Weekend reading links

1. The WSJ extrapolates from history of stock market crashes,

On March 10, 2000, the Nasdaq Composite Index hit an intraday high of 5132.52. We all know what happened next. By October 2002, the index had fallen 78.4%—to 1108.49. And that was only half the agony. The other half was the index’s anemic recovery from that low. It took until November 2014 for the index to battle back to its March 2000 level, even after taking dividends into account. If you adjust for inflation, the index didn’t recover until August 2017, more than 17 years later.

If the Dow Jones Industrial Average were to follow the same script, it would be trading at around 5400 in October 2022, and not make it back to its current level until November 2034 (or, on an inflation-adjusted basis, the summer of 2037). It is hard to overestimate how devastating such a scenario would be for retirees and soon-to-be-retirees.

2. Nidheesh MK writes about the problems facing Surat's diamond industry as it battles a crippling downturn,

According to a report in The Times of India (TOI) in September 2019, some 40,000 workers were laid off in the preceding year, and 20% of small diamond units were shut and salaries were trimmed across the sector... The city is the biggest processing hub for diamonds in the world. According to estimates, nine out of 10 diamonds sold anywhere in the world would have passed the hands of a worker in Surat. Of the 4.5 million residents in the city—it is among the world’s fastest-growing 30 cities as per recent United Nations data—more than 800,000 people work in the diamond industry, as cutters or diamantaires, workers, wholesalers, traders, brokers, retailers, jewellery fabricators, according to The Diamond Trailby Shantanu Guha Ray. But today, suicides and job losses reflect many trends of a slowdown— declining global sales; international trade wars which make imported diamonds from the US more expensive and less attractive in the biggest diamond market of Hong Kong; the impact of demonetization and the goods and services tax (GST); and more recently, the coronavirus outbreak.

3. A FT explainer on the latest oil war triggered by Saudi Arabia.

Saudi Arabia's decision to turn on the oil spigot loose even as Covid 19 was breaking out will be judged as a very reckless one. 

The biggest loser in the oil war may be Saudi Arabia itself. While for others, including US and Russia, the breakeven cost of oil is more relevant to their respective oil companies, in case of oil-dependent Saudi Arabia, it is of national economic relevance. 

The Economist writes,

Russia—the tactical target of Saudi Arabia’s price war—is different. Since 2014 it has run orderly monetary and fiscal policies. It has been a net provider of credit to the world, not a net borrower. And it has saved a lot of its surplus oil revenue for a rainy day, by basing its budget on an oil price of $40 a barrel. Middle Eastern and African producers (and never mind Venezuela) have not been as disciplined. Saudi Arabia itself needs $80 a barrel to balance the books. 

4. More on the World Bank's Pandemic Bonds which are yet to pay out.

The bonds did not pay out a cent during a severe attack of Ebola in the Democratic Republic of Congo last year and are yet to pay out to relieve effects of the coronavirus outbreak, which has led to at least 110,000 cases worldwide and more than 4000 deaths. Some analysts say the bonds’ terms are too stringent, preventing money from being funnelled to countries where the spread of the pandemic could be resisted.

Be that as may, the allure of financial engineering to solve complex problems will endure.

5. One of the most disturbing things about the aftermath of the global financial crisis has been the failure to convict any executives from the major financial institutions.

In a high-profile reversal, UK's Serious Fraud Office has failed in the first criminal trial to examine steps taken by senior bankers during the financial crisis. The jury exonerated three Barclays executives on allegations of lying to the market in the Bank's official documents on a deal with Qatar to mobilise capital at the height of the crisis. This acquittal follows that of the Bank's Chief Executive earlier.

This raises questions about UK's laws which make it difficult to establish corporate criminal liability.

Prosecutors in England and Wales must demonstrate that the “directing mind” of a company was involved in alleged criminality if they are to prove a company liable. “It is almost impossible to find a controlling mind and prove that controlling mind is complicit in any criminality,” says David Green, director of the SFO when it launched its investigation into Barclays, who argues that prosecutions are being hampered by this legal requirement. “The email chain tends to dry up at middle management level... The current law was developed in the industrial revolution when companies were beginning to be formed and consisted of one person or two or three people so it was very easy to identify who was a controlling mind.”

6. Good article about the changes happening in last mile distribution of groceries in India. The humble kirana shop is emerging as the last-mile warehouse for temporary storage by online grocers.

7. FT writes about the troubles mounting on the corporate debt market,

Companies have gorged on cheap debt for a decade, sending the global outstanding stock of non-financial corporate bonds to an all-time high of $13.5tn by the end of last year, according to the OECD, or double where it stood in December 2008 in real terms. Borrowing costs had tumbled after central banks lowered interest rates to jolt their economies following the 2008 financial crisis. Investors, starved of yield from safer government bonds, saw lending to riskier companies as a way to juice returns... Ruchir Sharma, Morgan Stanley’s chief global strategist, estimates that one in six US companies does not earn enough cash flow to cover interest payments on its debt. Such “zombie” borrowers could keep putting off the crunch as long as debt markets kept letting them refinance.

8. Softbank is apparently fast becoming a persona-non-grata in Silicon Valley. It is true that Softbank's practices have been corrosive and representative of the reckless financing trend in vogue. But it is hardly alone nor has it been the progenitor of this trend, though it has been critical in amplifying these practices. Softbank is merely taking a leaf out of Wall Street's own historical playbook that fuelled many an asset bubbles. The difference being private capital as against public markets.

The pushback in Wall Street to Softbank has more got to do with vested interests in the form of large incumbents like Sequoia being relegated into the margins by the new kid on the block. A touch of racism cannot also be denied.

9. A coronavirus primer with a lot of graphs. Also this. The main priority, at this point in time of the outbreak, may be slow down its spreading, thereby buying time for medical systems to cope with the flow. That may be possible only through isolation.

The Economist has a good technical briefing on SARS-CoV-2 virus which causes Covid 19.

And also a very informative Corona section.

Nice graphic of the progression, how it has tapered off in China.

The Chinese response has been striking in its success,

On February 4th China recorded 3,887 new cases. On March 4th the number was 139. The report that the who group published on February 28th put the good results down to the way that the state had used manpower and technology to implement quarantine meticulously on an unprecedented scale... All over the country cities closed down schools, public transport and almost all social and economic activity to stop people from moving around. In Wuhan, a city of 11m people, the population has been restricted to their homes for five weeks. The lockdown was enforced not just by the network of officials which covers every block of flats, street and alley but also, under the influence of those officials, by the property managers at residential compounds.

The corona mitigation immediate response strategy for the economy,

The first task is to get manpower and money to hospitals. China drafted in 40,000 health workers to Hubei province... Just as important is to slow the spread of the disease by getting patients to come forward for testing when outbreaks are small and possible to contain. They may be deterred in many countries, including much of America, where 28m people are without health coverage and many more have to pay for a large slug of their own treatment. People also need to isolate themselves if they have mild symptoms, as about 80% of them will. Here sick pay matters, because many people cannot afford to miss work. In America a quarter of employees have no access to paid sick leave and only scattered states and cities offer sickness benefits. Often the self-employed, a fifth of Italy’s workforce, do not qualify. One study found that, in epidemics, guaranteed sick pay cuts the spread of flu in America by 40%. Sick pay also helps soften the blow to demand which, along with a supply shock and a general panic, is hitting economies. These three factors, as China shows, can have a dramatic effect on output...

Better to support the economy directly, by helping affected people and firms pay bills and borrow money if they need it. For individuals, the priority should be paying for health care and providing paid sick leave... For companies the big challenge will be liquidity... Firms that lose revenues will still face tax, wage and interest bills. Easing that burden, for as long as the epidemic lasts, can avoid needless bankruptcies and lay-offs. Temporary relief on tax and wage costs can help. Employers can be encouraged to choose shorter hours for all their staff over lay-offs for some of them. Authorities could fund banks to lend to firms that are suffering, as they did during the financial crisis and as China is doing today. China is also ordering banks to go easy on delinquent borrowers. Western governments cannot do that, but it is in the interest of lenders everywhere to show forbearance towards borrowers facing a cash squeeze.

