Why are cites in Europe denser than in America?

Fascinating video that explains why European cities are much denser than US cities.

The answer is one word - transportation. People congregate to minimise commute times. Urban planning facilitates this by allowing vertical growth, especially around transit corridors, and having excellent public transit services inter-connecting population nodes with the city centre and with each other. 

Unfortunately, urban planning in most developing countries fail badly on both counts. 

Weekend reading links

1. Following pension funds and a growing list of institutional investors, the Carlyle Group, one of the four largest PE firms, is pulling back on its hedge fund investments. No wonder, given this,

Over all, hedge funds have underperformed the broader Standard & Poor’s 500-stock index for seven consecutive years. The average hedge fund returned 4.14 percent this year through September, according to the Hedge Fund Research Composite Index, the broadest gauge of hedge fund performance. The Standard & Poor’s 500-stock index gained 8 percent over that period, accounting for reinvested dividends... More than $50 billion has flowed out of the industry this year, according to Hedge Fund Research. In the latest financial quarter investors took $28 billion, the biggest quarterly outflow since the depths of the financial crisis in 2009.

2. Much of state and national industrial policy in developing countries like India are centred around fiscal and other concessions that benefit the largest firms. In fact, industrial and investment promotion itself is focused on the larger firms. As evidence, one only needs to verify how many small entrepreneurs or firms get called for consultations by governments or the high-profile business meets.

This flies against the fact that small enterprises form the major share of job creation and gross output creation. Not just in India, but even in the US. Consider this,

Out of 252,000 manufacturing companies in the United States, only 3,700 had more than 500 workers. The vast majority employ fewer than 20.

The difference with a developing country like India being that the vast majority of small enterprises are informal and grossly unproductive.

3. This high-profile working paper has created quite a stir and may have turned the tide in favour of Teaching at Right Level (TaRL) in primary school education. Here is from the paper,

The core element of all Pratham’s Programs discussed here is the pedagogy: it is called Combined Activities for Maximized Learning (CAMaL), but is also referred to as “Teaching at the Right Level” (TaRL). We call it TaRL below. This pedagogy has evolved over the years from Pratham’s own intensive experience, internal assessments, as well as external randomized evaluations...

It is interesting that Pratham chooses to call its model TaRL. This begs the question, what is Montessori, Activity Based Learning, adaptive learning etc, all of which focuses on instruction that is tailored to the student's learning level? At first look, the public policy challenge may be to get the right TaRL approach, one which is amenable to being scaled up in a business as usual public system. But I am not sure whether there is one right TaRL approach for every context. 

4. Olivier Blanchard and Julien Acalin have a study which questions the conventional wisdom about Foreign Direct Investment (FDI). They observe three stylised facts about FDI flows in the 1990-2015 period - a surprisingly high correlation between quarterly FDI inflows and outflows (why would domestic investors want to take out their money in a country which attracts high inflows, especially in the same quarter); increase in quarterly FDI inflows to EM economies in response to decreases in US monetary policy rate (why should FDI be so immediately elastic to quarterly changes, whereas portfolio flows would be); increase in quarterly FDI outflows from EM economies in response to decreases in US rates (why would outflows respond so immediately to US rate changes). They write,

These facts suggest two conclusions. The first is that, in many countries, a large proportion of measured FDI inflows are just flows going in and out of the country on their way to their final destination, with the stop due in part to favorable corporate tax conditions. This fact is not new, and, as discussed below, countries have tried to im- prove their measures of FDI to reflect it. But the magnitude of such flows came to us as a surprise. The second is that some of these measured FDI flows are much closer to portfolio debt flows, responding to short-run movements in US monetary policy conditions rather than to medium-run fundamentals of the country. Both have implications for how one should think about capital controls and the exclusion of measured FDI from such controls.

