At the outset, let me clarify that this post is not a defence of any government. Nor is it an attempt to blame anybody. It is only a reflection of the environment in which public debates are taking place in modern societies.
Why is the government unable to lower inflation? Why is the government failing to provide employment to the massive numbers of people joining the workforce? Why is the government raising the prices of petrol and cooking gas periodically? Why is the government unwilling to tackle corruption? Why are governments failing to provide good quality utility services? Why are governments increasing the utility tariffs?
These are the dominant themes in our public debates today. The agenda of the debate is framed in a manner that puts governments at the center of the issue. The audience, mostly passive recipients, have come to believe that governments are either "failing", "unable", or "unwilling" to resolve these important and universal issues. Even when there is a rare attempt to search for the causes, it ends up in a circular manner reverting back to the government.
This framing of the agenda and questions suits all sides to the debate. The villain of the piece, government, is easily identifiable. This narrative fits nicely into the widely accepted stereotype of governments being the source of all evils. In this simplified world-view, citizens find easily identifiable villains. Most often, these debates end up as opportunities for collective middle-class catharsis. It is perfect staple for tweets and Facebook comments. They also make for good media events - soundbites, short op-ed columns, blog posts and half-hour television debates involving 4-6 people. The opposition and intelligentsia love it. The former's job is after all to oppose the government, while the later are known to just criticize, without offering solutions.
Ironically, governments too may not be unhappy. It helps them to avoid confronting the difficult issues that need to be addressed to meaningfully settle the issue being debated. In fact, it makes governments try out populist band-aid solutions which merely kick the can down the road. In many respects, we have a classic collective action problem.
The fundamental issues are complex, not amenable to quick-fixes, requires hard-thinking, and painstaking and long-drawn out action on multiple fronts. It involves all stakeholders facing up to bitter truths that unsettles and often discards the settled conventional wisdom. Most importantly, it requires communicating to all of us certain fundamental realities and the need to accommodate our opinions and ideologies based on them.
These issues are important for developing economy democracies like India, which are in the middle of far-reaching social and cultural transformations. These countries have a strong and deeply entrenched legacy of dominant government role in all walks of life. All the surviving generations are used to relying on governments to resolve all their problems. Accordingly, the dominant discourse invokes the language of regulations, enforcement, punishments, subsidies, and so on.
When governments are making pretences of controlling inflation by coming down on hoarders, or helping farmers by raising the minimum support price, or protecting consumers by keeping tariffs and oil prices unchanged, or controlling corruption by sending the corrupt to jail, it is this discourse that is being played out. This discourse has limited space to explain the complex dynamics of modern markets and the limitations of governments.
The theatrics associated with these debates means that we lose the opportunity for informed debates about critical issues of concern to all of us. In all these cases, since the government is the perceived villain, we stop or refrain from examining these issues in greater detail in search of "real" answers. Take the case of the debate surrounding inflation. What are its causes? What can be done to mitigate, in the short-term, and resolve, in the medium and long term, the causes of inflation? What should be the responsibility of governments, academicians, media, citizens and the society in this endeavour?
Or take the case of corruption. What are the major sources of corruption? What are the different categories of corruption and what are its dynamics? How can we systemically prevent rent-seeking for each category of corruption? What should be the role of different stakeholders in collectively addressing this problem?
This is not to be fatalistic - the resolution of all these problems require collective effort, and since such efforts are difficult to mobilize, we are left with no choice! But a more nuanced perspective of these issues and their challenges helps all participants in the debate to atleast appreciate the complex nature of the problem. I am sure all of us realize that we stand a better chance of success with addressing a complex issue when we have a well rounded understanding of the forces contributing to the problem.
If we are able to elevate public debates to this level, all of us will quickly realize that controlling inflation, job creation, keeping tariffs and user charges constant, and so on are issues that are increasingly beyond the competence of mere governments. They require long-term structural changes and societal adjustments, where all of us have an important role to play, either directly or by co-operating with and assisting in the process. The governments have to take the lead (sadly, even this is missing!).
However, as mentioned at the beginning, none of this is to underplay or overlook the central role of governments. They can, and should, play an important role (though their degree of control varies from situation to situation), in both mitigating the adverse consequences of these problems and putting in place the mechanisms to enable their effective resolution. Addressing market failures are the basic responsibility of governments. Public debates and policy making will be much the richer for this realization.
