Weekend reading links

1. More on the share buybacks by Wall Street giants, especially the technology firms.

Microsoft’s share count has fallen by almost a third since the tech bubble two decades ago — even after taking account of all the new shares handed to employees or used in acquisitions... Apple has spent nearly $450bn since it began the repurchases in 2013. Its shareholders may one day look back and regret that it did not risk a slice of that money on some entirely new market, like automaking, but few currently question its level of investment in a broad range of technologies... IBM, Oracle, Intel and Cisco have each reduced their outstanding share count by between 40 and 50 per cent since the tech bubble... Oracle’s enterprise value may have crept up by only a quarter since the start of the millennium but, thanks to the falling share count, its stock price has almost doubled... IBM has bought back about half of its stock since the peak of the tech bubble, but its share price is roughly the same level it started the millennium at. Failing to invest enough at the dawn of the cloud computing era has left it well behind the leaders, and catching up looks a stretch. IBM’s capital spending dropped to $2.6bn last year.

2. Mahesh Vyas points to a very striking data point about India's formal sector

In a country of over a billion adults, there are less than 80 million salaried jobs.

3. India middle class fact of the day, 

India sells 3.2 million new cars a year, about the same in used cars and about 21 million two-wheelers a year. The average new car is $10,000, which is just one fourth of the US car price. The average used car price is $4,000. For scooters it is $1,000-1,500. Harley Davidson models in India start at Rs 10 lakh and go up to ₹50.3 lakh. “This is what Indians can afford. There are only 120-odd million households with an income between $7,700 and $15,400 and this is the real pool,” says Ravi Bhatia, director and president at Jato Dynamics, an automotive business intelligence firm.

Even the 120 million households number is questionable. 

4. Aswath Damodaran goes to the heart of the problem with the claim that ESG investing will enhance returns,

The notion that adding an ESG constraint to investing increases expected returns is counter intuitive. After all, a constrained optimum can, at best, match an unconstrained one, and most of the time, the constraint will create a cost.

And this on why ESG investing is a gravy train that has entrenched its rent-seeking ecosystem.

5. The controversy surrounding the World Bank's Ease of Doing Business rankings and its decision to end the survey is only the latest example of how high stakes rankings distort incentives. It will invariably trigger efforts to both game the data that feeds into the rankings and also pressure the rankers. 

This has important lessons for India which uses various rankings to foster competition among states. It's important that NITI Aayog be cognisant of similar efforts by all concerned. This also underlines the importance of keeping ranking parameters simple and easily observable. 

6. Fascinating account in the Times about the Israeli assassination of Mohsen Fakhrizadeh, who was leading the Iranian nuclear bomb program. Isreali agents had been chasing him for at least 14 years. The assassination story is, as the article describes, straight-out-of-science-fiction-story and involved a pre-positioned remote controlled machine gun. 

The operation’s success was the result of many factors: serious security failures by Iran’s Revolutionary Guards, extensive planning and surveillance by the Mossad, and an insouciance bordering on fatalism on the part of Mr. Fakhrizadeh. But it was also the debut test of a high-tech, computerized sharpshooter kitted out with artificial intelligence and multiple-camera eyes, operated via satellite and capable of firing 600 rounds a minute. The souped-up, remote-controlled machine gun now joins the combat drone in the arsenal of high-tech weapons for remote targeted killing. But unlike a drone, the robotic machine gun draws no attention in the sky, where a drone could be shot down, and can be situated anywhere, qualities likely to reshape the worlds of security and espionage...

Israel chose a special model of a Belgian-made FN MAG machine gun attached to an advanced robotic apparatus, according to an intelligence official familiar with the plot... But the machine gun, the robot, its components and accessories together weigh about a ton. So the equipment was broken down into its smallest possible parts and smuggled into the country piece by piece, in various ways, routes and times, then secretly reassembled in Iran. The robot was built to fit in the bed of a Zamyad pickup, a common model in Iran. Cameras pointing in multiple directions were mounted on the truck to give the command room a full picture not just of the target and his security detail, but of the surrounding environment. Finally, the truck was packed with explosives so it could be blown to bits after the kill, destroying all evidence. 

There were further complications in firing the weapon. A machine gun mounted on a truck, even a parked one, will shake after each shot’s recoil, changing the trajectory of subsequent bullets. Also, even though the computer communicated with the control room via satellite, sending data at the speed of light, there would be a slight delay: What the operator saw on the screen was already a moment old, and adjusting the aim to compensate would take another moment, all while Mr. Fakhrizadeh’s car was in motion. The time it took for the camera images to reach the sniper and for the sniper’s response to reach the machine gun, not including his reaction time, was estimated to be 1.6 seconds, enough of a lag for the best-aimed shot to go astray. The A.I. was programmed to compensate for the delay, the shake and the car’s speed. 

This follows the killing of Maj Gen Qassim Suleimani, the leader of the Iranian elite troops, Al Quds, in January 2020 in a US drone strike with help of Israeli intelligence. 

7. Graphical summary of the 16 year Merkel era in FT. While there is no doubt that her reign was associated with a dramatic resurgence in the country's economic fortunes, this about immigration will remain one of her most contested legacies - Germany absorbed more than 1 million of the refugees fleeing war in Afghanistan, Iraq, and Syria. 

