Liberal hypocrisy and the rise of Trump

At a time when the rise and rise of tech giants has engendered serious and immediate concerns on a host of problems about very proximate issues - privacy, inequality, political capture, stifling of competition, tax avoidance, fake news, social addictions etc - Anne-Marie Slaughter has this article which can even charitably be only described as a cop out.

Ignoring all these pressing and immediate issues, she labours painfully and incoherently on the dehumanising aspects of technology. When contrasted with honourable and insightful articles like this, Ms Slaughter's looks more like an exercise in digression from the real issues. 

And what on earth does this mean?

Going local will also be an important way to recover a belief in truth. With the decline of traditional trusted intermediaries, and the discovery that social media account holders may well be bots, we will crave verifiability. Blockchain technologies can help.

Note that there is not even a disclosure in her signature indicating that Google is a major funder of New America Foundation, of which she is the President, and which was at the centre of this disreputable incident which revealed people's true allegiances and convictions. 

What else can be expected from this poster child of liberalism, feminism and a host of other feel-good isms? 

When you have such people as role models representing the elite, why should we be surprised by the rise of Trump?

Corporate healthcare trends in India

A quiet revolution appears to be happening in India's corporate healthcare market. For long, barring a handful of large hospital chains, the Indian market was characterised by several small and family-owned multi-speciality hospital groups focused around no more than 2-3 cities, mostly the biggest ones. These small hospital groups were started by very credible and reputed physicians, whose diligence and commitment over at least 15-20 years helped their institutions acquire good name. But this landscape is changing fast.    

While I could not locate any study or report in this regard, a wave of consolidation may be underway in this market. And driving the consolidation is foreign capital. In particular, the sovereign wealth funds of Singapore and Malaysia as well as some private equity investors have been leading it. While Foreign Direct Investment (FDI) in hospitals had been permitted on automatic route since January 2000, it is only in the recent years that investor interest has spiked.  

Malaysia's IHH Healthcare Bhd, Asia's largest hospital operator, and owned by Khazanah, Malaysia's sovereign wealth fund, has invested in multiple hospitals in just one city, Hyderabad. Others like Temasek, GIC, and private equity institutions are also in the fray. 

In many of the investments, while the new investors have effective management control in light of their majority stake, the promoters have retained their Board positions. The original intent being that the foreign investors would bring in growth capital as well as latest technologies, and the promoters would use their proven experience, connections, and credibility to run the hospitals. 

But anecdotal evidence suggests that a power struggle is already on between promoters and investors in atleast some places. While there are no good chronicles like this, the new managements in these hospitals are over-ruling the promoters and forcing down efficiency improvements by mandating targets for doctors in terms of procedures and treating different specialities in a hospital as cost-centres competing with each other. I foresee this trend being accentuated going forward. 

A few observations

1. An examination of all the hospital names that have attracted foreign interest shows some features. All of them service the highest end of the market, are equipped with the latest medical technologies, operate predominantly in the largest urban centres, have promoters with very high credibility, and have emerged successful after a long period of struggle and winnowing of the competition. In other words, they represent the cream of private healthcare operators in the world's second largest and rapidly growing health care market. And it is this low risk and juicy assets that foreign capital is snapping up. 

So, is health care providers the latest addition to the long list of markets where the influence and control of foreign capital grows unabated? What does it reflect about domestic private capital that it does not find investing in some of the juiciest assets in a market which can be expected to grow rapidly over the coming decades unattractive? What does it say about domestic entrepreneurship that its pool has not expanded beyond the same old names Apollo, Fortis, Max, Wockhardt etc?

2. What prevents these new investors from recalibrating business plans to attract more foreign medical travellers? Is it in India's interest that the country with some of the worst access to tertiary care facilities and services, ends up being the medical procedures back-office of the developed world? What prevents the consolidation from driving up tertiary care prices, especially given the likely market power exercisable by an entity like IHH in a city like Hyderabad? 

3. The rapid growth of corporate health care and the creeping rise of public health insurance programs, the issue of regulation is never far away. Cases like this and this are likely to become increasingly common. While there are some, largely outdated, regulations, institutions and doctors operate on a virtual regulatory vacuum, and procedures and treatments have minimal or not regulation. But is a weak state likely to be in any position to be able to render effective regulation?

4. Given the poor, even Dickensian, state of government hospitals in most (but not all) states, corporate hospitals have become the default tertiary care option for all but the poorest. And now with universal health coverage being proposed for delivery through an insurance model, the neglect of government facilities and the focus on private alternatives will only increase. And we all know from all of history and documented evidence of any kind that no country has ever managed to achieve universal health coverage with this approach. What is the end-game?