This about paid sick leaves,

A study of paid sick-leave mandates in America by Stefan Pichler and Nicholas Ziebarth, two economists, found that the policy reduced the spread of influenza by 5% in normal times and 40% during a wave.

National responses have been varied. Singapore perhaps did the best in early response to prevent the outbreak. China's actions after the initial bungling has been very impressive. Italy too has responded with great swiftness. S Korea has been very impressive with testing and isolating. Iran, perhaps has been the most shambolic. In terms of being lackadaisical, given the importance of isolation in the strategy, US and UK are perhaps the worst offenders.

In fact, in terms of turnarounds, China's has been very impressive - even as Apple closed down all its stores globally, it re-opened its Chinese stores!

Vikram Patel puts Covid 19 in perspective compared to TB.

An assessment of its impact across a variety of sectors in the US, and on the equity markets here.

10. The majority of Indian startups that attract VC funding are incorporated outside India,

An analysis by Tracxn shows that of 73 SaaS firms that have received at least $20m each in funding, 50 have headquarters outside India. Many flee to Singapore, where expatriate managers can catch a six-hour flight to Delhi or Mumbai, which plenty do on a weekly basis.

Some of the reasons,

To list on India’s main exchanges firms must demonstrate a few years of profits. Laws impede those whose management is based in India from floating overseas (the approach of many successful Israeli startups) without first going public at home. Complex and mutable levies on shares handed to investors and staff in effect give the government first dibs on a firm’s cash.

11. Anirudh Laskar in Livemint chronicles the flawed rise of Yes Bank to become India's fourth largest private bank,

When the going was good, Kapoor was known as the banker who would never say “No". Under Kapoor, Yes Bank was the go-to institution for companies seeking loans. The bank would even lend money to corporates who had been refused by other lenders... All business decisions at Yes Bank, even where the bank’s board was involved, ultimately hinged on Kapoor’s whims and fancies. Many senior employees who couldn’t get along with him ultimately ended up leaving... Yes Bank’s commercial banking modus operandi was to lend to subsidiaries of large corporate groups whose promoters were friends of Kapoor. “When all banks used to refuse to lend to a particular client, Yes Bank would step in. That’s because different kinds of collateral—land parcels, plant machinery, promoter’s guarantees in personal capacity—were taken by them," said an ex-official of the lender on condition of anonymity... Kapoor’s remedy to keep bad loan ratios low was to grow the loan book at a breakneck speed. In the three years leading to FY17, Yes Bank’s loan book had bloated by 76%, which kept bad loan ratios near low single-digits.

While the regulator should obviously take blame, what about Yes Bank's management as well as Board, including the likes of Ashok Chawla?

See also this by Ananth.

The Yes Bank story should lay to rest all the claims about superior corporate governance and performance of private sector banks, as if that evidence was ever required given the experience of the US. All of ICICI, Axis Bank, and RBL have been guilty of corporate governance issues.

The challenge with implementing public policy

You can have the best structured and incentive compatible policies and yet not have much impact on the ground in addressing the underlying problem. And this state of affairs can persist for years, even decades. Not for nothing is state capacity, in the opinion of this blogger, the biggest challenge facing India. 

Crop insurance and foodgrain procurement are two examples of where acute last mile gaps come in the way of realising desired outcomes. In both cases, it is easy enough to announce the best possible design of a crop insurance or crop procurement policy. But those announcements mean nothing when the rubber hits the road. In case of the former, the constraint is the insurance payout, while with the latter it is the actual physical procurement itself. There are no magic pill universally replicable innovations out of these problems.

Indian Express carries a story on the troubles faced by farmers selling off their produce at the public procurement centres at a mandi in Vidisha district of Madhya Pradesh.

Roop had received an SMS eight days ago from the cooperative society with which they are registered, asking him to come to the mandi on Wednesday, but the father and son chose to come a day earlier... Their token number, a chit issued the day they reached, is 234 — there are 233 farmers ahead of them in the queue. No more than 40 trolleys can be weighed in a day, which means the duo will have to spend at least five days before their turn comes... Until last year, trading at the mandi would happen between noon and 4 pm, when farmers would come, post-lunch, with their produce, which would be auctioned in the presence of mandi officials. This year, after chana prices started crashing due to a bumper crop and less demand, the government decided to buy directly from farmers — at Rs 4,500 per quintal — for the Central pool. Selling to the government offers farmers better returns than selling to private traders, which explains the rush... While the Singhs own their tractor-trolleys, many other farmers have hired vehicles to transport their produce to the mandi. “The rent for the first day is calculated according to the weight of the produce (anywhere between Rs 40 and Rs 80 per quintal of produce). From the second day onwards, we have to pay a daily rent for the trolley,” says Roop... The farmers wonder if a dharma-kanta (a weighbridge) would have eased their woes unlike the existing practice of unloading the produce on the floor of the mandi, packing it in bags, weighing each of them and sealing them, the entire process taking nearly 80 minutes for 40 quintals... Six days after they arrived at the mandi, the Singhs managed to sell chana from one of their trolleys. But they were told the chana in the second trolley had impurities. They will now get it cleaned and come back.

Consider the problems. Immediately after harvest, with chana prices crashing following a bumper harvest, farmers rush to offload their produce at the procurement centres over a very short time window. The procurement centre, without any weigh bridge or other logistics, has to get the produce graded, packed into gunny bags, and weighed. All this takes up an inordinate time for a single farmer and farmers stand in line for hours days! This wait in turn inflicts heavy tractor rental charges and other opportunity cost on the farmers. And even after waiting for days to get their chance, farmers face the prospect of being turned away and being asked to come back after rectifying some defect or other!

Much the same (difficult last mile gaps) applies to the Soil Health Cards or electronic national agriculture market place (eNAM). Sample this series of actions suggested on eNAM,

The following steps should be taken in a concerted manner: (i) unyielding focus on agri-market reforms starting with basics of assaying, sorting, and grading facilities for primary produce as per nationally recognised and accepted standards; (ii) creating suitable infrastructure at mandi-level (like godowns, cold storages, and driers) to maintain those standards; (iii) bringing uniformity in commissions and fee structures that together do not go beyond, say 2%, of the value of produce; and (iv) evolving a national integrated dispute resolution mechanism to tackle cases where the quality of goods delivered varies from what is shown and bid for on the electronic platform.

Each of the four steps, after putting in place the enabling implementation frameworks, need to be materialised. And that is where state capacity, persistent action, and committed leadership becomes necessary. 

Programs like Fasal Bima Yojana, Bhavantar Bhugtan Yojana, Soil Health Cards (see this and this), and eNAM are examples of reforms where enacting the rules and regulations is the easier part. But when the rubber hits the road, state capacity and other systemic constraints start to bind. There is only so much (mostly tinkering at the margins) that can be done with technology and innovation.

In simple terms, successful implementation of these require committed and stable leadership at the Ministry/Department level for atleast five years, maybe as mission-mode projects, with the mandate being to fix the plumbing challenges and demonstrate success with at least a few models. And they need to be complemented with responsive systems both at the level of the District Collector and the Joint Directors (or equivalent) of Agriculture in the District, in at least some of the districts. And it needs to be done in a phased manner with diligence, practical compromises and improvisation where required. 

And also, a one speed nationwide roll-out of such things may not be possible (state capacity) nor desirable (since it may run into political economy challenges). We need to look at the possibility of doing such stuff as a multi-speed campaign (which would also not concentrate discontent) - get everyone to the starting line with all the enablers (both regulations and requisite documentation), make available a practical implementation plan with the likely constraints and possible solutions around it, let the districts/states run with it at different speeds, and foster healthy (but not high enough stakes) competition among them. 