Thursday, November 10, 2011
Wednesday, November 9, 2011
How we got here and what is the way forward with bank reforms
Andrew Haldane, Executive Director at the Bank of England, is one of the leading and credible voices championing financial regulation reforms so as to prevent a recurrence of events that led to the sub-prime mortgage meltdown. His most recent speech, the Wincott Annual Memorial Lecture, is an excellent chronicle of banking industry and summarizes his reform proposals.
He describes the source of a governance fault-line in banking sector,
He traces the evolution of the banking sector since the nineteenth century - unlimited liability moved to extended liability and finally to limited liability. Given limited liability, bank managements realized the benefits of excessive risk taking - the downside losses were capped, while the upside gains were all theirs. This meant that volatility with high upside gains increased the returns on equity. Similarly, higher leverage too enabled equity holders to amplify their returns on equity.
With equity holders having increasingly limited skin in the game, the other possible restraint on excessive risk taking, arising from debt holders (who could either have demanded higher returns on their investments or even denied their funds), too started breaking down. The disciplining role that debt holders had exercised on banks started failing for various reasons, the most prominent being the realization that governments will step in and bail out failing banks.
A measure of the too-big-to-fail (TBTF) subsidy of UK and global banks, based on different models, rose dramatically in the build-up to the sub-prime crisis. For the global banks, the TBTF subsidy is worth at least hundreds of billions of dollars per year. This subsidy is also a measure of the risk mispricing by bank debtors, and by implication also the extent of dilution in debtor discipline.
Finally, there is the executive compensation system that rewards short-term equity market gains over more sustainable value addition. Return on equity (ROE), with quarterly periodicity, has become the guiding post on evaluating manager performance and shareholder returns. Haldane describes how the shorter-term investors in bank equities gained from volatility,
Increased volatility, high leverage, and distorted basis for calculating management compensation and return on shareholder investments favors the short-term investor and the management over all others. All this coupled with the basic "governance fault-line" meant that incentives became badly mis-aligned all round.
He captures the results of all this in a few stunning figures. In the 1880s, total UK bank assets were equal to 5% of GDP. At the bubble peak they were 500%. The assets of the UK’s three biggest banks at the start of the 20th century were 7% of GDP. By the end of it they were 75%, and by 2007 it was 200%. Leverage climbed from 3-4 times in the 19th century to 30 times in the bubble. And return on equity went from modest single figures to 30% at the peak. As to executive compensation among the CEOs of the seven largest US banks, in 1989 it averaged $2.8 million, or almost 100 times the median household income. By 2007, it had risen ten-fold to $26 m, over 500 times the median US household income. Most astonishingly, temporary support for the global banking system during the crisis peaked at around a quarter of global GDP.
Haldane suggests four financial market regulation proposals
1. Higher equity capital. He writes about its benefits
He favors much higher capital reserve ratios than that being considered under the Basel III norms. More radically, he favors equalizing the scaales between equity and debt, thereby forcing debt holders to have much greater skin in the game and encourage them to play their traditional disciplining role.
2. Equity-like liabilities
He favors the use of financial instruments which explicitly combine the incentive features of debt and equity, the so-called contingent convertible securities or CoCos. They are debt in good times, but convert to equity in bad, and combines the benefits of unlimited liability without its practical drawbacks.
However, such instruments should be time-consistent (they should kick-in without discretion and expectations of its kicking in should not distort market incentives).
He suggests that the bank management should have no discretion on when and how conversion takes place. Further, conversion needs to take place well ahead of bankruptcy, thereby avoiding the deadweight costs of default which, for too-big-to-fail institutions, are likely to be too large to be tolerable by the authorities.
As a trigger for the conversion, Haldane prefers market-based measures of capital adequacy, like even equity prices. This would be better that regulatory ratios which can be tweaked to suit requirements. Such triggers would expedite pre-emptive recapitalisation of failing institutions and contain the spread of risks.
3. Control rights
Haldane prefers a ownership and control rights model that is a right mixture of the two extremes of a public limited company (rights vested in a small minority and voting rights assigned according to portfolio weights – an equity dictatorship) and the mutually-owned co-operative (rights spread over a wide set of liability-holders, with voting rights unrelated to portfolio weights – a liability democracy). Voting rights could be extended across a wider set of liability stakeholders, with rights allocated on the basis of their deposits, thereby ensuring that governance and control are distributed across the balance sheet - a wealth-weighted democracy.