8. The rising influence of China in the Gulf. Sample this,

Riyadh’s decision to use Huawei 5G in Neom, Crown Prince Mohammed bin Salman’s $500bn flagship development project to include a futuristic city, even though the “Americans were dead set against it”. The tech firm is already building its biggest overseas retail outlet in the kingdom as China cements its position as Saudi Arabia’s biggest trading partner. Over the past two decades, trade between the two has soared from less than $4bn in 2001 to $60bn in 2020, nearly half of which was Chinese imports... China has influence with [Saudi Arabia’s rival] Iran. It’s virtually Iran’s only valuable ally, so exceedingly important to Saudi Arabia... the US refusal to sell armed drones to Gulf states that has caused both Riyadh and Abu Dhabi to procure the weapons from China instead... US concerns that the sale of F-35 fighter jets to the UAE risks China gaining access to some of America’s latest military technology... And from a Gulf perspective, China offers something the US and other western powers cannot — an autocratic, state-led development model that resonates with the Gulf’s dynastical rulers.

9. Global housing prices (HT: Ananth) are at levels that has priced out the vast majority from home ownership, thereby triggering discontent across nations and scramble for all kinds of ideas to bring down prices. 

10. Akash Prakash points to the rise of shareholder activism and improved corporate governance in the Boards of listed Indian companies. Over the last fifteen years, the share of institutional investors in the equity of BSE 500 has risen from 25 to 35%, and abstentions in institutional votes has fallen precipitously from 90% to 10% in a decade. This is perhaps a good example of how progressive regulations released over the years have all started to finally show results. 

11. Tamal Bandopadhyay points to an existential crisis facing banking sector due to the twin headwinds on capital raising and technology. On the former, the glut of liquidity is making it easier for both customers and competitors like NBFCs to raise capital and cheaply at that. On the latter, the fin techs are disrupting and threaten to displace a significant share of bank's customers. 

Consider the capital deluge,

In the financial year 2021, corporations raised Rs 14.87 trillion from the market through bonds — 40 per cent higher than what they had raised in the previous year. Money raised through equity was Rs 5.91 trillion in 2021... Both the streams — corporate bond issuances and the equity issues — have gained further momentum in the current year.

This is at the heart of the problem,

Banks are allowed to raise deposits from the public and hence their cost of money is cheaper than the non-banking financial companies (NBFCs). Since they raise cheap money, they must have an exposure to the weaker section of society or the “priority sector” up to at least 40 per cent of the loans they give. Besides, they also need to keep 4 per cent of their deposits with the regulator in the form of cash reserve ratio (CRR), on which they don’t earn any interest, and buy government bonds to the extent of at least 18 per cent of deposits. That’s the Grand Bargain. The deluge of liquidity has changed all equations. It’s advantage well-run NBFCs now. How? The cost of money for the best-managed banks is between 4 and 4.5 per cent. Add to this at least 2 percentage points fixed cost (for branches, technology, wage bill and others). This makes the cost 6-6.5 per cent. In contrast, the best-rated NBFCs have around half a per cent fixed cost, and they have been raising one-year money at around 4.2 per cent. Indeed, banks can do many things which NBFCs cannot do, but when it comes to lending, banks today have clearly a 1.5-2 per cent disadvantage on cost of money vis-à-vis the best NBFCs. This is excluding the cost of reserve requirements. If you are running a sweetmeat shop, will you manage a dairy for milk supply or buy milk from the market? Banks are running a dairy (which has its cost for processing milk), while NBFCs are buying milk from the market.

12. On oil prices in India

India’s retail price for petrol is currently among the highest in the world in terms of US dollar per litre. Care Ratings has an interesting take on how to realistically gauge comparative petrol prices across different countries. The rating agency believes that a comparison with the price of a staple item such as milk is more appropriate. This comparison shows that, in India, the ratio of petrol price to milk ($ per litre for both) is the highest in the world—1.91.

13. Tax paid by technology companies in the US against those paid by the others

14. Livemint has some interesting data on the evolution of India's automobile market.

The market is concentrated in the largest two players - Maruti and Hyundai who have 68% combined share.

15. On household debt from the All India Debt and Investment Survey (AIDIS) released by the National Sample Survey Office (NSSO),

The average debt of rural households increased between 2012 and 2018. It grew by 84 per cent to almost Rs 60,000, and for urban households the equivalent increase was 42 per cent off a higher base, ending at over Rs 1.20 lakh. Debt, however, grew fastest for the urban self-employed in a period that included the twin shocks to the informal sector of demonetisation and the introduction of goods and services tax. Economists at the State Bank of India project that it has further doubled in the three years since the AIDIS data was collected in 2018, given the exigencies of the pandemic and the need to borrow to supplement sharply falling income in several areas. The debt-to-assets ratio has also deteriorated sharply between 2012 and 2018, indicating a greater fragility to the household balance sheet.

This has implications for the household consumption engine of India's economic growth,

Since the downturn in private investment in the 2011-12 period, it is clear that private consumption had become the main driver of the India story. Yet this consumption was essentially insecure, driven by the build-up of household debt. But even in this period, the growth rate of private consumption expenditure was slower than what it was between 2004-05 and 2011-12, and losing momentum throughout that period. Since then, there have been additional blows to this engine of growth. For one, the crisis in non-banking financial companies closed one major conduit for credit to households. The RBI’s consumer confidence surveys, meanwhile, indicated that perceptions of urban current income went into a decline from 2011-12 onwards. Growth momentum, which depends upon households diminishing savings and running up debt, is inherently unsustainable. It appears likely that the pandemic has pushed India to the moment of truth where this household debt-fuelled growth can no longer move forward. Research suggests that scarring from the pandemic will have affected those at the lower levels of the income distribution much more than those at the top, reducing the overall demand stimulus since it is that section that consumes more of its income. Without expectations from consumer demand, there is unlikely to be a revival in private investment either.

