a product safe to sell in the EU is safe to sell in the U.S., and vice versa). He should also join CPTPP... Biden should pursue a two-stage strategy: First, deepen economic integration among like-minded nations; but leave the door open to autocracies if they become more flexible. China could be wooed toward freedom. But nothing will improve unless Biden first glues together the free world. That means freer trade — and the sooner he tells his party that, the better... A global new deal should certainly include a focus on making multinational companies pay their taxes, and the environment should be to the fore. But Biden should also talk about the true cost of protectionism in terms of higher prices, worse products and less innovation.

6. A new study on ride sharing companies (or transportation network company, TNC) like Uber or Lyft has interesting findings,

They found that a TNC trip actually decreases local air pollution, on average, compared to driving a personal vehicle... the team found that, on average, a TNC trip produces just half of the local air pollution costs of a personal vehicle trip, reducing air pollution-related health costs by around 11 cents. However, the team showed in their study that added travel on the road from TNC vehicles also carries major drawbacks. TNC drivers spend much of their time driving between passenger pickups or waiting for new ride requests, known as deadheading. This extra driving means that a TNC's fuel consumption — and by extension its greenhouse gas emissions — are on average about 20% higher than a personal vehicle. More time on the road also means more congestion, more noise, and more potential for vehicle crashes. Considering all of these factors, the team found that opting for a TNC over a private vehicle increases external costs to society by 30% to 35%, or about 32 to 37 cents per trip. This burden is not carried by the individual user, but rather impacts the surrounding community. Society as a whole currently shoulders these external costs in the form of increased mortality risks, damage to vehicles and infrastructure, climate impacts and increased traffic congestion.

7. As the Russian invasion has egregiously surfaced the issue of oligarch's using western capitals to launder and hoard ill-gotten wealth and buy into the elite society, Daron Acemoglu has a very good article where he advocates using the opportunity to clamp down on tax havens and plug tax avoidance clauses that allow the use of these off-shore and on-shore locations. 

8. Janan Ganesh has a brilliant oped where he points out that the ongoing crisis has reminded everyone that it's energy and not technology that continues to be the driver of world history

Of all the illusions, though, the most quietly punctured is the idea that tech is the industry at the centre of the world: the one that makes it go round. Energy, it turns out, is still a worthier bearer of that mantle. This is an education for anyone born in the half-century since the Opec oil crisis. Silicon Valley’s self-image as the Middle Kingdom of the business world (or just the world) comes out in different ways... Tech is relevant in Ukraine; see the propaganda war. But next to the existential role of energy, which keeps Russia solvent, and has the west scrambling for alternative sources, what stands out is the modesty of its bearing on events. Silicon Valley is giving history a nudge here and there, no doubt, but not setting its essential course. That is still the role of people who dig stuff out of the ground for fuel.

The limits of efficiency maximisation through outsourcing

I have blogged on several occasions about the problems with excessive pursuit of efficiency maximisation. This post will draw attention to the perils of outsourcing in military, banking, and automobile industry. 

Matt Stoller (HT: Ananth) points to the role of management concepts and services contracting in the failure of the US strategy in Afghanistan. This from an Afghan General, 

Contractors maintained our bombers and our attack and transport aircraft throughout the war. By July, most of the 17,000 support contractors had left. A technical issue now meant that aircraft — a Black Hawk helicopter, a C-130 transport, a surveillance drone — would be grounded. The contractors also took proprietary software and weapons systems with them. They physically removed our helicopter missile-defense system. Access to the software that we relied on to track our vehicles, weapons and personnel also disappeared. Real-time intelligence on targets went out the window, too.

The US military like the corporate world appears to be another example of the pursuit of efficiency taken to its extremes - management consultants and their ideas being applied indiscriminately and outsourcing to keep costs down and harvest efficiency gains.

Another area where outsourcing poses great risks is in banking. 

Thanks to the success of fintech startups with customer acquisition and explosive growth in transaction volumes on the payments side, another area where outsourcing is gaining currency is loans origination of banks. The digital trails generated by their current activities and the inherent nature of digital platforms makes these fintechs very attractive intermediaries that banks can rely on to originate loans. Aadhaar completes the list of digital workflow requirements. These intermediaries can significantly lower two major costs faced by banks - customer acquisition and credit-worthiness assessment - and thereby expand the banking market itself. 