4. Performance and compensation
he advocates moving over from a system of evaluating performance based on ROE to one based on return on assets (ROA). This covers the whole balance sheet and, because it is not flattered by leverage, does a better job of adjusting for risk. He writes that if the CEOs of the seven largest US banks had in 1989 agreed to index their salaries not to ROE, but to ROA, by 2007, their compensation would not have grown tenfold but would have risen from $2.8 million to $3.4 million. Rather than rising to 500 times median US household income, it would have fallen to around 68 times.
He describes the source of a governance fault-line in banking sector,
"Ownership and control rights are exercised by shareholders. But for banks, equity is a vanishingly small fraction of their balance sheet. Worse still, equity-holders often have risk-taking incentives out of line with the interests of other bank stakeholders, much less society. This fault-line lies at the heart of the imbalance between privatised returns and socialised risks. Only in banking do control rights and incentive wrongs combine so uncomfortably."
He traces the evolution of the banking sector since the nineteenth century - unlimited liability moved to extended liability and finally to limited liability. Given limited liability, bank managements realized the benefits of excessive risk taking - the downside losses were capped, while the upside gains were all theirs. This meant that volatility with high upside gains increased the returns on equity. Similarly, higher leverage too enabled equity holders to amplify their returns on equity.
With equity holders having increasingly limited skin in the game, the other possible restraint on excessive risk taking, arising from debt holders (who could either have demanded higher returns on their investments or even denied their funds), too started breaking down. The disciplining role that debt holders had exercised on banks started failing for various reasons, the most prominent being the realization that governments will step in and bail out failing banks.
A measure of the too-big-to-fail (TBTF) subsidy of UK and global banks, based on different models, rose dramatically in the build-up to the sub-prime crisis. For the global banks, the TBTF subsidy is worth at least hundreds of billions of dollars per year. This subsidy is also a measure of the risk mispricing by bank debtors, and by implication also the extent of dilution in debtor discipline.
Finally, there is the executive compensation system that rewards short-term equity market gains over more sustainable value addition. Return on equity (ROE), with quarterly periodicity, has become the guiding post on evaluating manager performance and shareholder returns. Haldane describes how the shorter-term investors in bank equities gained from volatility,
"Institutional investors in equities are typically structurally long. They gain and lose symmetrically as returns rise and fall. Many shorter-term investors face no such restrictions. If their timing is right, they can win on both the upswings (when long) and the downswings (when short). For them, the road to riches is a bumpy one – and the bigger the bumps the better. As in Merton’s model, all volatility is good volatility. Perhaps reflecting that, there is evidence of the balance of shareholding having become increasingly short-term over recent years... Average holding periods for US and UK banks fell from around 3 years in 1998 to around 3 months by 2008. Banking became, quite literally, quarterly capitalism. Today, the average bank is owned by an investor with a time-horizon considerably less than a year...
What we have, then, is a set of mutually-reinforcing risk incentives. Investors shorten their horizons. They set ROE targets for management to boost their short-term stake. These targets in turn encourage short-term risk-taking behaviour. That benefits the short-term investor at the expense of the long-term, generating incentives to shorten further horizons. And so the myopia loop continues."
Increased volatility, high leverage, and distorted basis for calculating management compensation and return on shareholder investments favors the short-term investor and the management over all others. All this coupled with the basic "governance fault-line" meant that incentives became badly mis-aligned all round.
He captures the results of all this in a few stunning figures. In the 1880s, total UK bank assets were equal to 5% of GDP. At the bubble peak they were 500%. The assets of the UK’s three biggest banks at the start of the 20th century were 7% of GDP. By the end of it they were 75%, and by 2007 it was 200%. Leverage climbed from 3-4 times in the 19th century to 30 times in the bubble. And return on equity went from modest single figures to 30% at the peak. As to executive compensation among the CEOs of the seven largest US banks, in 1989 it averaged $2.8 million, or almost 100 times the median household income. By 2007, it had risen ten-fold to $26 m, over 500 times the median US household income. Most astonishingly, temporary support for the global banking system during the crisis peaked at around a quarter of global GDP.
Haldane suggests four financial market regulation proposals
1. Higher equity capital. He writes about its benefits
"It would put more skin in the game for equity-holders, thereby reducing their incentives to extract option value. It would reduce leverage directly, thereby reducing banks’ capacity to risk-up. And it would increase banks’ capacity to absorb loss, thereby reducing the probability of official intervention."
