Weekend reading links

1. Definitive signature of greening nature of global economic growth

In 2007, when China’s economy was roughly as big as India’s is today, it emitted around twice as much carbon dioxide. India and Vietnam are still powered by coal. The difference is they are making much more efficient use of it.

2. Wind power fact of the day,

One turn of an “SG 8.0-167 DD” turbine generates enough electricity to run a British home for a day and a night. SG stands for Siemens Gamesa, a subsidiary of the German industrial giant, which makes the machines in Hull. The 8.0 is the turbine’s maximum output in megawatts (MW). The 167 is the diameter of its rotor in metres: it sweeps out in a circle equivalent in area to about three football pitches. And the DD stands for direct drive, an electricity-generation technology with no fiddly gears to wear out. At Hornsea 2, a wind farm located off the Yorkshire coast, 165 of these vast turbines form a field of steel stretching farther than the eye can see. Hornsea 2, which became fully functional in August, is now the largest wind farm in the world. When the wind really blows it can power 1.4m homes... By 2010 there were 1.3 gigawatts (GW) of wind power in British waters. Today there are 14 GW... About 36% of British electricity now comes from wind, the majority of it offshore... In the process, the cost has fallen sharply. In 2015 new offshore wind cost £120 ($155) per megawatt hour; today it costs well below £40.

3. Rana Faroohar has a perceptive guide on the deglobalisng world.

After decades of a “winner take all” trend, in which the majority of prosperity has been located in a handful of cities and companies, look for business and policymakers to be more focused on ensuring that wealth and place are re-moored. This will come with costs — such as inflation. The old “efficiency” models, which assumed that people, goods and capital would move seamlessly to wherever they were needed, were cheap. Creating more opportunity at home, while still remaining connected to the global economy, will require building more resilient models — that involves better education, infrastructure, higher local wages, and less focus on the short-term bottom line. Efficiency was cheap. Resiliency will cost more. Who pays for it is up for grabs...

But as Harvard academic Gordon Hanson, one of the figures within this movement to reimagine free-market capitalism, puts it: “When workers without a college degree lose their jobs, few choose to move elsewhere, even when local market conditions are poor.” One reason for that is that they depend on the family and community ties of place to buffer them in difficult times. Hanson and his colleagues are building new, highly localised models of how economic growth happens in different areas.

About the costs of reshoring and localisation of supply chains, 

While some worry the shift would be too costly, a 2021 BCG analysis found that more localised production networks would add only a 2 per cent mark-up on a $35,000 car, a 1 per cent increase in the price of a smartphone, or 3 per cent more for a $200,000 home. This, coupled with precision data technologies that allow for extremely precise tracking within supply chains (a textile retailer can now identify the provenance of cotton down to a particular farm or field), and a younger consumer geared towards buying fewer things of better quality, will both encourage more localisation and help the planet.

4. Marianna Mazuccato has four requirements for industrial strategy involving procurements, grants, loans, and tax incentives,

Where affordable and equitable access is a policy priority, products and services with public funding should be priced accordingly. For example, the AstraZeneca Covid-19 vaccine, developed with the help of government investments in R&D, manufacturing, and advance sales, included provisions to keep prices low, limit profits during Covid and ensure knowledge-sharing for public health... Conditions can also shape the goals — or “missions” — behind investment and impose standards on companies. Decarbonising existing industries and expanding green innovation and growth is a priority... Conditions associated with a just green transition should cut across all industrial strategy investments: for example, requiring new manufacturing capacity to minimise carbon emissions and create jobs that meet labour standards. 

In addition, receipt of public funds should be conditional on sharing a proportion of royalties, equity or intellectual property with the government. This would enable the state to take a portfolio approach to investments, knowing some will succeed and some fail... Last, governments can prompt companies to channel their own investments into productive activities. Biden’s Chips and Science Act, which seeks to boost US semiconductor innovation and manufacturing, includes “guardrail” provisions that prohibit funds from being used for share buybacks. It does not yet, however, prohibit companies that receive chips act funding from engaging in such buybacks — a loophole that has led to calls for tougher rules.