This creates a problem. If the banks end up outsourcing their credit origination process, they are left with only the bulk money management activity - raise capital and manage investments. Bankers lose the important personal touch with their borrower clients. An industry which historically was thought to survive on the nature of personal relationships would have become completely impersonal. The perverse incentives are easy to see - the fintech which originates the loan is incentivised to maximise volumes (both numbers of borrowers and the amount they borrow) with little to answer for when the loan runs into trouble, and the banker is incentivised to focus only on money management and gloss over the small details of credit worthiness assessment and client relationships. The result, as with the sub-prime mortgage crisis and all financial engineering which disperses ownership far and wide, is all too obvious. 

In this context, Andy Mukherjee had an oped looking into the future of Indian banking,

Google Pay wants to push time-deposit products of small Indian banks that don’t have much of a retail liability franchise of their own. According to a press release, Equitas Small Finance Bank will offer Google Pay customers up to 6.85% interest on one-year funds as part of a “branded commercial experience” on the platform... The move has global significance. It shows the tenuous nature of the hold financial institutions have on a core operation like deposit-taking, and their vulnerability to an assault from online search, social media and e-commerce behemoths. Alphabet, Facebook Inc. and Amazon.com Inc. may pose a far bigger challenge to brick-and-mortar lenders than fintech startups that don’t have the scale of platform businesses. Just like in India, deposit-strapped challenger banks might throw the keys to tech intermediaries with hundreds of millions of active users. When the giants storm the fortress, even larger banks will lose control of banking..

China’s homegrown tech titans have already shown how easy it is to dislodge traditional lenders from lending... India’s deposit-taking institutions don't have any special advantage left in moving retail money. Yes, they still hold the accounts for sending or receiving funds. But rather than transacting on their bank apps or cards, customers prefer to use Google Pay or Walmart Inc.’s PhonePe to pay one another and merchants... Since it won’t even take two minutes for a platform to book deposits from scratch, if another lender offers a better deal, idle funds might go there next. Customer loyalty, which is often just plain inertia, will no longer ensure stickiness... For a fee, platforms can easily extend their insights into consumer behavior and payment flows to influence deposit mobilization. The higher the commission, the lower the banks’ profit... Regulated institutions may be left holding a license to take deposits--and a thick rule book accompanying that privilege--but platforms will decide if a bank’s promotional offer is to be displayed prominently or buried in an obscure corner. The same slow, painful decline that gutted the print media after readers and advertisers moved online and publishers lost their sway over them may be waiting in the wings for banking, too.

A third example that illustrated the limits of outsourcing is the automobile industry during the ongoing supply chain disruption. One auto manufacturer which managed to escape the problem and keep its production lines running and meet its annual target has been Tesla. A Times article writes, 

When Tesla couldn’t get the chips it had counted on, it took the ones that were available and rewrote the software that operated them to suit its needs. Larger auto companies couldn’t do that because they relied on outside suppliers for much of their software and computing expertise. In many cases, automakers also relied on these suppliers to deal with chip manufacturers. When the crisis hit, the automakers lacked bargaining clout. Just a few years ago, analysts saw Mr. Musk’s insistence on having Tesla do more things on its own as one of the main reasons the company was struggling to increase production. Now, his strategy appears to have been vindicated... “Tesla, born in Silicon Valley, never outsourced their software — they write their own code,” said Morris Cohen, a professor emeritus at the Wharton School of the University of Pennsylvania who specializes in manufacturing and logistics. “They rewrote the software so they could replace chips in short supply with chips not in short supply. The other carmakers were not able to do that.” “Tesla controlled its destiny,” Professor Cohen added... 

Doing more on its own also helps explain why Tesla avoided shortages of batteries, which have limited companies like Ford and G.M. from selling lots of electric cars. In 2014, when most carmakers were still debating whether electric vehicles would ever amount to anything, Tesla broke ground on what it called a gigafactory outside Reno, Nev., to produce batteries with its partner, Panasonic. Now, that factory helps ensure a reliable supply. “It was a big risk,” said Ryan Melsert, a former Tesla executive who was involved in construction of the Nevada plant. “But because they have made decisions early on to bring things in house, they have much more control over their own fate.”... Tesla’s approach is in many ways a throwback to the early days of the automobile, when Ford owned its own steel plants and rubber plantations. In recent decades, the conventional auto wisdom had it that manufacturers should concentrate on design and final assembly and farm out the rest to suppliers. That strategy helped reduce how much money big players tied up in factories, but left them vulnerable to supply chain turmoil.

Tesla's foresight points to the importance of striking a balance in the unconstrained pursuit of efficiency and profits at the cost of all else in any industry. 

Informal outsourcing within government

The mainstream discussion on outsourcing in government pertains to the transfer of certain public services to private contractors. This is a welcome development in so far as it generates significant efficiency gains.