16. The Nikkei Asian Review has a feature pointing to the emerging new normal in demographics, declining global population or a baby bust,

The population growth rate reached a peak of 2.09% in the late 1960s, but it will fall below 1% in 2023, according to a study by the University of Washington, published last year. In 2017, the growth rate of people aged 15 to 64 -- the working-age population -- fell below 1%. The working-age population has already begun to drop in about a quarter of countries around the world. By 2050, 151 of the world's 195 countries and regions will experience depopulation. Ultimately, the study forecasts that the global population will peak at 9.7 billion in 2064 and then start declining... The University of Washington predicts that China's population will begin to drop from next year, and that by 2100 it will plummet to 730 million from the current 1.41 billion. By that same year, 23 countries, including Japan, will see their populations shrink to half their current levels or less... South Korea had about 272,400 births in 2020, and its total fertility rate was only 0.84 that year, the lowest in the world. If a country's TFR stays under 1.5 for a long time, it becomes almost impossible to raise it.

A long period of sustained decline, the first time ever, beckons. And its consequences are profound,

The new reality will create new dynamics -- already visible in some cases -- in areas from monetary policy to pension systems to real estate prices, to the structure of capitalism as a whole. As global population approaches its peak, many governments are increasingly under pressure to rethink their policies, which have so far relied mostly on demographic expansion for their economic growth and geopolitical power... Global population growth has slowed to 1%, and economic growth and inflation have both slowed to between 2% and 3%. Interest rates have fallen to historic lows, casting doubts over the sustainability of pension systems... Even with low-interest rates, capital investment will not increase if companies do not expect the economy to grow. The government can increase public investment, but this will only lead to an increase in government debt if the investments are not put to use. Continued stimulus measures probably won't make up for the effects of a declining population.

It raises the importance of immigration,

Without immigration, many advanced economies already cannot sustain their labor pool. In the U.K. after Brexit, the combination of immigration restrictions and the pandemic has led to a severe labor shortage. Before the pandemic, 12% of heavy truck drivers were from the European Union. However, drivers can no longer be hired from outside the country under the U.K.'s new standards. According to the British Road Haulage Association, the country faces a shortage of more than 100,000 commercial heavy truck drivers. Logistics companies are becoming desperate, raising hourly wages by 30%.

17. KP Krishnan points to the challenges with attracting and retaining talent with professional competence in financial market statutory regulatory authorities (SRAs),

The General Financial Rules (GFR) of the government mandate that organisations that receive more than 50 per cent of their recurring expenditure in the form of grants-in-aid should formulate terms and conditions of service of their employees in a way that they are not higher than those applicable to similar categories of employees in government. In exceptional cases relaxation may be made in consultation with the Ministry of Finance. Another rule of the GFR requires that all proposals for creation of positions in such bodies shall be submitted to the sanctioning authority.

Given the weight of history and the general risk aversion of civil servants, notwithstanding explicit provisions in a parliamentary legislation, in practice the executive instructions contained in GFR triumph over the provisions of statute. Sebi escapes this tyranny today as it is not a grant-in-aid institution and generates its own resources in accordance with the law establishing it... SRAs are a category that need autonomy in the area of human resources for ensuring both capability and integrity required to avoid capture. The Financial Sector Regulatory Reforms Commission recommendations in this context, fully empowering the board of the SRA on these matters, along with appropriate changes in the GFR is the way forward.

This applies just as much to certain public sector organisations too.

Weekend reading links

1. Putting the World Bank's Pandemic bonds in perspective in the context of the coronoavirus outbreak - a "distraction from getting serious"!

2. From MR, nice video of traffic flows in different interchange designs

3. Simon Jager, Benjamin Schoefer, and Jorg Heining have a new paper which seeks to capture the effects of a German mandate allocating a third of corporate board seats to workers or shared governance. They write,

We study a reform in Germany that abruptly abolished this mandate for certain firms incorporated after August 1994 but locked it in for the older cohorts. In sharp contrast to the canonical hold-up hypothesis – that increasing labor's power reduces owners' capital investment – we find that granting formal control rights to workers raises capital formation. The capital stock, the capital-labor ratio, and the capital share all increase. Shared governance does not raise wage premia or rent sharing. It lowers outsourcing, while moderately shifting employment to skilled labor. Shared governance has no clear effect on profitability, leverage, or costs of debt. Overall, the evidence is consistent with richer models of industrial relations whereby shared governance raises capital by permitting workers to bargain over investment or by institutionalizing communication and repeated interactions between labor and capital.

The NBER has this summary,

Firms with shared governance actually had capital stocks that were between 40 and 50 percent larger than firms without workers on their supervisory boards. The greater capital stock was not associated with reduced employment; rather, there was an average 12 percent increase in the share of sales produced in-house. Even with slightly more workers, the increase in fixed capital meant a higher capital to labor ratio for companies with shared board representation. The capital share rose by a large 8 percentage points.

 4. India's start-up universe with over 50,000 registered firms raised $14.5 bn in 2019 spread over 887 startups, a 25X increase from $550 m in 2010. But an examination of the start-up sectors that raised most capital in 2019 does not inspire great confidence,

5. The Belgian artist Jan Van Eyck represented photography before the camera. Jason Farrago in the NYT has a brilliant tribute on his "ultra-meticulous art",

God is in the details, they assure you; but some art is so jam-packed with details, each hair so fine, each fold so painstaking, that it surpasses even the divine. Nearly six centuries ago, here in the northwest corner of Europe, the painter Jan van Eyck used a brand-new technology — oil paint — to pioneer an art of such precision that it almost negated its religious function, and went past inspiring prayer to become something eternal itself. Still today, for secular audiences, his diamond-hard paintings can appear to come from another world... Van Eyck developed an unprecedented new painting style, which saw the flat signs of Gothic painting give way to exquisite illusions of bodies in real spaces. He discovered that, by varying how crisply or hazily he painted a tree or building, he could reproduce on a flush plank of poplar the depths of a Flemish countryside or a palace interior... He used light effects to simulate buttery flesh that, even at small scale, made saints appear like real human beings...

