Metropolitan areas and economic growth

The Brookings Institution and the London School of Economics have released an excellent report on the economic growth and employment creation before, during and after the Great Recession in the 150 largest metropolitan cities across the world. In 2007, while these metros formed only 12% of the global population share, they contributed 46% to the global value added.



The performance of Indian metros on income growth and employment creation during the pre-recession 1993-2007 period was moderate. Bangalore enjoyed excellent performance.



Unlike the Chinese metros which escaped largely unscathed, the Indian cities were moderately affected by the Great Recession.



The Indian cities have been amongst the best performing metros during the post-recession recovery since 2009. Mumbai and Hyderabad have had the most impressive recoveries while New Delhi has lagged behind.



There are several interesting insights from the report. In general, employment growth rates have been much higher in the metros than the remaining country. Bangalore has been the standout performer among Indian cities. Delhi, Mumbai and Hyderabad too have out-performed the rest of the country, though Chennai and Kolkota have done no better than the remaining country. However, none of the Indian cities can match the emerging Chinese cities like Shenzhen and Guangzhou with their hugely impressive job creation achievements.

Shaming to improve outcomes?

The Economist has an article which suggests that "shame might be as important a tool as choice in improving public services".

The new British government is also considering this strategy to improve the quality of public services. As a first step, they are placing all information relating to performance outcomes in education, health care etc, on the department websites. It is hoped that this would expose the poor performing officials, generate peer-pressure, and shame them into improving their performance. Alternatively, it would also appeal to the public servants’ professional pride and motivate them. However, this approach has a few problems and should be used with caution.

1. The extent of its impact would vary based on individual national cultures. Therefore, for example, in communitarian countries like Japan, shaming and other forms of peer-pressure would be extremely effective. Its impact could be less powerful in more individual-centric countries.

2. The impact could also vary based on the prevailing performance levels. If the median performance-level is poor, then peer-effects are not likely to generate much impact. However, in societies where the performance-level is reasonably high, shaming has the potential to spur the poor-performers.

3. The presentation of the data assumes great significance. The message could get lost in the massive amounts of information made available in numerous rows and columns. Attractive and cognitively striking data representation techniques like visualizing graphics can be extremely powerful in conveying the message. For example, comparative graphics that highlight the performance of a subject-teacher in relation to those of his/her peer group (same subject teachers in neighbourhood schools) has a powerful motivational impact.

4. It is important that, atleast in the initial few months and years, this data should not be used for high-stakes decisions. Therefore, using such data representation techniques to shame teachers by directly comparing their performance with those of same subject teachers in the same tehsil/county may backfire. As stakes go up and the severity of public humiliation goes up, officials respond by gaming the data collection process. It is only a matter of time before the process gets discredited.

Saving through lotteries

I had blogged earlier about "lottery bonds" that could encourage savings habit among poor people. Such instruments seek to leverage poor people's attraction for lottery schemes to promote savings.

An NBER working paper by Melissa Schettini Kearney, Peter Tufano, Jonathan Guryan, and Erik Hurst explore the potential of Prize Linked Savings (PLS) accounts to incentivize people to save more. PLS accounts pools some of the interest from all depositors and pays out a big lottery prize every month or so. It combines the thrill of the lottery with the safety of a savings account. They write,

"In lieu of paying traditional interest to all investors proportional to their balances, these PLS accounts distribute periodic sizeable payments to some investors using a lottery-like drawing where an investor’s chances of winning are proportional to one’s account balances... This mechanism adds a lottery-like feature to an otherwise standard saving account, creating an asset structure that might hold great appeal to the target low-saver segment of the population."

Tax cuts have the lowest fiscal multiplier

The latest CBO assessment of the impact of ARRA once again (here is the earlier evidence) highlights that tax cuts are among the least effective of fiscal stimulus measures. This assumes significance in view of the decision pending before the US Congress on whether to extend the Bush tax cuts beyond its expiration period at the end of the year.

In fact, even the higher estimates on tax cuts on higher income people and corporates, revealed fiscal multipliers less than unity. In contrast, direct government spending, transfers to states, local governments, and individuals ((such as increased food stamp benefits and additional weeks of unemployment benefits), yielded higher multipliers.




In an excellent recent post, Mark Thoma examined the evidence on the impact of the Bush-era tax cuts of 2001 and 2003. The Bush tax cuts were done in two phases - in 2001 the top statutory income tax rate was reduced from 39.6% to 33%, while in 2003 the tax rate on both capital gains and dividends was lowered to 15%.