A more pernicious form is the practice of informal outsourcing of their core activities by individual public employees. It comes in several forms, all questionable and some plain illegal.

The commonest, and now largely accepted practice, is to contract teachers and lecturers in schools and colleges, and doctors and paramedical staff in hospitals. The perverse result is that the regular employees end up outsourcing their teaching and treatment responsibilities to these contract staff. From teachers relieving themselves on the likes of vidya volunteers or contract teachers, to Associate Professors and upwards in Universities and Medical Colleges informally transferring their instructional responsibilities to contract lecturers, the practice has become pervasive and with very damaging consequences.   

At a more institutional level, it's now very common for consulting organisations to be outsourced the task of thinking on behalf of government departments and prepare detailed project reports and contract documents, appraise programs, and even prepare Cabinet Notes. Government officials. The Secretariats and Commissionerates of Departments, and public research institutions have ceded space on public policy making and project design to them. I've blogged here about its corrosive effects. 

Then there is the completely illegal practice of teachers hiring outsiders at a fraction of their salary to take their place and attend school duties, so that they can attend to their business activities and make more money. In many offices, including State and central government secretariats, it's increasingly common to find outsourced data entry operators (DEOs) performing the file processing responsibilities of Section Officers and Assistant/Deputy Secretaries. It's worse still in the district offices of line departments. In fact, outside of the lower and middle-level staff, it's not uncommon to have senior officers of the government outsource their office work to individual consultants, some of whom even operate their digital file management system. 

It's surprising how little of this gets discussed in the public realm. It's time for journalists and newspapers to expose this problem and generate public debates on the issue. It's also an important area for academic researchers to engage. It's central to the enfeebling of state capability in India. It's likely the case in many developing countries, though India may be at the vanguard of this trend. 

The new brokers in town, consultants!

The conventional wisdom about corruption in India has revolved around the politician, bureaucrat, and the businessman. An equally important but less discussed actor is the consultant. 

It is now widely acknowledged that governments at all levels employ consultants extensively, with some agencies relying on them to do what are essentially statutory responsibilities. Every major infrastructure or development project has several consultants or service providers. Take the example of infrastructure. 

On the upstream side, these consultants help with everything from designing the project, preparing feasibility studies, defining technical specifications, preparing all procurement documentation (DPR, RFQ, RFP, contract etc), and managing the bid process itself. On the downstream side, consultants provide third party quality audits, project monitoring and management support, preparing terms for renegotiations, and so on. 

In other words, consultants span the entire spectrum of work relating to an infrastructure project. On each of the aforementioned activities, consultants exercise considerable scope to influence and shape the terms of reference and ground rules of the activity concerned. These include eligibility norms, technical specifications, service levels, and compliance standards. The fine print associated with each of these have implications in terms of providing preferential access to certain bidders (at the cost of others) and causing large wasteful public expenditures. Such controversies are never far from large projects. Their post-mortems invariably leads to some such fine prints.

Given weak state capacity, limited internal expertise, and aggressive implementation timelines, even well intentioned bureaucrats at the top end up relying completely on the drafts and opinions submitted by the consultants. This gives the consultant an unmatched, but near invisible, influence. What makes it even more problematic is that the same consultant often ends up doing both the upstream and downstream activities (with their associated conflicts of interest), and the same set of large consulting organisations dominate the business across the country and at all levels. 

While the politicians and bureaucrats are blamed (and rightfully for their share) for controversies and scandals associated with projects, the consultant, who in most of these cases would have been the intermediary responsible for transacting the activity, gets away without even a mention. In fact, realising their pivotal role, contractors, politicians, and bureaucrats have discovered in the consultant the perfect intermediary to execute their transactions. Consultants have become the new brokers in the town.

Consultants have embedded themselves across important ministries and agencies of government at all levels. One pathway is to ingratiate themselves to the leadership of these organisations. The senior officials, frustrated by the absence of competent staff (often people who can string together a few sentences or take minutes), find individual consultants extremely useful. These individuals slowly become part of the inner circle of powerful bureaucrats, and abuse their position to peddle favours to contractors. 

In many sectors, individual consultants have emerged as well-known brokers sought out by bidders to influence the procurement process in their favour.  

It is time to shine light on the role played by consultants. Consultants have a useful role to play. But like with the private sector and financial markets, there is a corrosive side to the role of consultants. If left unchecked the latter role comes to dominate the former. Unfortunately, it appears to have become the case in several sectors involving public agencies. And it is a phenomenon confined to not just India.