What empowered Van Eyck’s out-of-nowhere naturalism — the incredible sense, as the art historian Ernst Gombrich would write, that he was holding “the mirror to reality in all its details”? New scientific insights, for a start, into optics, reflections and focal points. Hand-eye coordination that would make an Olympic archer jealous. Above all, it was the innovation of oil paint, which dries more slowly than tempera, and which can be blended wet-on-wet to produce contours, shadows and highlights... Oil paint did to 15th-century Flanders what camera phones did to our time: It set off an image explosion. Portraiture became more robust and vivid.

6. Paris Mayor Anne Hidalgo's re-election campaign manifesto speaks about making Paris a "15-minute city".

Paris needs to go one step further and remodel itself so that residents can have all their needs met—be they for work, shopping, health, or culture—within 15 minutes of their own doorstep.

Paris en Commun’s 15-minute city concept. From the top, clockwise, the headings read: Learn, Work, Share and Re-Use, Get Supplies, Take the Air, Self-Develop and Connect, Look After Yourself, Get Around, Spend, and Eat Well. (Paris en Commun)

This turns the conventional wisdom on urban planning on its head,

This focus on mixing as many uses as possible within the same space challenges much of the planning orthodoxy of the past century or so, which has studiously attempted to separate residential areas from retail, entertainment, manufacturing, and office districts. This geographical division of uses made sense at the dawn of the industrial era, when polluting urban factories posed health risks for those living in their shadows. Car-centric suburban-style zoning further intensified this separation, leading to an era of giant consolidated schools, big-box retail strips, and massive industrial and office parks, all isolated from each other and serviced by networks of roads and parking infrastructure. But the concept of “hyper proximity,” as the French call it, seeks to stitch some the these uses back together, and it’s driving many of the world’s most ambitious community planning projects.

Paris is following in the footsteps of others like Portland, Oregon which aims to convert 90% of the city into 20-minute neighbourhoods for everything except work, and Barcelona's Superblocks of car-free 40-acre multi-block pedestrian-first zones.

7. The tiny South American country of Guyana, the poorest in the continent, with a population of 780,000 and annual budget of $1.4 bn, has had the world's biggest oil discovery in years. 

But the hurriedly signed renegotiated production sharing contract with Exxon Mobil Corp, which is estimated to give the country nearly $170 bn in revenue over the coming decades, has re-ignited the debate about the exploitative relationship between small resource rich countries and multinational companies. The WSJ reports,

It’s kicked off a fuss over fairness and secrecy over the price of the contract and how it was handled. At the heart of the debate is a renegotiated production-sharing agreement signed in 2016 by Guyana’s natural resources minister—just days before Exxon disclosed an increased estimate for the size of its find. Amid mounting criticism of the terms, Guyana’s resources ministry recently hired U.K. law firm Clyde & Co. to examine the circumstances leading to the 2016 deal. It found that Exxon pressured Guyanese officials into signing the deal in a short time frame, “presumably because knowledge of a ‘world class’ discovery could have altered the government’s negotiating position,” according to a copy of the Jan. 30 investigative report reviewed by the Journal... 

The deal comes at a good time for Exxon, which has been struggling to maintain its leading status among global oil companies in recent years. Exxon expects a return of at least 30% in Guyana, more than double the 15% return the industry regards as the lowest necessary to justify investment. Since first striking oil there in 2015, the Exxon-led consortium, which also includes HessCorp. and China National Offshore Oil Corp., has repeatedly raised estimates for how much it can recover, and recently upped it to more than 8 billion barrels. The first vessel carrying Guyanese oil, which is extracted 120 miles offshore and sold directly to market, set sail last month... Global Witness, a London-based watchdog group that seeks to expose what it sees as resource exploitation in poor countries, estimated in a report this month that the deal pays Guyana some $55 billion below market value for its resources over three decades. The group also provided documents to the Journal about the process that led to the renegotiation.

8. A new AER paper finds that Facebook reduces subjective well-being and increases political polarisation,

In a randomized experiment, we find that deactivating Facebook for the four weeks before the 2018 US midterm election (i) reduced online activity, 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 post-experiment Facebook use. Deactivation reduced post-experiment valuations of Facebook, suggesting that traditional metrics may overstate consumer surplus.

Weekend reading links

1. Following Paris, Brussels, Dhaka, Orlando, and Istanbul, the French Riviera town of Nice was the latest to suffer in the growing list of terror attacks. In the context of the terror attack by an unsophisticated attacker who crudely rammed a plain truck through a crowd of holiday revelers, killing 84 people, the NYT has an excellent article which highlights the challenge posed,

And yet this act, whatever its particulars, represents the culmination of long-building trends, in which terror tactics become more rudimentary and the targets more random. It is forcing a recognition that security and intelligence measures, long the core of Western thinking, are of limited utility and can never provide total safety from an individual who decides to kill. This is shifting pressure onto more abstract and unproven counterterrorism methods that do not promise to halt violence but merely ameliorate underlying political or social drivers. And it is straining the politics of Western countries, where leaders have spent the past 15 years describing terrorism as a war that could be won. The populations targeted by terrorism are confronting a difficult new reality, in which the danger can be managed or policed but perhaps never entirely overcome...