India had the sixth highest inflow-outflow correlation, exceeding 0.6. And of particular relevance,

A number of other statistical facts are also intriguing and suggest the need for a granular look at tax treaties, specific tax rates, treatment of FDI debt versus FDI equity flows, capital controls, and the details of tax optimization. For example, in a few countries (in particular, India), there is a high correlation between FDI equity inflows and debt outflows. This correlation is consistent with the hypothesis that some of the high correlations (between quarterly FDI inflows and outflows) reflect in part hedging of currency and country risks by foreign investors.

In the case of India, it has long been suspected that a significant share of its FDI inflows are round-tripping of domestic capital to take advantage of tax treaties. 

5. The WSJ has this graphic from the IMF's latest that highlights the indebtedness problem facing the world economy.  

The report is spot on in its assessment, 

Anemic global growth is "setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown".

6. Finally, Fareed Zakaria has an excellent article on the rise of populism in developed economies. He highlights the point that while populism has been on the retreat in developing economies, even Latin America, it has been rising in developed economies. He attributes this to the slowing economic growth. Unfortunately, this has been accompanied by declining population growth rates, globalisation and off-shoring, automation and labor market displacement, and pervasive fiscal indebtedness, all of which leaves governments pretty ineffectual in singificantly ameliorating conditions. 

The result of all this, coupled with the convergence between the right and left spectrums of economic ideology (at least in practice, both have gravitated to the centre), has been the decline of economics and the emergence of other factors as driving force of politics. Zakaria points to the work of Ronald Inglehart and Pippa Norris who document the rise of right and left-wing populism in Europe since 1960s,

The most striking findings of the paper are about the decline of economics as the pivot of politics. The way politics are thought about today is still shaped by the basic twentieth-century left-right divide. Left-wing parties are associated with increased government spending, a larger welfare state, and regulations on business... Voting patterns traditionally reinforced this ideological divide, with the working class opting for the left and middle and upper classes for the right. Income was usually the best predictor of a person’s political choices. Inglehart and Norris point out that this old voting pattern has been waning for decades... Today, an American’s economic status is a bad predictor of his or her voting preferences. His or her views on social issues—say, same-sex marriage—are a much more accurate guide to whether he or she will support Republicans or Democrats... Noneconomic issues—such as those related to gender, race, the environment—have greatly increased in importance...

This convergence in economic policy has contributed to a situation in which the crucial difference between the left and the right today is cultural... The shift began, as Inglehart and Norris note, in the 1970s, when young people embraced a postmaterialist politics centered on self-expression and issues related to gender, race, and the environment. They challenged authority and established institutions and norms, and they were largely successful in introducing new ideas and recasting politics and society. But they also produced a counterreaction. The older generation, particularly men, was traumatized by what it saw as an assault on the civilization and values it cherished and had grown up with. These people began to vote for parties and candidates that they believed would, above all, hold at bay these forces of cultural and social change. In Europe, that led to the rise of new parties. In the United States, it meant that Republicans began to vote more on the basis of these cultural issues than on economic ones. The Republican Party had lived uneasily as a coalition of disparate groups for decades, finding a fusion between cultural and economic conservatives and foreign policy hawks. But then, the Democrats under Clinton moved to the center, bringing many professionals and white-collar workers into the party’s fold. Working-class whites, on the other hand, found themselves increasingly alienated by the cosmopolitan Democrats and more comfortable with a Republican Party that promised to reflect their values on “the three Gs”—guns, God, and gays.

Immigration, the "final frontier of globalisation", has become the rallying point for the latest spurt in the rising trend of non-economic populism.

More on judicial activism gone astray

The Allahabad High Court has abrogated the tolling contract awarded to the IL&FS owned Noida Toll Bridge Company Limited (NTBCL) on the 9.2 km eight-lane Delhi-Noida-Direct (DND) Expressway which became operational in 2001 as one the country's first PPP road projects. The court ruled the concession agreement as "unfair" and that NTBCL has "recovered all reasonable returns" from the bridge. The concessionaire has approached the Supreme Court.

This is all very sad and predictable. That the contract was deeply flawed, even fraudulent, is beyond doubt. The decision could therefore rightly be seen as divine (or democratic) retribution to crony capitalism. Populist grandstanding is therefore inevitable. 