Update 1 (10.09.2020)

George Monbiot points to have consultants have become the centre of the Covid 19 public procurements gravy train and how consultants have come to populate the revolving door between governments and private sector. 

Weekend reading links

1. China is using the Covid 19 pandemic to push through a legislation that would allow it to establish national security institutions. The legislation, which would by-pass Hong Kong's Legislative Council and be an annex to the Basic Law, the city state's constitution. It would allow the government to target people indulging in "splitting the country, subverting state power" etc.

A similar attempt in 2003 to insert a new national security law, Article 23, was shelved after massive pro-democracy protests.

2. Pakistan has awarded the first phase of the construction of the Diamer Bhasha dam project in Gilgit-Baltistan in occupied Kashmir to a joint venture between Power Construction Corporation of China and Pakistan Army's Frontier Works Organisation. The total project, estimated to now cost between $8.77-14 bn, will be funded from Chinese loans drawn from the China-Pakistan Economic Corridor (CPEC). The project is estimated to finally generate 4.5 GW of power and store 8.1 million acre feet of water.

3. The NAR reports of threats from China to retaliate against US actions on Huawei,

"Based on what I know, if the U.S. further blocks key technology supply to Huawei, China will activate the 'unreliable entity list', restrict or investigate U.S. companies such as Qualcomm, Cisco and Apple, and suspend the purchase of Boeing airplanes," said Hu Xijin, editor-in-chief at the Chinese Communist Party-affiliated Global Times, which published such a report Friday... After U.S. intentions to double down on its Huawei ban had become known in March, Huawei's rotating chairman Eric Xu said he does not think "the Chinese government would sit and watch Huawei be slaughtered" and warned of rippling ramifications if Washington went ahead with such a move.

This would effectively trigger the start of a tit-for-tat round of actions, whose end-game can be very unpredictable.

For a start, such retaliation will almost certainly force President Trump, facing an election, into even greater belligerence. And in the short and even medium-run the costs to China can be prohibitive. Besides, it would further entrench the new Cold War mentality in the US as a bipartisan consensus.

4. The China diversification game is easier said than done. Even as President Trump is urging US companies to diversify away from China, Apple appears to be yoking itself even deeper into China. In what is being seen as an attempt to diversify its supply-chain dependence on Taiwan's Foxconn, Apple has been propping up a fast growing Chinese competitor, Luxshare ICT.

Apple has advised one of its Chinese AirPods assemblers to make a major investment in an iPhone and MacBook metal casing provider, a move the California tech titan hopes will create a formidable alternative to another of its longtime suppliers, Taiwan's Foxconn. Luxshare-ICT, a fast-rising Chinese tech company known for its aggressive growth strategy, has been in talks with Catcher Technology, the world's second-largest metal casing provider, for more than a year and has recently entered a deeper round of negotiations... The deal, if realized, would give Luxshare the ability to produce high-quality metal casing as well as access to smartphone assembly know-how, which would take it a step closer to becoming the Chinese version of Foxconn -- a single company with operations that span nearly the entire electronics supply chain. Such a move could ultimately help Luxshare grab a share of iPhone production, which ships around 200 million units each year. Foxconn, the world's largest contract electronics manufacturer, has long been Apple's biggest supplier, accounting for more than 50% of iPhone production since the device's debut in 2007. 

5. Graphic details of Chinese encroachments into Indian territory gradually over the years by Phunchok Stobdan. This article by Sekhar Gupta has a nice description of the Chinese strategy on the border. 

Everything, from 1962 to Doklam, fits a pattern: Deliver a message, add leverage, and return. All the stand-offs after that, including recent ones such as Chumar, Depsang Plains, and Doklam, have ended the same way. The message is, see, who’s the boss out here.

6. Saudi Arabia's $325 bn SWF, Public Investment Fund (PIF) is on a bargain hunting spree to invest in the assets distressed by the pandemic.

This is even as the country is facing a fiscal crunch from low oil prices, which has forced deep cuts in government spending, new debts, painful austerity measures and a tripling of VAT to 15%.

7. How quickly food tastes change, from the US yogurt market,

Greek yogurt occupied 1 percent of the yogurt market in 2007; that jumped to 44 percent by 2013.

8. The Economist has a profile of Princeton economist Leonard Wantchekon,

In 2014 Mr Wantchekon founded the African School of Economics in Abomey-Calavi, Benin. Its aim is to offer African students the highest standards of mathematics and economics teaching, ensuring they can compete with graduates overseas. It is refreshingly drab, with no splurging on a flashy campus or needless technology. The 100 or so students pay $2,400 per year, about the same as at a public university. “This is not about doing something grandiose,” says Mr Wantchekon. It is a model that can be replicated. Another campus was opened this year in Ivory Coast. The school draws on several influences. The name nods to the London School of Economics. Princeton is one of more than a dozen “academic partners”.