5. It may only be a matter of time before health care debates are taken over by a lobby of corporate care providers, their financiers, and insurers. And in environments where regulations are grossly inadequate and state is out there to be captured, an eventuality playing itself out not just in other industries but in health care itself in state government programs involving the private sector, this danger is very likely. And even for perfectly honest bureaucrats, frustrated and despairing at the scale of the challenge and the utter dysfunctionality of the public healthcare system, the logic of private participation can look very attractive. 

6. It is nobody's case that India does not need foreign capital in health care. It sure needs foreign investors and their technologies. But given the size of the country and vast needs, such foreign capital can be nothing more than marginal contributor. It is domestic capital and entrepreneurs who have to drive this market. Unfortunately, that seems not forthcoming in anything compared to the required scale.

Or, am I being unduly pessimistic in painting this bleak picture and should instead look at the perfectly logical hypothesis around the beneficial effects from private participation. But does the evidence of private health care in India lend credence to such optimism? Also is there any other similarly placed country which has achieved universal health coverage through this approach?

Update 1 (21.03.2018)

The latest hospital to fall to foreign capital is the Gurugram-based Medanta-Medicity Super Specialty hospital. Malaysian IHH Healthcare Bhd has submitted a bid to buy a controlling stake at a reported valuation of Rs 5500-5700 Cr. Carlyle Group and Temasek Holdings Pte already own 27% and 18% of the hospital. Since entering India just in 2015, IHH already owns 51% of Continental Hospitals Ltf and 74% of Global Hospitals Pvt Ltd. Besides, it is actively pursuing buying a controlling stake in Fortis hospitals. KKR recently invested Rs 1300 Cr in Radiant Life Care.

Update 2 (04.01.2019)

Oped in Livemint expressing concern at the trend of PE investments in healthcare. The latest PE investments being KKR-backed Radiant Life Care picking up 49.7% stake for $293 m in Max Healthcare, and General Atlantic investing $130 million to take a minority stake in KIMS hospitals.

Is corporate India failing India?

Just as I had blogged this, the Nirav Modi story broke. Do not be fooled into demonising just him and rationalising such practices as being only at the margins. 

A significant proportion of the stalled projects with non-performing loans involves big name promoters who took loans after bagging large contracts, diverted the money elsewhere, and then conveniently blamed everything from government lethargy to world economic weakness for their failure to repay the loans. 

Here are two more examples of the malaise with corporate India. 

Ananth points to this article which highlights how Indian pulse importers are reneging on contracts entered into with sellers from Myanmar, Tanzania, and Mozambique, following the sharp collapse in pulse prices after the bumper crop of 2016-17. This is the most detestable of business practices,

Sellers complained that many buyers here deliberately chose not to accept the shipping documents on arrival of the cargo. To be sure, most of the import business in pulses is done on CAD (cash against documents) terms; and often, the seller finds himself at the mercy of the buyer when the cargo reaches the destination port... default of international contracts sully the image of the country and bring disrepute to the trade.

Funnily, or expectedly, the author of the article gave this example of corporate misdemeanour the populist spin of a policy failure by the government in (believe it or not) effectively regulating private contracts! 

One of the points made in a completely different context (and as a positive reference) by Nilesh Shah about the openness of corporate India to foreign investors is disturbing,

India is the only country in the world where in the listed segment, the largest bank, the largest insurance company, the largest mortgage company, the largest FMCG company, the largest telecom company, the largest automobile company etc are majority-owned by foreigners.

This is a very surprising development for a country like India, especially given the past two decades of economic growth. Have the foreign investment and financial market deregulation gone too far? Or is corporate India again failing India? Or is it that the Indian government is so weak and apathetic compared to its peers that it has failed to help its corporates stand up on their feet and fight off foreign investors?

I am inclined to argue that while the first is less likely and the and the second are more likely the proximate causes, the mainstream narrative is likely to be characterised in terms of the third!

India Jobs Deficit graph of the day

This blog has long advocated that India's biggest challenge is not about generating more entrepreneurship but creating more productive salaried jobs in the formal sector. 

This Livemint graphic from a World Bank report is stunning in the magnitude of the problem compared to even our peers and neighbours,

This is arguably India's biggest economic challenge!

More evidence on business concentration

Here is the short-history of 21st century capitalism. Despite global savings glut, ultra-low interest rates, and massive corporate surpluses, the dynamics of modern capitalism has delivered business concentration and declining competition, regulatory capture, resource misallocation away from productive investments towards financial market speculation, higher profits and wage stagnation, greater share of income going to capital and away from labour, and widening of inequality. The evidence continues to mount. 