The cavalier nature of the abrogation, with immediate effect, is increasingly becoming a feature of judicial rulings on large infrastructure contracts. The cancellation of the telecom spectrum licenses has been the most high-profile example. 

But such judicial actions impose prohibitive collateral damage on the country's institutional systems. Consider a very risky project, where the bidder bets on windfall gains, which are by definition more than "all reasonable returns", and where the risks subside significantly, for whatever reasons (and there could be many) after a couple of years of the project's commissioning. Given that most such judicial (and any investigative or audit) scrutiny is done with the benefit of hind-sight, without much appreciation of the context in which the decision was actually taken, even such fair bids run the risk of populist abrogation. 

I can understand the judicial revocation of a bad contract. But the grounds have to be legal inadequacies and established fraud in the contract. Both may never have been very difficult to establish with the instant concession, starting from 2001. But now, a fully fifteen years later, to revoke a contract on an interpretation of the gains made by the concessionaire, and that too by a judicial action and not by a technically competent entity, disturbs me. At the least, the matter could have been referred to the National Highways Authority of India or some other entity to identify the legal inadequacies and clearly quantify the cumulative construction cost and recoveries, and then adjudicate thereon.   

But the unfortunate thing is that governments and, more surprisingly, developers never learn. We will continue to have such egregious excesses, as is still happening in many states with large tenders and land allotments. And all this will only encourage more judicial actions that strike at the sanctity of contracts. 

Public policy in establishing markets

Samir Saran and Vivan Saran argue that Government of India's role in certain markets may be impeding its own Make in India initiative. The example of BSNL is instructive and I am inclined to agree. BSNL's greatest negative externality may well be that its presence crowds out other far more efficient private operators in public procurements of telecom services (by government entities), which forms a very significant share of the country's high value telecom services market.  

But I am not sure about whether the argument that government intervention to create the RuPay card through the National Payment Corporation of India (NPCI) belongs to the same category. In fact, the RuPay is already shaking up the market for payment transaction gateways which is currently under the vice-like oligopolist grip of "market" players like Master and Visa. A RuPay disruption may well be the difference between the widespread adoption of digital payments in a highly margin and price sensitive market like India. 

If the government can calibrate its arms-length role and gradually exit, then this should count as one of the great global examples of a public intervention to address a market failure. In any case, even with the heavy guidance by Reserve Bank of India, this is one of those market interventions that was long over-due. 

Amidst all this, one should not forget that the biggest disruption of them all, Aadhaar, was a government intervention. So is now the NPCI and its catalysing the roll out of the Unified Payment Interface (UPI) for mobile payments. The eco-system of digital payments is being created, maybe unwittingly, through direct government interventions. And, interestingly, this has involved not just enabling regulations but also the establishment of service providers and even products. 

Italy represents the breakdown of bond market price discovery!

David Stockman highlights how quantitative easing has broken down the standard price discovery dynamics in the sovereign bond markets. 

The case of Italy is striking illustration. It has a clearly unsustainable sovereign debt of 133% ($2.4 trillion), the second largest in Europe after Greece. Its over-sized $4.4 trillion banking sector (double the GDP), with over $400 bn non performing loans, is technically insolvent. But the country's 10 year bond yields have been constantly declining. At 1.18%, it is lower than even comparable US Treasury Bond! 

Stockman is spot on,

The notion that today’s yield of 1.15% on the Italian 10-year bond even remotely compensates for the risk embedded in Italy’s fiscal and economic chamber of horrors is just plain laughable. And that’s to say nothing of the risk the Brexit is just stage one, and that the EU itself will ultimately succumb to a wave of populist insurgency, including a Five Star led move to take Italy out of the euro. Indeed, Italy is truly a case of the blind leading the blind... Needless to say, these (government bonds) securities are vastly over-valued owing to the Draghi bond-buying spree, and they would plummet in price were the speculators who have been front-running Draghi’s QE campaign ever to loose confidence in the ECB or the ability and willingness of an Italian government to continue the giant fiscal charade now in place... with public debt already at 133% of GDP, why would anyone except Mario Draghi’s printing press be buying 10-year bonds at a 1.15% yield? Once upon a time, price discovery by the bond vigilantes kept governments quasi-sober and functionally solvent. No more. The Italian Job now underway is just the opening round in a world of failed states and broken markets.