This is a mighty impressive achievement. The School has campuses in Benin and Cote d'Ivoire.

This is a good example of what reputed academic researchers based in US universities can do for their native countries - promoting academic pursuits there, instead of just using them as platforms to promote their professional careers. 

9. Has Covid 19 ushered in the return of the permit raj in India? The number of notifications and guidelines issued by the central and state governments in India is 4890 and counting. Naushad Forbes has a good listing of the new regime faced by his company here.

10. Good chronicle of a migrant student's misery in a journey from Ahmedabad to Warangal on the Shramik Special train. Sensitivity is not a trait that Indian state shows even in best of times. For sure, there are reasons. But the reality cannot be denied.

11. The Economist has a fascinating article on overseas Chinese diaspora billionaires. 

According to The Economist’s analysis of data from Forbes magazine, last year more than three-quarters of $369bn in South-East Asian billionaire wealth was controlled by huaren (a Mandarin term for “overseas Chinese” who are citizens of other countries). A lot resides in Singapore, a rich majority-huaren city-state. But plenty is spread from Indochina and Indonesia to the Philippines. Malaysia’s Robert Kuok oversees an empire that spans everything from sugar to Shangri-La hotels. In Indonesia Lippo Group, owned by the Riady family, is active in banking, property and health care. On last year’s list 15 of 17 Filipino billionaires were ethnic Chinese; SM Group, run by the Sy clan, has high-end malls across China. Myanmar is too poor for billion-dollar fortunes, but many of its leading businessmen are Chinese-Burmese, like Serge Pun of Yoma, a property-to-banking concern, or Aik Htun of Shwe Taung Group, with interests in infrastructure and real estate...

Although Chinese settlers first arrived in South-East Asia in the 15th century, many founders of today’s top huaren business dynasties fled south to escape poverty and violence in the early 1900s. Most assimilated culturally and, like Chia, took local names. They prospered first as traders, then in some cases by cosying up to power. Liem Sioe Liong of Salim Group, a noodles-to-finance conglomerate, enjoyed famously close ties with Suharto, Indonesia’s dictator from 1967 to 1998, picking up lucrative monopolies and licences in areas from flour-milling to clove imports. Around the region such links helped the tycoons build vast, vertically integrated groups as Asia boomed in the 1990s. Together these constituted what has sometimes been described as a “bamboo network” of firms with Chinese roots, united by Confucian values of diligence and thrift. Trading and feuding with one another in turn, their bosses ended up dominating industries from farming to finance.

And as with everything that has a Chinese connection, there is plenty to be concerned about,

The Overseas Chinese Affairs Office was recently folded into the Communist Party’s shadowy United Front propaganda division. Many suspect that Mr Xi Jinping wants to muddy the distinction between huaren and huaqiao (Chinese nationals living abroad). Some huaren business leaders are handed roles on Chinese state bodies, such as the Chinese People’s Political Consultative Conference, a talking shop. Politicians in South-East Asia worry in private about “influence operations” from Beijing.

12. Jean Dreze argues in favour of a dramatic expansion of the NREGS and making it a true demand-driven program,

This situation calls for large-scale opening of NREGA works on a proactive basis. Every village needs at least one major worksite, where a good number of people can work at short notice (with adequate distancing precautions). Ideally, workers should be allowed to enrol at the worksite... Much can be done to facilitate this: expanding the list of permissible works, hiring more gram rozgar sevaks (employment assistants), simplifying the implementation process, mobilising para-teachers for work application drives, and so on. And of course, top-down orders to expand the scale of works could work wonders... It is also worth considering a return to cash payment of NREGA wages, at least as an option for the duration of the crisis. This would not only help to ensure timely and reliable payment of wages, but also spare workers the ordeal of extracting their wages from overcrowded banks or business correspondents. Further, cash payment of wages would act as a tremendous incentive for rural workers to demand NREGA work, whatever it takes. 

13. Business Standard has an article examining the case for private prisons. This is an area where the tide has already turned in countries ranging from US, UK, Australia etc, as stories of problems with prison privatisation mount. An editorial in the Financial Times, no less, threw in the towel on privatised prisons last year. Another example of how trends which have played itself out and become discredited in developed economies continue to enjoy credibility among commentators in India (developing countries).

14. Finally, there is growing evidence of Indian lenders becoming over-cautious due to the mounting Covid 19 distress and turning away borrowers.