He favors much higher capital reserve ratios than that being considered under the Basel III norms. More radically, he favors equalizing the scaales between equity and debt, thereby forcing debt holders to have much greater skin in the game and encourage them to play their traditional disciplining role.
2. Equity-like liabilities
He favors the use of financial instruments which explicitly combine the incentive features of debt and equity, the so-called contingent convertible securities or CoCos. They are debt in good times, but convert to equity in bad, and combines the benefits of unlimited liability without its practical drawbacks.
However, such instruments should be time-consistent (they should kick-in without discretion and expectations of its kicking in should not distort market incentives).
He suggests that the bank management should have no discretion on when and how conversion takes place. Further, conversion needs to take place well ahead of bankruptcy, thereby avoiding the deadweight costs of default which, for too-big-to-fail institutions, are likely to be too large to be tolerable by the authorities.
As a trigger for the conversion, Haldane prefers market-based measures of capital adequacy, like even equity prices. This would be better that regulatory ratios which can be tweaked to suit requirements. Such triggers would expedite pre-emptive recapitalisation of failing institutions and contain the spread of risks.
3. Control rights
Haldane prefers a ownership and control rights model that is a right mixture of the two extremes of a public limited company (rights vested in a small minority and voting rights assigned according to portfolio weights – an equity dictatorship) and the mutually-owned co-operative (rights spread over a wide set of liability-holders, with voting rights unrelated to portfolio weights – a liability democracy). Voting rights could be extended across a wider set of liability stakeholders, with rights allocated on the basis of their deposits, thereby ensuring that governance and control are distributed across the balance sheet - a wealth-weighted democracy.
4. Performance and compensation
he advocates moving over from a system of evaluating performance based on ROE to one based on return on assets (ROA). This covers the whole balance sheet and, because it is not flattered by leverage, does a better job of adjusting for risk. He writes that if the CEOs of the seven largest US banks had in 1989 agreed to index their salaries not to ROE, but to ROA, by 2007, their compensation would not have grown tenfold but would have risen from $2.8 million to $3.4 million. Rather than rising to 500 times median US household income, it would have fallen to around 68 times.
Tuesday, November 8, 2011
Decline of capitalism and availability bias
Availability bias refers to human cognitive failure to grasp historical perspectives and draw flawed inferences from immediate and salient events. The graphic below captures this problem in the context of debate questioning the value of capitalism as an economic system. As I have blogged earlier, this trend prevails in many areas of modern public life.
I am not holding a brief for capitalism. Capitalism is surely flawed and like any system of allocating scarce resources, need to be constantly learning from successes and failures, adapting and evolving. The more important point that deserves serious debate is that the events of the past few years have raised several questions about some of the characteristic features of American capitalism. Capitalism needs to learn from these experiences and adapt if it is to retain its credibility.
In fact, the ardent free market capitalists and neo-liberals too suffer from availability bias when they abstract from the limited experience of the two decades of Great Moderation to oppose any role for government to remedy market failures, including by imposition of higher taxes.
Appropriate to this debate, John Kay has an excellent op-ed in FT in the contenxt of the Occupy Wall Street protests that capitalism "should be replaced by something nicer". He is spot on in this assessment,
I am not holding a brief for capitalism. Capitalism is surely flawed and like any system of allocating scarce resources, need to be constantly learning from successes and failures, adapting and evolving. The more important point that deserves serious debate is that the events of the past few years have raised several questions about some of the characteristic features of American capitalism. Capitalism needs to learn from these experiences and adapt if it is to retain its credibility.
In fact, the ardent free market capitalists and neo-liberals too suffer from availability bias when they abstract from the limited experience of the two decades of Great Moderation to oppose any role for government to remedy market failures, including by imposition of higher taxes.
Appropriate to this debate, John Kay has an excellent op-ed in FT in the contenxt of the Occupy Wall Street protests that capitalism "should be replaced by something nicer". He is spot on in this assessment,
"Perhaps the "something nicer" which should replace capitalism is a more nuanced – and more accurate – account of capitalism itself."