In 2008, Pakistani militants killed 166 people in Mumbai, India, attacking what experts call “soft” targets: places such as hotels and train stations that are populated but, because of their seeming randomness, rarely defended. At security conferences in Western capitals, officials and analysts began to worry about whether they could prevent a “Mumbai-style attack” in their own countries. Then came the rise of “lone wolf” attackers who acted on their own, without training from or often even contact with the terrorist groups they claimed to serve. Attacks are planned within the minds of individuals whose intentions remain hidden until the shooting begins.

Such attacks predate the Islamic State, though the group emphasizes them, disseminating propaganda that provides tactical guidance and ideological justification available to anyone with an internet connection. The use of a truck in Nice was new only in the specifics and in the degree to which it has forced a realization increasingly difficult to ignore: In the world of lone wolves and Mumbai-style attacks, more barricades and metal detectors and monitoring programs can improve security, but can’t guarantee it absolutely.

2.  In the context of the failed military coup in Turkey, MR points to this paper by Jonathan Powell and Clayton Thyne which clearly indicates that while coups are far less frequent today, they are much more likely to succeed,

3. The third big global story is the rise of right-wing populism that underpinned the Brexit vote and the rise of Donald Trump in the US. Dani Rodrik draws the distinction between globalization 'shocks' from immigration and trade and foreign investments. He argues that the former sets the stage for the emergence of right-wing parties (much of Europe) and the latter of left-wing ones (Latin America).

He also makes the case for the left to embrace an alternative to unfettered free market capitalism and hyper-globalization,

Consider just a few examples: Anat Admati and Simon Johnson have advocated radical banking reforms; Thomas Piketty and Tony Atkinson have proposed a rich menu of policies to deal with inequality at the national level; Mariana Mazzucato and Ha-Joon Chang have written insightfully on how to deploy the public sector to foster inclusive innovation;Joseph Stiglitz and José Antonio Ocampo have proposed global reforms; Brad DeLong, Jeffrey Sachs, and Lawrence Summers (the very same!) have argued for long-term public investment in infrastructure and the green economy. There are enough elements here for building a programmatic economic response from the left.

A crucial difference between the right and the left is that the right thrives on deepening divisions in society – “us” versus “them” – while the left, when successful, overcomes these cleavages through reforms that bridge them. Hence the paradox that earlier waves of reforms from the left – Keynesianism, social democracy, the welfare state – both saved capitalism from itself and effectively rendered themselves superfluous. Absent such a response again, the field will be left wide open for populists and far-right groups, who will lead the world – as they always have – to deeper division and more frequent conflict.

4. In a reflection of the rise of "alternative" investment class in a world of ultra-low yields, Brookfield, the Toronto-based asset manager which has $250 bn under management, has raised a $14 bn fund to invest in infrastructure. It would be the largest single commitment to a sector. Brookfield, which bought the owner of London's Canary Wharf, allocates 60% of its investments to developed and the rest to emerging markets, and follows a counter-cyclical investment strategy of buying in distressed periods. It has as partners some of the world's largest SWF's like Singapore's GIC and Qatar Investment Authority and has been acquiring assets in Latin America, including a 2013 acquisition of an integrated system of railroads, ports and inland terminals in Brazil and is investing $7bn to expand the port and terminals.

5. Finally, to Ireland, which claims to have increased its GDP by 26% in 2015. On the back of corporate tax inversions and other forms of corporate re-engineering, Irish exports rose 34%, imports 22%, and investment by 27%. For example, when AerCap, the world's biggest aircraft leasing company, moved its fleet to Ireland, the country gained 35 billion euros in output, without any real economic impact. But even with its super-low taxation rate, corporates have not been satisfied - corporates based in Ireland made $100 bn in profits in 2012, of which, instead of paying $12.5 bn in taxes, they actually paid just $4 bn!

Alphaville puts the Irish growth story in perspective.

Weekend Reading Links

1. India needs more of this type of market makers and peer-to-peer lending platforms which can credibly signal the credit-worthiness of borrowers by using non-conventional sources and strategies of credit assessments,

The financial tech startups are trying to evaluate credit risk using a wide variety of consumer data including the digital footprint of customers arising out of social networks, ecommerce, mobile usage and geo-location. For example, IndiaLends claims to capture alternative information points such as bank statement, utility data, social data and customer interaction with the website... Startups like IndiaLends do not lend money of their own. Using their technology platform, they connect consumers with banks and financial institutions which results in better rates for the borrowers and a reduction in overall default rates... where they differentiate... from the bank is in scientifically matching the right borrower profile with the most relevant lender and hence reducing inefficiencies that lead to lower loan approvals, higher interest rates and sub-optimal loan amounts.

2. The most obvious indicator of state capability weakness is the gross inadequacy of personnel in many critical public agencies. As against a global average of one policeman per 450 people, India's has one for 709 people, with the numbers being 1298 and 1282 for Bihar and UP respectively. 

The problem here is that any discussion on increasing personnel strength gets conflated with the mistaken belief that the government is already too big and needs to be pruned down.

3. Ian Bremmer points to this map of the world would could well represent the beliefs of ISIS

4. Economic Times has a story on the increasing use of robots among India's car manufacturers,

Robots have begun to take over an array of functions from humans at car plants in India. Volkswagen India has 123 robots at its Pune plant while Hyundai Motor India, the subsidiary of the Korean carmaker, has 400 robots at its factory in Chennai... The Ford Sanand plant actually has 453 robots in the shop floor, with up to 90 per cent of the work automated... The entire body shop, most of the paint shop and parts of the final assembly line in these plants are now automated. Robots are performing functions ranging from welding to foundry operations to laser applications.