Many things which can be done relatively easily at the district level may not be possible for the States or Government of India to prescribe. It demands more of a gradual and bottom-up diffusion approach than a top-down, one-speed, universal coverage approach. 

This applies as such to the IBC too. As we go ahead, some or all of the following are likely - the Resolution Professionals (RPs) will be captured, judiciary will intervene indiscriminately, NCLT will be compromised, promoters will create hurdles even after resolution, and so on. We need some concerted systemic effort to be at it for a reasonably long enough period of time to allow some hysteresis to set in. 

A practical agenda for a government is to identify no more than 10 schemes/priorities, structure them as Missions, appoint an appropriate Joint Secretary/Mission Director for each for five years, give them a clear (but practical) road map, equip them with sufficient resources, and let them run with it for 5 years. And monitor them closely for five years at different levels.

Weekend reading links

1. I had blogged briefly earlier about the challenges associated with compliance with standards in Indian Railways. This is a much under-appreciated problem with most things done by governments - delivering in an environment of acute scarcity of resources, time, and capacity.

Alok Kumar Verma, a retired Railway officer, shines light on the problem and argues at how safety and speed have been crowded out by priorities of capital intensive modernisation and new trophy projects. The article deserves to be quoted at length,

The recent accident near Khatauli station on August 19, which resulted in the death of 23 passengers, is a reminder of the dangers of the excessive over-utilisation of the lines. The section where the accident occurred carries 35 trains a day against a capacity of 25 trains. Reportedly, block (temporary suspension of traffic) for carrying out repairs to a broken rail was refused... According to the latest data, utilisation exceeds the capacity on 65 per cent of busy routes. It is 120 per cent to 150 per cent on 32 per cent of the routes, and utilisation exceeds 150 per cent on 9 per cent of the routes. For optimal performance, utilisation should be 80 to 90 per cent of the capacity. Over-utilisation is leaving little time for safety inspections and essential maintenance of track and other infrastructure as well as the rolling stock. The focus of IR has shifted to daily fire-fighting, to somehow keep trains running, leading to all sorts of maladies like inter-departmental tussles and low morale. Arguably, IR has one of the highest incidences of accidents due to material, equipment and human failures.

From 1985-2000, IR acquired locomotives, coaches and wagons and carried out modernisation and upgradation of track and other infrastructure, with massive infusion of funds. But it kept deferring the last mile works (which include the easing of sharp curves, strengthening some bridges, improving track geometry to tighter tolerances, cab signalling etc.) that are needed to unlock the full potential of an upgraded network. The last mile works are tough to execute, requiring immaculate planning and precise execution. Blocks will be regularly needed for which some services may have to be diverted or curtailed temporarily. Services that can be catered to by road transport, like short distance passenger trains, shall have to be closed altogether.

A comparison with the Chinese Railway (CR) is illustrative of the magnitude of IR’s failure. Till the 1990s, the speed of trains on CR was limited to 100 to 120 km/hr. But in the 10 years (1997-2007), it undertook a “speed-up” campaign in six rounds and raised speeds to 160 km/hr on 14,000 km and to 200 km/hr on 5,370 km route-lengths. Simultaneously, the speed of freight trains was raised to 100 to 120 km/hr. With the streamlining traffic flow, line capacity was increased by 60 to 70 per cent... Indian Railways has remained stuck at 130 km/hr since 1969, while congestion on the trunk routes sky-rocketed. It’s time to shift focus to the core network that carries more than 80 per cent of the total traffic. The last mile works for upgrading the trunk routes which were repeatedly deferred should be undertaken on a priority basis so that the entire nation can realise the benefits of faster and safer travel. Else, safety on Indian Railway will only worsen.

This is a classic problem in governments. Addressing last mile gaps is unsexy and does not bring laurels. Maintenance of existing assets is invariably overlooked for new projects, where ribbons can be cut, inauguration done, and personal credits apportioned. It is the same everywhere - power transmission and distribution, water and sewerage, and all existing infrastructure elsewhere.

Let's face it. This is a big choice that Railway Ministry, led by the Government of India, has to make. Identify two or three objectives - safety, raising speeds, increasing freight - and single-mindedly pursue them for a decade or so. In doing so, the leadership will have to acknowledge the costly and often politically difficult trade-offs that are necessary.

2. Ananth points to an excellent article by Chris Balding that highlights the wave of academic censorship sweeping China and how western universities are helping its spread. He points to the decision by Cambridge University Press to take down 300 articles from its Chinese website at the request of Chinese government and writes about the choice facing Western academia and how they have chosen to respond,

It was the fact that a respected publication was bending the knee to censorship and what this represented about the broader complicity of Western organizations, universities, and academics in helping China export its academic censorship around the world... Western universities’ traditional response to criticisms on China’s restrictions on free inquiry was to claim that they could help liberalize their Chinese counterparts by establishing contact with them. What has happened instead is that they’ve ended up importing Chinese academic censorship into their own institutions. Cambridge University Press censoring on behalf of Beijing is not the first time elite British universities have opted for the bottom line over principle in accepting Chinese censorship contributions... Aiming for a diverse student body or announcing opposition to U.S. President Donald Trump’s immigration ban is a low-cost form of opposition that helps a university establish liberal credentials at home. No foreign university, however, has demonstrated willingness to show the same level of opposition to demands made by the Chinese government that it would deem unacceptable at home. The opportunities are too big, and their principles turn out to be surprisingly pliable. Western universities, academics, and publishing houses face a stark choice. If they continue to obey Beijing, they make themselves complicit in promoting censorship and human rights violations. If they walk away, they turn their backs on large revenue streams and potential donors.

I had blogged earlier here and here about the larger point that Ananth makes about the hypocrisy of the western liberals who on the one side criticise Trump (and rightly so) and cry hoarse on issues that involve no trade-offs but pliantly ignore those that inflict costs. It is one thing to demonise Russia and aggressively pursue the low-cost option of forcing the tightening of sanctions on that country. It is an altogether different thing to incur personal costs and go beyond mere bleeding heart articles and force actions on things like executive compensation or business concentration and anti-trust action. 

New America Foundation, a left leaning think tank, of which Google and Eric Schmidt are major donors was at the centre of a recent controversy. It removed Eric Lynn, a scholar who had posted an article praising the European regulator's decision to levy a $2.7 bn fine on Google on anti-trust actions, reportedly at Eric Schmidt's behest. Annie Marie Slaughter, a darling of the liberal elites for her no trade-off and "talk is cheap" views on several social issues, summoned Lynn and fired him for "imperilling the institution as a whole". 

Both the protagonists, Eric Schmidt and Annie Marie Slaughter, are important, reputed, and credible voices of the liberal establishment, and their hypocrisy when faced with personal costs is what creates events like Brexit and Trump. 

3. Business concentration and the rising power of monopolies has been a constant theme of this blog in recent times. Noah Smith has a very good article that summarizes the literature,

In the past few years, researchers have found that industrial concentration -- measured by the market share of the four biggest companies in an industry -- has indeed been increasing in most parts of the U.S. economy. They’ve documented a correlation between industrial concentration and a decline in labor’s share of national income. They’ve confirmed that profits have risen substantially. They’ve documented a slackening in the enforcement of antitrust law. And they’ve found some evidence that after mergers, prices go up while productivity doesn’t improve. A paper by economists Jan de Loecker and Jan Eeckhout, has caused quite a stir... find that markups -- the amount that companies charge over and above their costs -- have been on the rise since about 1980. Back then, according to the authors’ estimates, the average company charged a price that was about 18 percent above costs -- now, the number is 67 percent...