The latest comes from Gauti Eggertsson, Ella Getz Wold, and Jacob Robbins who argue that the driving force behind this dynamic is "an increase in monopoly power together with a decline in interest rate". They find,

An increase in firms’ market power leads to an increase in monopoly rents - economic parlance for profits in excess of competitive market conditions - and thus an increase in the market value of stocks (which hold the rights to these rents). This leads to an increase in financial wealth and to what’s known as Tobin’s Q, the ratio of a firm’s financial value (market capitalization) to the value of its assets (book value)... With an increase in market power, the share of income consisting of pure rents increases, while the labor and capital shares both decrease. Finally, the greater monopoly power of firms leads them to restrict output. In restricting their output, firms decrease their investment in productive capital, even in spite of low interest rates.

Their suggestion carries great relevance,  

Greater monopoly power tends to depress economic growth and increase income and wealth inequality. With high levels of monopoly profits, it may be optimal to have higher taxes on corporate income than would be suggested by analyses that assume perfect market competition.

If businesses are anyways unlikely to invest and most certain speculate in financial markets, higher levels of taxation can both curb such speculation and also generate more public revenues without crowding out any productive economic activity. 

Weekend reading links

1. The Economist has a fascinating survey of the harmful effects of occupational licensing in the US. Sample this,

In 1950 one in 20 employed Americans required a licence to work. By 2017 that had risen to 22%... Most studies find that licensing requirements raise wages in a profession by around 10%, probably by making it harder for competitors to set up shop... Forty-one states license makeup artists, as if wielding concealer requires government oversight. Thirteen license bartending; in nine, those who wish to pull pints must first pass an exam... manicurists are licensed everywhere but Connecticut. Louisiana licenses florists... Such examples... are not representative of the broader harm done by licensing, which affects crowds of more highly educated workers... Among those with only a high-school education, 13% are licensed. The figure for those with postgraduate degrees is 45%. More educated workers reap bigger wage gains from licensing. Writing in the Journal of Regulatory Economics in 2017, Morris Kleiner of the University of Minnesota and Evgeny Vorotnikov of Fannie Mae, a government housing agency, found that licensing was associated with wages only 4-5% higher among the lowest earning 30% of workers. Among the highest 30% of earners, the licensing wage boost was 10-24%. Forthcoming research by Mr Kleiner and Evan Soltas, a graduate student at Oxford University, uses different methods and finds no wage boost at the bottom end of the income spectrum, but a substantial boost for higher earners... In particular, licences are more common in legal and health-care occupations than in any other.

2. In the context of assessments of historical figures and events, Livemint invokes John Rawls to offer a three point Rawlsian test,

The first point Rawls made was that the giants of the past had to be understood in the context of their times rather than ours. Any moment in history should then be seen from their point of view rather than ours. It is fundamentally wrong to pass sweeping judgements, with the benefit of perfect hindsight, on people making complicated choices in real time. The next point Rawls made was that any scholar has to strive to offer the ideas of a historical figure in their strongest form. They have to be assessed in the best light possible... Rawls once quoted John Stuart Mill in this respect: “A doctrine is not judged at all until it is judged in its best form.”... The third lesson from Rawls is that one should approach the great figures in history with modesty. “I always assumed that the writers we were studying were always much smarter than I was…. If I saw a mistake in their arguments, I suppose they saw it too and must have dealt with it, but where? So I looked for their way out, not mine.”

3. In the context of the debate surrounding whether macroeconomic theory needs revision or not, Srinivas Thiruvadanthai makes a very valid point that perhaps we need to go back and construct certain stylised facts from real world data. He suggests some which are all contrary to the orthodoxy - demand shortfalls have persistent effects; fiscal policy is effective in recessions; private debt matters enough to cause recessions and worse, whereas public debt matters less so; investments are not very sensitive to interest rate changes, both reductions and increases.

I can add a few more - capital grows faster than national incomes; technology markets converge to monopoly; financial markets cause misallocation of capital and human resources; higher marginal tax rates do not appear to reduce effort or investment decisions etc.

4. This story highlighted the bruising work culture among white collar employees in Amazon. It does appear that the story is even worse with blue-collar workers.

Highlighting the fact that jobs do not translate into higher incomes as well as the features of jobs in the logistics industry, City Lab illustrates with the example of San Bernardino, 60 miles east of Los Angeles, where since establishing base in 2012, Amazon has come to employ more than 15000 full-time workers in 8 fulfilment centres (where goods are stored and packed for shipment) and one sortation centre (where packages are organised by delivery area).