Monday, November 7, 2011
Urban renewal on Railways Lands
FT has an article that describes the successful ongoing re-development of the King's Cross district of London, the largest urban re-development project in London in the past 150 years. It consists of the redevelopment of a particular area, King's Cross Central,
The biggest challenge with urban re-development is the difficulty associated with negotiating with multiple property owners and convincing them about a single comprehensive plan. The much diminished credibility of governments in many developing countries adds to the difficulty of convincing them. They are likely to be wary of time over-runs and suspect governments to infringe on their contractual obligations.
In this context, like with the King's Cross Central, the large swathes of sub-optimally utilized lands around railway stations in many large Indian cities offers tremendous opportunities for commercial development and urban renewal. There are two big advantages in choosing such areas. One, the major chunk of land parcels around these stations are likely to be owned by Indian Railways. This would eliminate much of the practical difficulties associated with re-development.
In fact the King's Cross Central re-development project benefited from the fact that all the land was held by the same owners, thereby eliminating the need to manage multiple contract negotiations, and facilitating the process of comprehensive planning and delivering ‘joined-up’ infrastructure. Nevertheless it is an impressive project.
Second, they are generally located in the older part of the city, have crowded residential and commercial units, and could do with a big dose of urban renewal. Re-development projects in such areas would deliver the biggest bang for the buck. Such renewal projects can provide the stimulus to revitalize stagnating urban districts. It would form the anchor around which modern economic activities can emerge and flourish. Land values will invariably increase.
Areas where government departments have large tracts of land and where the renewal projects can potentially provide the platform for a much larger development agenda too can be prioritized for such projects. However, such projects require very careful and painstaking preparatory work before arriving at any re-development plan.
This assumes critical importance since there is a serious risk that such projects become viewed more as engineering and architectural projects than as area renewal projects. The former approach overlooks the social, economic and political dimensions of such re-development projects. How does the project promote livelihood opportunities, both for those within the project area and those outside? How does it mesh with the social and political realities of the area?
Further, urban planners and developers miss the big picture and tend to view these projects as self-contained developments. They need to realize that the value of these projects go beyond the specific project area and has to form a catalyst to usher in more broad-based development in its surroundings. In other words, such projects have to provide the economic, social, and cultural development opportunities that its neighbourhood can leverage to their benefit.
All the aforementioned means that such projects cannot be mere Railway Department Projects, if they are built on railway lands. It will have to be driven by the local municipal body, draw on professional expertise in design and implementation, and involve profit sharing with the railways. The local government will invariably lose money, atleast in the initial years. However, the net long-term social benefit from carefully structured urban renewal projects will always be a huge positive.
"Ten years ago, prostitutes and drug dealers loitered on the streets and many buildings were disused or derelict. Now King’s Cross has been cleaned up and is in the middle of a £2bn redevelopment programme, which is transforming the area and making it an appealing place to live...
Behind the station is a 67-acre former brownfield site, which is being turned into a new community, King’s Cross Central. Owned by London & Continental Railways, a UK government-owned property company, and DHL Supply Chain, it is the largest single-owned site to be redeveloped in central London for 50 years and even has its own new postcode, N1C...
The statistics for King’s Cross Central come thick and fast: there will be 20 new streets, 10 major public spaces and 50 new buildings. Meanwhile, 20 historic buildings and structures are being restored and refurbished. There will be 8m sq ft of mixed-use space and 22 per cent of King’s Cross Central has even now been "taken"... Two thousand new homes (44 per cent of them affordable) are also planned, with the first stage of 143 homes being completed by 2013...
In the past seven years, prices for homes in the King’s Cross district have doubled, from £400 per sq ft in 2004 to between £800-£1,000 per sq ft today. By comparison, homes in neighbouring Bloomsbury and Fitzrovia fetch about £1,200-£1,300 per sq ft."
The biggest challenge with urban re-development is the difficulty associated with negotiating with multiple property owners and convincing them about a single comprehensive plan. The much diminished credibility of governments in many developing countries adds to the difficulty of convincing them. They are likely to be wary of time over-runs and suspect governments to infringe on their contractual obligations.
In this context, like with the King's Cross Central, the large swathes of sub-optimally utilized lands around railway stations in many large Indian cities offers tremendous opportunities for commercial development and urban renewal. There are two big advantages in choosing such areas. One, the major chunk of land parcels around these stations are likely to be owned by Indian Railways. This would eliminate much of the practical difficulties associated with re-development.