I have blogged earlier that far from having any positive impact, the marginal income tax rate increases of 2001 adversely affected household incomes, unemployment rates, and deficits. There is a large body of evidence to show that capital gains and dividend tax cuts had little or no impact on stock prices and corporate payouts. Further, the tax cuts on capital gains and dividends has also been held responsible for the massive widening of income inequality in the US in recent years.

The case for labor mobility

Here is my Mint op-ed today that points to an underlying suspicion of migration in our development discourse and explains why we need to overcome it.

More on hospital corruption

Here is the science and psychology behind hospital corruption. As can be seen, the very low government hospital user fee, the huge differential between it and private consultation fee, and the substantial un-captured higher willingness to pay (WTP), provides for considerable rent-seeking opportunities (shaded area in graph below). The WTP is amplified by the vulnerability of a patient fighting for his/her life.



Elimination of bribery by raising user fees to match that of the private hospitals is politically unfeasible. The logistics of managing reimbursement of the higher fees to the poor (to UID-linked bank accounts) is simply too complex. Standard prescription like more rigorous regulations - anti-corruption agencies, exemplary punishments, transparent recruitment process, etc - while essential, are not likely to make much head-way given the huge numbers (of officials and offices) involved, the vast spread, effective monopoly of service provision (atleast to the poorest), and entrenched and commonplace nature of such rent-seeking. In fact, the challenge is to resolve corruption given the aforementioned existing factors.

Simple and cliched as it sounds, the reasons for keeping consultation fees low in government hospitals is worth repeating. Basic health care services are a public good - not supplied by private sector and the preserve of governments. Pricing up the access to the service so as to capture the full WTP, will naturally end-up denying the service to the poorest. However, they are precisely those who cannot access private health care and who are among the most certain beneficiaries of such government welfare programs. Any attempt to increase consultation fees in government hospitals and reimburse the subsidy will be too complex to administer, even with enabling systems like the UID.

In any case, market efficiency is not the issue here, as one of the comments (KP) nicely put it, "If the government steps in to provision and deliver a service, it is invariably a question of satisfying un-met demand because of market failure, its logic is not to capture the consumer surplus in entirety". Further, comparison with the US is irrelevant for the two reasons - cultural and law-abiding nature of citizens - which are not applicable, atleast for now, to India. And, as POM graphically and brilliantly highlights, capturing consumer surplus by higher pricing is no insurance against rent-seeking or other forms of exploitation. It simply morphs and emerges in an even more difficult-to-address form! Outsourcing, especially to SHGs and NGOs, while theoretically appealing, have been found to deliver much the same, even worse, outcomes.

Even raising the wages of the street-level bureaucrat is likely to do little to limit rent-seeking. In view of many of the aforementioned factors, the rents are likely to be inelastic in relation to the salaries. In other words, the increased salaries, without addressing the WTP and other contextual factors, will do little to depress the bribes.

I cannot but completely agree with KP that it is "perverse" to apply the WTP principle and maximize consumer surplus while designing public policies (that too on supply of public goods) in an environment of huge unmet demand. Fortunately, our sense of right and wrong have not degenerated so much that we are forced to deny a person an opportunity to save his life because he cannot afford the required treatment.

The challenge, and the problem I posed in the earlier post, is to design implementation strategies for delivering health care services in government hospitals, given all the adversities of the environment.

Here my understanding of the problem. The last-mile issue here is the multiple interfaces between officials and the patient. We cannot avoid them, but we can minimize them and even create conditions to limit the chances of bribe-transactions. The challenge then is to structure an implementation environment that will nudge/coax/deter/condition officials so as to mitigate or even eliminate the rent-seeking opportunity. And these environmental framing can be done in different ways, taking into account the specific cultural and functional factors.

At a more generic level, is it possible to have a single-window type interface? Can all the tests be done at one location so as to eliminate multiple interfaces? Can tests be carried out at the bedside? Is it possible to issue tokens with clear timings to each patient to access these services? What are the different means of corrupt practices at each interface, and can we do something to deter them? Can we rotate officials at the cutting edge with some periodicity? Answers to all these and more would be determined by the micro-environments of the rent-seeking action and how we can re-frame them to dis-incentivize corrupt practices.

Or, on a more unconventional manner, can we have a system wherein, no in-patient can keep possession of any money? And even if they want, the notes should be dipped in a powder that dis-colors water? Or we can even borrow this from Kathmandu airport - pocket-less employee uniforms!

More on the Celtic crisis

Paul Krugman makes an interesting comparison between the relative paths adopted by Iceland and Ireland when faced with similar financial crises. He describes the relative success, till now, of Iceland and the disaster looming on Ireland, as the triumph of heterodoxy over orthodoxy in economic policy making.