A second paper, by German Gutierrez and Thomas Philippon... look at historical episodes where competition increased -- an unusual wave of new companies in the 1990s, and increased Chinese competition in the 2000s. In each situation, industries where competition increased more also tended to invest more... Gutierrez and Philippon have another paper where they test eight different economic theories to explain falling business investment, and find that market power -- along with corporate short-termism -- is the most likely explanation. Another paper, by Gustavo Grullon, Yelena Larkin and Roni Michaely... find that in industries that have become more concentrated, profits have risen. And they verify that concentration has been caused by megamergers among public companies, not by some companies going private and disappearing from the records. A final paper, by economists Mihir Mehta, Suraj Srinivasan and Wanli Zhao, finds evidence of political influence driving antitrust enforcement. Mehta et al. discover that when a company trying to do a merger happens to be headquartered in the district or the state of a politician who oversees antitrust enforcement, the merger is more likely to be approved. 

4. The gains for the Indian economy from lower oil and commodity prices have been very significant.  Sample this

The decline in crude prices has led to a significant reduction in import bill from Rs 8.6 lakh crore in FY14 to Rs 4.7 lakh crore in FY17, resulting in savings of approximately Rs 8-10 lakh crore... Since crude bill is paid in dollars, this has led to a saving of foreign exchange of $150 odd billion in the last three years. The bulk of the increase in forex reserves from May 2014 to current date is on account of the above. The decline in crude prices has had a significant impact on inflation. This has resulted in an increase in disposable income of Indians by 3.3 percent of GDP as per an IMF report, which in turn has provided a boost to private consumption...

While crude oil price, inclusive of adverse exchange rate movement, has declined by 49 percent, petrol prices have reduced only by 8.5 percent... All this has led to a significant decline in petroleum subsidy bill from Rs 65,000 crore in FY14 to Rs 27,000 crore in FY17... On an aggregate, Rs 11-13 lakh crore have been savings/additional receipts to the Modi government on account of low crude oil prices. This accounts for around 3 percent of aggregate GDP of FY15-17. The higher excise duty receipts have helped GoI maintain its fiscal deficit targets.

These are very significant numbers. Without this good fortune, we may well have been staring down the abyss. 

5. Ta-Nehisi Coates takes issue with the Trump-as-a-white working class reaction and frames it as Trump-as-a-white America reaction (not just to a just concluded black American presidency but a deep-rooted white supremacist belief). Sample this,

According to Edison Research, Trump won whites making less than $50,000 by 20 points, whites making $50,000 to $99,999 by 28 points, and whites making $100,000 or more by 14 points. This shows that Trump assembled a broad white coalition that ran the gamut from Joe the Dishwasher to Joe the Plumber to Joe the Banker. So when white pundits cast the elevation of Trump as the handiwork of an inscrutable white working class, they are being too modest, declining to claim credit for their own economic class. Trump’s dominance among whites across class lines is of a piece with his larger dominance across nearly every white demographic. Trump won white women (+9) and white men (+31). He won white people with college degrees (+3) and white people without them (+37). He won whites ages 18–29 (+4), 30–44 (+17), 45–64 (+28), and 65 and older (+19). Trump won whites in midwestern Illinois (+11), whites in mid-Atlantic New Jersey (+12), and whites in the Sun Belt’s New Mexico (+5). In no state that Edison polled did Trump’s white support dip below 40 percent. Hillary Clinton’s did, in states as disparate as Florida, Utah, Indiana, and Kentucky. From the beer track to the wine track, from soccer moms to nascar dads, Trump’s performance among whites was dominant. According to Mother Jones, based on preelection polling data, if you tallied the popular vote of only white America to derive 2016 electoral votes, Trump would have defeated Clinton 389 to 81, with the remaining 68 votes either a toss-up or unknown...

The focus on one subsector of Trump voters—the white working class—is puzzling, given the breadth of his white coalition. Indeed, there is a kind of theater at work in which Trump’s presidency is pawned off as a product of the white working class as opposed to a product of an entire whiteness that includes the very authors doing the pawning. The motive is clear: escapism. To accept that the bloody heirloom remains potent even now, some five decades after Martin Luther King Jr. was gunned down on a Memphis balcony—even after a black president; indeed, strengthened by the fact of that black president—is to accept that racism remains, as it has since 1776, at the heart of this country’s political life. The idea of acceptance frustrates the left. The left would much rather have a discussion about class struggles, which might entice the white working masses, instead of about the racist struggles that those same masses have historically been the agents and beneficiaries of. Moreover, to accept that whiteness brought us Donald Trump is to accept whiteness as an existential danger to the country and the world. But if the broad and remarkable white support for Donald Trump can be reduced to the righteous anger of a noble class of smallville firefighters and evangelicals, mocked by Brooklyn hipsters and womanist professors into voting against their interests, then the threat of racism and whiteness, the threat of the heirloom, can be dismissed. Consciences can be eased; no deeper existential reckoning is required... 

the argument that America’s original sin was not deep-seated white supremacy but rather the exploitation of white labor by white capitalists—“white slavery”—proved durable. Indeed, the panic of white slavery lives on in our politics today. Black workers suffer because it was and is our lot. But when white workers suffer, something in nature has gone awry. And so an opioid epidemic among mostly white people is greeted with calls for compassion and treatment, as all epidemics should be, while a crack epidemic among mostly black people is greeted with scorn and mandatory minimums. Sympathetic op‑ed columns and articles are devoted to the plight of working-class whites when their life expectancy plummets to levels that, for blacks, society has simply accepted as normal. White slavery is sin. Nigger slavery is natural.

This is the central point that Coates is making,

An imagined white working class remains central to our politics and to our cultural understanding of those politics, not simply when it comes to addressing broad economic issues but also when it comes to addressing racism. At its most sympathetic, this belief holds that most Americans—regardless of race—are exploited by an unfettered capitalist economy. The key, then, is to address those broader patterns that afflict the masses of all races; the people who suffer from those patterns more than others (blacks, for instance) will benefit disproportionately from that which benefits everyone. “These days, what ails working-class and middle-class blacks and Latinos is not fundamentally different from what ails their white counterparts,” Senator Barack Obama wrote in 2006...

Obama allowed that “blacks in particular have been vulnerable to these trends”—but less because of racism than for reasons of geography and job-sector distribution. This notion—raceless antiracism—marks the modern left, from the New Democrat Bill Clinton to the socialist Bernie Sanders. Few national liberal politicians have shown any recognition that there is something systemic and particular in the relationship between black people and their country that might require specific policy solutions... Certainly not every Trump voter is a white supremacist, just as not every white person in the Jim Crow South was a white supremacist. But every Trump voter felt it acceptable to hand the fate of the country over to one... White workers are not divided by the fact of labor from other white demographics; they are divided from all other laborers by the fact of their whiteness.

It is indeed surprising that this very plausible narrative foresee has hardly found its way into the mainstream.

6. Finally, from MR, this letter reveals the very fine mind that James Buchanan had, 

Given the state monopoly as it exists, I surely support the introduction of vouchers. And I do support the state financing of vouchers from general tax revenues. However, although I know the evils of state monopoly, I would want somehow, to avoid the evils of race-class-cultural segregation that an unregulated voucher scheme may introduce... We should not want a voucher scheme to reintroduce the elite that qualified for membership only because they have taken Greek and Latin classics. Ideally, and in principle, it should be possible to secure the beneficial effects of competition, in providing education, via voucher support, and at the same time to secure the potential benefits of commonly shared experiences, including exposure to other races, classes, and cultures. In practice we may not be able to accomplish the latter at all.

I had blogged earlier about Ken Arrow's cautious case for socialism. Genius is not about figuring out complicated models or crunching numbers to tease out social trends, but is about connecting research to fundamental, but glossed over, nuances of real life. There are very few such minds today.

The distance between financial access and usage

More evidence from Chile, Malawi, and Uganda that merely giving bank accounts does not translate automatically to its usage, leave alone outcomes like increased savings,

Bank accounts as currently offered appear unappealing to the majority of individuals in our three samples of unbanked, rural households – even when these accounts are completely subsidized. While we do observe substantial usage among a subset of active users, we are unable to pick up any statistically significant effects on downstream outcomes. This is not surprising since the average impact on total savings is itself relatively modest at best, and noisily estimated. If any, treatment effects on downstream outcomes are likely diffuse since savings purposes are heterogeneous, thus difficult to detect, because of little ability to predict how user households would use the savings.