In fact the King's Cross Central re-development project benefited from the fact that all the land was held by the same owners, thereby eliminating the need to manage multiple contract negotiations, and facilitating the process of comprehensive planning and delivering ‘joined-up’ infrastructure. Nevertheless it is an impressive project.
Second, they are generally located in the older part of the city, have crowded residential and commercial units, and could do with a big dose of urban renewal. Re-development projects in such areas would deliver the biggest bang for the buck. Such renewal projects can provide the stimulus to revitalize stagnating urban districts. It would form the anchor around which modern economic activities can emerge and flourish. Land values will invariably increase.
Areas where government departments have large tracts of land and where the renewal projects can potentially provide the platform for a much larger development agenda too can be prioritized for such projects. However, such projects require very careful and painstaking preparatory work before arriving at any re-development plan.
This assumes critical importance since there is a serious risk that such projects become viewed more as engineering and architectural projects than as area renewal projects. The former approach overlooks the social, economic and political dimensions of such re-development projects. How does the project promote livelihood opportunities, both for those within the project area and those outside? How does it mesh with the social and political realities of the area?
Further, urban planners and developers miss the big picture and tend to view these projects as self-contained developments. They need to realize that the value of these projects go beyond the specific project area and has to form a catalyst to usher in more broad-based development in its surroundings. In other words, such projects have to provide the economic, social, and cultural development opportunities that its neighbourhood can leverage to their benefit.
All the aforementioned means that such projects cannot be mere Railway Department Projects, if they are built on railway lands. It will have to be driven by the local municipal body, draw on professional expertise in design and implementation, and involve profit sharing with the railways. The local government will invariably lose money, atleast in the initial years. However, the net long-term social benefit from carefully structured urban renewal projects will always be a huge positive.
Sunday, November 6, 2011
The Great Wage Stagnation
The financial crisis and consequent Great Recession has re-ignited an intense debate about whether western capitalism is facing a crisis.
In a much read and debated e-book, Tyler Cowen has argued that the modern economy suffers from a deficit of truly great innovations, ones that dramatically improves the quality of lives and creates large numbers of jobs. He has also claimed that growth is slowing because economies have already gotten most of the innovative benefit out of previous big leaps and are now squeezing out more marginal gains.
Such trends are not exclusive to technology. There have been numerous studies which have pointed to disconcerting trends in the labour market. In the latest, Economix points to a new report from the Resolution Foundation, a British research organization, that examined trends from 10 rich countries over the 2000-07/08 period and finds weakening relationship between workers incomes and economic and productivity growth. Here are some of the findings from the report.
1. The growth rate of median pay versus economic growth per capita from 2000 to the start of the Great Recession for these ten countries indicates that wages have more or less stagnated in many countries and have lagged behind GDP growth rate in all these countries.
2. The authors represent the changing dynamics of relationship between GDP and wages using the graphic below which removes subsidies and taxes and focuses on production at basic prices or Gross Value Added (GVA) by any unit of labour engaged in economic production in both private and public sectors. It illustrates the movement from GVA at the economy wide level to the wages received by individuals as a three stage process.
3. In all these countries, the share of wages as a proportion of all employees compensation has been fallin, with the decline picking up in the last decade. Interestingly, during the same period, the proportion has either remained stangnat or even moved up in Germany, France, Sweden, and Finland.
4. The summary of findings are captured in this table. (Click on image to enlarge)
In a much read and debated e-book, Tyler Cowen has argued that the modern economy suffers from a deficit of truly great innovations, ones that dramatically improves the quality of lives and creates large numbers of jobs. He has also claimed that growth is slowing because economies have already gotten most of the innovative benefit out of previous big leaps and are now squeezing out more marginal gains.
Such trends are not exclusive to technology. There have been numerous studies which have pointed to disconcerting trends in the labour market. In the latest, Economix points to a new report from the Resolution Foundation, a British research organization, that examined trends from 10 rich countries over the 2000-07/08 period and finds weakening relationship between workers incomes and economic and productivity growth. Here are some of the findings from the report.
1. The growth rate of median pay versus economic growth per capita from 2000 to the start of the Great Recession for these ten countries indicates that wages have more or less stagnated in many countries and have lagged behind GDP growth rate in all these countries.
2. The authors represent the changing dynamics of relationship between GDP and wages using the graphic below which removes subsidies and taxes and focuses on production at basic prices or Gross Value Added (GVA) by any unit of labour engaged in economic production in both private and public sectors. It illustrates the movement from GVA at the economy wide level to the wages received by individuals as a three stage process.