In both cases, the crisis could be traced to irresponsible lending by banks and borrowing by real estate and other businesses. And businesses and borrowers in both ran up massive amounts of external debts. When faced with their respective decision-moments, the responses could not have been starker.

Nearly 18 months back, Iceland responded by making "foreign lenders to its runaway banks pay the price of their poor judgment, rather than putting its own taxpayers on the line to guarantee bad private debts". The result was a number of private sector bankruptcies, which also "led to a marked decline in external debt". It also introduced capital controls to prevent sudden capital flight by foreign and domestic investors. It refrained from destabilizing its Nordic social welfare model with the standard fiscal austerity measures like spending cuts.

In contrast, faced with the prospect of huge losses for banks and their irresponsible foreign lenders, the "Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations". The result is that the debts got transferred from the banks to the Irish Government's balance sheet. At the first signs of trouble, it imposed a series of "savage fiscal austerity" measures in order to restore "market confidence". And followed it with more doses of the austerity medicine.

The "confidence fairy" has responded in the most unexpected manner to the actions of both governments. If the supporters of the "confidence fairy" hypothesis were correct, Iceland should have been ravaged by the bond-vigilantes and Ireland should have been ovewhelmed by a rush in market confidence. The results have been exactly the opposite. The bond markets continue to savage Ireland, whose bond yields and CDS spreads continue to rise steeply despite nearly three years of austerity. However, Iceland has made a smart recovery, both its economy and the financial markets, winning praise from even the IMF.

Its CDS spreads have fallen from 800 to less than 300, whereas Ireland's cost of insuring debt has risen precipitously from less than 200 to over 500 points.



In fact, a testament of its success and the problems of the EU peripheral economies is the fact that Iceland's CDS spreads have fallen below that of even Spain.



And, unlike Ireland, being out of the single currency zone meant that Iceland could indulge in significant currency devaluation to increase the competitiveness of its exports.

In this context, Simon Johnson points to the odds stacked against Ireland being able to emerge out of its debts any time in the foreseeable future. He points to the fact the fact that atleast 20% of Irish GDP is from 'ghost corporations', attracted by Ireland's 12.5% corporate tax rate, that have little or no real activity in Ireland. This effectively means that the real debt burden of Ireland is more than 100% of the GNP and could rise to 150% of GNP in the next few years.

The steep fiscal contraction by way of spending cuts, especially at a time when the economy is set to contract for the third year in a row, will amplify the real debt burden. In the absence of a national currency, it cannot even devalue and increase the competitiveness of its exports. And given the extraordinary rise in asset valuations - property prices rose four times - any chances of asset prices rising to reduce the real debt burden is remote.

Further, this year, the government will run a deficit of 15% GNP, and with nominal GNP falling, it could well remain that high next year, even if the government cuts spending by the 2 to 3% of GNP currently envisaged. In other words, Irish economy would have to grow at close to its highest ever growth rates just to ensure that its debt share stays the same.

In the circumstances, it is certain that Ireland cannot resolve its debt crisis without some form of debt restructuring that forces lenders to take substantial haircuts. But coming in the way of this is the significant exposures of European banks to Irish debt.

It is estimated that the claims of foreign banks on Ireland are at over $500 billion. German banks are owed $139 billion, which is 4.2% of German GDP British banks are owed $131 billion, or about 5% of Great Britain’s GDP, French banks are owed $43.5 billion, which is approaching 2% of French GDP, and Belgian banks are owed $29 bn, or 5% of its GDP. None of these countries are likely to support measures that would effectively force their own banks to take losses on their Irish exposures.

Update 1 (29/11/2010)
Ireland becomes the second country after Greece within the Eurozone to accept a bailout. The 85 billion euro ($112 billion) bailout plan, at an average interest rate of 5.83% (compared Ireland's 10 year bond rate of close to 10%), includes a contribution of 17.5 billion euros by the Irish government itself through money it has already raised. Of the rest, 22.5 billion euros will come from the International Monetary Fund. The remaining 45 billion euros will come from bilateral loans from European nations and two European Union rescue funds set up in the spring.

Of this €10 billion will be used to immediately to recapitalise the banks to bring them up to a core tier 1 capital ratio of 12%, with a €25 billion contingency. The remaining €50 billion will be used to meet the budgetary requirements of the State. Under the Plan, Ireland will reduce its budget deficit to 3% of GDP by 2015.

Update 2 (3/12/2010)
Barry Eichengreen has the best article on the prospects for the Irish economy. It is in one word - brilliant!