The scale validity challenge

Teaching at Right Level (TaRL) is the flavour of the season. I am favourably disposed. But, unlike this much discussed study, I am not sure about what should be the right design for remedial instruction - the grouping, duration of remediation, resource support necessary etc. I am not even sure whether there is any one "right model" that should be replicated across widely varying contexts. But this is for another post.

This post reiterates a constant puzzle for me about the scale validity dimension of the efficacy of evaluations like Randomized Control Trials (RCTs). This assumes significance in the context of drawing scalability conclusions from RCTs like the aforementioned. The discussion about efficacy of any RCT revolves around its internal (evaluation design) and external (generalizability across other environments) validity. But scale validity is critically important, especially if the results are to be replicated by a weak public system. I have written about the scale validity problem earlier,

One, there is a big difference between implementing a program on a pilot basis for an experimental study and implementing the same on scale. In the former, the concentrated effort and scrutiny of the research team, the unwitting greater over-sight by the official bureaucracy, and the assured expectation, among its audience, that it would be only a temporary diversion, contributes to increasing the effectiveness of implementation. Two, is the administrative system capable of implementing the program so designed, on scale? Finally, there is the strong possibility that we will end up implementing a program or intervention that is qualitatively different from that conceived experimentally.

It is one thing to find considerable increases in teacher attendance due to the use of time-stamped photographs or rise in safe water consumption from the use of water chlorination ampules when both are implemented over a short time horizon, in microscopic scale, and under the careful guidance and monitoring of smart, dispassionate, and committed research assistants. I am inclined to believe that it may be an altogether different experience when the same is scaled up over an entire region or country over long periods of time and with the “business as usual” minimal administrative guidance and monitoring. And all this is leaving aside its unanticipated secondary effects. In fact, far from implementing an intervention which is tailored based on rigorous scientific evidence, we may actually end up implementing a mutilated version which may bear little resemblance to the original plan when rolled out at the last mile.

So, how do we discount for the fact that, for example, the TaRL study was done in a small number of schools under the watchful eyes of smart and committed RAs, which undeniably contributes to maintaining some rigour in the implementation. In its absence, as would be the case in business as usual scale up, how can we be confident about being able to replicate the results? This assumes even greater significance when the interpretation of most positive results are complicated by very low baseline and overall marginal (yet statistically significant) effects. 

India's first MPC meeting takeaways

India's newly minted Monetary Policy Committee (MPC) had its first meeting last week. The interest rate cut was surprising. I'll not delve into the technical merits of the decision. Instead I have three observations. 

1. The unanimity of the vote (6-0) at a time when the case for a cut is at least debatable and was definitely not unanimously expected is disturbing. Prima facie, it gives rise to the feeling that the MPC's objective function is skewed more towards growth, with attendant risks of being behind the curve. 

2. It may have been prudent tactically to refrain from a rate cut now, especially in the immediate aftermath of the exit of a hawkish Governor and the recent history of constant tussle with the Government on easing. In fact, just to stay the course would have been a good signal to reinforce perceptions about the central bank's autonomy, leave aside inflation fighting credentials.  

3. A rate cut now reduces the RBI's room to manoeuvre as the Budget quarter approaches. The pressure from the Government to oblige with another cut closer to the Budget will be intense. In response, another rate cut, following this one, will be viewed by the market participants as further proof of the ascendancy of North Block. 

In conclusion, as a statement of intent from a brand new institution to an audience who live on reading the tea leaves, this decision may have the potential of adversely unhinging a few expectations.