The authors speculate about two possible reasons - poverty (people are too poor to save any money and thereby use the accounts) and transaction costs (bank branches are far away and the processes associated too complicated).

I would go one step further and add that even if we assume away these two, there is another barrier, which we haven't even seriously though about - demand. Do we have financial products that are tailored to meet the requirements of poor people, especially those reliant on farm incomes? Forget product development, there is very little serious thinking on this last mile gap. 

Fundamentally, the solution to a problem has to start with the product (or service) that caters directly to the issue. In this case, poor people need financial products that meet their requirements, and not just processes and intermediate steps that lead to the desired products. I have blogged earlier about exactly such interventions that meet their requirements.

So, the high prevalence of unused accounts from India's Jan Dhan Yojana, even in areas where poverty is not as acute and where access and transaction costs are marginal, should not come as any surprise. We under-estimate the formidable last mile gaps that come in the way of addressing such problems. 

The recalibration of the pensions privatisation debate

It is a natural tendency of human beings, especially as a social collective, to seek out simple solutions to complex public policy problems. What if there are no simple solutions to complex public policy initiatives?

Consider the example of pension schemes. The conventional wisdom since the early eighties has been that pension plans are best administered by private fund managers. As part of the Reagan-Thatcher axis and later the Washington Consensus, countries were encouraged to move from defined benefit to defined contribution schemes as well as privatise the management of their pension funds. Chile was cited as the poster child of such reforms.

Now, three decades later, Chile is revisiting its pension model. The Times has a nice article,

The options being considered include creating a state-run pension administrator, raising the retirement age, instituting a 5 percent contribution from employers and adopting stronger regulations for the pension fund administrators. “After going from a totally public system to the other extreme in 1981, now we are moving towards a middle ground that combines individual savings, state spending and contributions from employers,” said Mr. Bravo, of the Catholic University of Chile. “Another option is tearing down the A.F.P. system, but it’s too costly. We don’t have the privilege of starting from zero anymore.”

Clearly, the privatised pension model overlooked the messy realities of managing a system with too many moving parts, which cannot always be either regulated or incentivised into conformity. It also mistook a certain demographic and global development moment to be representative of all times to come. 

A pension account requires contributions to be made into individual accounts with a defined periodicity. It is no surprise that poor people, suffering from real financial constraints and amplified behavioural biases, struggle to meet this requirement. The example of unutilized bank accounts from India is an example of such serious last mile gaps. And now, there is growing evidence from everywhere that employers, more due to fiscal and unscrupulous reasons, too renege on contributions.  The article mentions that in Chile, a study found that only a quarter of those who retired last year had paid into the pension scheme for more than 25 years and 62% of women contributed for less than 15 years. So, it appears that the private providers are not well positioned to bear these risk all by themselves. 

Then there are structural issues. The demographic pyramid has slowly changed shape, leaving an increasing share of subscribers exiting the labor market. The age of double-digit or high single digit returns on portfolios looks most likely a thing of the past as we peer into a long period of low interest rates. In fact, as the management and other fees extracted by fund managers rise as a proportion of net returns, pension funds are left clutching at the straws. This has naturally re-iginted the debate on whether the contributions of the workers are in the first place adequate enough to sustain a pension scheme which can give reasonable payouts at the time of retirement. 

All this naturally questions the priors about the neat outsourcing of pensions management responsibilities to private providers. At a more fundamental level, this should be one more in the long list of reminders that the quest for simple, neat, outsourced, start-up driven solutions to complex problems is most likely to be futile.

Update 1 (18.09.2016)

Times has a nice story on the calculation of pension liabilities. The actuarial measurement, which uses a discount rate of 7-8 per cent (the expected investment return), vastly understates the actual liabilities. In contrast, if the risk free rate is taken as the discount rate, the net present value of the liabilities would have to be discounted by closer to 2-3 per cent, which would in turn be a much larger liability. Pension funds prefer to state the former and keep the latter confidential.

Nudging the taste-buds with audio-visual and other perceptions

Nicola Twilley has this profile of the work of experimental psychologist Charles Spence who studies how sensory responses influence our assessments of physical products. In particular, his studies have shown that apart from conventional olfactory sensibilities, various audio-visual perceptions play an important role in perceptions about the quality and taste of food products. These insights from neuroscience carry great relevance for packaging of food products,

His results show that the Pringles that made a louder, higher-pitched crunch were perceived to be a full fifteen per cent fresher than the softer-sounding chips. The experiment was the first to successfully demonstrate that food could be made to taste different through the addition or subtraction of sound alone... Afterward, Spence’s lab began studying the crunch of apples, the fizz of carbonated water, and the rustle of potato-chip bags... Spence has found that a strawberry-flavored mousse tastes ten per cent sweeter when served from a white container rather than a black one; that coffee tastes nearly twice as intense but only two-thirds as sweet when it is drunk from a white mug rather than a clear glass one; that adding two and a half ounces to the weight of a plastic yogurt container makes the yogurt seem about twenty-five per cent more filling, and that bittersweet toffee tastes ten per cent more bitter if it is eaten while you’re listening to low-pitched music... a cookie seems harder and crunchier when served from a surface that has been sandpapered to a rough finish, and that Colombian and British shoppers are twice as willing to choose a juice whose label features a concave, smile-like line rather than a convex, frown-like one.

Some of these insights have applications far and wide, like increasing the appetite of old-aged people,

He noted that... the elderly, when eating tomato soup, must add more than twice as much salt as a young person does in order to achieve the same taste. Why not mitigate that increased salt consumption, and its attendant health hazards, by presenting the soup in a blue container, a color that Spence has shown can make food seem significantly saltier? Similarly, experts estimate that sixty per cent of eighty-year-olds have an impaired sense of smell, sharply reducing their enjoyment—and thus, often, their intake—of food... Spence found that when people were served a scoop of bacon-and-egg ice cream accompanied by the sound of sizzling bacon they described the taste of the ice cream as much more “bacony” than subjects whose consumption was accompanied by the clucking of chickens. This insight—that the appropriate soundtrack can intensify the flavor of a food—inspired Blumenthal’s iconic “Sound of the Sea” dish, for which diners at his restaurant, the Fat Duck, in Bray, are presented with an iPod loaded with a recording of crashing waves and screeching gulls to listen to while enjoying an artfully presented plate of seafood. The effect could be used similarly, Spence said, to design soundtracks that replace some of the lost flavor of food for the elderly.

His research findings go beyond food,

In 2006, with funding from Unilever, Spence conducted a study to see whether altering the volume and pitch of the sound from an aerosol can would affect how a person perceives the pleasantness or forcefulness of a deodorant. Based on Spence’s findings, the company invested in a packaging redesign for Axe deodorant, complete with new nozzle technology. The underarm spray, which is targeted at young men, now sounds noticeably louder than the company’s gentler, female-targeted Dove brand... sounds originating from behind a driver’s head will direct attention forward more quickly than sounds that come from the side—has found its way to market with the introduction of headrest-mounted speakers in 2015 Volvo FH trucks.

Apart from their commercial utility, behavioral framing like Spence's and this generate significant social externalities. They are important last-mile gap bridging measures, which are often the difference between success and failure of large public policy interventions. But these are far from low hanging fruits and require huge amount of carefully constructed, and possibly expensive, research, which unlike commercial beneficiaries, public stakeholders have limited incentive to pursue. In this context, dedicated behavioural units, like those in the UK and US, assume significance.

The risk with such sensory manipulation is, as the author identifies, its potential for "sensorial enrichment and nutritional impoverishment", whereby products are shaped to maximize sales and profits at the expense of health and well-being. Given the skewed information and cognitive balance between sellers and consumers, it is most likely that its effects end up being not so benign, even socially harmful, more so for the poorest.  