5. India's labour cost and size advantage

6. The sheer scale and nature of corporate governance breakdown at FTX is staggering. FT has a good article. 

... an environment where employees’ every need was catered for, and where a circle of senior executives in their late twenties and early thirties splashed millions of dollars on everything from travel to sport sponsorship deals and luxury homes. A lack of internal controls that are typical of large financial companies meant FTX’s spending went largely unchecked, according to former employees and filings in the group’s Delaware bankruptcy case. “[It was] kids leading kids,” said one former employee. “The entire operation was idiotically inefficient, but equally mesmerising,” they added. “I had never witnessed so much money in my life. I don’t think anybody had, including SBF.”... Concerns about value for money from employees with marketing experience were brushed off by Bankman-Fried and the company’s top executives, this person said. Bankman-Fried or one of two other executives signed off hundreds of millions in spending on sponsorship deals. “It just kinda went crazy,” the employee said. “If Sam said OK, it was good to go. Regardless of the amount.” John Ray, the new FTX chief executive leading the exchange through the bankruptcy, said he had never seen “such a complete failure of corporate controls”.

Some should surely attract criminal liabilities

“The [company] did not have the type of disbursement controls that I believe are appropriate for a business enterprise,” he said in filings, adding that company money was spent on buying homes and personal items for FTX employees and advisers. “There does not appear to be documentation for certain of these transactions . . . and certain real estate was recorded in the personal name of these employees and advisers,” Ray added... Bankman-Fried’s companies also extended loans to executives, bankruptcy filings show. His trading firm Alameda Research loaned $1bn to Bankman-Fried himself, $543mn to head of engineering Nishad Singh and $55mn to Ryan Salame, co-chief executive of FTX Digital Markets, its entity in the Bahamas.

Sample this about poor quality of due diligence by venture capital investors,

The boring process of checking that potential investments can live up to their promises has fallen completely by the wayside. Due diligence once meant sending bankers to check that a mining company really had a working gold mine, hiring accountants to scour the books and asking lawyers to identify contracts that could prove troublesome in a bankruptcy. These days, it is hard to know what due diligence actually means. Ontario Teachers’ Pension Plan, which put $95mn into FTX, insists that its professionals “conduct robust due diligence on all private investments”. Tiger Global, which tossed in $38mn, pays outside consultants including Bain & Co to do the work. Yet both missed what FTX’s new chief has described as a “complete failure of corporate controls”. Sequoia Capital, which handed FTX founder Sam Bankman-Fried $214mn even though he played video games during his pitch to them, has walked a fine line... Veteran Silicon Valley dealmakers say there has been a gradual erosion of standards, as venture capitalists stopped trying to select and nurture the smartest entrepreneurs and started spraying cash around... decades of easy money and a lack of decent yields from safer alternatives mean this approach has spread from early investment rounds involving a few million dollars to gigantic deals involving billions.

7. No matter the details, the six year old public procurement website Government eMarketplace (GeM) is an outstanding success 

Prashant Kumar Singh, chief executive officer of GeM, recently said the portal would be the largest e-commerce platform in India by the end of the current financial year, crossing Amazonand Flipkart. Singh pegged the FY23 GMV target for GeM at Rs 2 trillion (around $25 billion). In FY22, GeM recorded a GMV of $14.2 billion, as against Amazon India’s $17 billion and Flipkart’s $23 billion.

8. To say that Morgan Stanley is bullish on India is an understatement

We see over the coming decade to 2031, India’s GDP more than doubling to over $7.5 trillion, the stock market compounding annually at 11 per cent to around $10 trillion, a discretionary consumption boom led by a rise in per capita income from $2,000 to over $5,000 and a quintupling of households earning in excess of $35,000/year to over 25 million, a rise in credit to GDP from 57 per cent to 100 per cent, causing a 17 per cent annual compounding of credit growth, and a doubling of India’s share in global exports.

Let's see how much of this materialises by 2031. 

9. Qatar World Cup 2022 

Since winning the competition to hold the World Cup in 2010, Qatar has spent more than $250 billion on soccer-related development, a figure that dwarfs the estimated $42 billion that China spent on the 2008 Beijing Olympics and the $55 billion that Russia spent on the Winter Olympics in 2014. Ten billion has gone on eight soccer stadiums. The rest was devoted to a wholesale transformation of the country: the complete remodeling of downtown Doha; the construction of nearly a hundred new hotels; the expansion of the port and the airport; a revamped road system; the creation of three metro lines; and a new city with homes for more than a quarter of a million people.