3. In all these countries, the share of wages as a proportion of all employees compensation has been fallin, with the decline picking up in the last decade. Interestingly, during the same period, the proportion has either remained stangnat or even moved up in Germany, France, Sweden, and Finland.
4. The summary of findings are captured in this table. (Click on image to enlarge)
Confession of the week!
In four years of reflection and rather intense involvement with this financial crisis, not a single aspect of dynamic stochastic general equilibrium has seemed worth even a passing thought.
Lawrence Summers
Saturday, November 5, 2011
The changing dynamics of public rent-seeking in India
Ashutosh Varshney recently wrote about the dynamics of rent-seeking in India,
In fact, this analysis, while broadly accurate, can be made more nuanced. The top tier of the political and bureaucratic establishment is increasingly getting its dominant share of rents from the high rent yielding infrastructure sector. These sectors are predominantly urban in nature and their rent interfaces (say, decision makers and corporate offices) are located in urban areas. As opportunities in these sectors have grown, the politicians and officials in the upper tier have vacated their traditional rent space for those at the lower rung.
Consider this illustration. Since independence, until a few years back, the major sources of rent-seeking for everyone was in the local sources of patronage - dealership of fair price shop, control over anganwadi center and school, local officials postings, small local engineering works (of the panchayats and other departments) etc. The large construction works and private industrial establishments, except in industrial belts, were generally absent or marginal. The rents available too were minimal. Everyone from local government politicians to the state and central legislators sourced their rents from this small pie.
Over the last decade or so this landscape has been undergoing a transformation. There have been steep increases in infrastructure investments even in rural areas, which in turn have spawned off property booms in their catchment areas. Big infrastructure contracts involve large private contractors, who provide great opportunities for the local political establishment. Private investments too have flowed into many areas. Since the pie has expanded dramatically, the upper levels of the political establishment can now feast on these larger opportunities and leave their local minions to corner the older set of opportunities.
Obviously, the degree of evolution of this pattern varies from state to state. In certain states, this pattern has advanced considerably. In any case, this transformation only shifts the agents of corruption without altering any of the existing incentives to seek rents.
It is worth noting that the countryside, where 68 per cent of India currently lives, is not where most of national income is generated. At this time, not more than 25-30% of India’s GDP comes from villages, with agriculture accounting for a mere 15% of GDP. More simply stated, over two thirds, perhaps as much as three fourths, of the nation’s GDP is generated in cities where less than a third of the country lives, whereas less than a third, perhaps as little as a fourth, of the country’s GDP is produced in the countryside where over two thirds of the national population resides.
As a consequence, for politicians, the city has primarily become a site of extraction, and the countryside is predominantly a site of legitimacy and power. The countryside is where the vote is; the city is where the money is. Villages do have corruption, but the scale of corruption is vastly greater in cities.
In fact, this analysis, while broadly accurate, can be made more nuanced. The top tier of the political and bureaucratic establishment is increasingly getting its dominant share of rents from the high rent yielding infrastructure sector. These sectors are predominantly urban in nature and their rent interfaces (say, decision makers and corporate offices) are located in urban areas. As opportunities in these sectors have grown, the politicians and officials in the upper tier have vacated their traditional rent space for those at the lower rung.
Consider this illustration. Since independence, until a few years back, the major sources of rent-seeking for everyone was in the local sources of patronage - dealership of fair price shop, control over anganwadi center and school, local officials postings, small local engineering works (of the panchayats and other departments) etc. The large construction works and private industrial establishments, except in industrial belts, were generally absent or marginal. The rents available too were minimal. Everyone from local government politicians to the state and central legislators sourced their rents from this small pie.
Over the last decade or so this landscape has been undergoing a transformation. There have been steep increases in infrastructure investments even in rural areas, which in turn have spawned off property booms in their catchment areas. Big infrastructure contracts involve large private contractors, who provide great opportunities for the local political establishment. Private investments too have flowed into many areas. Since the pie has expanded dramatically, the upper levels of the political establishment can now feast on these larger opportunities and leave their local minions to corner the older set of opportunities.
Obviously, the degree of evolution of this pattern varies from state to state. In certain states, this pattern has advanced considerably. In any case, this transformation only shifts the agents of corruption without altering any of the existing incentives to seek rents.
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