In San Bernardino, the unemployment rate that was as high as 15 percent in 2012 is now 5 percent... Yet in many ways, Amazon has not been a “rare and wonderful” opportunity for San Bernardino. Workers say the warehouse jobs are grueling and high-stress, and that few people are able to stay in them long enough to reap the offered benefits, many of which don’t become available until people have been with the company a year or more. Some of the jobs Amazon creates are seasonal or temporary, thrusting workers into a precarious situation in which they don’t know how many hours they’ll work a week or what their schedule will be... the experience of San Bernardino shows, Amazon can exacerbate the economic problems city leaders had hoped it would solve. The share of people living in poverty in San Bernardino was at 28.1 percent in 2016, the most recent year for which census data is available, compared to 23.4 in 2011, the year before Amazon arrived. The median household income in 2016, at $38,456, is 4 percent lower than it was in 2011... according to a report by the left-leaning group Policy Matters Ohio, one in 10 Amazon employees in Ohio are on food stamps.

This contrast between the labour markets of two eras is striking,  

In 2012, Amazon seemed like a lifesaver. San Bernardino’s unemployment rate was at 15 percent, home values had fallen 57 percent since 2007, and the city, facing a $45 million budget shortfall, would file for bankruptcy in August of that year... The jobs that used to dominate San Bernardino were unionized ones with good benefits, at the Kaiser steel mill, the Santa Fe railroad maintenance yard, and the Norton Air Force Base. Now, jobs like the ones Amazon creates pay less and aren’t unionized, and require multiple members of a household to work, often more than one job.

In terms of the Amazon effect, this is illuminating,

According to available data from the Bureau of Labour Statistics (BLS), warehouse workers in counties where Amazon operates a fulfilment centre earn about $41,000 per year, compared with $45,000 per year in the rest of the country, a difference of nearly 10% (see chart 2). The BLS data also show that in the ten quarters before the opening of a new Amazon centre, local warehouse wages increase by an average of 8%. In the ten quarters after its arrival, they fall by 3%.

The one thing that comes to mind is that this fabulous wealth of the world's richest man has been effectively built on what should arguably constitute "slave labour" in the world's richest country!

5. After having overtaken the US in exports and manufacturing, the final frontier for the Chinese economic march may be the technology sector. 

In some of the cutting-edge areas of technology like artificial intelligence, facial and speech recognition, the Chinese are breathing down the Americans on most parameters.

6. Finally, the graphic below puts the Chinese debt orgy in perspective - in 2009-17 its official and shadow bank lending was more than $20 trillion during 2009-17, whereas US Fed, BoJ, ECB, and BoE together added just $13 trillion in their respective fastest ever balance sheet expansions!

This is truly scary. The only thing that would be of some comfort is the Chinese government's commitment to address the problem and its credibility in terms of translating talk into actions. As a measure of that consider two data points - the crackdown on capital outflows led to it collapsing from $640 bn in 2016 to just $60 bn in 2017; shadow bank lending in January 2018 was the lowest January level since 2009 at just $25 bn, 90% lower than in January 2017. Not too many governments anywhere can pull off such feats. 

Corporate cash hoards invested in bonds

Rana Foroohar points to a just released Credit Suisse study by Zoltan Pozsar which documented the massive off-shore corporate savings of US S&P 500 firms invested in high yielding corporate bonds. She describes them as being as influential on the bond markets as some of the investment banks. Of the $1 trillion savings of about 150 firms, 80% belong to the largest and most intellectual property rich 10% of firms. 

The savings of the 150 firms shows that IT and pharmaceuticals dominate, with the top 10 names controlling over $600 bn of the off-shore savings, with Apple alone having a trove of over $200 bn!

The next figure shows how the total savings (offshore plus onshore, though 90% are held offshore) of the top 10 have evolved over time in terms of categories of investments.  

Observe the striking coincidence with the global financial crisis, as savings ballooned from just over $100 bn in 2008 to over $700 bn by end-2016. 

Highlighting the relevance of IT companies with their ability to shift profits across borders through IP, Pozsar writes,

Corporations that rely on booking revenues derived from intellectual property (IP) assets in tax havens are more efficient at shielding earnings from the IRS than firms that don’t (IP assets range from the integration of design and hardware into a phone to the formulas of blockbuster drugs). This explains the greater concentration of savings in the first segment. Compared to the first segment, the second segment of the universe is less reliant on IP assets – there ain’t no “killer” apps, brands, codes, designs or formulas in the auto, energy, industrial and medical equipment manufacturing sectors. The strategy to book revenues generated by a portfolio of IP assets in tax havens is not easy to apply in these industries.

The paper has several interesting graphics. There are two graphs which show how the corporate's holdings of US Treasury bond and agency debt as well as corporate bonds, ABS, RMBS etc compare very favourably with those of the largest investment banks.