10. Adrian Wooldridge on Sweden

The Swedes combine the best features of German and American capitalism. German-style Swedish companies dominate global niches through a combination of engineering excellence, high-quality training and constant innovation... Swedish society at large is remarkably pro-business. The government allows private companies to run bits of the state such as schools and hospitals. The Swedish stock market is Europe’s largest, with 950 listed companies (mighty Germany comes second with around 800). Half the adult population has savings in the Swedish mutual fund account. Sweden has more venture capital investment as a share of GDP than any other European country, much of it drawn from America, and venture capital-funded investment is thought to have increased GDP by six percentage points since 2005.

11. India has received strident criticism from western politicians and commentators about buying oil from Russia. But contrary to the impression of India's purchases bailing out Russia, even today its purchases are a small share of those by Europeans. 

12. Janan Ganesh has an excellent article that captures the times,

If you tell me what you think about, say, the return of the Benin bronzes, I can infer with some confidence your views on public spending, the EU, rail strikes, immigration, working from home, climate change, Meghan Markle and much else. Nothing connects these subjects. It should be possible to be a small-government Remainer who thinks imperial loot is better off in western museums and who loses sleep to visions of a burning planet. But such a person would stand out now. To take a more concentrated example, lots of people should be anti-lockdown and pro-vaccine mandate. How many do you know?... People do not work out their beliefs and then join the corresponding tribe. They join a tribe and infer their beliefs from it. The sense of belonging, the group membership, is what hooks people, not the thrill of being right or pursuing a thought on its own terms. Politics has become a team sport, goes the line on this.

13. Finally, FT has an article on India's emergence as a major creditor to its neighbours, nearly tripling in value since 2014 to $32.5 bn. 

India’s cumulative “development assistance” since its independence in 1947 has nearly doubled from $55bn to $107bn since 2014, according to the government-backed RIS think-tank. The scale is far below what China is attempting through the BRI launched nine years ago, which the American Enterprise Institute think-tank estimates reached $838bn last year. Yet the foreign ministry said India has extended more than 300 lines of credit for around 600 projects, ranging from a cement factory in Djibouti to the Maldivian bridge. India has also funded everything from training courses to restoring overseas cultural sites such as mosques and temples.

Lending through India’s development partnership administration, by which it offers other governments lines of credit, has nearly tripled in value since Modi came to office in 2014 compared to the previous eight-year period, according to the foreign ministry, totalling $32.5bn.

In contrast with China, as the article points out, Indian credit is concessional and comes in the form of partnerships involving private companies. 

The discretion trade-off with public procurements

Public procurements face the classic problem of any principal-agent framework. Discretion that utilises the informational advantage of agents leads to efficient decision-making. But it also comes at the cost of abuse of the discretion by agents. Getting the trade-off right and allowing the right level of discretion is a big challenge. In bureaucracies where the risk aversion is high, it is generally the case that bureaucrats err on the side of limiting discretion.

This manifests egregiously in the form of the unqualified preference for least price auctions/tenders which, as I have blogged here and here in the context of decision paralysis within the Indian bureaucracy, leads to sub-optimal outcomes.

Francesco Decarolis, Raymond Fisman, Paolo Pinotti, and Silvia Vannutelli have an excellent paper which does an empirical examination of this problem using the example of infrastructure procurements in Italy and establishes several important insights. While most of these are widely known, it's perhaps the first time it has been established using rigorous evidence.

The authors use a unique and rich database on over 200,000 procurement tenders in Italy during the 2000-16 period covering civic buildings, and roads, bridges and highways. The database has information on whether firms that participated and won the tenders were under investigation for corruption and whether the administering officials were similarly being investigated for corruption charges. The size of the database allows the authors to examine several dimensions of contracting and discretion and come up with very robust results. 