But robots are not likely to displace humans any time in the foreseeable future,

Still, despite the many benefits, companies will not be in a hurry to replace labour simply because robots are costly. A robot does the work of three technical workers, but it typically costs between $3,00,000 and $4,00,000. In other words, automation is 10 times more expensive than manual labour

5. Business Standard has an article on the findings of the Ashok Misra Committee which examined India's unregulated professional course entrance examinations coaching industry. The report proposes the establishment of a regulator for the coaching industry. The report highlights the scale of the industry,

According to an a 2013 survey by Associated Chambers of Commerce and Industry of India (Assocham), titled "Business of Private Coaching Centres in India", the size of the private coaching sector was $23.7 billion, or Rs 1.41 lakh crore. The survey also predicted that by 2015, it would grow to $40 billion, or Rs 2.39 lakh crore. The survey had collected data from 5,000 students and parents across 10 cities. It revealed that 87 per cent of primary and 95 per cent of high school students in the major cities took private tutoring. This industry grew by 35 per cent in the previous six years.

6. Global corporate bond offerings have crossed $2 trillion for the fourth consecutive year on the back of continuing monetary accommodation and signals that the ECB may be willing to continue and expand the ongoing QE.

7. Roula Khalaf has a nice summary of the differences between Isis and Al Qaeda. This is interesting,

The Sahwa movement comprised a group of Iraqi tribesmen that collaborated with the US a decade ago to root out the Iraqi branch of al-Qaeda. That branch took its revenge: it eventually became the Islamic State of Iraq and the Levant, better known as Isis... Isis seems obsessed with al-Qaeda, from which it split in 2013 following disagreements over the goals of jihad in Syria. Since then Isis has distinguished itself from its parent through its savagery (there is no limit to the violence it is willing to inflict) and its move to create a caliphate in parts of Iraq and Syria. 

8. Nice article in NYT on how Isis sustains itself - "they fight in the morning and they tax in the afternoon". The article describes how Isis is running the legitimate revenue collection operations of a regular government,

The better known of the Islamic State’s revenue sources — smuggling oil, plundering bank vaults, looting antiquities, ransoming kidnapped foreigners and drumming up donations from wealthy supporters in the Persian Gulf — have all helped make the group arguably the world’s richest militant organization. But as Western and Middle Eastern officials have gained a better understanding of the Islamic State’s finances over the past year, a broad consensus has emerged that its biggest source of cash appears to be the people it rules, and the businesses it controls...

(Isis) has set up a predatory and violent bureaucracy that wrings every last American dollar, Iraqi dinar and Syrian pound it can from those who live under its control or pass through its territory. Interviews... describe the group as exacting tolls and traffic tickets; rent for government buildings; utility bills for water and electricity; taxes on income, crops and cattle; and fines for smoking or wearing the wrong clothes. The earnings from these practices that mimic a traditional state total tens of millions of dollars a month, approaching $1 billion a year, according to some estimates by American and European officials. And that is a revenue stream that has so far proved largely impervious to sanctions and air raids... 

In Raqqa, the Syrian city that is now the de facto capital of the Islamic State, a department called Diwan al-Khadamat, or the Office of Services, sends officials through the city markets to collect a cleaning tax — 2,500 to 5,000 Syrian pounds, or about $7 to $14, per month depending on the size of the shop. Residents go to collection points to pay their monthly electricity and water bills, 800 Syrian pounds, or roughly $2.50 for electricity and 400 pounds, about $1.20, for water. Another Islamic State department, the Diwan al-Rikaz, or the Office of Resources, oversees oil production and smuggling, the looting of antiquities and a long list of other businesses now controlled by the militants. It operates water-bottling and soft-drink plants, textile and furniture workshops, and mobile phone companies, as well as tile, cement and chemical factories, skimming revenues from all of them...

The group has taken over the collection of car-registration fees, and made students pay for textbooks. It has even fined people for driving with broken taillights, a practice that is nearly unheard-of on the unruly roads of the Middle East. Fines are also included in the punishments meted out for breaking the strict living rules imposed by the Islamic State. 

In this context, the prevailing strategy to contain them, involving targeting their oil production and smuggling operations is unlikely to yield results,

Ultimately, though, many officials and experts said the Islamic State would probably be able to cover its costs even without oil revenue, and that so long as it controls large stretches of Iraq and Syria, including major cities, bankrupting the group would take a lot more than blowing up oil tankers. “These are all going to be little pinpricks into Islamic State financing unless you can take their revenue bases away from them, and that means the territory they control,” said Seth Jones, a terrorism expert at the RAND Corporation... the old strategy for stopping the flow of money to terrorist groups like Al Qaeda, which was largely based on cutting them off from donors in the Persian Gulf upon which they depend, does not apply to the Islamic State. 

9. The $160 bn reverse takeover of US-based Pfizer (maker of Viagra) by the Dublin-based Allergan (maker of Botox), an investment company trading pharmaceuticals businesses, is classic tax-inversion. It enables Pfizer to use its accumulated overseas profits without incurring US tax liability, thereby saving atleast $21 bn in future tax liabilities. It also joins Burger King and Liberty Global as brands which have fled overseas to avoid tax payments.