Mitigating last-mile gaps in irrigation

Mihir Shah has a nice reminder in the Indian Express where he advocates to "push irrigation not dams". Pointing to large numbers of dams constructed with disproportionately low irrigation coverage realized, he argues in favor of a participatory and multi-disciplinary approach to the development and management of irrigation structures. 

This is not dissimilar to last-mile gaps elsewhere - schools where no learning happens, hospitals which do not cure, toilets which are not used, no-frills bank accounts which are not transacted, and so on. At a fundamental level, it is also a reflection of how weak state capability comes in the way of achievement of transactional outcomes. 

In case of irrigation, the incentives associated with major irrigation projects and minor irrigation works are grossly mis-aligned. In fact, it strikes as disturbing that irrigation sector stands out with contracting which is divorced from outcomes. Irrigation structures like large and small dams and water harvesting units, by themselves contribute little to irrigation, unless complemented with canals and field channels. 

Contractors though are more interested in the former. They find the single-location, regular construction work associated with dams far more easier and attractive than the right-of-way acquisition problems and other transaction costs that characterize widely-spread canals and channels. In case of larger projects, the dam and canals are given as separate contracts, and it is common place to find the dams and other large engineering structures in place without the canals. 

Similar incentives drive government stakeholders. Irrigation departments, most often interested only in contracting out works, too push projects, making unrealistic irrigation coverage estimations. In cases of projects done with assistance from Government of India, state governments routinely make over-optimistic irrigation coverage claims to get project approvals. The tortuous process of acquiring right-of-way for canals and field channels, which involves engaging and negotiating with local land owners and resultant transactional challenges, is severely constrained by weak state capability. All this, coupled with the problems of siltation and maintenance for canals and channels, makes dams the primary objective and irrigation a distant and secondary objective. 

The physical salience of the dam or water harvesting structure being dominant and its relative ease of site acquisition, compared to the long-drawn process of getting right-of-way clearance for long-winding canals and channels, makes everyone more interested in the dam instead of the canals. It is therefore no surprise that dams have been built with vast difference between the promised and actually delivered coverage. In fact, an audit of the original estimate of the irrigation potential and the realized coverage from all major and minor irrigation contracts is most likely to reveal a scandal as big as anything we have seen. 

While there are no easy answers to the problem, one possible strategy would be to package construction contracts as irrigation contracts rather than dam construction contracts. Instead of constructing a dam, the terms of reference in the bid should be clearly redefined as "creation (or stabilization) of 5000 Acres", with levels of water access. This would require much closer engagement among the contractor, irrigation officials, and the beneficiary farmers, and far more rigorous project preparation work. The project reports for each structure would have to evolve bottom-up, capturing local requirements and practical considerations, so as to ensure that outcomes remain at the center of the project.

The risks associated with not getting the coverage estimations right can be mitigated by appropriate safeguards with respect to upstream water availability. I am not aware of any state which have procured even minor irrigation contracts through irrigated land coverage tenders. 

The last mile challenge with public service delivery

The latest edition of IMF's Finance and Development monthly has an article by Jorge Coarasa, Jishnu Das, and Jeff Hammer which urges caution against expansion of public health care and advocates focussing on improving existing systems, public and private. This assumes great significance in view of private, formal and the less-than-fully-qualified informal, care providers forming the majority of point of contact in developing countries.

In particular, it points to recent studies involving vignettes and survey which highlight the quality problem - less time spent with patients, non-adherence to treatment protocols, wrong treatment prescriptions, over-treatment etc - being faced by health care systems in developing countries. They write,

Consultation time varies from as little as 1.5 minutes (public sector, urban India) to 8 minutes (private sector, urban Kenya). Providers ask on average between three and five questions and perform between one and three routine examinations, such as checking temperature, pulse, and blood pressure. In rural and urban India, important conditions are treated correctly less than 40 percent of the time; when patients receive a diagnosis, it is correct less than 15 percent of the time. Unnecessary and even harmful treatments are widely used by all providers and in all sectors, and potentially lifesaving treatments, such as oral rehydration therapy in children with diarrhea, are used in less than a third of interactions with highly qualified providers. Less than 5 percent of patients receive only the correct treatment when they visit a provider... Public doctors in primary health clinics prescribed antibiotics for diarrhea 75.9 percent of the time, spending 1.5 minutes to reach a treatment decision.­

However, while the quality of care is poor in both private and public sectors, it is far less inferior in the former. Interestingly, they also find that "patient-centered interactions and treatment accuracy were highest in private sector clinics with public doctors", underlining the higher median quality of doctors in public systems.

 

All this highlights the challenge associated with achievement of desired outcomes in sectors where the quality of human interface is the critical determinant. Like with poor quality of learning outcomes in school education, this is an example of the frustrating last-mile deficiencies with some public service delivery challenges that are not amenable to readily available, off-the-shelf solutions.

Such activities, what Lant Prtichett has described as "thick" activities, are more transactional, requiring continuous engagement by human agents, and difficult to script into monitorable actions which can be supervised with information. They stand in contrast to "thin" activities that are informational and involve some form of logistics which can be readily monitored using information.

This assumes great significance as the government in India grapples with the scaling up of transactional activities like Clean India, Skill India, Open-defecation Free India, and so on. 

Last mile gaps - financial inclusion and toilet usage

Last mile gaps are pervasive with many social policy issues. Two flagship programs of the government are most certain to be only the latest to realize that supply-side strategies are unlikely to address this challenge to any degree of satisfaction.

1. Jan Dhan Yojana aims to increase financial inclusion, thereby enabling access for the vast majority of unbanked Indians to formal financial institutions.

2. Total Sanitation Campaign aims to address India's shameful open-defecation problem by provision of heavily subsidized toilets to those without toilet facilities.

In both cases, formidable last mile gaps come in the way of access to bank accounts translating into actual usage and new toilet owners using their toilets. Such gaps can be overcome only through massive social mobilization involving painstaking and long-drawn campaigns that resist the temptation for targets-driven quick wins and band-aid solutions. Does the Indian state have the capability to successfully manage such efforts?

The challenge with private development of mineral and energy resources

What is the most effective contractual framework for governments to appropriate "fair returns" from the allotment of natural resource exploitation rights to private parties? I think this is a question that deserves much more attention than it has got.

It is critical to effectively address the governance issues in natural resource exploitation contracts. This assumes great relevance for mineral resource rich countries, especially in Africa, whose relationships with mining and energy firms have been mired in allegations of corruption and exploitation. It is equally important for many developing countries seeking to enter development contracts with private firms to exploit their natural resources. 

This is not to say that things will be fine once we have effectively addressed contract governance issues. The effective management of the money generated from the contract would still remain a formidable challenge.

Evidently, the most relevant contract will vary based on context as well as sector. However, there are basically two broad questions. One, what should be the contractual form for sharing of profits between the private developer and the government? Two, should the price of the resource extracted be regulated or determined by a market-based (domestic or international) process of price discovery? If regulated, what should be the principles for the regulated price discovery?

Unfortunately, there exists considerable ambiguity, certainly no consensus, on any of these questions. The commonest form of development contract is different models of production sharing contracts (PSCs). There are broadly two types of PSCs - one where the entire capital investment made by the developer is recovered before revenues or profits are shared and another where the revenue/profit sharing (or royalties) starts as soon as production begins. In the former, the investment risks are borne entirely by the government whereas in the later those risks lie with the developer. In practice, most development contracts reside somewhere between the two extremes. Further, many of these PSCs also have an upfront signing bonus which is transferred by the developer to the government alongside the signing of the agreement.

In case of the least developed resource-rich countries, where developers often hold the upper hand in negotiations, the PSC is more likely to be skewed towards back-loaded sharing of returns. However, governments in larger developing countries prefer to front-load the extraction of their benefits, which in turn often ends up putting off the larger multinational firms.