They compare two broad categories of tenders, based on awarding process (open auction and negotiations) and selection criterion (lowest price or scoring rule). The so-called scoring rule (or quality based) auctions also involve (potentially subjective) non-price criteria in selecting a winner. On the firm characteristics based on corruption allegations and the level of discretion in the tenders, they find, 

We begin by examining the types of auctions that are most often won by investigated firms. We show that two auction arrangements are significantly more likely to lead to a contract being awarded to an investigated firm: first, so-called scoring rule auctions, which involve (potentially subjective) non-price criteria in selecting a winner, are 1 percentage point (6 percent) more likely to be won by investigated firms, relative to first-price (non- discretionary) auctions. Auctions that use “negotiated” procedures in which procurement officials invite bidders (rather than allow for open bidding) are no more likely to be won by firms investigated for corruption, relative to open auctions. However, when we look at the subset of negotiated auctions in which officials fail to invite the requisite number of bidders (which we take to be an indication of abuse of discretion), we find a 1.9 percentage point (11 percent) higher probability of an investigated winner. While more at risk of selecting investigated firms, we also find that scoring rule auctions are associated with lower cost overruns and higher award prices, while negotiated procedures are associated with lower delays and higher award prices... we interpret these features as an indication of improved contract execution.

They also looked at whether the choice of discretion is affected by whether the auction was administered by or associated with an individual flagged as suspected of corruption. They examined whether individual procurement officials prone to corruption and areas where suspected corruption is present (proxied by municipalities with at least one official accused of corruption) are more likely to select discretionary (corruptible) tenders.  

Our results show effects that go in opposite directions: public officials suspected of corruption are 2.9 percentage points more likely to use one of the two discretionary auction types we flag for concern (discretionary criteria or discretionary procedures with too few invited participants). By contrast, discretionary auctions are 1.9 percentage points less common in “corruption-suspected” municipalities.

Their summary is important,

In our context, greater discretion allows for more efficient implementation of government projects by well-informed and well-intentioned procurement officials, which must be traded off against the higher prob- ability of leakage by corrupt officials. If the choice of auction design is one of the primary means of oversight by a (non-corrupt) central monitor, then less discretion will be allowed in locales where the probability of corruption is higher. When possible, however, corrupt officials deploy discretion, to the benefit of corrupt firms.

They also look at two methods often used to contain corruption, rotation of procurement officers and tighter limits on subcontracting (seen as the main channel for funnelling public money into bribes and kickbacks), both of which also come with efficiency costs. They find that both these are more commonly used in "corruption-suspected" municipalities. 

The implied effect of suspected corruption on turnover is very large, with a 22 percent (6.82 percentage points) lower fraction of contracts managed by an average official in “corrupt” versus “non-corrupt” municipalities (and a nearly identical effect on the value of the con- tracts managed)... Indeed, we show a series of results indicating that firms investigated for corruption sub- contract more often and – conditional on subcontracting – they are more than 60 percent more likely to delegate subcontracts to other investigated firms and to award a larger share of all subcontracts to investigated firms. But subcontracting is also a tool for the efficient allocation of job tasks, especially for more complex projects. When inspecting regional procurement regulations on subcontracting rules, we find that regions in which corruption is less of a concern are more apt to loosen regulations on subcontracting, whereas regions where corruption is more of a concern implement tighter subcontracting rules.

They also show that government systems tend to err on the side of caution and impose excessively strict constraints on discretion by lower officials. They examined the consequence of a mid-2000s reform which loosened regulations governing negotiated tenders. 

Whereas such contracts could only be deployed for relatively small projects (under €300,000) in the early 2000s, by 2011 the limit had been raised to €1,000,000. This change, motivated by the government’s desire to stimulate the economy by reducing the procedural times to award public contracts, led to a massive increase in the share of auctions held via negotiated procedures, from 10 percent in 2006, to 60 percent by 2012. Yet the vast majority of these were conducted with the legally required number of bidders, and hence the loosening of rules had at most a very small effect on the fraction of contracts awarded to firms under investigation for corruption. And in locations in which officials might have exploited discretion, their use was relatively limited. Indeed, calculations based on our estimates imply a 0.05 percent increase in investigated winners overall between the periods before and after the increase of the threshold for using negotiated procedures. This appears to be a small cost when compared to improvements in contracting quality from discretion, such as a 14 percent reduction in delays.

This points to the scope for allowing greater discretion in procurements which is likely to be net welfare enhancing. 

The paper assumes significance in light of the Government of India considering amendments to the General Financial Rules (GFR), 2017 to shift away from the lowest-price auctions towards more quality (or scoring rule) based tenders. The paper offers a ringing endorsement for any such move.