Apart from tax inversion, as John Gapper writes, it also highlights a new trend in pharmaceuticals industry,

Pharmaceuticals companies used to be research enterprises that discovered and developed drugs. Then they became marketing giants, skilled at selling as many blockbuster pills as possible. Lately, they have turned into mergers and acquisitions machines, buying and selling medicines invented by others. It is hard to view their evolution as progress... Instead of taking their chances by investing in drug discovery themselves, some wait until a smaller biopharmaceutical enterprise has done so and then try to buy the rights. It is less risky and uncertain for investors but it also tends to be extremely expensive. AbbVie, for example, paid $21bn for Pharmacyclics this year, largely to acquire a single blood cancer treatment.

In this case, Pfizer is buying up Botox!

10. Finally, the ECB has extended QE, but not by as much as anticipated. Apart from extending its 60 billion Euro a month bond buying program for another six months till March 2017 or "beyond" and purchase municipal bond in addition to government bonds, it has also lowered the deposit rate to minus 0.3 per cent.

Peru's high-noon of democracy and rule of law?

Last week, in a less publicised event, a three judge panel of the Peruvian Supreme Court convicted former President Alberto Fujimori to 25 years in jail for human rights abuses, including the killing of 25 people by a military death squad and series of kidnappings and murders.

The charges against Mr Fujimori revolve around the counter-insurgency methods used by his government during his 10-year presidency, from 1990 to 2000, to successfully combat and eliminate the decades long insurgency by two Maoist guerrilla groups - the Shining Path Movement and the Túpac Amaru Revolutionary Movement. The conviction marks the culmination of a fiteen month long trial, that climaxed with Alberto Fujimori becoming the first democratically elected President to be tried and convicted in his own state.

The poignancy in the outcome cannot be missed, and is an enduring dimension in the debate surrounding governance and rule of law when administering civil strife or terrorist militancy prone polities. On the one hand, the conviction is a triumph of judicial oversight and rule of law, a testimony to the strength of Peru's fledgling democracy and its institutions. One the other hand, one cannot but wonder whether Fujimori, who did more than anyone else to bring a corrupt, civil war and hyper-inflation prone Latin American backwater to today being one of the most democratic, politically stable, and economically vibrant countries in the region, deserved better.

The Fujimori verdict should spotlight attention on similar examples of well-documented and widely acknowledged instances of human rights violations in counter-insurgency and counter-terrorism operations by governments and their functionaries across the world, including in and by accomplished democracies. Are the institutions of democracy in these leaders of the free world not strong enough to bite the bullet? Or are the opinion-makers and the establishment in these countries living in a state of self-denial?

Tackling terrorism - India and Israel

In the last few weeks, we have been witnessing two contrasting foreign policy responses to state-sponsored terrorism. Apart from minor substantive variations, the situation in South Asia and Middle East are no different. In fact the similarities are striking - Hamas and LeT are internationally outlawed terrorist outfits banned by the UN; both are legally recognized (albeit differently) by the Palestinian and Pakistani governments respectively; both are on openly declared war with Israel and India respectively; both the Palestinian and Pakistani governments are in no position to control the activities of these groups; there is limited (or no) prospect for peace in the respective regions if these two groups continue in exercise of their present power. But the stark contrast in responses is a testimony of the national security philosophies of India and Israel and the global balance of power.

Even as Israel bombs its aggressors to submission, in an action reminiscent of using a sledgehammer to kill a fly (after all, the ostensible reason for the brutal air bombardment and invasion which has claimed more than 500 lives so far, is that Hamas was hurling rockets that "traumatized" Israelis across the border!), India is in its true Gandhian tradition, almost apologetically, imploring Pakistan to stop its, now well established (state or non-state), clandestine support to terrorists on a bombing spree in city after city across India. Statistically, over the past two years, India has lost many times more of its citizens in such terrorist attacks than Israel has over the same period.

The response from Washington conveys another story. The US blocked efforts in the UN Security Council to call for an immediate ceasefire, and has described Israel's security as "non-negotiable" and to be "achieved at any cost", even if a massive human rights disaster ensues in Gaza. In contrast, India's security is very much negotiable, as the Bush administration prevaricates between its loyalty to an old ally and its sympathy for a fellow victim of terror, even in the face of clear evidence of Pakistan government's duplicity in stoking terrorism. Even as the Indian Home Minister has to personally carry a "dossier of evidence" to convince the Bush administration of Pakistan's complicity in the terror attacks, the US Government spokespersons have taken upon themselves the responsibility of defending Israel's aggression.

In many respects, India should learn from the Israeli response, not so much from the nakedness and brutality of the aggression, but the underlying premise behind it. Diplomacy cannot achieve deterrence against non-state actors operating in the lawless political terrain of countries like Pakistan (and Palestine), where the boundaries between state and non-state have long since disappeared. Israel realizes this and sees the elimination or atleast substantial weakening of Hamas as the only route to deterrence and peace. In the absence of any American support for an invasion and the acrimonious nuclear legacy between India and Pakistan, the only window of opportunity for Indian air strikes on the terror camps in Pakistan may have been in the immediate aftermath of the Mumbai terror attacks.

But that moment has long since elapsed, leaving the Government with no option but diplomacy, and that too preferably through the US (because Pakistan will find it difficult domestically to be seen taking the hard decisions, if any, on the terrorist groups at the behest of India). In the final analysis, the security of India from Pakistan based non-state terror groups, supported or not supported by the Pakistani State, depends almost exclusively on how strongly we can convince the US to arm-twist the Pakistani government to decisively crackdown on those groups. In some respects, this should suit at least many of the political actors within the Pakistani establishment, who see these groups (except in relation to India) as threats to their own stability, but cannot be seen taking action on them, except maybe under pressure from the US as part of a global war on terror, for fear of destabilizing the domestic political balance of power.