Both these PSC's suffer from operational problems. The back-loaded revenues sharing PSC raises the question of valuation of the capital investment. Since the firm knows more about its investment decisions and governments have limited expertise to reliably assess investments made, the incentives are aligned towards the private firm gold-plating its investments so as to extend the investment recovery period. The front-loaded revenues sharing PSC often runs into problems of accurate estimation of the production output or its value, as firms try to under-invoice its production either directly or through abusive transfer pricing (under-invoice or charge lower prices in selling the output to its subsidiary) along the upstream of the production chain. Again, a mix of incompetence and corruption enables firms to game the process to its benefit.

Interestingly, in case of the energy sector, the development of oil and gas fields is mostly done or led by state-owned entities. Private participation is through strategic partnerships with the state-owned entity. This eliminates the need to enter into production sharing agreements. Indeed there are just a handful of cases where governments have invited private firms to exclusively develop oil or gas fields. The Government of India's allotment of the KG Basin to Reliance is a very rare example of such PSC with a private developer. It is no surprise that the contract has been mired in controversies.

In the US, where competitive market exists and regulatory and political uncertainty is minimal, most PSC's are front-loaded with a pre-defined revenue/royalty sharing and with a signing bonus as the bid/auction parameter. Much the same is true of other developed market. However, private developers would be reluctant to invest in many developing countries with such a PSC design given the large political and regulatory uncertainties with these countries. But any back-loaded PSC runs the risk of private profiteering and large-scale corruption, with attendant controversies and regulatory and political uncertainties.

This leaves us with the question of pricing. In this there is greater consensus that the price discovery should be left to the market mechanism. However, there are sectors like natural gas, which does not have a globally integrated market. In such cases, a market-based price discovery may not be possible nor be the most efficient option. Once price regulation becomes the most effective option, it begs the question of how the price should be calculated. Again the case of Reliance in India is instructive.

In any case, as the aforementioned challenges highlight, the issue of contracting private firms for the development of natural resources remains a minefield. And it is surprising how little attention is paid to the critical last mile issue of structuring the development contract. 

Do higher wages reduce supervision costs?

Freakonomics points to the example of Hungarian musician entreprenuer Gabor Varszegi who made millions by providing high-quality service in his photo developing shops in Budapest by hiring workers and paying them wages that were four times the going rate. It quotes Hal Varian on the reason behind this apparently strange wage payments,

There are very few employees per store and monitoring their behavior is very costly.  If there were only a small penalty to being fired, there would be great temptation to slack off. By paying the workers much more than they could get elsewhere, Varszegi makes it very costly for them to be fired — and reduces his monitoring costs significantly.

In other words, higher wages act as a deterrent against shirking and working sub-optimally. Consequently, the need for more rigorous monitoring is less and productivity and retention increases. However, the success of this strategy lies in the threat of being immediately fired if they shirk. Remove this threat and the model collapses.

Public bureaucracies are the best example. Salaries at the lower levels of the permanent bureaucracy in India are very high, several times higher than the going market rate for similar work in the private sector. So, the Varszegi model should have made these workers more productive and reduced supervision costs. But a very strong countervailing force, in the form of (formal and informal) security of tenure or trade union activism, works against and virtually depletes the threat of being fired. The incentives get immediately misaligned.

So can this approach work with the contract employees in the bureaucracy. Thanks to minimum wages, they too get wages that are higher than the prevailing market rates. Theoretically, removing them is easy since the contracts can be easily terminated. And this is the case when the numbers involved are smaller. However, when such contract employees swell in number and have worked for a few years, the moral hazard resurfaces. They form unions and the lines of distinction with the regular employees, atleast to the extent of their labour rights, gets blurred. The threat of being fired gets diminished.  

In other words, the moral hazard arising from being part of the regular public bureaucracy or being part of large enough contract labour force who have been working for sometime nullifies the positive effect of the higher wages. As I blogged earlier, this is yet another example of how the emergent dynamics of human responses, under certain conditions, undermines logically sound incentive systems.  

Limits of technology in public policy interventions

We consistently underestimate the last mile gaps that are pervasive in society. Despite several ubiquitous examples of failures, we mistakenly continue to believe that technology fixes or regulatory diktats will help address social policy issues.   

Sample the fate of the parking ticket vending machines installed at a few locations in Hyderabad city,

The much-talked about parking meters installed in the State capital to automate the disbursement of parking tickets is proving to be futile as the vehicle-owners are not evincing any interest in utilising the facility... But due to the lack of public participation... (the company) which maintains the machines, is now forced to employ contract workers to issue the tickets... a motorist has to go and take the parking token. But none of them prefer to do it... Motorists are used to paying money and obtaining the tickets and so they are reluctant to walk down to the parking meters.

It is obvious that the opportunity cost of walking across to the parking meter, dropping the coins and generating a parking ticket is too high. There are two elements to this cost. One is the deeply internalized behavioural inertia against this additional exercise, especially when motorists are so used to getting tickets from parking attendants.

Two is the minimal cost associated with not generating the parking ticket. Without strict supervision, motorists would simply drive off without making the payment. However, if supervisors are appointed and monitoring is made rigorous, then (given the numbers required to supervise even small stretches) the cost becomes prohibitive and defeats the purpose of installing such devices. We could as well have a more efficiently run outsourced parking attendants (equipped with electronic billing machines) based system. And there is always the danger that the supervisors will themselves start collecting illegal parking rents.

Lowering the opportunity cost would involve inculcating a sense of civic responsibility among motorists and also increasing the cost of non-compliance (by prohibitive fines or vehicle tow-aways). But both these solutions run into problems when examined from the lens of real-world implementation. The first takes a long-period of continuous use of such parking meters, apart from issues related to general socio-economic development. The second poses significant enforcement challenges and compliance costs.

So, at this stage of the country's development, except for a few locations (where civic responsiveness is likely to be higher), the traditional attendants based parking regulation appear the more realistic proposition.The availability of cheap labour only serves to increase its attractiveness.

Hospital infections - nudging on hand washing

Hospital infections are the fourth leading cause of death in America, with 2 million patients in America acquiring an infection in the hospital every year (about one in 20 patients) and 100,000 people dying of them. The ratios are certain to be much higher in developing countries.

The commonest source of such infections are unwashed hands of doctors and medical attendants. In fact, a recent study of several intensive care units in the US showed that hands were washed on only one quarter of the necessary occasions. The report claims that "hand hygiene (HH) is the single most important factor in the prevention of health care-acquired infections".

Though extremely trivial, hand washing by doctors and nurses before attending to each patient is one of the most vexatious of problems. Atul Gawande has documented the challenge posted by it and chronicled how some hospitals have tried to create a culture of hand-washing by using checklists and by redesigning hand hygiene systems to make hand-washing easier and automatic. However, the amount of efforts required makes such approaches difficult to replicate on scale. In this context, NYT Fixes points to a technological solution being piloted in a few hospitals in the US,

"Every health care worker wears an electronic badge. When she washes her hands or uses alcohol rub, a sensor at the sink or dispenser or her own badge smells the alcohol and registers that she has washed her hands. Another sensor near the patient detects when her badge enters a room or the perimeter around a patient that the hospital sets. If that badge shows that her hands were recently washed, it displays a green light or something else the patient can see. If she hasn’t washed, her hands, the badge says so and emits a signal to remind her to do so. The sensor also sends this information to a central data base. Information about the hand-washing practices of a particular unit, shift or individual is instantly available."

In other words, the sensors nudge hospital staff to wash their hands before they attend to their patients. They bridge the last mile gap by bringing in a point-of-care compliance monitoring system that nudges health care workers to follow hand hygiene standards.

Though these systems are largely in pilot phase, initial results are encouraging. Its prohibitive costs means that it will be some time before they become affordable for even the richer hospitals. However, the simplicity of the solution, RFID tags attached to sensors means that once its utility is established they could be quickly commercialized at affordable rates.

See Proventix's nGage, HyGreen's Hand Hygiene Recording and Reminding System, BioVigil's Health Care Badge and Alcohol Sensor, and Patient Care Technology System’s Amelior 360.

Update 1 (30/4/2011)

The second part of Fixes article by Tina Rosenberg is available here. Peter Pronovost's landmark paper in the NEJM (made famous by this New Yorker article of Atul Gawande) which chronicled the experiment of 103 ICUs in hospitals across Michigan that used a five-point checklist to prevent infections in central line catheters is available here.

The five-point checklist - wash hands; cover the patient with sterile drapes; clean the skin with chlorhexidine antiseptic; do not insert catheters into the groin area; remove catheters as soon as they are no longer needed - reduced the the median rate of infection to zero within 3 months and was sustained for the remaining 15 months of the follow-up.

Update 2 (2/9/2011)

A study of handwashing in the Journal of Psychological Science by David Hofmann and Adam Grant found that changing the messages posted in the hospital environment from "Wash Your Hands to Protect Yourself" to "Wash Your Hands to Protect Your Patients" could motivate some doctors and nurses to wash their hands more frequently.

They measured the change in soap use when they put up different signs by the dispensers. One sign read "Hand Hygiene Prevents You from Catching Diseases". Another read "Hand Hygiene Prevents Patients from Catching Diseases". And a third sign, which served as a control, had a generic message: "Gel In, Wash Out". The patient-focused sign produced a 33 percent increase in the amount of soap and disinfectant used per dispenser over a two-week period, compared with the other signs.

In a second phase of the study, trained observers recorded how often doctors and nurses physically washed or disinfected their hands. The sign urging doctors to think about patients produced a roughly 10 percent spike in hand washing compliance, a jump that was small but statistically significant.

The last-mile gap with microfinance and the way ahead for MFIs

In a country full of paradoxes, it should have come as no surprise that one of India's most profitable business sectors is also one that claims to provide a platform to lift its millions out of grinding poverty.

After a brief lull, microfinance institutions are back in the news with a big bang. First came the spectacular $354 million IPO of SKS Microfinance followed by an ongoing debate about the ethical concerns with making profits out of poor people. Then came the acrimonious ouster of the CEO of SKS under mysterious circumstances.

Now, following a number of high-profile suicides allegedly driven by harassment from usurious micro-lenders and mounting opposition, the Andhra Pradesh (AP) government has cracked the whip on microlenders. An ordinance has been promulgated capping the interest rates charged by micro finance institutions (MFIs) and introducing stronger regulatory requirements. In AP alone the MFIs are estimated to have given loans worth Rs 3500 Cr so far this year, against Rs 2358 Cr given by government banks (against annual target of rs 7500 Cr).

On the face of it, there should not have been any competition between MFIs and government-financed SHGs, especially in AP. The SHGs financed by the government of AP receive considerable interest subsidy, leaving them to pay an interest of just 1% if the group maintains regularity in repayment for six months continuously. The linkage amounts too are large, Rs 75000 for the first linkage (given to groups after six months of satisfactory thrift activity), Rs 2-4 lakhs for the second linkage, and so on.

In contrast, the MFI groups recieve smaller amounts and at usurious annual interest rates of 24-60%. The repayment terms are much more onerous - weekly repayment (as opposed to monthly for government SHGs) and the threat of force and public humiliation for recoveries. Despite these obvious disadvantages and attractions of the other side, women groups prefer MFIs in large numbers. What are the last-mile gaps that force poor people into making such apparently irrational choices?

Unlike the bureaucracy-layered loans grudgingly given by the scheduled banks as part of their priority sector lending to government managed SHGs, MFI loans come with the red-carpet rolled-out. While the group members are forced into making multiple visits to bank branch, the MFIs offer loans at the door-step. And the paper-work and other procedural formalities are minimal with MFI micro-loans. The repayment procedures too are convenient. The always-available nature of these MFI loans as opposed to the still-distant nature of bank microloans, also ensures that they fulfill the critical timeliness requirements of poor people.

There are also the attractiveness conferred by way of lack of regulation and absence of standard due-diligence requirements. MFIs encourage formation of groups followed by immediate sanction of loans, whereas the government banks insist on six months of continuous thrift activity to become eligible for the first round of loan linkage. The same group can access loans from multiple MFIs, without any questions raised about repayment capabilities.

In simple economic terms, thanks to all the aforementioned last-mile deficiencies, the opportunity cost of accessing micro-loans offered by government banks is much larger than the cost of the MFI loans, even with their usurious interest rates.

My argument that follows is neither in favor nor against MFIs. On the one hand, there is ample evidence that most MFIs indulge in unhealthy business practices that ends up exploiting the very people whom it intends to help. It is by now widely-known that apart from the downright illegal strong-arm tactics to recover defaulting loans, they also employ unethical practices that conceals the true cost of loans from their unsuspecting borrowers.

On the other hand, it is undoubtedly true that MFIs are only the latest in the long-line of businesses that have seized the opportunity to exploit the massive profits that characterize virgin markets. The only difference being that unlike their predecessors, MFIs have been making their super-normal profits even as they maintain pretensions of helping the poor and complementing the efforts of the government in lifting people out of poverty.

In simple terms, it cannot be denied that the MFIs are merely exploiting an extra-ordinary business opportunity. However, it can be argued that they are free-riding on public externalities (tapping into the existing SHGs and the social capital and trained field personnel created by the government microfinance movement) to run an exceptionally lean and low-cost business model. In the purest capitalist language, any business enterprise which, notionally atleast, purports to play by the rules of the game, and generates a return on investment far in excess of 50% is arguably efficient.

It cannot also be overlooked that MFIs, like money lenders, play an important role in meeting credit requirements of the poor. In recent years, MFIs have proliferated in response to the realisation of huge un-met credit demand among the poor, arising partially from the government's own inability to provide universal access to formal credit mechanisms. In other words, MFIs are a form of the cliched "necessary evil".

The challenge now is to ensure that the MFIs contribute towards meeting the credit requirements of poor people, without compromising on the their undoubted capitalist efficiency and entreprenurial drive. In other words, how do we get MFIs to shed their predatory and unethical business practices and start to function like normal businesses? The instinctive answer to such questions is stringent regulation - interest rate caps, severe punishments and so on.

I am inclined towards a more nuanced position. While regulations are essential, it needs to be borne in mind that they can be successful only if the state has the capability and commitment to enforce them. As is the case with similar regulations on a host of other sectors and activities, neither pre-requisites are available. In the circumstances, regulations have to be supplemented with strategies that can re-align the profit-maximizing incentives of micro-lenders with achievement of the desired public-policy objective of expanding access to formal credit mechanisms.

One way to achieve this is to formulate the market for micro-loans in a manner that makes borrowers effectively sub-ordinated equity partners in the enterprise. Profits beyond a pre-defined bound, and after accounting for the regular shareholder dividends, could be ploughed back into the respective accounts of the borrowers as bonuses that effectively lowers the final interest rates. This would enable an efficient form of price-discovery on interest rates which reconciles both the commercial imperatives of the MFI and the reasonableness of the interest rate borne by the poor borrower.

Another approach would be to have a sliding scale for appropriating some of the super-normal profits. In simple terms, a graduated system of taxation can be introduced that internalizes some of the earlier mentioned public externalities that have been captured free by the MFIs. Governments could then reimburse this as an interest subsidy to the borrowing groups.

The administration of both these strategies could become dramatically simpler with the coming of UID and the introduction of UID-linked bank accounts. It also becomes easier to enforce regulatory requirements on capacity-related eligibility norms for groups, on the number of separate loans a group can hold, and other factors.

In conclusion, MFIs may or may not have succeeded in their ostensible mission as social enterprises. It may also be debatable as to whether their activities will be to the benefit and long-term good of their customers. However, it is undoubtedly true that they have enormously enriched their promoters.