Urban terrorism Vs Naxalism

The Mumbai terrorist attacks, and recent Delhi and Assam bomb blasts, like the greatly increased number of other recent incidents of urban terrorism, have coalseced and strengthened the collective anger and hatred being felt across the country against terrorism and militancy. The Mumbai attack, in particular, appears to have jolted the Government into action for setting up an institutional architecture that would work towards preventing such incidents.

In a different context, rural terrorism, in the form of naxalite attacks in remote and interior areas of many states, has been going on for many years. Major incidents of naxalite attacks are becoming increasingly commonplace, taking the lives of large numbers of innocent and poor villagers, and policemen on duty.

However, naxalite activities have never caught the imagination of the national public consciousness as urban terrorism, and has therefore not been the focus of any sustained and co-ordinated actions of the state and central governments. This despite the fact that the former has been a much older problem, claimed many times more lives, and has been more debilitating in ao far as it has contributed substantially to these areas being perpetually trapped in poverty and under-development.

To the extent that terrorism is part of an effort by its perpetrators to focus the attention of the state and its citizens to the cause espoused by them, from the perspective of its perpetrators urban terrorism has surely been much more successful than rural terrorism. It is also understandable that this should be so, given the fact that the majority of our opinion makers (media, academia, commentators, bureaucrats, and political class) and their targets (upper and middle class) live in cities and towns. There is therefore an immediacy and closeness to terrorist incidents in their backyards, which they can easily identify with. In contrast, the naxalite incidents take place in the back-of-beyond, isolated from the consciousness of these opinion makers and the middle class.

Without any intention to incite naxalite terrorism in cities, this difference in responses in the public consciousness does raise a few interesting questions of academic interest. Does it mean that naxalite planners should re-think their strategies? Would a naxalite group which focuses on urban terrorism be more successful? What effect will a shift in strategy have on their rural support base, since they rely on such incidents to re-affirm their strength and hence support among rural poor? Will this change also isolate the naxalite movement from its roots and prevent them from claiming moral legitimacy? Will a shift to urban terrorism, force governments to give more attention to the long pending problems of these areas?

However, the aforementoned shift can also be counterproductive for naxalites, given the possibility of increased attention generating more aggressive counter insurgency response by the government, thereby sowing the seeds for the end of such naxalite activites.

The price of greater national security?

The Bombay terrorist attacks have unleashed a "tsunami" of outrage against politicians. The media, especially the electronic visual ones, have led the way in inciting and riding a wave of popular anger against the perceived inability of politicians to assure security to citizens. I have several reservations about this simplistic and naive analysis of the massive challenge that national security is in the present times. It may be a classic example of barking down the wrong tree!

Any meaningful effort at addressing the national security issue has to go beyond the traditional prescriptions of newer security and intelligence institutions (revamped architecture), greater co-ordination among the intelligence agencies and regular police force, additional security personnel, better use of technology in intelligence gathering and policing etc. All these are important but not the most important of decisions to be made.

All the aforementioned can be done with some level of political commitment and making susbtantial investments, both of which may now be inevitable (given the scale of outrage and the electoral compulsion). However, there are limits to putting in place these traditional prescriptions, even with the best of efforts and political and bureaucratic commitment. Even in a US, shaken up by the 9/11 attacks, it has been well documented that co-ordination among intelligence agencies remains largely in paper. Turf wars among intelligence agencies is a common feature across the world. Further, the new Department of Homeland Security has been accused of being politicized and packed with cronies.

The challenge becomes even more immense in India with its huge population and geographical spread, and the massive and growing numbers of sources from which the dangers to national security arises. No amount of additional recruitments and investments in technology can remedy the reality that our first line of defence against public security remains de-motivated, unprofessional, stretched-out and corrupt. In many ways, the national security institutions and personnel will suffer from the same inevitable problems and handicaps (that of a developing civil society), that face the other institutions of the State in our country.

India has been accused of being a "soft state", where the Government, under pressure from its electoral compulsions, shy away from actions and legislations that are perceived to intrude into the liberties of the citizens in the name of security. This collective reluctance was prevalent in the American and European societies for a long time. The dramatic increase in Middle Eastern terrorism over the past two decades, climaxing in the 9/11 attacks, led to a realization that some amount of individual liberties will have to be sacrificed as a price for greater security. India stands at the same cross-roads today.

Are we ready for identity cards and citizen profiling that can help ensure effective monitoring of crime and criminals? Are we ready to be inconvenienced by periodic searches of our vehicles and even our properties? Are we ready to give up our privacy by letting big brother snoop on our telephone conversations, internet navigations, and even our bank accounts? Are we ready to pay the higer costs (by way of say, ticket prices) of enhanced security at our public strategic installations like airports and railway stations? Are we willing to amend our Criminal Procedure Code and other policing regulations and provide greater powers to the police while pursuing investigations? Are we willing to condone (or permit) occasions when the human rights of terrorists and extremists get violated - preventive detentions etc? Are all the different institutions of the State, including judiciary and media, willing to exercise the required self-restraint that is vital to the objective? Finally, is our civil society vibrant and cohesive enough to provide the demand side pressures that are necessary to sustain the implementation of such measures?

Most of these are prices which have to be paid by the same opinion makers and upper middle class who have now raised the banner of revolt against the political class. The recent history of our society and polity would suggest that these are troubling questions, which may not elicit affirmative answers. Interestingly, the poor are not likely to come in the way of such interventions as they are in any case being subjected to far more intrusive transgressions of their liberty by the various arms of the State.